SCMPE Theory Notes Nov 23 and Onwards

INDEX
SCMPE
Chap. No. Chapter Name Page No.
1 Introduction to Strategic Cost Management 1.1
2 Modern Business Environment 2.1
3 Lean System and Innovation 3.1
4 Cost Management Techniques 4.1
5 Decision Making 5.1
6 Pricing Decision 6.1
7 Performance Measurement and Evaluation 7.1
8 Divisional Transfer Pricing 8.1
9 Strategic Analysis of Operating Income 9.1
10 Budgetary Control 10.1
11 Standard Costing 11.1
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CHAPTER 1
Introduction to Strategic Cost Management
1. Traditional cost management

 Meaning & Basic
 It involves allocation of cost & OH to the prodn for cost determination
 It involves comparison of actual with budget, then analysing and
controlling the variances
 Focus on cost control or reduction
 Objective to reduce cost and earn better profit
 Limitations of traditional cost management
 Short term outlook
 Reactive approach
 Excessive focus on cost reduction leads to inferior quality of products &
services
 Rely on accounting date which can be misleading Ignores external factors
such as competition market and customer requirement
 Limited focus on review to improvisation.
2. Strategic cost mgt. (SCM)

 Meaning & Basics
 Apply of cost mgt. techniques to improve strategic position of business as
well as control cost
 Main aim is to achieve competitive advantage through product:
differentiation & low cost leadership
 Traditional v/s strategic cost management
Basis of difference TCM SCM
1. Time short term concept long term concept
2. Focus Internal Both internal & external
3. Cost driver concept Based on volume separate cost driver based
(cost allocation method) on activity
4. Objectives score keeping cost leadership or product
differentiation
5. Cost reduction Primary Objective cost red along with value
improvement
6. Approach Risk-averse Risk taking
3. Components of SCM
a. Strategic positioning analysis
 Analyse present position of organisation.
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 what will be desired future position of org.

 Making of plans to achieve that position
b. Cost driver analysis

i. Traditional – Based on value
ii. SCM based on activity such as Structural cost driver (can be quantify) or
executional cost driver (cannot be quantify)
c. Value chain analysis (purchasing RM to service the sales service is VCA) :

i) Value chain - All activities performed by firm in respect of product.
ii) Value chain analysis →identify Activities→ a. value added-special focus & b.
non-value added-eliminated
4. Value Chain analysis

 Meaning & basics
 Idea of value chain was suggested by Michael porters
 Poster describes value chain as internal processes or activities that a
company performs to design, produce, market, deliver or to support its
product
 value chain analysis is a process by which firm :
→identify & analyse various activities that add value to the final product
→Identify those activities which do not add value to the final product and
eliminate those non-value adding activities
 Various activities undertaken by firm can be divided into
a. Primary Activities - Activities directly involved in transforming input into
output & service thereafter.
b. secondary / support activities - Activities that support primary activities at
all levels
SECONDARY/SUPPORT ACTIVITIES INCLUDES
Procurement Technology Human resource Infrastructure
development management
Activities relating Software, hardware, Recruitment, Finance,
to purchasing of technical knowledge selection, training, accounting, legal
input assets, e.g. ERP, inventory promotion, affairs, control
equipment etc. management rewards etc. of system
e.g. vendor system, process employees
selection, Placing automation
order etc.
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PRIMARY ACTIVITIES INCLUDES

Inbound Operations Outbound Marketing Services
logistics logistics and sales
Meaning Receiving storing Transforming Collecting, Customer After sales
& distributing input into Storing & made aware services
input final product distributing about
final product product
e.g for Inward Machining, Warehousing, Advertising, Installation,
normal movement of packaging, order promotion, repair,
sectors material, testing, processing, pricing warranty,
material maintenance delivery of policy, replacement,
handling, product distribution handling
transporting & channel customer
warehousing of selection complaints &
material claims
for Delivery of Running of Same as Same as Same as
Retail product from stores above above above
Sector supplier to
retailer
for Services received Services Customer get Same as Handling
Services from vendors, performance what they above customer
sector data received & order complaints &
from clients maintenance claims
of premises
 Benefits of VCA
1. It helps in eliminating non value added activities and helps in creating
special focus on value added activities treating achieving cost leadership
or product differentiation.
2. It assists in determining best ways for developing higher level
competitive performance.
3. It helps in focusing core areas of business.
4. It also facilitates the development of performance matrix.
 Limitations/criticism of VCA
1. It cannot be easily applies to firms belonging to service industry.
2. Often, it can be complicated and create frustration for management of
firm.
3. It is time consuming and expensive as a whole.
4. It has a linear approach and ignores the concept of value networks.

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5. Strategic framework for value chain analysis

1. Industry structure analysis
 Also known as porter 5 forces analysis
 Used to check whether industry is profitable or not – To take decision of
entering into industry, - To access competitive environment of existing
business/ industry
 Factors which influence profitability/porter 5 forces
Bargain power of Bargain power of Threat of Threat of Intensity of

buyer (BPB) supplier (BPS) substitute new competition/
product/service entrants rivalry
s among firms
Ability of buyer to Ability of supplier More Less Depends on High when –
push down price of to dictate any price substitute substitute barriers to 1. Industry has
product/services of input ↓ ↓ industry higher no of
Low price High price e.g. capital firms
↓ ↓ requirement, 2. High exit
Low High legal factors, barriers
High when – High when – profit profit licenses, High
1.Volume 1. Very few Technology, competition =
purchased is high supplier of input automation low profit
2. Many option 2. Short supply
available 3. High importance High Low
(standardised of product Barrier barriers
product) 4. No substitution ↓ ↓
3. Small number of ↓ High Low
buyers profit profit
↓ High BPS = low
High BPB = low profit
profit
2. Segmentation Analysis
 Identify segmentation variables & categories --> Product/
geographic/customer
 Construct segmentation matrix
 Analyse segment attractiveness and key success factors
 Analysis attractiveness of brand v/s narrow segment scope

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3. Core competencies analysis

 It means unique skill that creates distinctive customer value as compared
to competitors
 It comes from resources and capabilities
 It is primary source of organisation competitive advantages (advantage
over competitors) 1. Differentiation advantage product
differentiation/differentiation strategy 2. Low cost advantage  cost
leadership/low cost strategy
a. Product differentiation/differentiation strategy
 Customer perceives product/Service offered by business as superior
to others. E.g. Apple, Dove, Havel’s, sleepwell, Big 4
 It enables to Change Premium Price for Product /service
 Achieved by
- Superior quality
- Superior innovation
- Superior customer responsiveness i.e. timely delivery, low waiting
time etc.
 Risk in differentiation strategy
- Works only when Customers are not Price Sensitive.
- Competitor can replicate design and features of your product.
b. Cost leadership / Low cost Strategy

 When total cost of product/Service is lower than Competitors
without affecting quality e.g. Jio, Dmart, Indigo
 It enables to change low price than competitors to gain market share
and
 Change Similar Prices in Future & Increase Profit
 Achieved by
- Reduce cost by substitute supplier resources.
- Incense productivity [Economies of Scale]
- High volume purchase to get butt discounts
- Government support
- Learning curve benefits
 Risk is low cost strategy
- Competitors can also lower the price
- Quality can also be affected

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c. Focus Strategy
 Focus on attaining low cost or product differentiation for particular
buyer group segment of product or geographic market rather than
for industry as a whole (narrow target) 1. Cost focus 2.
Differentiation focus
d. Identification of strategy of firm in the same industry on the basis of
income statement
 Calculate Contribution to sales, Fixed cost to sales, profit to sales
when it is higher differentiation strategy adopted and when it is
lower low cost strategy adopted
6. Approach for assessing competitive advantages

1. Internal Cost analysis
 Identify firm value creating process.
 Determining portion of total cost attributable to each value creating
process.
 Evaluate opportunities for achieving low cost advantage.
2. Internal differentiation analysis

 Identify customer value creating process.
 Evaluate differentiation strategies for enhancing customer value.
 Determine best differentiation strategies.
3. Vertical linkage analysis

. Supplier
Acquisition of supplier/ integration Backward vertical
. integration
of supplier value chain
.
Firm
. Acquisition of customer/ Forward vertical
. integration of customer value integration
. Customer chain
. (wholesaler/retailer)
 Effects of Forward/Backward and integration on competitive ability and
cost competency
 Has to operate to different product lines
 Warehousing, carrying cost, idle capacity may increase

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 May be difficult to compete with competitors due to diversion of

management focus
 Benefits
 Give strength for differentiation/ cost leadership
 Helps to understand customer specification
 Limitations
 Operating as well as financial Risk
 May not be able to attract requisite number of clients
7. Value shop model or Service value chain

 Designed for service sector
 Designed to solve customer problems rather than creating value
 It only deals with problems and finally comes with solution
 It mobilizes resources (people, knowledge, money) to solve specific
problems
 This model has same support activities as porters value chain but primary
activities are described differently
.
.
Primary Activities Secondary Activities
.
1.Problem
. finding & acquisition 1. Procurement
2.Problem solving 2. Technology development
.
3.Choosing among solutions 3. Human resource management
.
4.Execution 4. Infrastructure
.
5. Control/evaluation
8. Mission, Vision and objectives

 A Company mission statement is a statement of company’s reason to be
(why company exists).
 A company vision is what the company would be like to achieve.
 A company objective statement specifies what needs to be done to attain
company mission or vision.

CHAPTER 2
Modern Business Environment
1.Quality management
A. Cost of Quality
 Meaning and basics
a. Cost of Good quality/cost of conformance/cost of Control:
 cost incurred to bring quality in product or service
i. Prevention cost: incurred before production starts to bring quality e.g.
- Quality planning
- design/quality review
- staff/quality training
- quality circles
- supplier review/screening/evaluation
- planned preventive maintenance
- Design/Process re-engineering
ii. Appraisal cost: incurred during production at all stages to bring and
maintain quality e.g.
- Testing and inspection of material
- Equipment, product etc.
- Equipment accuracy checks
- Process/field testing
- Product acceptance testing
- Procedure verification
- Service of quality control consultant
b. Cost of bad quality/Cost of Non-performance/Cost of failure of control
 Co incurred due to quality failures
iii. Internal failure cost: Incurred after production but before delivery/sales
to customer due to quality failures e.g.
- Any scrap and wastage
- Rework/rectification/repair/retesting
- Downgrading
- Downtime
- Rejection
iv. External failure cost: incurred after product delivery to customer due to
quality failures e.g.
- Return/replacement
- Servicing
- Warranty claims/warranty repairs
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- Customer complaints centre costs

- Support centre cost
- Litigation cost
- Product liability insurance
- Recalls
- Contribution loss
*high spending on cost of good quality results in lower cost of bad quality and vice
versa
c. Optimal Cost of Quality (COQ)
 When combined cost of good quality & bad quality is minimum.
 Note: for non-financial perspective, better option is where cost of poor quality
is lowest as it results in increase customer satisfaction and sales
 Measures to reduce non-conformance cost
a. Total quality management
b. Total productive maintenance
B. Total Quality Management (TQM)

 Integration of system of planning and control by management to meet
customer expectation and organisation objectives by continuous
improvement in quality with aim of achieving zero defect in quality
 TQM is an investment not a cost.
 It increases profit and competitive advantage without incurring additional
expenditure to improve quality.
 Ways in which investment in TQM can be made
 Improving product mix & process to improve quality
 Introducing employee development programs
 Empowering employees
 Improving top management commitment to quality
 Monitoring performance
 Ensuring customer satisfaction
 Six C’s of TQM for successful implementation of TQM
 Commitment
 Culture
 continuous improvement
 co-operation
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 customer focus
 control
 Deeming 14 points for process improvement for achieving quality
improvement: According to deeming, reasons of defect are 85% due to
process and management and 15% due to employee’s
i. Adopt new philosophy
ii. Create constancy of purpose towards improvement.
iii. Institute training on the job
iv. Drive out Fear
v. Institute Leadership
vi. Move towards single supplier for any one item
vii. Eliminate Slogans
viii. Transformation is Everyone's Job
ix. Remove workmen barriers
x. Institute Education and self-Improvement.
xi. Cease dependence on Inspection
xii. Eliminate management by objectives.
xiii. Improve constantly and forever.
xiv. Breakdown barriers between departments
 PDCA Cycle for continuous improvement
 Plan: establish objective/develop action plan
 Do: Implement
 Check: measure
 Act: Take corrective Actions
C. Business Excellence Model

 Meaning and Basics
 Philosophy for developing & strengthening management system, process
of an organisation by developing quality management principles for
achieving excellence in everything than an organisation does and also to
sustain it.
 Business excellence model is an holistic tool that create value for all
stakeholders not just owners – shareholder, customer, employee, society.

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 Some business excellence models/tools to achieve & sustain excellence

i. EFQM excellence model.
ii. Baldrige criteria for performance excellence.
iii. Singapore BE model.
iv. Japan quality award model
v. Australian BE framework
 European foundation for quality management (EFQM) excellence model

 European model used to achieve sustainable excellence.
 EFQM model has a set of three modules
i. Module 1: direction --> purpose, vision & strategy
ii. Module 2: Execution --> engaging shareholders, creating sustainable
value.
iii. Module 3: Results --> stakeholder perceptions.
 RADAR (analysing results) – Result, Approach, Deploy, Assess, Refine
 Baldrige criteria for performance excellence

 It is built around seven categories:
i. Leadership
ii. Strategy
iii. Customer
iv. measurement, analysis & knowledge management
v. workforce
vi. operations
vii. results
2.Theory of constraints/ throughput accounting

 Set of principles to manage & remove bottleneck and maximise profit.
 Bottleneck is a resource whose availability is minimum in comparison to
requirement among all other resources.

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3.Supply chain management (SCM)

a. Supply chain: all activities associated with flow/moving and transformation of
goods from raw material stage to end user.
b. Supply chain management: management of all the activities associated with
flow/moving and transformation of goods from raw material stage to end
user.
c. Porter primary activities in value chain:
i. inbound logistics
ii. Operations
iii. Outbound logistics
iv. Marketing & sales
v. service
d. Supply chain:
i. Production planning
ii. Procurement/purchase of raw material
iii. Operations & production
iv. Distribution & logistics
e. As per SCM, each of the above activities are integrated & interrelated to each
other
f. SCM is a continuous effort where commitment is required from top to bottom
g. Objective of SCM is to meet customer demand is cost effective manner.
 Supply chain management process

a. Plan/production planning
 Develop a plan to address requirement of customer
 Production must be planned based on estimated or actual demand
b. Procure
 Raw material is procured/purchased from suppliers in this step
 Good relationship with suppliers to ensure timely delivery & better
quality
 Select quality suppliers
c. Make
 Manufacture the product required by customer.
 As per demand & taste of customer.

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d. Deliver/Logistics
 Deliver the product manufactured for customer
 This stage is concern with logistics
i. Inbound logistics ii. Outbound logistics
 An excellent system must be in place to ensure movement of materials
and goods is uninterrupted inbound logistics should be trained and
outbound logistics should tie up.
 Types of supply chain

a. Push model: Stocks produced on the basis of estimated demand/ research
based.
b. Pull model: Stocks produced on the basis of actual demand.
Upstream and downstream supply chain
 Upstream supply chain
 Management of transaction with supplier.
 It rely upon supplier relationship management and use of information
technology
 Supplier relationship management
- How relationship with suppliers are developed & maintained
1. Sources
2. No. of supplier
3. Cost, Quality, Time
4. Partnership with supplier
- Benefits
1. Ensure quality & innovation
2. Enhance reliability in delivery
 Use of information technology

- E-procurement is an electronic method which improves speed &
efficiency of procurement.
- Constituents of E-procurement
1. E-sourcing: Electronic method for finding new suppliers
2. E-purchasing: Product selection and ordering online
3. E-payment: electronic invoicing & electronic fund transfer

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 Downstream supply chain management

 Management of transactions with customers.
 It reply upon customer relationship management and use of information
technology
 Customer relationship management
1. Analysis of customer & their behaviour
2. Customer account profitability
3. Customer lifetime value
4. Customer acquisition, retention(quality and satisfaction) and extension
(resell, cross sell, upsell)
 Use of technology
1. To collect orders
2. To record sales (use of E-POS)
 E commerce & SCM

 SCM shall be necessary for e-commerce business.
 As customer buying online wants faster delivery from any part of the world
with good quality
i. Customer order: effective mechanism to capture customer order
(integrated ERP system)
ii. Procurement: seamless communication to supplier (integrated ERP)
iii. Production
iv. Logistics.
 In all stages SCM shall be necessary for e-commerce
 Key processes in SCM business model

 Information flow: to understand expectation of customers & collect feedback
of customers
 Capacity & skill management: required capacity & skilled staff
 Demand management: How to generate demand of product
 Customer relationship management
 Supplier relationship management
 Service delivery management: monitor service performance
 Cash flow: inflow from customer and payment to supplier

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 Benefits of supply chain management

 Minimize wastage
 Reduce supply chain cost
 Better customer service
 Better delivery
 Optimum inventory
 Generating capability and becoming future ready
 Improves supplier relationship
 Ease & transparency
 Service level arrangement (SLA)

 An arrangement between customer and service provider
 Legally binding formal or informal contract
 Include many components from definition of services to termination of
agreement
 Customer lifetime value
 Net present value of projected cash flows from lifetime of customer
relationship.
 Customer lifetime value = PV of inflow – PV of outflow
4. Gain sharing Arrangement

 It is a contractual arrangement where supplier agrees to supply to customer
with no guarantee of receiving payment but payment of supplier is based
upon benefits that emerge to customers.
 Risky stance to supplier, as he can walk away with nothing.
 It benefits to customer are substantial, supplier can get larger return.
 Gain/benefit is not necessary financial.
 It is a win-win situation for both supplier & Customer.
 There should be pre-defined formula for sharing of benefits & period
thereof.
 Reasons of failure of gain sharing arrangement
 Unstructured terms of agreement.
 Error in implementation.
 Bad relationship between supplier & customer.

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5. Outsourcing
 Also referred as contracting out.
 It means shifting of tasks/jobs/operations or products to another part of
span of time with objective to reduce costs & increase efficiency
 Advantages of outsourcing
 Cost savings.
 Investment savings
 Business flexibility
 Disadvantages of outsourcing
 Loss of confidentiality/risk of losing sensitive data.
 Quality problems
 How to address issues in outsourcing
 Develop code of conduct.
 Setup audit team that regularly audit outsourcing entities.
 Give list of outsourcing entities on website.

CHAPTER 3
Lean System and Innovation
 Lean system
 Method for waste minimization during production/manufacturing.
 Waste: any step/process which is not required to complete a process.
 7 types of waste :-
i. Over production
ii. More inventory
iii. Waiting of products for next production step
iv. Motion →people/equipment moving more than required
v. More transportation, Defects
vi. Over processing.
 Various techniques of lean system
i. JIT
ii. Kaizen costing
iii. 5’S
iv. TPM
v. Cellular manufacturing
vi. 6 sigma
a. Just in time (JIT)
 JIT is a collection of ideas that streamline company’s production process so
that wastage of all kind is driven out of the process.
 Under this system, material is purchased exactly when required for
production and production will be done on the basis of actual sales demand
(pull system)
 JIT purchase: purchase of material only when required for production
 JIT production: finished goods produced only on the basis of actual sales
demand
 Key factors/ pre-requisites for implementing JIT
i. Manufacturer has to ensure that he receives material from supplier on
exact date and exact time when required.
ii. Supplier should be located in close proximity to be manufacturing plant.
iii. Supplier must be willing to make frequent deliveries in small lots and in
exact quantities specified by manufacturer.
iv. Delivery should be sent directly to the production floor for immediate use.
v. For ensuring quality, engineering staff must visit supplier site & examine
their process.

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vi. Manufacturer shall also keep in mind the efficiency of its workforce.
vii. Entire production process has to be detailed & integrated.
viii. Continuous monitoring of the system after implementation to ensure
smooth operations.
 Savings and cost due to JIT

i. Reduction in holding cost/ warehousing cost/ storage cost.
ii. Reduction in insurance cost.
iii. Reduction in carrying cost i.e. material handling cost or opportunity
cost of funds blocked in inventory
 Cost due to JIT
i. Extra payment to supplier.
ii. Overtime cost. Ordering cost.
iii. Stock out cost.
iv. Contribution loss due to stock out.
 Notes
i. Holding, insurance and carrying cost is to be calculated on average
inventory.
ii. Calculation of average inventory for
a) JIT purchase = [ (order size ÷ EOQ) ÷ 2] For production = (op. stock +
closing stock)÷2 .
b) Economic order quantity (EOQ) = √2𝐴𝑂 ÷ 𝐶
Here A= Annual consumption of raw material, O= ordering cost per
order, C= carrying cost p.u.p.a.
 Features of JIT system/ why implementation of JIT is a major source of

competitive advantage & success to the company
i. Opportunity to customize the product as per customer needs.
ii. Material handling & holding cost is reduced.
iii. Minimizing defects, rework, wastage & scrap.
iv. Multi-skilled labour/ Multitasking by employee.
v. Reduced lead time for receiving materials.
vi. Reduced setup time.
vii. Reduced number of supplier & move towards single sourcing
 Back flush accounting
i. It helps in implementing JIT system.

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ii. Reduces number of accounting entries by delaying recording, hence

save cost & time.
 Kanban system
 Meaning
i. Visual signal based workflow management technique.
ii. Used in pull system of inventory.
iii. Visual cue to worker to understand that further material is required.
iv. Reduces cycle time.
v. Hold specific amount of material.
vi. Can also applied to non-manufacturing entities.
 Kanban size = C x LT x L x SF
Here, C= consumption per day, LT= lead time, L=location of kanban, SF=
Smoothing factor.
 No. of Kanban = (safety stock + consumption during lead period) ÷
kanban size
 Factors/Assumptions to be considered and specific precautions/pre-
requisites of kanban system:
i. Supplier should participate in pull system of inventory and agree upon
kanban program.
ii. Supplier agrees to supply material directly at point of use.
iii. Supplier ready to supply material in lot size equal to kanban size.
iv. Consumption is constant throughout period.
v. Space requirement to store number of kanban met
b. Kaizen Costing
i. Meaning & Basics
 Kaizen is Japanese word which means ‘change of better’.
 In business, Kaizen refers to ‘small and continuous improvement’ across
all functions, processes, and employees.
 Toyota production system is pioneer in kaizen costing.
 Since kaizen costing is a continuous improvement, a radical change is not
expected in kaizen costing.
ii. Key features/Principles of kaizen costing
 It focuses on eliminating waste in system & processes and improving
productivity for achieving continuous improvement.

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 Small changes over long period can lead to significant improvement.

 It involves workers from all levels and functions in organisation.
iii. Benefits of Kaizen Costing
 It improves the overall profitability of the company.
 Kaizen requires participation of all employees. It improves team work
across organisation.
 It leads to less number of defective products thereby increasing
customer satisfaction.
 Cost reduction can be achieved through small improvements and cost
savings.
 Kaizen reduces waste in many areas which lead to improve efficiency in
overall business process.
iv. Changes required for adopting kaizen costing system
 Cost control system to cost reduction system.
 Reduction in periodicity of setting standards & variance analysis
(weekly/monthly).
 Participation of workers in standard setting.
v. Impact of kaizen costing implementation on employee management

 Role of employees will change drastically. Employees are seen as
solution provider.
 Increase staff motivation through empowerment.
 Changes in culture to employee self-empowered work culture.
c. 5’S
 Meaning: It explains how a workplace should be organised for efficiency
and effectiveness.
 5 Japanese word
Sort Set in order Shine Standardise Sustain
(seiri) (seiton) (seiso) (Seiketsu) (shitsuke)
Sort & remove Systematic Keep work Every Maintain discipline
unnecessary items arrangement of place clean process is to by auditing work
from work areas items & safe be areas
↓ ↓ standardise ↓
So that relevant So that they can So that 5’s apply
items can be easily identified continuously
found easily for use

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 5’s reduces errors, improves process time and increases employee

satisfaction.
d. Total Productive Maintenance (TPM)

 Maintenance philosophy aimed at eliminating production losses due to
faulty machines/equipment.
 It includes attaining zero breakdowns, zero downtimes/stoppages, zero
defects, and no efficiency loss due to machine/equipment.
 Features of TPM/8 pillars of TPM/Principal of TPM for TPM

Implementation: foundation base if 5’s i.e. TPM start with 5’s.
 Autonomous Maintenance: Training operators so that they can do
minor maintenance e.g. cleaning, lubrication etc.
 Focused Improvement: Minor improvement made on continuous basis.
 Planned Maintenance: Productive instead of reactive with aim to
produce defects from product from total customer satisfaction.
 Early management: Shortening time required for product
development.
 Quality maintenance: maintenance of quality during production for
achieving customer satisfaction.
 Education & training: Training of workers across all levels and
departments.
 Office TPM: Application of TPM techniques in administration. Safety,
 Health & Environment: Zero accidents and health damages.

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 Types of maintenance under TPM

Breakdown Preventive Corrective Maintenance Autonomous
maintenance maintenance maintenance Prevention maintenance
- No - Daily or - Reconfiguration - Create/buy - Minor/day to
maintenance routine - makes machines that day repairs
unless maintenance. maintenance are more carried out by
equipment - Used for easier. reliable. operations.
fails. regular use
- used when machines.
equipment - Reduced
failure does breakdowns.
not have much
impact.
 TQM and TPM

 Different approaches.
 TQM focuses on quality of product.
 TPM focuses on equipment used to produce the product by improving
quality of equipment, quality of product increases.
 Both result in increase in quality of the product.
 Therefore TPM is a way of achieving goals of TQM.
 Connections between TQM & TPM
1. Both improve customer satisfaction.
2. Involvement of workers is necessary in both.
3. Commitment from top management is necessary in both.
4. Fundamental training and education is necessary in both.
 Performance measurement in TPM

 By way of overall equipment effectiveness (OEE).
 OEE is an aggregate measure of productivity which comprises
component of availability performance and quality. It assumes each
component have equal importance.
 Six big losses : (next page)

CHAPTER 3
Time loss Speed loss Quality Loss

Planned time loss Unplanned time loss - Minor stops - Reduced output
(planned downtime) (unplanned - Reduced - Quality defects
downtime) speed
Lunch break, tea break, Equipment failure,
misc. break, shift change, breakdown, setup
preventive maintenance, changes, power
clean-up period failure
Use to calculate Use to calculate
Use to calculate availability performance quality
efficiency
e. Cellular manufacturing
Meaning & Basics:
 Also known as one piece flow production system/u-shape
manufacturing.
 It is a scientific way of production and lean way to enhance
productivity in which manufacturing system has been converted
into manufacturing cells.
 Types of manufacturing/production system
Traditional Modern
Department wise manufacturing Cellular manufacturing
D1 D2 D3 D4
desi Cutti finishi packi
ning ng ng ng
De
Limitations of department wise - Divide production process into

manufacturing: small cells
- Extra WIP - Cell should be U-shaped so that
- Extra Waste workers/supervisor has to move
- Breakdown in one dept. affects other dept. less & can watch entire process
- Issues in maintenance of big machines &
high setup time
- No customization
- Delay in production
- Extra transportation (motion)

CHAPTER 3
 Goals/benefits of cellular manufacturing

 Reduced work-in-progress (WIP) inventory.
 Little waste.
 Breakdown in one cell does not affect other cells.
 Reduced setup time & easy maintenance.
 Provide scope for customization.
 Eliminate delay in production.
 Eliminate transportation (motion).
 Better use of human resource.
 Better scheduling.
 Types of machine cell designs
Single machine cell Group machine cell Group machine cell Flexible
with manual with semi-integrated manufacturing
handling handling system
Single machine plus More than 1 More than 1 Fully automated &
supporting tools machine plus machine plus integrated material
human operator mechanical handling system
runs the cell and handling system
perform material such as conveyor
handling
f. Six sigma
 Six sigma is a quality improvement technique whose objective is to
eliminate defects is every aspect that affects customer satisfaction and
practically achieves zero defects.
 Used to turn things around (eliminate quality issues & defects)also in
case of service industry.
 Six sigma improves the quality of process/product/services by
identifying and removing the cause of defects.
 Six sigma is 3.4 defects per million or getting things right 99.99966% of
time.
 Six sigma means total bad quality cost is zero/negligible.

CHAPTER 3
 Various sigma levels

Sigma level Correct % Defect % Defect per million Quality/profitability
1σ 31 69 6,91,462 Loss
2σ 69 31 3,08,538 Non-Competative
3σ 93.3 6.7 66,807 Industry average
4σ 99.38 0.62 6,210 Above average
5σ 99.977 0.023 233 Below perfection
6σ 99.99966 0.0034 3.4 Near perfection
 Two methodologies for implementation of six sigma

1. DMAIC - Define, Measure, Analyse, Improve, Control. Used to improve
existing business process/product/service.
 Define problems projects goals & customer requirements.
 Measure the process to determine current performance.
 Analyse the process to determine root causes of poor
performance/defects.
 Improves the process by eliminating root cause of defects.
 Control means maintaining improved process and future process
performance.
2. DMADV - Define, Measure, Analyse, Design, Verify. Used to
develop/design new business process/product/service.
 Define project goals & customer deliverable.
 Measures & determine customer needs.
 Analyse process option to meet customer needs.
 Design process to meet customer needs.
 Verify design performance to meet customer needs.
DMAIC DMADV
1. Review existing product/process 1. Emphasis on design of new product or
2. Reactive process process
3. Rupee benefits quantified 2.Proactive process
3. Rupee benefit more difficult to quantify.
 Limitation of six sigma

 Focuses on quality only.
 Substantial investment is required.
 Complicated for some tasks.

CHAPTER 3
 Process Innovation
 It means implementation of new - production methods or delivery methods or
support service methods
 Business process re-engineering (BPR)
 Meaning and basics
i. BPR is fundamental re-thinking and radical redesign of business
processes/functions to achieve dramatic improvement in critical
contemporary measures of performance such as cost, quality, service and
speed.
ii. Four key components of BPR
a. Fundamental Re-thinking: Change thought.
b. Radical redesign: totally change and fresh start.
c. Dramatic improvement: 60-70% improvement.
d. End to end business processes: whole process not individual activities
 How to implement BPR/stages of BPR

i. Each business process needs to be designed into series of processes.
ii. Each business process needs to be documented & analysed whether it is
essential and adding value or not.
iii. Processes which do not add value must be removed.
iv. Remaining process are restructured/ redesigned as efficiently as possible.
 Characteristic of BPR
i. Combining several job/process/functions into one.
ii. Permitting workers to make more decisions themselves.
iii. Defining different processes for simple cases V/s complex ones.
iv. Reorganising jobs/functions to give individuals more understanding &
responsibilities.
 Inputs of BPR
i. Worker:
a. Workers are not susceptible to change.
b. Many become unemployed.
c. Those continued may uncertain about their jobs in near future.
d. It may lead them to resists BPR.
ii. Suppliers: unethical practices creates negative image.
iii. Environment: Pollution & other effects due to new processes

CHAPTER 3
 Benefits of BPR/ How BPR can improve performance/ Improvement

expected from introducing BPR
a. BPR may increase cost in short run as investment in technology.
b. In long run it results in
1. high level of efficiency
2. Meeting performance targets
3. Lower prices & costs
4. Better customer satisfaction
5. Increase profitability
6. Motivating staff
7. Better facilities for staff
8. Fast & parallel processing
9. Error reduction

CHAPTER 4
Cost Management Techniques
 Cost Control and Cost Reduction
Cost Control Cost Reduction

1. Comparison of actual with budget to 1. Permanent reduction in cost.
regulate actual cost temporarily
(temporary saving in cost).
2. Quality is not guarantee. 2. Quality is retained.
3. Emphasis is on only present cost. 3. Emphasis is on present and future
cost.
4. Preventive measure. 4. Corrective measure.
5. Example: Substituted material, 5. Example: Value analysis, Increase
reduced labour productivity, JIT, Kaizen costing
 Activity Based Costing (ABC)

 Traditionally overheads are recovered / allocated on the basis of 1 or 2
recovery rates (based on volume production), as a result accuracy of cost of
product/service cannot be measured.
 Under ABC, and overheads are allocated on the basis of so many different
recovery rates. Each rate is based on an activity.
 It used when company manufactures more than 1 product/variety of product
or provide more than 1 service.
 Target Costing
 Target costing is a cost management technique that aims at reducing overall
cost of a product with the help of value analysis, value engineering and other
concepts. Target is exact opposite of cost based pricing.
 Traditional costing  sellers’ market: selling price = product design + total
estimated cost + desired profit.
 Target costing  Buyers’ market: Market/target selling price – desired profit
= target cost then product design.

CHAPTER 4
 Components of target costing:

Value analysis Value engineering/function analysis
1. Analyse existing product. 1. Applies to design of new product.
2. Eliminate any costs which do not give 2. Break product into functional parts.
any contribution to value (e.g.
machine setup, storage, unnecessary
transportation & movement).
3. By reviewing product design and 3. Eliminating unnecessary features and
material composition. adds new & attractive features.
 Pros and Cons of Target costing

 Pros
 Real savings.
 Proactive approach to cost management.
 Focus on value added activities.
 Cons
 Required detailed cost data.
 May reduce quality of product.
 High forecasting & estimation.
 Issues and challenges after adoption of target costing and their remedial
measures/actions
 Maintaining target price: Apply cost reduction techniques such as Kaizen
costing continuously.
 Environmental issues: Pollution control norms.
 Safety issues: Safety standards.
 Competition: Apply cost reduction techniques such as Kaizen costing
continuously.
 Unwanted pressure on design & implementation stage: strong control/ over
design team
 Most suitable situation for adopting target costing

 Target costing is most useful in those situations where substantial amount of
product costs are committed during product design phase (manufacturing
sector).
 Following types of organisations are expected to gain maximum from target
costing.

CHAPTER 4
- Assembly oriented industries.

- Involved diversification of product lines.
- Use technologies of factory automation.
- Shorten product life cycles.
- Implementing methods such as JIT, value engineering etc.
 Life Cycle Costing

 Every product has a certain life that varies from few months to several years.
 The life cycle of product consists of 4 phase - Introduction, Growth, Maturity
and Decline.

 Customise phase with regard to types of costs incurred

i. Design: R&D, design (approx. 80% of product cost is committed in design
phase, so cost management can be most effectively exercised during
design phase).
ii. Manufacturing: Material, labour, overheads, machining (major cost are
incurred in manufacturing stage).
iii. Operation: Distribution, advertising.
iv. End of life: Disposal, clean-up.
 Phases of product life cycle

1. Introduction: In this phase there is minimal awareness of product.
Competition is almost negligible and profits are non-existent.
i. Characteristics
 Huge promotion cost & efforts.
 Few competitors produce basic version of product.
 Product refinements are not possible.

CHAPTER 4
ii. Strategies
 Attracting customer through promotion.
 Expanding channel & supply chain.
 Inducing customer to try product.
2. Growth: In this phase, sales increase rapidly because of greater customer

awareness. Competitors enter the market in large number.
i. Characteristics
 High volume of business and increase in competition.
 Improving/Adding features.
 Educating market.
ii. Strategies
 Establish a clear brand identity.
 Control product quality to ensure customer satisfaction.
 Maximise availability of product.
 Value based pricing strategies may be used.
3. Maturity: In this stage sales continue to increase but at decreasing rate.

Intense price competition. Profit decline.
i. Characteristics
 Over capacity in the industry.
 High R&D budgets.
 Customer move towards other substitutes.
ii. Strategies
 Strong marketing efforts.
 Product features may be improved to differentiate from competitors.
 Price has to be reduced to attract price sensitive customers.
 Retention of existing customer & trying to win over competitor
customers.
4. Decline: In this phase, demand of product disappears due to better and less
costly substitutes.
i. Characteristics
 Sales drop to zero or low level.
 Profit declined and become negative.

CHAPTER 4
ii. Strategies
 Firm can continue to offer product to its loyal customers at reduced
price.
 Can discontinue product.
 Use as replacement product for launching another product successfully.
 Use/Importance of product life cycle costing
 Planning tool.
 Control tool.
 Forecasting tool.
 Leads to appropriate strategy formulation at each stage.
 Benefits of product life cycle costing
 It results in earlier actions to generate revenue or to lower cost.
 More accurate and realistic assessment of revenue and cost.
 Promote long term profitability rewarding.
 Provides overall framework for considering total cost over entire life.
 Traces research, design and development cost over entire life cycle
 Pareto Analysis
 It is based on 80:20 rules.
 Observed by Pareto that 80% wealth of Milan city was owned by 20%
citizens and remaining 80% citizen occupy only 20% wealth of city. This rule
is used to solve business problems effectively.
 Application of Pareto analysis in business
Customer
Pricing of product profitability analysis Stock Control Quality Control
20% product = 80% 20% customer = 80% 20% stock = 20% defects =
profit and 80% profit and 80% 80% vale and 80% products and
product = 20% profit customer = 20% 80% stock = 80% defects =
profit 20% value 20% products
Focus on 20% (high Analyse which Special focus First remove 20%
profit products) and customer is profitable on 20% high defects which are
delegate pricing of and maintain good value stock found in 80%
80% (low profit relationship with products.
products)to lower them and review
level of management pricing of other
customer

CHAPTER 4
 Environmental Management Accounting (EMA)

 Process off collection & analysis of information relating to environmental
costs for internal decision making.
 EMA identifies cost of environment related activities and seeks to control
these costs.
 Areas of application of EMA - Product pricing, Budgeting, Investment
appraisal, setting performance targets
 Classification of environmental cost
1. As per Hansen and Mendoza
Environment prevention Environment Environment Environment

cost appraisal Internal Failure External Failure
(detection)cost cost cost
Preventing adverse Determine Costs from Costs on activities
environmental impact process & activities performed after
activities are in produced but not discharge waste
compliance with discharged into into environment
environment environment
standards
E.g. Investment in e.g. Monitoring & E.g. Recycling e.g. Penalties,
pollution control testing, scrap, Disposing Fines, Legal Cost
equipment, Extra contamination toxic chemical & damages
investment in protective test, Audit of
machines, Formulating environmental
environmental policies activities
2. As per United States environmental protection agency (USEPA)

 Conventional costs: usage of resources (material, water, energy etc.).
 Hidden costs: Costs hidden in general overheads.
 Contingent costs: Penalties, fines etc.
 Relationship & corporate image costs: Cost of preparing environmental
reports
3. General classification
 Internal environmental costs: incurred by organisation.
 External environmental costs: borne by society

CHAPTER 4
 Techniques for identification and allocation of environmental costs
Input-Output Flow cost Life cycle costing Activity based

analysis accounting costing
Input of material Accounting of Consider total Allocation of
compared with waste at each step environment cost environment cost
final output. (Quantity, cost, over entire life to each product
Difference is value)
waste/scrap
 Controlling/managing environmental cost

1. Waste
 Mass balance approach can be used to determine material wasted in
production.
 By weight of material bought compared with product yield.
 Minimise waste by using lean system.
2. Water
 Identifying where water used & how consumption can be decreased.
 RO ultrafiltration etc.
3. Energy
 Identify inefficiencies & wasteful practices and remove them.
 Install LED lights, 5 star energy equipment’s, solar lights etc.
4. Transport & Travel
 Invest in more fuel efficient and electric vehicles.
5. Consumables & Raw materials
 These are directly attributable costs & discussions with management can
reduce such cost.
 Use recyclable technology for raw material & consumable.
 Example, Toner cartridges refilled rather than replaced.
 Reasons for managing environmental cost/why management of environment
cost is important
 Carbon footprint: Measures greenhouse gas released into atmosphere.
 Environmental costs are becoming huge so they need to be managed.
 For gaining advantage over rivals and for improving brand image.
 To protect organisation from environmental risks (Noncompliance of
regulations can exposed to environment risks such as fines, penalties,
legal costs and damages)

CHAPTER 4
 Pros and Cons of EMA

 Pros
 Improving image
 Cost reductions (reduce or eliminate scrap wastage, fines, penalties etc.)
 Improving revenue (Also provide carbon credits)
 Cons
 Increase in costs
 Additional burden on top management

CHAPTER 5
Decision Making
1. Factors to be considered while accepting special priced order

 Statutory compliance – Documentation
– Foreign laws (if export)
– Penalty for Non-Compliance
 Buyer creditworthiness – Proper Documentation
- 100% Advance
- LC (if export)
 Industry Analysis - Current & future demand of product
- Porter 5 force analysis
 Additional Terms – Delivery
- Bank charges
- Other terms
2. Qualitative/others factors to be considered in make or buy decision
 Quality of goods
 Reliability of suppliers : assurance of quality and timely delivery
 Financial stability of supplier
 Availability of labour and infrastructure for manufacturing
 Demand regulatory of product
 Confidentiality of process
 Alternative uses of capacity
3. Other/qualitative factors to be considered in continue or discontinue decision

 Adverse effects of discontinuation on sale of other products
 Customer relations
 Employee relations
 Supplier relations
 Timing of shutdowns
4. Ethics and Non-financial considerations in decision making

 Organization should analyse both financial as well as non-financial factors
because modern organization have moral duty to care wide range of
stakeholders not just owners

CHAPTER 5
Decision Making
 If organization does not consider ethics and non-financial considerations in

decision making, it may earn profit in short run but will hurt profitability in
long run
 Some ethics and non-financial considerations in decision making
a) Government Regulations : Ensure all relevant laws & regulation are
compiled otherwise may face penalties
b) Employee satisfaction/motivation : Consider employee satisfaction
otherwise strikes, lockdown & protest by employee
c) Quality
d) Corporate Social Responsibility :Responsibility towards society &
environment
e) Availability of resources: Analysis availability of material, manpower
infrastructure etc.
f) Customer Satisfaction
g) Environmental Factors: Consider factors such as pollution, de-forestation
etc. If adverse effect on environment, protest by environmentalist.
h) Humanity Values & Business ethics : should act in fair and transparent
manner and be honest in all dealing
 Benefits of considering ethics and non-financial factors
a) Ensure profitability and sustainability in long run
b) Avoid bad publicity and protect brand image
c) Avoid potential legal action
d) Ethical operating environment gives well-being to employee

CHAPTER - 6
Pricing Decision
1. Pricing policies/strategies
A. Pricing under different markets
1. Perfect Competition
 Large number of sellers selling- identical product/service
 Free entry and exit
 No pricing policy
 E.g. cement industry, medicine industry
2. Monopoly
 Only one seller of that product/service & no substitute
 Firm is price setter
 Any price
 E.g. Microsoft windows
3. Monopolistic competition
 Large no of sellers selling similar product but not identical
product/service
 Market price or below market price
 E.g. mobile industry, restaurants
4. Oligopoly
 Few member of seller selling identical product/service
 Limit pricing, predatory price, rise price together
 E.g. Telecom industry
B. Pricing of new product

a) Category of new products
1. Revolutionary product
 Replaces existing product
 Totally new
 Premium/skimming pricing
 E.g. normal phone to android, TV to OTT platform
2. Evolutionary product
 Upgraded version of existing product
 Demand based price
 e.g. Intel 7th gen to 8th gen, redmi 6 to redmi 7
Page 6.1
CHAPTER - 6
Pricing Decision
3. Me-too product
 It is similar to/copy of revolutionary or evolutionary product of other
entity
 Market/penetration pricing
 e.g. sputnik vaccine - covishield vaccine
b) Strategies for new product

1. Skimming pricing: Under this strategy product is introduced in market at high
price, later on price is decreased gradually.
- Circumstances of adoption:
 Product has innovative features
 Skim the cream by selling out few units and earn better profit
 Demand inelastic
 High initial cost incurred such as R&D cost, patent cost, etc.
 Product launched in highly priced segment
 Reduction in price in later years may increase sales
2. Penetration Pricing: under this strategy product is introduced in market at

low price and when product is established in market then price is gradually
increased.
- Circumstances of adoption
 For setting market/penetrate market
 Demand elastic
 Threat of competition
 Substantial saving due to large scale of production

CHAPTER - 6
Pricing Decision
c) Change in selling price and production cost in skimming and penetration

strategy during product life cycle
SKIMMING – PRODUCT LIFE CYCLE

Introduction Growth Maturity Decline
1. Selling High Reduced : Reduced or Reduce
Price *Less unique as competitor Constant (cost or
use reverse engineering below
*To discourage competitor cost)
to enter in market
*To gain market
share/achieve growth in
sales volume
2. Produ High : Reduce : Constant Increas

ction *It’s an *Due to large scale of *Since production is ed: Due
Price innovation production no longer increased to low
*E.g. Bulk discount, due to productio
negotiation for better 1.Material cost n
price, learning & remains constant
experience benefits, fixed 2. Labour cost
cost spread over large no. remains constant
of production 3.OH cost remains
constant
PENETRATION – PRODUCT LIFE CYCLE

Introduction Growth Maturity Decline
1. Selling Price Low Increased Increased Constant
2. Production Price Low Reduced Constant Increased
C. Pricing Under Special Situations

a. New product for company but not new for market → Market price
b. Perishable goods → Any cash realisable value
c. Large stock & market has fallen(out dated product) → Pricing below
marginal cost
d. Pricing in period of recession → Less than total cost but above marginal
cost

CHAPTER - 6
Pricing Decision
2. Principles of Product pricing

A. Price customization:
a) Ways in which Price Customization can be done
 Based on Product Line
 Based on Customer Past behaviour
 Based on Demographics
 Based on Time differential
b) Price Adjustment Policies
 Cash Discount
 Quantity Discount
 Distributor Discount
 Geographic Pricing
 Price Discrimination [Differential Pricing/Peak-load Pricing]
B. Price Sensitivity
 It measures Customer behaviour to Change in Price of product.
 Price Sensitivity
- High: Charge in Price result in change in demand customer behaviour
- Low: Change in Price does not result in Change in demand/
 Factors that Contribute to Price Sensitivity
 Price quality effect - Low
 Shared cost effect – Low
 Sunk investment effect – Low
 Total expenditure effect – Low
 Unique value effect –Low
 Difficult comparison effect – Low
 Inventory effect - Low
 End benefit effect - Low
 Substitute Awareness effect - High

CHAPTER 7
Performance Measurement and Evaluation
A.Responsibility Accounting
 Decentralisation delegation of decision making authority to lower levels of
organisation.
 Responsibility accounting means collection, summarisation & reporting of
financial information where individual manager is held responsible for
certain costs, revenue or assets of firm.
 Objective of responsibility accounting is to judge each manager performance.
 Responsibility centre is a specific unit of organisation assigned to manager.
 Four recognised levels of decentralisation

 Cost centre: Responsibility for cost, main focus cost minimization.
Performance measured on the basis of cost variance.
 Revenue centre: Responsible for generation of revenue. Performance
measured on the basis of profit.
 Profit centre: Responsibility for both revenue & cost. Performance measured
on the basis of profit.
 Investment centre: Responsible for not just revenue & cost but also asset &
investment decisions. Performance measured on the basis of ROI, RI, EVA.
 Organisational structure
 Functional organisation structure

CHAPTER 7
 Divisional orgnisation structure
B. Divisional Performance Measures

 Financial measures
1. Return on investment (ROI)
 ROI represents divisional profit as a % of assets employed in division.
 Evaluating divisional manager performance on the basis of ROI may not
encourage goal congruence.
2. Residual Income (RI)
 To promote goal congruence, RI approach can be used to measure
performance.
 If residual income is positive then accepts project if it is negative then
reject it.
3. Economic Value Added (EVA)

 EVA is a measure of economic profit which shows real value creation.
 If EVA is positive then performance is acceptable.
 Non-Financial Measures
 Need of non-financial measures: for being sustainable (to sustain financial
performance for long term), organisation needs to consider non-financial
measures.
 Scope/Role of Non-financial measures/indicators
a. Human resource management: Job satisfaction, staff turnover.

CHAPTER 7
b. Product & service quality: distinct from others that can beat rival
product.
c. Branch awareness: value of brand, High customer loyalty.
 Advantages and Disadvantages of Financial performance measurement

a. Advantages
- Focus on financial objectives.
- Qualification of results is possible.
- Such measures are comparable.
- Established framework for measurement.
b. Disadvantages
- Focus on short term & ignores long term growth.
- Can be distorted by inflation.
- Can be manipulated.
 Advantages & Disadvantages of Non-Financial performance measurement
a. Advantages
- Focus on qualitative aspects as well.
- Takes long term view.
b. Disadvantages
- Requires huge information.
- Cannot be qualified.
- Difficult to measure.
1. Balanced Scorecard
 It is a method displays organisation performance into 4 dimensions.
 The four dimensions acknowledge the interest of shareholders, customers
and employees by considering both long term and short term goals.
 Four areas of balanced scorecard
a. Financial perspective (related to shareholder)
- It views organisational performance from shareholders point of view.
- Focus on financial performance of company and divisions.
- It includes measures such as revenue growth, ROI, EVA, profitability,
operating expenses etc.
b. Customer perspective (related to customer)
- It views organisational performance from customer’s point of view.

CHAPTER 7
- It includes measures such as customer satisfaction, customer loyalty,

repeat buyers, first time buyers, return %, complaints, recalls etc.
c. Internal Business Perspective (related to internal process/activities of
company)
- It views organisation performance through quality, efficiency of
processes to achieve objectives of financial and customer
perspective.
- It includes measures such as productivity, manufacturing cycle
efficiency, defects produced, replacement time, support centres etc.
d. Learning & growth/training & development perspective (related to
innovation & employees)
- It views organisation performance through human resources,
technology, innovation, culture etc.
- It includes measures such as new products produced, investment in
R&D, Training hours, Employee satisfaction, employee turnover etc.
 Objectives and measures of each perspective of balanced scorecard
Perspective Objectives (critical success Performance measures (key
factors) performance indicators)
1. Financial - Increase ROI/EVA - Revenue, ROI & EVA growth
- Increase sales & profitability - Profitability & operating ratios
- Most profitable company
- Highest market share
2. Customer - No. 1 choice of customers - Customer satisfaction.
- Increase customer quality - Return %, Recalls, Complaints.
- Increase no. of customer - No. of first time buyers.
- Increase in customer retention. - Repeat customers.
3. Internal - Increase efficiency of - Manufacture cycle efficiency

business operations. (MCE)
- Reduce non-value added - Productivity
activities - Replacement time
- Implement TQM & TPM - No. of support centres
- Improve after sales services
4. Learning - Up to date technology - Amount invested in R&D
and - Increase new products - No. of new products produced
Growth - Improve employee satisfaction - Employee’s satisfaction rate.
& morals - No. of training hours
- Adequate training

CHAPTER 7
2. Triple bottom line (TBL)

 It measures not only profit but also measures which impact on society &
environment.
 Difference between traditional accounting framework and TBL framework.
Traditional Accounting Framework TBL Framework

- Traditional accounting framework has a - TBL reporting focuses on social &
single bottom line that focuses only on environmental performance rather
profit. It focus on meeting information than simply financial performance. It
needs of any 1 category of shareholder has 3 bottoms line i.e. Environmental,
i.e. Share holder. Social, and Economic.
- It does not provide insight on social & - It encourages each division within
environmental implications of company organisation to act in socially
operations. responsible manner.
- It uses reporting currency as unit of - No uniform standard or measurement.

measurement and follows GAAP.
 TBL framework incorporates 3 dimensions Environmental (Planet), Social

(people) and economic (profit).
a. Environmental (Planet)
- Measures impact on resources such as air, water, ground etc.
- It covers following aspects
i. Waste disposal, waste treatment
ii. Solar system, energy consumption
iii. Environmental resources such as paper, cartridge, fuel
consumption.
iv. Plastic usage.
b. Social (People)
- Measures CSR and Social performance.
- Here all are covered Employee + customer + social people.
i. Quality of service
ii. Charity
iii. Employee development & training.
iv. Workplace environment.

CHAPTER 7
v. Litigations
vi. Child labour.
vii. Financial support
viii. Health, Safety & care
ix. Product safety
x. Ethical behaviour.
c. Economic (Profit)
- Measures companies’ financial success and tax.
i. Profit generation
ii. Tax payments compliances.
 Ways to bring turnaround in reporting framework and to do something
sustainable for environment and society
– Producing quality materials/products.
– Address safety issues.
– Spread awareness among customer.
– Compliance of labour laws.
– Channelizing efforts towards recycling.
– Reduce usage of natural resources (degradable) as much as can.
3. Performance pyramid

CHAPTER 7
 Internal efficiency: Financial success can be achieved through improving

productivity by reducing cycle time and waste.
 External efficiency: Market success can be achieved through increasing
customer satisfaction by improving quality and delivery. This success
requires internal business efficiency.
4. Performance Prism:
 It aims to meet needs of all stakeholders (SH’s), while balance scorecard
mainly focuses on SH’s and customers.
 Five face to performance prism
a. Stakeholder Satisfaction: Identify stakeholder and needs & wants of
stakeholder
- Investors: Better ROI.
- Customer: Good quality & low price.
- Suppliers: Better price for inputs & volume purchase. Employees:
Better work life balances.
- Government: Taxes.
- Society: Employment opportunities.
b. Strategies: Required to fulfil & wants of stakeholders.
c. Processes: Required for implementer strategy.
d. Capabilities: Required for operating processes.
e. Stakeholder Contribution
- Investors: Investment.
- Customers: Buy product.
- Suppliers: Better quality.
- Employees: better work.
- Government: Simple compliances.
- Society: Co-ordination.
5. Building block model
 By fitzgerald & moon, these were Australians.
 Mainly for performance measurement of service industries.
a. Standard
– Standard are target related to performance measures (for employee
generally).
– Characteristics

CHAPTER 7
i. Equity: equally challenging for all

ii. Achievable: Should be realistic
iii. Ownership: Responsibility for results in accepted.
b. Reward
– To Ensure employees motivated to meet standards, proper reward
system is required for achievement of standards.
– Characteristics
i. Motivation: Reward scheme should be set in manner which
motivates employees to achieve desired result.
ii. Clear: Should be clearly communicated to employees in advance.
iii. Controllability: reward or penalised only for results over which
they have control.
(1 & 2 are objectives).
c. Dimensions
– These are business goals that company wants to achieve
i. Determinants: Performance areas which influences the results
- Quality: ability to deliver service with consistency.
- Resource utilisation: Ability to use resources in efficient ways
- Innovation: Ability to devise new products & new ways of
things
- Flexibility: Ability to cope with changes.
ii. Results: It reflects the success or failure of determinants
- Financial performance: Monetary terms (measure: N/p,
Profitability ratios)
- Competitive performance: Competitive edge/advantages (e.g.
inquiries converted into customer order) it can be Cost
leadership or product differentiation.
C. Benchmarking
 Techniques for continuous improvement in performance.
 By comparing firm products, Services, activates, against other best performing
organisations either internal or external to the firm.

CHAPTER 8
Transfer Pricing
 Basics of transfer pricing

 When a division / department transfer goods & services to other division /
departments of sesame enterprise, then price at which transfer took place is
transfer price.
 Division which sell good is transferor/supplying division and which receives
goods is transferee/receiving division.
 Objectives of transfer price

 To develop health competition among various division of organisation.
 To develop commercial attitude among divisional employees.
 For performance evaluation of various divisions of organisation.
 To give bonus to divisional employees properly on the basis of performance.
 Transfer pricing methods

1. Cost based
i. Total cost + profit
ii. Variable cost + profit
iii. Standard cost + profit
iv. Total Cost + ROI.
2. Market based.
3. Negotiation based.
 Proposal for resolving transfer pricing conflict

 Alternate transfer pricing models/steps to change the attitude of divisional
heads if they are against inter-divisional transfer OR
 Transfer pricing policy to overcome conflicts/ to keep motivated divisional
managers.
1. Dual rate transfer pricing system
 Supplying division credit with full cost plus profit margin.
 Receiving division charged with margin cost.
 Impact of dual rate transfer pricing
- Improves co-operation, promote goal congruence.
- Complicate records, results in errors.
- Profit is artificial & used only for internal evaluation.

CHAPTER 8
Divisional Transfer Pricing
2. Two part transfer pricing system

 Transfer price = marginal cost + lump sum fixed charge
 Impact of Two part transfer pricing system
- Better profit to supplying division.
- Purchasing division can purchase at lower price than market.

CHAPTER 9
Strategic Analysis of Operating Income
1.Profitability Analysis
a. Strategic profitability
 Reasons for changes in profit
 Growth component: Change in revenue & cost due to change in sales
units. Market size or market share changes.
 Price recovery component: Change in revenue & cost due to change in
prices.
 Productivity component: Change in cost due to change in efficiency.
b. Direct Product Profitability (DPP)

 Used primarily within retail sector.
 Attribution of purchase price and other costs such as warehousing,
Retailing, Transportation (distribution).
c. Customer profitability analysis

 Analysis/comment/recommend on customer wise profit
i. General comment
 Total profit per customer and profit per unit per customer analysis in
brief.
 Discount given and impact on sales in brief.
 Overhead cost relating to customer activity (order processing, Delivery,
Customer unit, others).
ii. Special comment
 Maintain good relationship with profitable customer with help of
customer relationship management.
 Review discount & OH cost of low profit/non-profit customer.
 Benefits of customer profitability analysis

 Helps to identify which customer erode overall profitability or which
contribute to it.
 Provide basis of constructive dialogue between buyer and seller to
improve margins.

CHAPTER 9
 List of service organisation using customer profitability analysis

 Financial institution like bank and insurance companies.
 Hospitability service.
 Professional service.
 Hospital. Logistics.
 Fundamental aspects of customer relationship management (CRM) to
facilitate building relationship with profitable customers
 Operative: Take care of individual transaction.
 Analytical: Behaviour analysis of Quality sensitive or Price sensitive etc.
 Collaborative: Seamless information flow.
2.Activity Based Cost Management (ABM)

 Use of ABC to manage cost at activity level is known as ABM.
 Focus on efficient and effective management of activities.
 ABC v/s ABM ABC is to determine cost of activity ABM is to manage cost of
activity.
 ABM is divided into
i. Operational ABM  Doing things right  Increase efficiency (reduce cost
driver rate of activities)
ii. Strategic ABM Doing the right things determine which product to be
manufacturing and which activities are to be used Removing non-value
added activities.
 Applications and benefits of ABM

 Activities based budgeting.
 Business process re-engineering.
 Cost reduction.
 Performance measurement.
 Process improvement.
 Value added activities / Non value added activities

 Value added activities = processing time.
 Non value added activities = inspection time, Storage time, waiting time,
move time, queue time.

CHAPTER 9
 Manufacturing cycle efficiency (MCE) = (value added time ÷ total production

time/manuf. Cycle time) x 100.
 Total production time = Value added + Non value added time
 Note:
- Wait time before order processing/ before order received by
manufacturing department (receipt time) is irrelevant in above
calculation, hence ignore.
- Delivery cycle time = Receipt time + Manuf. Cycle time.
iii. Activity Based Budgeting (ABB)

 Planning and controlling the expected activities of organisation by making
and analysing overhead cost budget based on activity.
 Elements of ABB
- Types of Activities to be performed.
- Quality of activities to be performed.
- Cost of Activities to be performed.
 Activity based budget = Budgeted ABC rate for each activity x Budget units of
cost driver of activity for each product.
 Benefits of activity based budgeting

 Better identification of resource needs.
 Clear linking of costs with staff responsibilities.
 Identification of budget slack.

CHAPTER - 10
Budgetary Control
Budgetary Control
“Systematic arrangement of organisation operations through establishment of
standards & target regarding income & expenses and continuous monitoring and
adjustment of performance against them”
1. Control Scheme
a. Feedback control
 Also known as past action control.
 Reaction after an action has taken place i.e. control activity that takes place
after process is complete.
 Simple & easy to implement.
 Compare the actual results with budgeted results & modification of
subsequent actions to achieve future required results.
 Types of feedback
i. Primary Reportable to lower management (small variance).
ii. Secondary  sent to higher level (large variance).
iii. Negative means adverse > try to reverse deviations > Amend input or
process.
iv. Positive Favourable variance > reinforce deviation.
 Feedback management control report
i. Should disclose both accomplishment and responsibility.
ii. Should be extracted properly.
iii. Should disclose trends & relationships.
iv. Should disclose variations from standards.
v. Should be in standardised format.
b. Feed forward control

 Also referred as preventive control.
 Foresee potential problems & take corrective actions to ensure that final
output is as expected.
 Forecasting of expected results of future & if difference arise between
expected & budgeted results then control actions are taken to minimize gap.
 Costly to implement as it requires additional investment & resources.
 Feed forward control attempts to take corrective action before event
whereas feedback takes corrective action after event.

CHAPTER - 10
Budgetary Control
 Guidelines for implementation of feed forward control

 Through planning & analysis is required.
 Model of control system should be developed.
 Data must be regularly assessed & collected.
2. Behavioural aspects of budgetary control system

a. Shortcomings in budgetary control system
i. General shortcomings in budgetary control system
- Lack of co-ordinated goods.
- Influences of uncontrollable factors.
- Short run perspectives.
ii. How to remove general shortcomings
- Clearly define company objectives.
- Develop on accounting reporting system.
- Establish budget values for appropriate time period.
b. Participation in budget setting process
i. Top down approach Also called top down budget/imposed style budget
Top management > Department management (middle) > Budget holding
staff/subordinate (lower).
 In top down approach, budget figures will be imposed on subordinates by
top management & subordinates will have very little participation in
budget process.
 Produced more quickly & involves less management time.
 Significant risk of inaccurate budget being set.
ii. Bottom up approach Also referred as participative approach Budget
holding staff/subordinate (lower) > department management (middle) > top
management (top).
 In bottom up approach sub-ordinates create their own budget & these
budgets are received by top management.
 This result in greater goal congruence as budget goals becomes manager
personal goals.
 Knowledge of local conditions may enhance entire planning process. This
approach is time intensive & very costly.
 In order to achieve personal goals, participants may also engage in
creating budgetary slack.

CHAPTER - 10
Budgetary Control
 Other advantages and disadvantages of involving staff in budget setting

Advantages Disadvantages
1. Ownership of work. 1. Lack of knowledge to formulate
2. Cannot blame for unrealistic goals. the budget.
3. Feeling of appreciation & values. 2. Personality traits.
4. Can discuss organisational issues.
3. Beyond Budgeting
 Limitations of traditional budgeting
 Add little value.
 Often a barrier to change.
 Develop & updates too frequently usually annually.
 Make people feel undervalued. Concentrates on cost control & not on value
creation.
 Time consuming & costly.
 To overcome these limitations, a tool comes into force known as beyond

budgeting.
 Beyond Budget
 Budget revised/amend as per market changes & uncontrollable factors.
 Continuous monitoring & forecasting. + Bottom up approach + Growth based
target instead of budget based targets + Target shift to competitors.
 Advantages of beyond budget

 More adaptive process than traditional budgeting.
 Decentralised process (in traditional budgeting, Leaders plan and control
organisation centrally.
 Nature of beyond budgeting

 Shift from top down to bottom up.
 Budget is evolving rather than obsolete.
 It depends on trust & transparency. Involves forecasting.
 Highlights level of improvement that can be achieved.

CHAPTER - 10
Budgetary Control
 Benefits of beyond budgeting

 It helps in motivating individuals by defining clear responsibility & challenges.
 It eliminates behavioural issues by making rewards team based.
 It establishes customer oriented teams.
 It creates information system which provides fast & open information.
 It helps managers to work in co-ordination to beat competition internal
rivalry is reduced as target shift to competitors.
 Suitability of beyond budgeting

 Industries where there is repaid change in business environment.
 Industries using methods such as TQM.
 Industries undergoing radical changes.
 Revision in budget due to uncontrollable factors

 Calculate revised budgeted sales and variable cost for controllable
period/months by excluding uncontrollable period from original budget.
 Budgeted fixed costs will remain same (however if any specific
uncontrollable fixed cost is given then it will be considered in revised budget)

CHAPTER 11
Standard Costing
 Reporting & Interpretation of variances

i. Material Variances
a. Price due to
 Purchase of low quality material.
 Use of different supplier.
 Order size.
 Unexpected decrease/increase in price.
b. Usage due to
 Purchase of inferior quality material.
 Increase/Decrease in efficiency.
 Change in material mix.
ii. Labour Variances

a. Rate
 Bonus.
 Market conditions not predicted properly.
b. Efficiency
 Increase/Decrease in productivity of labour.
 Workers efficiency not estimated correctly.
iii.Sales Variances
a. Price
 Discounts.
 Low price to increase sales volume.
b. Volume
 Depends on marketing efforts.
 High demand due to reduction in selling price.

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INDEX

2 Modern Business Environment 2.1

3 Lean System and Innovation 3.1

4 Cost Management Techniques 4.1

5 Decision Making 5.1

6 Pricing Decision 6.1

7 Performance Measurement and Evaluation 7.1

8 Divisional Transfer Pricing 8.1

9 Strategic Analysis of Operating Income 9.1

10 Budgetary Control 10.1

11 Standard Costing 11.1

For Queries: rushigawali1212@yahoo.in

1. Traditional cost management

2. Strategic cost mgt. (SCM)

BY Rushikesh Gawali page 1.1

 what will be desired future position of org.

b. Cost driver analysis

c. Value chain analysis (purchasing RM to service the sales service is VCA) :

4. Value Chain analysis

BY Rushikesh Gawali chapter 1

PRIMARY ACTIVITIES INCLUDES

BY Rushikesh Gawali chapter 1

5. Strategic framework for value chain analysis

Bargain power of Bargain power of Threat of Threat of Intensity of

BY Rushikesh Gawali chapter 1

3. Core competencies analysis

b. Cost leadership / Low cost Strategy

BY Rushikesh Gawali chapter 1

6. Approach for assessing competitive advantages

2. Internal differentiation analysis

3. Vertical linkage analysis

BY Rushikesh Gawali chapter 1

 May be difficult to compete with competitors due to diversion of

7. Value shop model or Service value chain

8. Mission, Vision and objectives

BY Rushikesh Gawali chapter 1

BY Rushikesh Gawali Page 2.1

- Customer complaints centre costs

B. Total Quality Management (TQM)

BY Rushikesh Gawali Chapter 2

C. Business Excellence Model

BY Rushikesh Gawali Chapter 2

 Some business excellence models/tools to achieve & sustain excellence

 European foundation for quality management (EFQM) excellence model

 Baldrige criteria for performance excellence

2.Theory of constraints/ throughput accounting

BY Rushikesh Gawali Chapter 2

3.Supply chain management (SCM)

 Supply chain management process

BY Rushikesh Gawali Chapter 2

 Types of supply chain

 Use of information technology

BY Rushikesh Gawali Chapter 2

 Downstream supply chain management

 E commerce & SCM

 Key processes in SCM business model

BY Rushikesh Gawali Chapter 2

 Benefits of supply chain management

 Service level arrangement (SLA)

4. Gain sharing Arrangement

BY Rushikesh Gawali Chapter 2

BY Rushikesh Gawali Chapter 2