Strategic Cost Management
1) The following information is available for a watch showroom.
Calculate the following:
-
a) Contribution
-
b) PV Ratio
-
c) BE Ratio (in no. of units and value)
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d) MOS at actual sales of Rs. 6, 00,000/-
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e) Number of watches to be sold to get a profit of Rs. 20,000/-
Sale Price |
Per unit (Rs.) |
9800 |
Variable Costs |
Per unit (Rs.) |
4905 |
Commission (variable) |
Per unit (Rs.) |
500 |
Rent |
Per month (Rs.) |
100000 |
Salaries |
Per Month (Rs.) |
120000 |
Ans:
Introduction
PV Proportion and BE Ratio are two essential financial metrics that are used by businesses to assess their productivity and economic wellness. PV Ratio represents Profit Volume Ratio, while BE Ratio represents Break-Even Ratio.PV Ratio is the %age of the involvement boundary earned on each sale. The contribution margin is the change in the vending value & the mutable price of creating an item or facility. We divide the payment margin by the auction profits to determine PV Proportion. The resulting portion tells us how much of each sale is added to cover the taken care of costs and create profit.
Concepts and Applications
To calculate the required values, we first need to determine the fixed costs and the contribution per unit.
Fixed Costs = Rent + Salaries
= 100000 + 120000
= 220000
Contribution per unit = Sale Price – Variable Costs – Commission
= 9800 – 4905 – 500
= 4395
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a) Contribution
Contribution = Total Sales x Contribution per unit
= 6,00,000 x 4395
= 26,37,000
-
b) PV Ratio
PV Ratio = (Contribution / Total Sales) x 100
= (26,37,000 / 6,00,000) x 100
= 439.5%
-
c) BE Ratio
In units: BE Point (in units) = Fixed Costs / Contribution per unit
= 220000 / 4395
= 50 units
Conclusion
Regarding MOS or the Margin of Safety and security, this concept is utilized to identify the quantity of sales revenue a service can shed before it reaches the break-even point. MOS is computed by subtracting the break-even factor from the actual sales income. The resulting number tells us how much sales revenue can be shed before the business operates at a loss.
2) A Factory produces 3 types of shoes. While producing, for switching over from one type to another, there is a shift-over process involved. Costs incurred are as follows:
Shift-over costs Rs. 50,000
Factory Overheads Rs. 1, 00,000/-
Packing costs Rs. 20,000/-
Engineering Costs Rs. 30,000/-
Supervisor Costs Rs. 10,000/-
Quantity produced A- 1000, B – 2000, C- 4000
Allocate the costs to the 3 shoes (A, B, and C) using the Traditional Costing method and Activity Based Costing. Some other information about the 3 products is as under:
A |
B |
C |
|
No. of Switches |
3 |
4 |
2 |
Machine Hours |
20 |
18 |
15 |
No. of Receipts/packs |
4 |
5 |
8 |
Engineering Hours |
30 |
40 |
50 |
Supervisor Hours spent |
10 |
12 |
10 |
Compare the results and discuss.
Ans:
Introduction
To allot costs using Standard Costing, we need to recognize a single cost driver that prevails over all three products. Here, we can choose the number of components shaped as the price chauffeur. In this situation, the activity-founded evaluation technique offers an additional precise allotment of costs, considering the various activities and cost chauffeurs connected with each shoe.
Concepts and Applications
Traditional Costing Method:
In this case, we can allocate the costs based on the number of machine hours.
Total machine hours = (201000) + (182000) + (15*4000) = 122000
Allocation of costs:
A: (201000/122000) * (50,000+1,00,000+20,000) + (3/9)(30,000) + (10/9)*(10,000) = Rs. 16,733.61 + Rs. 10,000 + Rs. 11,111.11 = Rs. 37,844.72
B: (182000/122000) * (50,000+1,00,000+20,000) + (4/9)(30,000) + (12/9)*(10,000) = Rs. 20,490.16 + Rs. 13,333.33 + Rs. 13,333.33 = Rs. 47,156.82
C: (154000/122000) * (50,000+1,00,000+20,000) + (2/9)(30,000) + (10/9)*(10,000) = Rs. 21,081.97 + Rs. 6,666.67 + Rs. 11,111.11 = Rs. 38,859.75
Conclusion
Traditional setting you-back and Activity-Based Costing (ABC) are two preferred techniques for allocating costs to services or products. Conventional costing assigns costs to products founded on straight product & work costs, which can be incorrect and misleading. In contrast, ABC gives prices to goods based on the intricacy of creating them.
3) a) Prepare a Cash Budget with the following information.
Diary |
Notebook |
SpiralBound |
|
Sales Units |
8750 |
12500 |
5000 |
Selling Price (per Unit) |
80 |
64 |
100 |
Variable Cost ( per Unit) |
20 |
23 |
35 |
Fixed Cost |
65000 |
140000 |
95000 |
Allocation of General Overhead |
280000 |
320000 |
200000 |
Ans:
Introduction
A cash spending plan can help services recognize possible cash shortages or surpluses, enabling them to make informed choices about funding, investments, and other business activities. It allows businesses to forecast their cash inflows and discharges, helping them understand how much cash they require to run and where it will come from.
Concepts and Applications
To prepare a cash budget, we need to evaluate an organization’s inflows and discharges of money. Below is the cash allocated for the given info:
Cash Budget for the Year Ending December 31, 2023
Sales Revenue:
Diary: 8750 units x $80 per unit = $700,000
Notebook: 12500 units x $64 per unit = $800,000
Spiral Bound: 5000 units x $100 per unit = $500,000
Total Sales Revenue: $2,000,000
Conclusion
A cash financial plan is crucial for anticipating cash inflows and outflows over a particular duration. It helps companies determine future cash shortages or surpluses and make adjustments.
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b) A firm faces a decision about the replacement of a machine.
Following is the information available:
-
Depreciation of existing machine is Rs. 25000/- p.a.
-
A new machine is available at Rs. 45000/- that is much more efficient in production.
-
Increase in power cost due to the new machine is Rs. 5000/- p.a.
-
Rent of the factory building is Rs. 60000/- p.a.
-
Scrap Value of the old machine is Rs. 4000/-
Identify which of the above information is relevant and which is not relevant for deciding whether to continue with the existing machine or use a new one.
Ans:
Introduction
When determining whether to replace equipment, it is essential to recognize the relevant details affecting the decision. The following is an evaluation of the details provided to establish which is suitable and which is not applicable for making the decision.
Concepts and Applications
-
Depreciation of the existing machine is Rs. 25000/- p.a. This info is relevant as it represents the annual cost of using the existing equipment. This price will no longer be sustained if new equipment is acquired.
-
A new maker is offered at Rs. 45000/- that is much more efficient in production. This information is relevant as it stands for the cost of purchasing the new machine. Considering the initial investment needed to buy the new maker is essential.
Conclusion
To conclude, the relevant details for determining whether to change the equipment or not consist of the annual devaluation rate of the existing device, the expense of acquiring the unique instrument, the rise in running prices connected with the new maker, along with of the scrap value of the old machine.
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