CA Final Case Study New

FINAL COURSE
(Revised Scheme of Education and Training)
PAPER : 5
Strategic Cost Management and
Performance Evaluation
CASE STUDY DIGEST
BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
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Preface
Syllabus of the subject links strategy, management control systems and performance
management. The various models of performance management, the strategy mapping
process, as well as flowing performance measures in performance management, are part
of the curriculum. Syllabus comprises many contemporary concepts like supply chain
management, 5S, business excellence model, cellular manufacturing, beyond budgeting,
performance measurement models etc. Contemporary topics can be assessed mainly
through the case studies and case scenarios. The basic objective of a case study is to allow
the students to apply ideas and insights from theory to the real-life issues and problems.
Case scenarios, as opposed to case studies, are short cases written in a more compact
style with an appealing narrative, the case scenario’s focus is on covering more depth in a
specific area. While case studies provide the width and depth required for a holistic
analysis-based-discussion, case scenario enable more in-depth analysis of a given
managerial dilemma.
The Board of Studies (BoS) has undertaken the step of developing the Case Study Digest
to help the students with better understanding of the subject through a mode of case
studies, case scenarios and skilled assessment based questions on different important
topics and problems. This Digest and Study Material of the subject complements each other
and all the students are expected to make holistic study of both to gain maximum benefit
and acquire in-depth knowledge of the subject. The Digest in the subject of “SCMPE” has
been developed by BoS taking primary input from real life issues and problems.
The Digest will serve as a revisionary help book towards preparing for examination and help
the students in identifying the gaps in the preparation for the examination and developing
strategic plan to bridge it. The Digest contains solutions to the cases/ questions which will
act as a guide towards developing the skills of students on framing appropriate answer to
a problem and thereby to help students to improve their performance in the examination.

Every effort has been made to make this Digest error free, however if inadvertently any
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rectified at our end.
For any further clarification/ guidance, students are requested to send their queries at scm-
final@icai.in
Happy Reading and Best Wishes!
iv

Detailed Contents
Case Studies
Case Study 1 .....................................................................................................................................1
Case Study 2 .....................................................................................................................................4
Case Study 3 .....................................................................................................................................8
Case Study 4 ...................................................................................................................................13
Case Study 5 ...................................................................................................................................18
Case Study 6 ...................................................................................................................................24
Case Study 7 ...................................................................................................................................29
Case Study 8 ...................................................................................................................................36
Case Study 9 ...................................................................................................................................42
Case Study 10 .................................................................................................................................49
Case Study 11 .................................................................................................................................53
Case Study 12 .................................................................................................................................56
Case Study 13 .................................................................................................................................59
Case Study 14 .................................................................................................................................66
Case Scenarios
Case Scenario 1 ..............................................................................................................................72
Case Scenario 2 ..............................................................................................................................74
Case Scenario 3 ..............................................................................................................................77
Case Scenario 4 ..............................................................................................................................81
Case Scenario 5 ..............................................................................................................................82
Case Scenario 6 ..............................................................................................................................85
Case Scenario 7 ..............................................................................................................................88
Case Scenario 8 ..............................................................................................................................90
Case Scenario 9 ..............................................................................................................................94
Case Scenario 10 ............................................................................................................................96
Case Scenario 11 .......................................................................................................................... 100
Case Scenario 12 .......................................................................................................................... 101

Skill Assessment Based Questions
Question 1 ..................................................................................................................................... 104
Question 2 ..................................................................................................................................... 106
Question 3 ..................................................................................................................................... 109
Question 4 ..................................................................................................................................... 111
Question 5 ..................................................................................................................................... 114
Question 6 ..................................................................................................................................... 117
Question 7 ..................................................................................................................................... 121
Question 8 ..................................................................................................................................... 127
Question 9 ..................................................................................................................................... 130
Question 10 ................................................................................................................................... 132
Question 11 ................................................................................................................................... 135
Question 12 ................................................................................................................................... 137
Question 13 ................................................................................................................................... 138
Question 14 ................................................................................................................................... 140
Question 15 ................................................................................................................................... 144
Question 16 ................................................................................................................................... 147
Question 17 ................................................................................................................................... 150
Question 18 ................................................................................................................................... 154
Question 19 ................................................................................................................................... 157
Question 20 ................................................................................................................................... 159
Question 21 ................................................................................................................................... 160
Question 22 ................................................................................................................................... 168
Question 23 ................................................................................................................................... 177

Case Studies
Case Study 1
BA is the second largest airline in the Country “X”. Aviation industry in the Country “X” is
growing fast. In 2011, 45 million people travelled to/ from/ or within the Country “X”. By 2020
that doubled to 100 million. This number is expected to treble to 300 million by 2030. Also, by
2025, Country “X” is expected to be the third largest air transport market in the world, behind
the US and China.
Government is trying to meet the significant growth potential of aviation Industry. However, it
will create challenges also for the airline industry and its industry partners.
Government also wants to ensure that broader business and policy environment should not
place hurdles which inhibit growth and reduce the level of benefits that aviation can deliver to
the nation. The industry, its supply chain partners, and the government and policy makers
have a clear mandate to work in collaboration towards the common goal of ensuring that
aviation’s economic and social benefits are fulfilled.
Despite of operating in World’s fastest growing market BA struggles for passengers. Also, BA
is facing following problems:
 Aviation Turbine Fuel (ATF) prices constitute about 40% of operational costs in Country
“X” and are taxed higher here than anywhere else in the World. The Central government
charges 14% duty on ATF. While the state government pile on their own local tax that
can go as high as 29%.
 The currency depreciation is hitting Airline harder. About 25% to 30% of their costs,
excluding ATF, are dollar denominated, from aircraft lease rents, maintenance costs to
ground handling and parking charges abroad etc.
 With the entry of Low Budget Carriers, full-service carrier like BA that have higher
overhead costs have been forced to offer discount to passengers looking for great
bargain.
 Continuous improvements in tourism infrastructure, tourism policies, human resources
development, airport infrastructure density are among the areas that could further
enhance Country “X”’s competitiveness. Ease of doing business over the last five years
has risen.

2 STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION
 The intense competition among domestic airlines carriers, the need to capture a slice of
the ever-expanding market and passenger price sensitivity makes the airlines difficult to
raise ticket prices.
Together, these factors have now plunged Country “X”’s aviation industry to its most
precarious phase in the last three years or so.
BA is facing huge competition as a “year of sharp U-turns” for “X”’s aviation industry from
record profit in Financial Year 2019-20 to mega losses, resulting in direct need of
recapitalisation. BA has been appealing to the government for a decade for a reduction in
taxes on fuel, but all in vain. ATF is 35-40% more expensive in Country “X” than in the rest of
the world, because of relatively high tax rates.
Required
ADVISE the strategy that BA should follow in order to gain superior performance and
competitive advantage over its competitors.
Solution
In consideration to Michael Porter’s theory about creating a superior performance and
competitive advantage, a firm’s overall competitive advantage derives from the difference
between the value it offers to customer and its cost of creating that customer value. In order to
survive and prosper in industry, firm must meet two criteria– they must supply what customers
want to buy and they must survive competition.
To attain superior performance and attain competitive advantage, firm must have distinctive
competencies. Distinctive competencies can take any of the following two forms:
Relative low-Cost advantage– under which customers gain when a firm’s total costs
undercut those of its average competitor.
An offering or differentiation advantage– If customer perceive a product or service as
superior, they become more willing to pay a premium price relative to the price they will have
to pay for competing offerings.
Low Cost Advantage (Cost Leadership)
BA can enjoy relative cost advantage if its total costs are lower than those of its competitors.
This relative cost advantage enables a business to do one of the following:
– Charge a lower price than its competitors for its services to gain market share and still
maintain current profitability; or
– Match with the price of competing services and increase its profitability.
Cost reductions in BA can be achieved through yield management with variable pricing
depending on capacity utilization with careful monitoring; application of computer and
communication technology in cost effective way i.e. selling seats via the internet rather than
through travel agents; trimming overhead costs by using lower cost out-of-town airports, no

CASE STUDY DIGEST 3
printed tickets, seat allocations, or free meals and drinks; efficient operations i.e. fast
turnaround times for aircraft to improve utilization; and no exceptions policies to reduce the
cost of handling exceptions (e.g. no flexibility for passengers who arrive late). Cost economies
can also be realized from large scale operations. However, it is important to note that as soon
as more firms strive to become the cost leader, rivalry become so fierce that the
consequences for the profitability in the industry are disastrous.
Differentiation Advantage
It occurs when customers perceive that a business services offering is of higher quality,
involves fewer risks and/or outperform services offered by competitors.
In other words, customers perceive the service offered by a business to be superior. For
example, differentiation may include a firm’s ability to deliver services, and other factors that
provide unique customer value. BA is a multinational passenger airline. It can adopt a
differentiation approach by offering passengers a higher-quality experience than many of its
rivals. This allows it to charge a premium for its flights compared to many other airlines.
A differentiation advantage can be achieved by offering enhanced features such as prime
landing slots can be obtained at major airports around the world; using superior and advance
technology; well-maintained, clean, and comfortable aircraft; training in customer care and the
recruitment of high-quality staff; providing complementary services such as in-flight
entertainment, high-quality food, and drink. Customer value can also be increased by
subjective features such as brand image, advertising based on quality of service provided.
However, differentiator cannot ignore its cost position. If costs are too high the premium price
are nullified.
On successfully differentiated its offering, management of BA may exploit the advantage in
one of two ways viz., either increase price until it just offsets the cost of improvement in
customer benefits, thus maintaining current market share; or price below the “full premium”
level to build market share.
Alternatively, BA may focus on geographical region and short point to point flights to reduce
costs. Michael Porter enlightens focus as attaining low cost or product differentiation for a
particular buyer group, segment of product line, or geographic market rather than for the
industry as a whole. The focuser can attain competitive advantage within a niche, because
large firms are either not attracted to niche or have ignored the potential. The narrow focus in
itself though is not adequate for a competitive advantage. The firms need to optimize the
strategy on two variants: cost focus and differentiation focus. One risk of a ‘focus strategy’ is
that broadly targeted competitors devastate the segment once it becomes economically
attractive.
In addition, the currency depreciation is hitting Airlines harder and international overhead
costs have risen, the BA should attempt to increase the number of internal domestic flights.
Moreover, ATF cost can also be lowered by investment in fuel saving modern Airbuses,
however, the reduction in operating costs may outweigh the capital equipment costs.

To gain competitive advantage BA may also assess Value Shop Model. Value Shop generates
value by organizing resources (e.g. people, knowledge, and skills) and deploying them to
solve specific problems, for example, delivering airline services to the passengers or
delivering a solution to the business problem. Shops are organized around making executing
decisions- identifying and assessing problems or opportunities, developing alternative
solutions or approaches, choosing one, executing it and evaluating results.
In this way, the above discussed strategies may be more appropriate for helping BA in
achieving superior performance and competitive advantage over its competitors.
Concept in Practice
Southwest Airlines (SA) targeted on a geographic region and short point-to- point flights to
reduce costs. Even though it offered no-frills service (no-frills or no-frills service is one for
which the non-essential features like food, entertainment, printing of boarding pass etc.
have been removed to keep the price low) and was based in secondary airports, SA
improved quality relative to the limited set of competing alternatives by offering direct flights
rather than connecting flights requiring changing planes at large hub airports. The SA also
offered better on-time performance and friendly amenities.
Case Study 2
Bhalla & Singh LLP (BS LLP) is an accounting firm in form of limited liability partnership with
20+ branches across India, in all major cities. BS LLP offers to its customer services in
accountancy, assurance, tax consultancy, business advisory services. Since the country is
passing through economic slowdown, hence large numbers of business are entering into
either internal/ external reconstruction; resultantly advisory services are in huge demands. The
industry of accounting practices in India is mature, despite some of statues enforced recently.
As part of performance analysis, at BS LLP; partners for each service domain collectively
meet with top officers, on monthly basis. Following performance related data (belong to latest
financial year) was considered in one of recent conducted partner meeting.
Tax Business
Particulars for BS LLP Accounting Audits
Consultancy Advisory
Revenue (In Crores) 690 846 145 34
Growth of revenue over previous 2% 9% 3% 18%
year
Net profit ratio 5% 4.3% 6.7% 9.8%
Revenue (In Crores) of Accounting 2,518 5,430 1,652 286
Industry as whole
Remuneration Structure at BS LLP
 Partners are getting fixed contractual payment apart from share in profit.

CASE STUDY DIGEST 5
 Non – Partners are getting fixed salary apart from variable pay depending upon rating
from their immediate boss and peers.
Client Relation Officer who is working parallel to marketing team, first time participated in
monthly performance evaluation meeting and presented following data which contain rating
from clients of BS LLP. It is decided that these rating will also be added in performance matrix/
table stated above–
Tax Business
Particulars for BS LLP Accounting Audits
Consultancy Advisory
Customer Ratings (higher the better) 3.6 3.2 3.1 4.5
Required
You are newly appointed management consultant with experience in non-finance

performance evaluation techniques. During discussion at lunch table, managing partner (Mr.
Singh) explain the above process of performance analysis to you. You quoted about your
past experience of implementing non-financial performance evaluation techniques, including
Performance Prism, Balance Scorecard and Building Block. Building block sounds
interesting to Mr. Singh, he asks you to:
(i) LIST essential components of any performance management system.
(ii) DESCRIBE Building Block Model of performance management.
(iii) EVALUATE the BS LLPs’ existing performance management system from perspective
of 3 essential aspects of Building Block Model.
(iv) ADVISE the main improvements that introduction of a Building Block approach can
bring to BS LLPs’ performance management system.
Solution
(i) Essential Components of Performance Management System
Performance management system which is considered as a key aspect of management
accounting and must contain following components–
 Establishing functional and divisional organisation's structure along with
determination the level of decentralization.
 Establish responsibility centres and identify the person responsible for
performance of each such centre.
 Establishing the system to identify KPI against which performance will be measure
and establishing the yardsticks.
 Review system in order to compare the actual against standards and required
corrective action.

(ii) Building Block Model

Building Block model of performance management is developed by Fitzgerald and
Moon as a framework to improve performance measurement in service businesses.
The model suggests that performance systems should be based on three concepts:
dimensions, standards, and rewards.
Dimensions (these are critical success factor) - There are six areas upon which
company needs to focus in order to improve its performance. The model also suggests
that the dimensions can be divided into two sets–
Results – Competitiveness & Financial Performance.
Determinants – Quality of Service, Flexibility, Resource Utilization and Innovation.
Note – Improvement in results can be ensured by improving performance in
determinants.
Standards (these are key performance indicator) - Second aspects of Building Block
Model are to establishing the standards or determining the yardstick level. Model also
suggests the three properties which must be possessed by performance measure, these
properties are–
 Ownership,
 Achievability and
 Fairness.
Rewards - In order to encourage the workforce, so that they can achieve the standards
established; model also suggests three properties which every reward should possess.
These properties are–
 Clarity,
 Controllability and
 Motivation.
(iii) Evaluation of Existing Performance Management System
The existing performance management system at BS LLP doesn’t focus upon
determinants specified by Building Block Model. Prima facie it is apparent from the
performance matrix used by partners in their monthly meeting that performance is
evaluated based upon financial performance only. Let’s evaluate existing performance
management system further–
Dimensions
The existing performance management system at BS LLP is allowing to consider the
results in reference to: (i) Financial performance - it measures net profit margin and
change/ increase in revenue over previous year and (ii) Competitive performance –
revenue of BS LLP can be compared with industry revenue (segment wise) to calculate
market share.

CASE STUDY DIGEST 7
The matrix used by existing performance management system doesn’t contain any major
information from which performance level of determinants can be measured. But
recently at BS LLP customer rating is used, which can be taken as KPI for quality of
service.
Standards
Presently it seems BS LLP is measuring segment wise performance against performance
of industry (based upon revenue) apart from measuring net profit and growth.
Ownership - Since organisation structure is not clearly defined in the case above, hence
ownership for each of dimension stated above can’t be identified in existing performance
management system.
Achievability & Fairness – In order to ensure achievability of standard established and
fairness of same, presently it seems BS LLP is measuring segment wise performance
against performance of industry (based upon revenue), whereas measure net profit and
growth against standard established internally.
Reward System
Although non-partners at BS LLP are getting variable component of their remuneration/
rewards based upon their rating by immediate boss and peer, but the criteria of rating are
not clearly defined and weight is also not mentioned for boss rating and rating by peer. If
such criteria are not ration may cause de-motivation among staff.
Whereas partners are getting fixed remuneration apart from share in profit earned. Here
in given case it is not clear whether profit of respective division or entity as whole, BS
LLP. It is obvious that, if partners are getting reward based upon measure, which they
can’t control they may be de-motivated. This may also not improve the performance of
bad performing division, because they are also getting reasonable amount as share in
profit due better performance by other departments.
(iv) Advise to Improve the Performance Management System
First and foremost, improvement will be consideration of all the dimensions of
performance as per building block ensuring that all the critical success factors for
performance should be measured. This will help BS LLP considering the importance of
flexibility, resource utilization and innovation.
Flexibility is important from the prospective from delivery of service, the manner and
timing and of delivery.
Since staff is the key resource at BS LLP, hence essential it is to ensure optimum and
effective resource utilization. In order to measure the productivity of the staff, hour
charged as percentage of total available hour/ total hour paid can be computed. This ratio
will also signify the peak and off period.

Although the scope of innovation is not much available in accounting firms, but still use
of IT tools can improve the utility for client. Moreover, innovation can be seen as offering
new range and category of services.
Further, while identifying the parameter for evaluating performance; the Building Block
model will help to set the standards against which performance is needed to be
measured. Such standard should be achievable and fair, which should encourage the
motivation among staff. Such standard may be financial and non-financial. Building Block
Model will not only set the fair standard, but also help in establishing the mechanism that
how such standard should be established.
Building Block will also help in reviewing the rewards system, in order to motivate both
Non-Partner Staff and Partners at SB LLP. Reward should be based upon those criteria
for which worker is responsible or has control, so partner at SB LLP must get the share in
divisional profitability and non-partner worker must get the variable based upon their
productivity (which can be measure either by self-appraisal or 360 o degree.
Case Study 3
Bhatia Motor Works (BMW) is one of the renowned coach builders (fabricator) in North India,
with a mission to design and fabricate high-quality buses that are innovative in style and
engineering; whilst maintaining standards of reliability. BMW has market both locally and
internationally.
Human resource at BMW is highly skilled and well versed with latest tools and techniques of
respective functional area. BMW is innovative company and always try to improve its
performance.
Till date standard costing at BMW is limited only up to calculation of variance. Analysis and
classification of variances are never performed. But newly appointed cost controller is highly
motivated. Recently, post his appointment, the budgetary system at BMW was revamped
drastically as part of cost efficiency drive. Same was done to give best response to variance
identified, if any. Not only this, but cost controller is also interest in incorporation of relevant
costing and learning curve in standard costing and budgetary control system. With help of
management accountant, he able to fetch following data, pertaining to different divisions–
Fabrication division of BMW manufactures two products seat handle (product code B-SH-
101) and seat cover (B-SC-102) with BMW logo imprint on both apart from fabrication. Product
B-SH-101 takes 6 men hours to make while product B-SC-102 takes 12 hours. In a month of
25 actual working days of 8 hours each, 1,200 units of B-SH-101 and 750 units of B-SC-102
were produced. BMW employs 75 men in the department responsible for producing these two
products. The budgeted hours are 1,86,000 per annum. No. of budgeted working days were 26
but due to break-down, production function actually remains in operation for 25 days only.

CASE STUDY DIGEST 9
Painting Division
The budget was prepared by management accountant for painting division based upon
performance report of last year, he assumes that workers learning curve rate will be 95%. But
workers are skilled and specification of task is well known to them, so they assure their
manager of 90% learning curve rate (learning index value will be -0.152). Since BMW believe
in participatory budgeting, hence management accountant revised the budget estimate post
feedback from worker’s group.
In each month 15 buses are made ready for delivery after painting & fabrication. It is estimated
that initial bus will take 20 hours for painting. It is estimated that learning will be terminated
post 6 th unit.
Extracts and Values from tables
Log 2 = 0.3010, Log 3 = 0.4771, Log 5 = 0.6990; Antilog of 1.1827 is 15.23, Antilog of 1.2808
is 19.08 and Antilog of 1.1948 is 15.66.
Required
(i) Is favourable variance being conclusive proof of efficiency, or investigation of

variances is essential? ILLUSTRATE.
(ii) EXPLAIN planning and operating variance.
(iii) ‘Standard cost used for variance analysis is not always relevant cost’. EXPLAIN the
importance of relevant cost while determine standard cost for variance analysis.
(iv) ‘Largely the standard yardsticks are static in nature, during a particular period for ease
of variance analysis for said period; but not in case of labour related standard
yardsticks; due to learning curve’ ASSESS the validity of the statement, in light of
need of recognition of learning curve, while establishing the standards.
(v) COMPUTE revised budgeted labour hours for management accountant incorporating
learning curve.
(vi) EXPLAIN and INTERPRET control ratios.
Solution
(i) Investigation of variances are essential
Variance identified post comparison of actual cost against standard cost are not a
conclusive sign of performance. No doubt variances are strong indicator of the potential
problem. However, investigation of root cause of the adverse variances is necessary.
Some of variances are composite of in nature (for e.g., material usage variance can be
further classified in material efficiency and material yield variance) hence break down
them in part and investigation of each element becomes essential.

So even favourable variances need to be investigated. To understand this statement a

suitable illustration can be of raw materials that too in competitive pricing environment.
Suppose inferior quality good (whose price is comparatively less) is ordered, on the one
side favourable price variance will arise; on the other side most likely there will be
substantially more scrap & rework, and thus a higher usage variance.
(ii) Planning & Operating Variances
Planning Variance – These variances are arising due to revision of standards. In order to
compute planning variance original standard needs to be compared with a revised
standard. Revised standard is that standard, which may be used as yard stick, if what
happen earlier known to person responsible for planning. These are also known as
planning variance
Operating Variance – These variances are on account if variance of actual performance
or results from revised standard.
(iii) Variance Analysis and Relevant cost
Traditional approach to variance analysis is to compute variance based on acquisition
cost (incurred out of pocket) and standard price for the acquisition of such resources.
This may be misleading when resources are scarce in nature, because if scarce
resources are not effectively used; it will not only increase the purchase cost (because
finance cost is also incurred in addition to acquisition cost) but also result in loss of
contribution.
Hence it makes sense, if we incorporate relevant costing to variance analysis; in term of
contribution lost on scarce resource/bottleneck activities. To illustrate, while computing
material usage variance, lost contribution should be embedded in standard price (to
reflect how efficiently, scarce resources is being used) as follows–
(𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 − 𝐴𝑐𝑡𝑢𝑎𝑙 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦) × 𝑅𝑒𝑙𝑒𝑣𝑎𝑛𝑡 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑃𝑟𝑖𝑐𝑒
Where, relevant standard price is standard cost of acquisition of scarce resource
(material) added by contribution lost (for else product, where this material; otherwise
supposed to be used)
(iv) Recognition of learning curve while establishing the standards
Learning Curve recognises the progression of learning potential of people, it presumes
worker become quicker if he repeats the process. Now this presumption has implication
on standard setting process, in regard to computation of labour related variance and
interpretation thereto.
Due to learning curve, standard time established soon become outdated yardstick for
performance evaluation, hence computing labour variance with such out-dated standard
date is meaningless from prospective planning and control.
Hence in order to accommodate, rapid change in form of reduction of time required/taken
producing further each unit of same product with identical specification; effect of learning
curve should be considered while computing labour variance. Effect of learning curve
should be in embedded while setting the standard.

CASE STUDY DIGEST 11
Even in case of material related variances, learning curve has critical implication;
because while producing identical product for second time or thereafter; there is high
probability of elimination of defect and wastage. Same may improve both the material
price and usage variances. Variable production overhead, which are associated to labour
hours may also impacted by learning curve. Hence considering the effect of learning
curve is essential for material and overhead variances too.
(v) Revised budgeted hours
A learning curve is geometric with the general form Y = axb
Whereas–
Y = cumulative average time per unit or batch.
a = time taken to produce initial quantity.
x = the cumulative units of production or, if in batches, the cumulative number of batches
b = the learning index or coefficient
Time taken to paint 6th unit is 13.08 hours i.e. (91.38 – 78.30) (See working note 1 & 2)
Time required to paint unit 6th onward = 13.08 hours (because learning curve will cease
post 6th unit)
Revised budgeted time required to paint 15 buses = 78.3 hours (for first 5) + 13.08
hours × 10 units (next 10 – 6th to 15th) = 78.3 hours + 130.8 hours = 209.10 hours
Working note 1 - Time required for painting first 6 buses
Y = 20 × (6)-0.152
Log Y = Log 20 – 0.152 × Log 6
Log Y = Log 20 – 0.152 × Log (2×3)
Log Y = Log 20 – 0.152 × (Log 2 + Log 3)
Log Y = 1.3010 – 0.152 × (0.3010 + 0.4771)
Log Y = 1.3010 – 0.152 × (0.7781)
Log Y = 1.3010 – 0.1183
Log Y = 1.1827
Y = antilog of 1.1827
Y = 15.23 hours
Time required for painting first 6 buses is 91.38 hours (15.23 hours × 6 buses)
Working note 2 - Time required for painting first 5 buses
Y = 20 × (5)-0.152
Log Y = Log 20 – 0.152 × Log 5

Log Y = 1.3010 – 0.152 × (0.6990)

Log Y = 1.3010 – 0.1062
Log Y = 1.1948
Y = antilog of 1.1948
Y = 15.66 hours
Time required for painting first 5 buses is 78.3 hours (15.66 hours × 5 buses)
(v) Control Ratios
 Activity Ratio measures the level of activity attained over a period by expressing
number of standard hours required for actual production as percentage of the
budgeted hours, as follows–
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 ℎ𝑜𝑢𝑟𝑠 𝑓𝑜𝑟 𝑎𝑐𝑡𝑢𝑎𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 × 100
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 ℎ𝑜𝑢𝑟𝑠
= (16,200/ 15,500) × 100 = 104.52%
104.52% signify that BMW is need to work 4.52% extra than what it budgeted for to
manufacture what actually it manufactured.
 Capacity Ratio indicates the actual utilisation of budgeted hours. It is a measure
which express actual working hour as percentage of budget hours (or maximum
possible number of working hours).
𝐴𝑐𝑡𝑢𝑎𝑙 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 ℎ𝑜𝑢𝑟𝑠 × 100
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐻𝑜𝑢𝑟𝑠
= (15,000/ 15,500) × 100 = 96.77%
96.77% signify that BMW actually worked for 96.77 hours against every 100
possible hours.
Or Budgeted Capacity is utilised up to 96.77% and 3.23% capacity remains
unutilised.
Note –
Instead of formula used above, Capacity Usage Ratio can also be measured using
below mentioned formula–
𝐴𝑐𝑡𝑢𝑎𝑙 ℎ𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑 × 100
𝑀𝑎𝑥𝑖𝑚𝑢𝑚 𝑝𝑜𝑠𝑠𝑖𝑏𝑙𝑒 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 ℎ𝑜𝑢𝑟𝑠
 Calendar Ratio is a measure where actual number of working days are expressed
as number of working days during budgeted period.
𝐴𝑐𝑡𝑢𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑎 𝑝𝑒𝑟𝑖𝑜𝑑 × 100
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑟𝑒𝑙𝑎𝑡𝑒𝑑 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑝𝑒𝑟𝑖𝑜𝑑
= (25/26) × 100 = 96.15%

 Efficiency ratio indicates the degree of efficiency attained in production. It is

expressed in term of standard hours for actual production as a percentage of the
actual hours spent in producing that work.
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 ℎ𝑜𝑢𝑟𝑠 𝑓𝑜𝑟 𝑎𝑐𝑡𝑢𝑎𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 × 100
𝐴𝑐𝑡𝑢𝑎𝑙 ℎ𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑
= (16,200/ 15,000) × 100 = 108%
108% signify that efficiency is 108% or task for which 108 hours is available finished
in 100 hours.
Working Notes 1 - Calculation of standard hours for actual production
No. of men Total
Sr. No. of Unit
Product hour required Standard
No. produced
per unit Hours
1 Seat handle (B-SH-101) 1,200 6 7,200
2 Seat cover (B-SC-102) 750 12 9,000
Total standard hours for actual production 16,200
Working Notes 2 - Calculation of monthly budgeted hours
Annual budgeted hour =1,86,000
Monthly budgeted hour = 1,86,000 hours/ 12 months= 15,500
Working Notes 3 - Calculation of actual hours for actual production
Sr. Particulars Quantum
No. in No.
1 No. of days production function worked 25
2 No. of hour in day 8
3 No. of worker in division 75
Total actual hours for month 15,000
Note – All calculations are on monthly basis.
Case Study 4
Style-inn Fabric & Clothing (SFC) is manufacturer of clothing fabrics to be made up into
dresses and suits. SFC established long ago back and presently enjoys the reputation as
producer of quality fabric. SFC producing fabrics from high quality synthetic yarns with all
standard features which other fabric manufacturer offers. Designs of fabric are old fashioned
(traditional in nature) as SFC was established long ago.

Management team at SFC shown believe in integration (vertical and horizontal) and
diversification (product range or market reach) as tool of risk reduction and value
enhancement (profit too). SFC opts for un-organic forward integration to gain control over
value chain by acquiring ‘Skylark Designer Clothing’ (SDC). SDC is operating in designing and
weaving of fabric into fashion wears. SDC is targeting the customers who are in age group
from 40 to 60 years and belongs to price sensitive income group. SFC in this way is able to
reach to end consumer through retailers by manufacturing cloth themselves. Acquisition of
SDC by SFC remains largely successful as result in relative high increase in sales and profits,
both.
Problem Point
But the sale & profit are not growing at same old rate now, top and bottom line witness the
slowdown, which may be due to exhaust of synergy benefits. Retail stores through which SFC
sold its material also find it difficult to make reasonable amount of sale. SFC starts exploring
new retailers. But due to presence of large number of supplier (of manufactured cloth), buying
power of retailers is high; resultantly SFC has to rest at unacceptable low margins.
Down the Line
SFC is considering of acquisition of one of cloth retail chain, named ‘Paridhaan’ in order to
deliver fabrics to the customers directly and eliminate retailers in order to boost its profit
margins.
Required
(i) DRAW Value Chain and EXPLAIN briefly.

(ii) What do you mean by competitive advantage and how it can be attained? EXPLAIN.
(iii) IDENTIFY strategy SDC opted to gain competitive advantage.
(iv) DISCUSS ‘value chain effect’ of forward integration (acquisition of SDC) on SFCs
‘competitive ability and cost competency’.
(v) EVALUATE possible acquisition of cloth retail chain ‘Paridhaan’ by SFC.
Solution
(i) Value chain (suggested by Michael E Porter*) describe those activities of organisation,
those add value to input before it become output. Value Chain can be expressed as way
of assessing and explaining current competitive advantage while identifying cost drivers.
*Note - Michael E Porter, in 1980 wrote a book ‘Competitive Strategy; Techniques for
analyzing industries and competitor’ in which he explained value chain. In 1985 he along-
with Miller suggested value chain as part of bigger network i.e., Value System. It split
down company’s activities between those which are ‘primary (Those result in production
of goods/rendering services)’, and those which ‘support (assist in such production)’ these
primary activities (as shown in figure below)–

Concept of Value
Successful organisation able to create value for its customer (end user) either by offering
differentiation (more utility through customized/unique product/services at same price) or
cost competitiveness (same utility at par to competitor, but at lower price).
(ii) Competitive Advantage is ability to generate more economic value than competitor.
There are three generic strategies, suggested by Michael E Porter (In another book
which he wrote in 1985 on ‘Competitive Advantage – Creating and Sustaining
Super Margin’) through which an organisation could achieve competitive advantage–
Competitive Advantage can be obtained
Scope/Scale of Strategy through
Lower Cost Uniqueness
Broad Target Overall Low Cost
Differentiation
Competitive (Industry Wide) Leadership
Scope can be Narrow Target
Cost Focus Differentiated Focus
(Particular Segment)
a) Cost Leadership, where there is great emphasis on keeping costs down. This
opens up the profit margin by lowering costs, ideally more than any competitor can.
b) Differentiation, where a better product or service is sold. This opens up the profit
margin by raising selling prices.
c) Additionally, an organisation can choose a focus strategy, where the organisation
concentrated on a small segment of the market. Within the focus strategy, the
organisation must choose whether or not to become a cost leader or a differentiator.

(iii) Strategy at SDC

Since SDC targeting the customers who are in age group from 40 to 60 years, and
belongs to price sensitive income group, hence strategy opted to gain competitive
advantage can be considered as Cost Focus.
(iv) Value Chain Effect at SFC
Acquisition of SDC by SFC can be termed as forward vertical integration. Any forward
vertical integration can be justified because it ensures increase in profit, effective
control over market as well on pricing and finally brand building by reaching to
target group. SFC’s main objective behind SDC acquisition was getting control
over value chain and increase in profit. SFC has precluded the possibility of other
ways of increasing fabric sales for e.g., exporting.
SFC extends the value chain. Earlier it was restricted up-till sale of fabric to garment
manufacturer, but now SFC reach out to retailers to sell the in manufactured garments.
Scope of value addition to end user increased but value system become more
complex reason being two systems now merged into one value chain.
SDC (which is acquired by SFC) is believing in focus strategy by restricted its market to
the 40-60 years aged and price sensitive income market. This may be a sensible
strategy for a company engaged in designing of cloths, but surely not for a
manufacturer of fabric.
Effects of forward integration on competitive ability and cost competency
(Importance from cost perspective)
a) Post integration SFC has to operate two production lines (different set of Men -
Workforce, Machine and Methods - product and production layout). One being
spinning the fabric and being manufacturing of cloths. Resultantly transfer pricing
will be cost aspect which need to be decided.
b) Since the operation is sequential in nature, first weaving then stitching; hence any
mismatch in capacity, lead/run time of both the production lines may result into
increased cost of either warehousing or idle capacity. (may result in additional
working capital required or loss of contribution)
c) Carrying Cost (warehousing cost) will also increase on account of manufacturing
of cloth ahead of retail demand. (again, additional working capital may be
required)
d) For SFC, it may become difficult to compete with other fabric manufacturer;
because due to diversion of management focus in two production line (may lose
cost competitiveness) and SFC is now directly impacted by customer/ consumer
who has verity of option apart from SFC’s cloths to choose between.

e) Since design of fabric (manufactured by SFC) are fit for traditional wear, but
expertise of SDC is in fashion wear; so designer at SDC may resent the lack of
freedom. (integration of objective and culture is essential to overcome)
(v) Although, the intention is to earn more of the value in the value system, but possible
acquisition of retail chain ‘Paridhaan’ (forward vertical integration into retail outlets)
has its own pros and cons for competitive advantage.
Expected Benefits
a) SFC will have full control over the production, pricing and marketing. So, acquisition
of Paridhaan will give strength to SFC for keep relying upon differentiation
strategy.
b) Since SFC will reach to end consumer directly, hence will have access to entire
customer related data. Such data can help SFC to understand customer
specification and do customization in product as per requirement of specific
customer group.
c) Since post acquisition of Paridhaan, SFC will have exclusive retail chain; hence
reduce the competition from other brands whose products are lying along-with
SFC products at selling shelves of retails.
Anticipated Drawbacks
a) Managing retail chain will open another area of operation for SFC (Own retail chain
is capital intensive business rather labour intensive – high amount of capital will be
invested in properties – even then outcome depends upon location of stores) and
increase operating as well as financial risk too.
b) Since SFC manufactures fabric, which is good for traditional clothing only, hence
limited range of products may be available for sale at exclusive showroom/retails
shops of SFC (through acquisition of Paridhaan); so, may not be able to attract
requisite number of clients to cover the fixed cost.
c) In order to complete product range SFC may have to complement its product with
product of another manufacturers; this may be not possible in cost effective
manner.
Conclusion
SFC should acquire retail chain ‘Paridhaan’, mainly as a response to reduce the
competition from other brands whose products are lying along-with SFC products at
selling shelves of retails and to reach end consumer directly to understand their needs.
However, acquisition would not be so easy due to the high amount of capital investment
is required. In addition, cultural changes are also essential to from overcome the
traditional shell.
Overall, the benefits of acquiring retail chain do, however, need to be compared to the
financial cost and other qualitative factors.

Case Study 5
Marcus Neo-Fashion Limited (MNFL) is leading brand in fashion world. Company is dealing in
both fabric and readymade garments. Since the company was established long ago, hence
has well established SOPs. Management at MNFL is highly concerned with performance and
productivity.
In order to determine and appraise the performance, MNFL conducts fortnightly meeting of
heads of different responsibility centres apart from quarterly master meeting. In master
meeting each of such departmental head need to present report for his department on
following aspects–
Performance Matrix Dashboard at MNFL
Criteria Indicators
I Average Capital Employed in department with detailed information of source and
nature (working or permanent capital)
II Revenue and Earnings
III Output (in terms of no of units and per employee productivity)
IV Existing Clients and New Customer added with data on market share
In one of recent such master meetings, which was chaired by CEO, newly appointed VP-HR
quoted ‘Intellectual capital is as critical as financial capital in order to ensure smoothening,
success and sustainability of any business’ hence employee where so ever lagged in technical
skills, it is essential and important to work on his skills in order to enhance the productivity.
VP-HR said at MNFL ratio of skilled, semi-skilled and unskilled worker are 1:2:6, which needs
to be worked at. He also insists to roll-out new wage policy which should support ‘Performance
Related Pay’. He said, ‘I don’t know much about enterprise performance, but I strongly believe
that performance indicators must include performance of employees in term of their skill and
knowledge’.
Immediately VP-Finance said existing performance matrix is essentially focused EV/ EBIT and
returns on capital hence sufficient from prospective of performance appraisal. Hence there is
no major need to consider impact and effect of human capital. He also added that entities
revenue is growing @ of 14% and earning is growing at 12% which 4% on higher side then
industry. He said present rate of ROI is 11.5% which is better than industry average of 9%;
and Market Cap is also doing well.
VP-Finance countered by VP-Planning & Operations, according to him ‘skilled labour will be
added advantage in order to develop ‘zed’ culture i.e., zero accidents, zero defects, zero
delays, zero inventory, zero breakdowns, zero changeovers, zero waste’. He also said skilled
labour can also add value by incorporating innovations. He quoted presently average defect
rate is 1.5% of total production.

On this VP-Marketing add ‘skilled employee means better process and better processes leads
to competent value chain which can serve highly customised product; hence preconceived
quality (conformance to customers’ need) leads to strong brand equity.
Chief Information officer support VP-Marketing and VP-HR by quoting the position of brand
can be improved by product development. Newly developed product will meet and set, latest
style statement in market; eventually help MNFL to acquire new customers within existing
marketing without incurring much on advertisement or sales and promotion. Skilled labour can
easily bring innovation to the product.
Required
Post conclusion of meeting, CEO requested you (Management Accountant) to–

(i) DESCRIBE performance management indicators.
(ii) DISCUSS need of non-financial performance indicators at MNFL.
(iii) TABULATE role of non-financial performance indicators considering the indicator or
measures suggested by VP-HR and Chief Information officer.
(iv) Briefly EXPLAIN different models of non-financial performance indicators that MNFL
can apply.
Solution
(i) Performance Management Indicators
Performance Management System plays a key role in developing strategy; it is require
measuring the current performance and establishing standard. For performance
measurement, certain indicator can be established & such indicator may be–
 Financial Performance Indicator e.g., ROI, EPS and EBITDA
 Non-Financial Performance Indicator e.g., Balance Scorecard
Performance indicator having objectives of
 Evaluating the achievements of organisation objective
 Compensate manager
(ii) Need of non-financial performance indicators
Since financial performance indicators are profit oriented only, but strategy needs to be
sustainable apart from profitable. Hence in order to overcome the inadequacy and
unjustifiable nature of financial performance indicators, non-financial performance
indicator need also to be used. Hence opinion framed by VP-Finance is not tenable
that revenue and earnings growth of 14% and 12% respectively, apart from ROI is 11.5%
is sufficient to evaluate performance.

Non-Financial Performance Indicators are sustainable action-based indicators. For

example, employee training/ health & safety will increase the profit & let them feel
empowered, hence NFPIs are equally important to consider. Similarly putting effort in
research and development to yield innovative product will result in high brand image &
high intellectual property rights.
(iii) Role of Non-Financial Performance Indicator (NFPI)
As already stated, Non-Financial Performance Indicator consider non-monetary aspects
of performance such as–
 Skill, Attrition and Job Satisfaction of Human Resource
 Quality of Product
 Brand Equity
Roles of NFPI
Management of Human Quality of Product Brand Awareness &

Resources Company Profile
Monitor & Control Staff Qualitative Product and In term of;

in term of; Service; Value of brand with high
Staff Turnover that can beat rival's loyalty
Absente Rate product Preceived Quality
Result of Job & R&D image
Satisfaction Survey Full-fill need of customers Brand awareness
(iv) Different Models of Non-Financial Performance Indicators that MNFL can apply
Top bosses at MNFL wish to consider non-financial indicators apart from financial
indicators, hence following models of non-financial performance indicators can be
applied–
Balanced Scorecard (By Robert Kaplan and David Norton in 1990)
Balanced Scorecard can equip, MNFL with a management system (which is more than
just measurement system) that is better, in terms of ensuring availability of information to
business manager to make better decision and evaluation thereof, by establishing goals
and measures in regard to four perspectives–
 Innovation, Learning and Growth Perspective – Suggested by VP – HR
 Internal Business Process Perspective – Suggested by VP – Operation and
Planning
 Customer Prospective - Suggested by VP – Marketing and Chief Information Officer

 Financial Perspective – Already under consideration
Innovation, Learning & Growth Perspective

 Employee training & corporate culture attitudes in order to ensure individual and
corporate improvement.
 People are main resources in an organisation because they are only repository of
knowledge.
 It constitutes essential foundation for success of any knowledge worker organisation
(learning and growth).
 Learning is something more than training. Purpose is to improve ratio of skilled,
semi-skilled and unskilled worker (1:2:6); not by hiring but by inculcating learning
into exiting workforce.
Internal Business Process Perspective
 This perspective refers to internal business process.
 This perspective allows the manager to know how well their business is running.
 This perspective needs to be carefully designed/ explained by those who know
these processes most intimately.

Customer Perspective
 Recent management philosophy has shown on increasing realisation of the
importance of customer focus.
 Customer Satisfaction is very important for any business, because if customer is not
satisfied, then will find other supplier to fulfil their need.
 Customer base should be categorised and analysed.
Financial Prospective
 Kaplan and Norton don’t disregard the traditional needs of financial data.
 Ensuring availability of accurate financial data on timely bases is one among the
priority of management – process of storing and retrieving financial information
should be centralised and automated.
 There may be needed to include additional financial data such as risk assessment
and cost aspects.
Expected benefit to MNFL of implementation of balance scorecard includes holistic
approach, overall agenda, objectivity, management by objective, feedback and learning
and system approach.
Performance Pyramid (By Lynch & Cross)
Performance Pyramid which contains hierarchy of financial and non-financial
performance measures, can help MNFL in considering customer and market as part
of performance indicators apart from financial aspects. There are the 4 level of
pyramid.
Vision or Mission
Market & Financial Measures
Operating Stategies
Lower Level Departmental Indicators
Level 1
Corporate Vision and Mission defines how organisation will achieve long term success &
competitive advantage.

Level 2
In order to achievement of Corporate Vision and Mission the focus is on–
 Market Related Measures
 Financial Measures
Level 3
Operating Strategies become guiding force to achieve strategic objective, which includes
Customer Satisfaction, Increased Flexibility and High Productivity.
Level 4
Status of level 3 driving forces can be monitored using the lower-level departmental
indicators such as Quality, Delivery, Cycle time and Waste etc.
Note – There is drawback of pyramid that it does tend to concentrate largely on
shareholder & customer.
Building Block Model (By Fitzgerald and Moon)
Building Block Model an approach to performance measurement in business services.
There are three blocks Dimensions, Standards and Rewards.
 Dimensions are Critical Success Factors (CSFs)
 Standards are Key Performance Indicators (KPIs) and
 Reward is essential in order to keep workforce energetic and motivated – hence
should be performance related.
MNFL can use the Building block model to identify the CSFs and then determine the
KPIs. These both CSFs and KPI will become the part of performance matrix at MNFL.
3 Building Blocks
Standards
Dimensions Rewards
It have the characterstics of
These are the goals to Ensure-employees are
ownership, achiveability and
measure each performance motivated to meet standards
fairness
Standards must be linked to

the controllable factor and
clear.

Performance Prism (By Andy Neely and Chris Adams)

There is limitation of balance scorecard that is only two set of stakeholders, which are
shareholder and customer. MNFL can overcome that limitation of balance scorecard by
using Performance Prism model.
Performance Prism framework can help the top bosses at MNFL to consider wide range
of stakeholders including activities, communities, consumers, employees, legislators,
regulators and suppliers with five focus areas.
Five Focus Area's
Stakeholder Satisfaction - Identify the stakeholder and understand their need
Strategies - Should be drafted in order to fullfill stakeholder's need
Process - Critical processes to fulfill such needs & strategies
Capabilities - Capabilities need to operate our processes more effectively and efficiently
Stakeholder Contribution - Need from our stakeholders to maintain capabilities
Case Study 6
Dream Homes, a US based MNC, started its Indian operations with opening of few stores in
its nascent phase. In recent times, it started running nationwide stores in India selling range of
home-based products right from home improvement tools, decors, electronic appliances to
small kitchen utilities like steel pans, nonstick dishes, kitchen organizers, knifes, cardboards,
countertop stickers, ice cream molds, chocolate molds and alike. It had gained wide popularity
particularly among the ladies’ group of India since its expansion of the product line. Previously
it was selling just the intermittently purchased home-based products like furniture and
appliances. It was the extended accessibility to daily utilities that elated the ladies’ group
about visiting the stores. Some women referred Dream Homes as the one stop search for all
their necessities.
Dream Homes manufactured some of the products rather than making an outright purchases
and sales thereof of all its products. To make various kinds of furniture and kitchen based
small utilities, it derived its raw materials directly from local market which were mostly the
recycled materials like plastics, scrapped items, used furniture and alike rather than the raw
wood, forest products and firsthand products. Its raw materials were therefore capable of
generating various forms of work in progress. The work in progress and finished product
relation worked in similar fashion. From a particular WIP, it was capable of generating multiple
outputs. Therefore, the firm kept its material cost low and primarily relied on the recycling
process, thereby keeping up its pledge to serve the environment.

For the in-house manufactured products, the materials department of the firm functioned in
the below manner:
1) The manager of the department kept a watch on each type of inventory levels in the
warehouse.
2) He then estimated the required production based on historical demand and long-term
forecasting policies of the firm.
3) A room was also left for safety stock so that any unforeseen delay in delivery of the
goods could be covered.
4) Based on the existing inventory and production plans and safety stocks, inventory
replenishment levels were calculated.
5) Once the stock reached its reordering level, an order to replenish the stock was being
sent to the vendor.
6) Based on departmental orders, vendor delivered the materials.
To manufacture the finished products i.e., to convert raw material to finished good, the
intervening time was 3 weeks. It will take approximately take 4 weeks to deliver the in-house
manufactured product from the time order is received. The standard lead time of similar
products in industry is 2.5 weeks.
For products purchased out-rightly, a purchase order was prepared by the purchasing
department based on the inventory in hand and expected demand. Some of those products did
show a sketchy demand pattern, with surge in demand for lame reasons. However, the
department did not take into account safety stocks for any of these purchased products, since
the cost to maintain such inventories were high and the costs of these products itself were
high enough. The problem however was failure to meet surprise orders or sudden increase in
demand.
People were getting busier and there was hardly any time to procrastinate buying things they
need until they could visit the stores based on their availability. Moreover, it was just the metro
cities, that had overwhelming number of stores, but states like Gujarat and Odisha remained
an untapped target with very few stores only in the developed parts of the cities. Dream
Homes’ agenda was not just to add more variety to its existing offerings, but to reach people
all around the country since it perceived manifold needs were yet unmet.
Going digital was a challenge since its popularity was limited to its store locations and
therefore it was dubious of its acceptability among the nationwide customers. It was prepared
for an extensive marketing of its digital channels though and funds were not a problem. Having
heard about the peaking demand of businesses for E Customers, it was supportive of the idea
and considered to follow the suit.
From its US operations, it was very well aware about the expectations of its E Customers and
the quality of service they desire from their E Sellers. They tend to be progressively
demanding and expect their orders to be processed in couple of hours after being placed.

They do not want to grapple with the tracking information of their package. They need real
time update of their package location so that there are no abrupt surprises about the delivery
time and the condition of the package. They like to purchase from E Sellers who offers
competitive prices accompanied with free shipping and on time delivery. That is all too much
for a developing market like India.
The labor cost is relatively low in India but the infrastructure in not adequately sound to
guarantee the same level of service at their expected prices. Indian market is not similar to the
US market, there being an immense cultural gap. The income of the middle-class people is
also not remarkably high and hence they can spend sparingly on things that are not
paramount on their list. Kitchen items though marked as "necessities" by the women section of
the society were not real necessities in economic sense. Hence the firm thought of applying
the paradigms of Target Costing to set the prices of their online products such that they
remain competitive before their E Customers.
The firm also needs a flawless Supply Chain Management (SCM) System in Indian
environment, but the back-office team of the firm had little knowledge about this aspect of the
E Commerce project and it did not see the light of the day. Now they need you to help them
shape up the SCM look of Dream Homes.
Required
Given the facts of Dream Homes, answer the following questions:

(i) DISCUSS the suitability of Target Costing concept to Dream Homes?
(ii) Critically ASSESS its current inventory management system and RECOMMEND
suitable changes in light of its business strategy.
(iii) ADVISE the SCM look for Dream Homes as per their requirement.
Solution
(i) Usually, we notice a suit of prices of products being determined based on the cost of
their production, keeping a room for desired margin. In contrary to this, the then
originated Japanese concept tells us to estimate selling price at first place, to be
determined based on the price the market is currently willing to pay for a similar product.
Thus, the prices here are not based on the cost of their products rather costs have to be
targeted and thus the name “Target Costing”. This means once price is determined and
profits are set aside, the remainder becomes the costs to be achieved. In striving to
reach the cost goal, myriad managerial techniques and tools like Value Chain Analysis/
Value Reengineering, Six Sigma, are used. These techniques are used keeping in mind
the focus (i.e., to control cost in order to meet the target without compromising the quality
and value to be derived from the product). As such, various costs incurred with respect to
product like design cost, manufacturing cost, storage cost, transportation cost are
destined to be controlled.

Target Cost concept is very much relevant in Dream Homes’ situation since it is
considering to digitize its business where competition is intense specifically with regards
to the prices of similar products. Since the products offered by Dreams Homes lack much
differentiation, the unique selling point of the firm can be to offer quality products at
low prices. Further, E Commerce will mostly require the firm to operate as per Just in
Time (JIT) approach that will reduce inventory maintenance burden and also reduce
wastage, thereby controlling costs. Thus, Target Costing and E Commerce go hand in
hand.
We must also keep in mind that the firm can apply Target Costing concept to both its
manufactured products and the products purchased out-rightly. For the merchandise
goods, Dream Homes can plan to control various fixed cost (i.e., storage and inspection
cost) and variable cost (i.e., selling cost) incurred to handle such goods such that lower
prices can appeal wider customer base. Moreover, to achieve low costs for its supplied
products, it will have to enter into long term contracts with dedicated suppliers.
Considering the E Market, the scope of its operations will expand and therefore the
demand may also increase. Thus, suppliers can funnel the discounts in form of low prices
only if a commitment for long term purchases is made by the firm.
(ii) Currently, Dream Homes operates physical stores at which time inventories of
raw materials, WIP and finished products are maintained at the stores and in
warehouses considering the demand directly dependent upon the store locations.
It has been blocking large assets in form of various inventories piled up to
coordinate its production and retail function.
The three forms of inventories related to products that Dream House manufactures are
maintained in a traditional manner which seems to be out of the place for an E Retailer.
Dream House forecasts demand based on its internal policies and historical trends.
Today demand in every sector of the market changes by leaps and bounds, so using
historical data is not at all recommended. Demand forecasts should be pulled by current
market trends and prediction of future market sentiments. For example, Corona Virus
pandemic has drastically changed the face of world, where demand for some products
have taken a leap while some will continue sitting on the shelves for a prolonged period.
People are refraining themselves from going to stores and online retailers like Amazon
are reaping the benefits from this situation.
In the process of maintaining inventory, Dream Homes is also building up too much
safety stock which takes up cost and space. The lead time of the firm is remarkably high
relative to industry standards, which is untenable in an E Environment. Failure to
accommodate customers request as per industry norms, means losing a large chunk of
customers who do not want to wait.
Now when the firm is thinking of going digital, the scenario will be totally
different. With the switch over to ecommerce, production and purchase mechanism will
also have to undergo a drastic change. Just in time purchasing and production technique
will put an end to the harrowing task of inventory management. In this form of pull

system, purchasing of merchandise goods and production of in-house goods will be

based on online customer demands and Dream Homes will have to accordingly
coordinate with its suppliers to supply the right quantity of raw materials required at the
right time. JIT inventory management calls for having the inventory as and when needed
also taking care of massive holding cost suffered related to large build ups. The trick is to
set up plants in close proximity to chain of suppliers’ location to ensure several pick-ups
each day rather than holding on to bulks. ERP and other sources of electronic data
interchange between supplier and Dream Homes will act as backbone in supporting the
JIT activity. In this environment, Dream House will also be able to reduce the lead time to
deliver the ordered products from 4 weeks to around 2.5 weeks by streamlining the flow
of information in entire supply chain.
For the products purchased from its suppliers, it is recommended that Dream Homes
should employ vendor managed inventory technique. Under this, rather than firm
controlling the inventory management system, it is the suppliers who manage it. This is
implemented by allowing the suppliers of the firm to access the inventory information
from all locations i.e., warehouse, retail stores and distribution centers. They access the
inventory data and then decide accordingly on sending/ replenishing the inventories. For
example, using the point of sales technology, data from stores can flow to centralized
database showing units sold and units in the stores, that can be accessed by suppliers to
anticipate demand and refill requirement in each store. Similarly, to manage the inventory
at warehouse, RFID (radio frequency identification) technique can be used to pick up,
process and ship the order. For an inbound shipment too, this technology can easily scan
the product information in seconds, leaving no room for human intervention. The access
of this real time data can be allowed to vendor, to manage Dream Homes’ inventory.
In a nutshell, the onus and cost of inventory management passes on to the suppliers,
thereby underpinning the cost leadership strategy of Dream Homes. Low cost of
inventory management will consequently reduce the overall cost of inventory and thus
help, in achieving set cost targets.
(iii) The supply chain management system of Dream Homes can be designed in the following
manner:
a) As already known, E Commerce firms works on low inventories relative to physical
stores, therefore Dream Homes is pondering about changing its inventory
management technique. So, it is time for the firm to focus on building strong
collaborations with suppliers so that the lead time of orders placed by Dream Homes
can be kept at minimum. Quality of the product offered by such suppliers also
cannot be overlooked anymore since E Sellers not only make speedy shipments but
also guarantee hassle free returns of the delivered product if their products fail to
meet the specifications given in their website. Strong tie up with suppliers will assist
the firm in meeting the ever-changing demand of its customers in this technological
landscape.

b) Moreover, by implementing vendor managed inventory, as an effective SCM tool,

much of the onus of inventory management for its purchased products will shift onto
suppliers.
c) For the in-house manufactured products, Dream Homes needs to ensure that there
is pool of dedicated suppliers in the country who can supply expected materials on a
timely basis. Further, in the areas where there is dearth of such suppliers, it will
have to arrange transportation of the finished goods. To keep the overall cost of
product low, it should abide by the cost per touch inventory system (successfully
employed by the prominent furniture brand IKEA. It relies on the concept of passing
the cost savings to its customers by putting up their products together in easy to
assemble packaging enabling their customers themselves to select and pick up the
product from the store. In a nutshell, less the products get touched in shipping and
subsequent storage process less will be the overall cost of product).
d) Most E Retailers maintain number of distribution centers close to their customer
locations such that the outbound logistics process works in a seamless fashion and
customers end up receiving their packages on the promised dates. For this to
happen, Dream Homes should be ready to make large capital investments in setting
up distribution centers in the densely populated parts of Indian cities.
e) For the picking process of the goods in line with the order, it can make use of multi-
faceted robotics technology with some human participation. This technology can
assist human pickers in locating the required goods faster and with minimal error,
thereby speeding up the entire flow.
f) In the marketing section of supply chain, Dream Homes should use skillful data
scientists to pull overwhelming data based on customer searches which can be
analyzed to recommend products most useful to them. Further it could resort to TV
advertisements, public banners and other prominent modes to propagate the
digitization of its business.
Case Study 7
Bread and Butter Company (BBC) started its business a couple of years ago down when
customers preferred bread to other food items in their breakfast. Today the market has
seemingly turned narrow for bread or sandwiches. The high nutrient rich breakfast like corn
meal, rice crisps and oats meal are taking over the market share as opposed to bread butter
or a simple sandwich which appears to be aged old talks. BBC was about serving the kind of
bread their customers wanted. The breads were custom made, ready in no time on order, and
delicious, exactly how they need to be. The prices charged for the products offered were on
high end since it was the only store of its kind in the area covering 50 kms of east Georgia.
Georgians were fond of the unique service offered and the taste filled their morning
experience with happiness.

The business prospered and profits increased phenomenally on a year-to-year basis. The
prosperity called for additional space and resource requirement. BBC contemplated that since
they would have to hire more staff to meet the increasing demand and the space, they were
trying to lease was more than what they could use, they planned for add-ons to their current
production line “breads and sandwiches”. They started selling frozen food items, deserts,
beverages, and meals for train passengers. The Bread and Butter Company was now known
as “Just Taste It” (JTI). They started to hire new people with flawless cooking skills. There
seemed to be more supply than the demand and it appeared that commoners had great
cooking talent and were interested to learn more to take it to an altogether newer level. The
staffs were welcomed to share their unique recipes and team gathered to prepare items based
on the ones selected and approved. The employees started preparing meals on a prior
anticipation of demand including excess meals for any stock outs. In a month or so, the
warehouse seemed to be a chaos full of raw materials purchased from various suppliers
based on suggestions of staffs and prepacked meals. The kitchen was out of space to
accommodate the current staffs comfortably. The myriad ideas took JTI in a mirage creating
problem in coordination among staffs since many of their ideas had to be dropped and others
that were welcomed created a negative cost benefit equation.
The bread and sandwich business was hit by the negative publicity of the train meals business
since JTI had to compromise on quality to earn enough profit to keep the meal business up
and running. Gradually the loyal clients turned down on them and started to switch to other
caterers. The management of JTI was wondering if at all the business should be continued
since there were not enough orders and the pre prepared meals are getting wasted thereby
burdening the firm with huge costs. The frozen items, desserts and beverage business were
the only support they had. Clients continued to buy those items considering frozen items,
desserts and beverages were just bought and served to them on a margin. JTI ended up
losing customers trust and had no other option but to stop preparing anything for them. They
thought of bringing a changeover and presenting themselves as retailers rather than preparers
of meals, breads and sandwiches. The management of the company was in desperate need of
a savior that could prevent the demise of JTI.
One of the management people, Mr. Juniorson contacted you and approached you for some
valuable ADVICE in this regard. He also came up with their income and expenses (refer
Annexure) so that you could provide some insights on how to overcome the loss-making
situation and rebound back to a prosperous profit earning history.
Required
Consider yourself as a management accountant who was referred by one of the friends of Mr.
Juniorson. He has following questions in his mind that clogged all doors of ideas to revive.
(i) What are we doing wrong?
(ii) Is there any way JTI could continue its current business?
(iii) We need to save on costs and regain the lost trust of customers. How do we do this?
You see there was no dearth of loyal foodies when we use to sell just breads and
sandwiches. Even though we charged high prices back then we never had to confront
such predicaments we currently are in.

ANNEXURE
“Just Taste It”
Statement of Income
(Amounts in ’ 000)
Year Ended December 31,
2019 2018 2017
Revenue
Breads and sandwiches 41,000 45,000 49,000
Desserts and frozen food 92,000 79,000 68,000
Beverages 47,000 34,000 30,000
Meals 77,000 1,20,000 1,34,000
Total 2,57,000 2,78,000 2,81,000
Costs and Expenses
Food items as raw materials 1,10,000 95,000 78,000
Ready-made frozen 33,455 28,727 24,727
Desserts purchased 46,920 40,290 34,680
Beverages purchased 39,048 42,857 46,667
Labor 40,000 35,000 31,000
Other operating expenses
Rent 11,000 11,000 11,000
Insurance 5,000 5,000 5,000
Rewards to staffs 5,500 4,000 2,400
Packaging cost 4,000 3,400 2,800
Transportation cost for meal delivery 3,500 5,500 6,000
Total 2,98,423 2,70,774 2,42,274
Net Income -41,423 7,226 38,726
1. Since beverage market was competitive commanding high profit was never an
expectation.
2. Frozen items were sold at a markup of 10% on purchase cost Georgian preferred frozen
foods and fresh foods equally.
3. Desserts are all time favorite irrespective of seasonal variations.
4. Of the deserts and frozen revenue, 60% sale was dedicated to desserts.

5. 50% labor was identified towards meal preparation,40% towards sandwich and breads
and rest 10% for serving desserts. Beverages did not take labor hours since they could
be refilled in self-serving dispensers through which clients were served. Once they
served themselves with their choice of beverage, they stood in lines to complete the
billing of the service.
6. Of the cost of food as raw materials, only 40% was dedicated to earning bread and
sandwich revenue.
7. Rewards to staffs were paid on basis of their recipes being approved.
Product/ Service Wise Analysis ( )
Year Ended December 31,
2019 2018 2017
Revenue from breads and sandwiches 41,000 45,000 49,000
Less: Cost of food items 44,000 38,000 31,200
Less: Labor 16,000 14,000 12,400
Gross Profit -19,000 -7,000 5,400
Revenue from desserts 55,200 47,400 40,800
Less: Cost of desserts purchased 46,920 40,290 34,680
Less: Labor cost 4,000 3,500 3,100
Gross Profit 4,280 3,610 3,020
Revenue from frozen food items 36,800 31,600 27,200
Less: Cost of frozen food items 33,455 28,727 24,727
Gross Profit 3,345 2,873 2,473
Revenue from beverages 47,000 34,000 30,000
Less: Cost of beverage products 39,048 42,857 46,667
Gross Profit 7,952 -8,857 -16,667
Revenue from meals 77,000 1,20,000 1,34,000
Less: Cost of meals
Food as raw material 66,000 57,000 46,800
Labor 20,000 17,500 15,500
Other operating cost directly identified 9,000 9,500 8,400
Profit -18,000 36,000 63,300

Solution
(i) The idea to expand the business by diversification of product line and adding new
products/services like frozen items, train meals, and desserts, delivery of foods to
passengers at train were all directed towards growth and a better future for business.
This gave an additional edge over other bread manufacturers in the area since the more
products offered the more awareness among the customers. However, the manner in
which the business was executed seems to lack proper planning and organization which
is very much needed for survival of any business. Further a business success depends
on the execution of correct strategies meaning doing the right thing at the right time and
in the right manner. So, let us see what were we doing and what should have been done.
Manufacturing process in any business is a combination of series of activities, where we
need to identify which activities should be chosen and which should be excluded. This
calls for application of lean thinking in the conduct of those activities. The concept was
originally introduced by producers of a Japanese car manufacturer company named
Toyota. They were of the view that to make a production process efficient waste of all
forms must be eliminated from such process. They identified those activities as waste
which consume resource but are of no value addition from an end consumer perspective,
thereby increasing the overall production cost and time.
Basically, they meant that not only the design of the product or the utility of the product
but the production process itself should be customer focused. This is possible when we
can segregate each activity as value creating and non-value creating activity from
customer's view. In order to do this, we need to list all our production/ service activities
and then map each activity keeping customers’ value in mind. During this mapping, we
consider location of each machine, each human resource and the effort required to move
resources in order to be at the production location. Then an attempt is made to eliminate
all the non-value creating activities listed.
Having enumerated the idea of lean manufacturing, let us see how this could be applied
in JTI’s scenario. There are number of things that need attention. First of all, the lean
thinking is based on just in time production whereas JTI is producing on prior unexpected
demand basis for the fear of stock outs. We must remember that when operating in
service industry and that too when dealing in food items, maintaining quality of the food
items (considering the perishable nature of some items) becomes the top priority. We
must design the production process in such a manner that safety and retaining the
nutrition of the foods to be served remains ahead of everything. Customers always desire
their foods to be fresh and to contain all the expected nutrition value. In such a situation,
pre preparing the meals and storing them is not only a non-value-added activity but also
a prolific challenge to the food safety requirement. Thus, going by the lean concept, JTI
should prepare meals based on orders received or should pack meals just enough to
serve the customers on the same day. This is one of the mechanisms not only to work
smart but also to drive two forms of waste palpable in the production process, one is the
cost of storing the pre prepared meals and the other is the wastage of prepared food that
was prepared in anticipation of stock outs. Preparing fresh food will not only be a better

value addition approach from customers' perspective, but it will also boost quality and
reinforce customers’ trust thereby adding a competitive edge over others.
Next change over required would be to switch the basis of commission paid to staffs.
Currently staffs receive commission for the recipes approved irrespective of the cost
incurred to JTI in implementing such recipes. Executing any recipes requires assembling
of raw materials to prepare the food item, which bears a financial impact on the firm.
Purchase of raw materials from various suppliers based on staff recipes and their
suggestions have led to huge cost burden on the firm leading to a negative cost benefit
ratio. Purchase activity is a significant puller of cost and therefore purchase department
is considered as a cost center. Systematic operation of purchase department is highly
imperative to control cost and achieve efficiency. Purchase activity should be related to
production activity which is a direct factor of demand. Therefore, rather than acting on
staff suggestions, purchases should be made based on requisitions from production
department which has to operate based on just in time approach. Moreover, it is also felt
that staff participation has not been guided in the right manner since it has resulted in
more disharmony than teamwork. Rewarding them based on their recipes rather than
asking them to redirect their cooking efforts to the financial interest of the firm and to the
satisfaction of the customers, sounds an incorrect encouragement. Working at below the
optimum coordination levels result in under use of skill and cooking talent which is truly
perceived in this situation.
The other issue perceived is the disorganized warehouse due to lack of systematic
purchases and over involvement of staff in purchase activity. To achieve maximum
production efficiency, building a favorable working environment is utmost necessary. This
requires providing cooking staffs with organized clean kitchens and limited access to
warehouse. Further limited access to warehouse will help to keep it more organized.
Currently it seems storage facilities of raw materials and food items are totally messed
up. We need to introduce an effective housekeeping system such that warehouses are
organized systematically with all raw materials arranged employing specific techniques
like 5S for storage and organization. This will lessen the time required to locate them
when on demand thus removing the bottle neck developed due to time consumed for
non-organization.
(ii) The current business situation appears to lack planning and systematic approach. With a
strategized planning focusing customer satisfaction in mind, JTI will be able to continue
its current production activity instead of its planned switch over to just retailing activity.
When looking at the financial figures, we have five products to focus on. Currently JTI
only manufactures two of those and they are breads & sandwiches and train meals. The
other three are just purchased and served at a margin.
It should be noted that sandwich business got a hit due to quality compromise in meals
business and thus to revive this business, we must not only control quality of sandwiches
but also re boost trust of customers in the train meals.

The beverage business is good and requires a little amendment since beverages will
have to purchased and served for a margin. So, it is not a cause of much concern.
Now coming to frozen food items and desserts, it is recommended that JTI should make
a detailed financial analysis of buy vs. manufacture option considering all the related
costs and revenue. In some cases, in-house production of these items has proved more
profitable to firms rather than just an outright purchase and service. Moreover, JTI would
need to keep in mind the current resources available and the possible resources it could
gather provided it decides to switch over to in-house production, given the financial
positivity.
For the meal business, as suggested above, the production process needs a complete
change over right from the just in time production to systematic purchases and
implementing housekeeping system for achieving organized storage facilities. These
strides will help to reinforce customer trust in the train meals and thereby rebound the
entire JTI business. As we can see that meals business will have to be systematized first
so that the sandwich business can see a positive business environment. The meal
business is directly dependent on maintaining quality which can be perceived by it turning
into a loss-making business of 1.8 Cr. in year 2019 which used to produce profits of
6.33 Cr. back in year 2017 and 3.6 Cr. back in year 2018.
(iii) Regaining customer confidence is no rocket science for JTI since it had successfully
proved its success in past when it was known as the Bread and Butter Company. The
company was known for its quality and customers did not resist paying a higher price for
celebrating their happiness in the food they want. Due to series of undesired happenings,
the focus of JTI shifted from customer, which it needs to bring back. A correct focus can
ensure its move in the guided direction.
So JTI needs to perform as per customers’ expectation bringing to their table what they
exactly want, also ensuring a positive cost benefit ratio for the firm. It requires
reengineering of the way they currently work. This is the key to turn things favorable and
ensure business success irrespective of what industry we choose to operate in.
For cost saving strategies, JTI needs to associate some direct cost to the revenue it
earns. For example, commission paid to cooking staff should be based on the customer
satisfaction which is key to increased revenue in service industry. We can keep a control
mechanism for this. Asking the customers to rate their experience with the food and the
staff service would help the firm to improve with the changing needs of customer and rate
and reward their staffs. This will ensure that the firm incurs costs towards generation of
revenue. We also need to know what kind of transport mechanism is used to deliver the
meals to customers on train. To save transportation cost, it is better to use in-house
transportation vehicles rather than outsourcing the activity. This will ensure timely and
responsible delivery of meals at reasonable cost to the firm. Further we must not forget
that redesigning the meal preparation process will call for less storage and therefore less
packing. This will save significant packing costs.

Case Study 8
Welcome Foodies (WF) was a small restaurant in and around the busy city of Newtown. The
city was located in the banks of river Terresa and was known for its tourism value. The visitors
often passed days visiting the prominent natural attractions and the scenic beauty brought
them back again. They also treasured the culture of the town and adolescence of the local
surroundings. It was simple down to earth. It was untouched by man-made interventions like
infrastructures and celestial buildings. The people down there had the culture of visiting bars
and restaurants at the evening time to undo the monotony of the day. They liked sitting with
their friends, close relatives and chit chatting their busy schedules and what special they did
throughout the day, how things went fuzzy, which ought to have been straightforward. The not
so civilized ‘life’ went calm until the development of a highway that connected Newton city to
the "infrastructural sound" city called Angel. In no time, the Newtown found itself crowded and
overburdened to accommodate the daily passengers from highway and near surroundings.
This made the State government consider the development of infrastructure in the Newton and
additional hotels to welcome the growing tourism business. This led to a drastic changeover in
the restaurant business of Welcome Foodies.
It started getting busier and was brimming with food lovers all over the day. WF being a family
owned and self-funded business took this ambience as a door of opportunities to recover the
previous losses it had to book long back at its outset. It was thinking to expand its business
and open new restaurants in the town, but the funding was yet a trouble since its credibility
was questionable to lenders. WF could borrow just enough funds from its familiars to hire
additional staffs to serve the growing crowd. Albeit the new staffs were recruited, they lacked
proper skill and knowledge of the service industry that WF was into. Most of the staffs were
the local people of the city who knew no fancies of alluring the customers with their smiles and
warm heartedness. They had to work overtime for low pays since WF was in debt, paying the
peaking expenses of production and processing of food items. Given the rising bills and
heightening cost of raw materials, it had to escalate the prices of the items served in the menu
card. Notwithstanding the rise, the WF chain was easy on their guests’ pockets compared to
other posh dine place out in the city and so the customers resisted subtly and then continued
to walk in as before.
The operating efficiency of the restaurant began to decline with the increasing numbers, also
somewhat perceived by the incoming customers. The owner heard his customers’
conversation:
Customer Mike: Hey there how are you doing? Well! I wonder why we have to wait so long
when many tables are lying empty. Doesn’t the restaurant feel like harassing their customers
without any cause? My mood gets ruined for the wait and I plan to seek other nearby places to
dine. What about you?
Customer Davin: Yes, you are right. I also feel like claustrophobic having to dine among the
proliferating crowd. Hey, guess what, I heard the owner is short on finances and he could
hardly do anything to get himself out of this hell, at least not in the near future.

Customer John: The waiting time is ridiculously long. I mean I had to wait 20 minutes on a
peak Friday, which I do not mind but here I believe they hardly care to manage this.
The lines got bigger on the Fridays and weekends since the cleaning boy and his partner used
old cleaning techniques and were reasonably slow. Several people went ahead and decided to
leave rather than wait any further.
The hospitality business demanded unwavering flawless customer service which started to
shake. Because of dearth in finances, enough staff could not be placed at required locations
which turned things chaotic.
The kitchen environment was not sound either. They used outdated equipment to prepare the
food stuff and the manual cleaning of dishes was a big trouble altogether. With the increasing
demand for service, no adjustment was made to the number of kitchen equipment. The short
number of kitchen staff tried their best to manage things in order, but they could not help to
deliver with required speed since they had to clean the equipment manually before every use.
The ingredients of the items were not well arranged adding to stress and the wait time of
service. Some items like onion garlic paste, boiling of vegetables, chilies, sauces and pickles
ought to have been prepared before the restaurant opened for guests. No such arrangement
was in place. Some raw materials were in short supply while some were more than the
demand, which perished. There were three chefs in the kitchen each specialized in a given
cuisine. However, they were not groomed to switch efforts in times of necessity, they but were
asked to do this anyways and the results were atrocious.
Sometimes the guests found their tomato soup containing odd ingredients like mushrooms or
potatoes and sometimes the guests so claimed 100 % vegetarian dish was found to comprise
fish or chicken remnants. This situation called for significant quality issues on the processing
of food in the most unexpected manner one could think of.
Moreover, the lax kitchen staff had the customer request on their table, which they did not
accede in the order received. Some orders were served early while some customers kept
seating for long time, waiting for their food to show up on the plates.
The billing machine was not modern and cashier had to manually enter price and other
specifications of each item ordered and served.
Most of the times, the only supervisor was found snuggling in his chair. He did not care to
advice the waiters and other assistant staffs to improve. As a result, staffs persistently made
same mistakes and guests were forced to report the complaints to the restaurant manager,
who was also the owner. No leadership role was identified among the staffs.
Some staff took leave on weekends and returned on Tuesdays. They lacked motivation to stay
during the peak weekends. When any staff was missing from his respective role, the manager
replaced the position since he wanted to save on currency.
The hygiene of the place was also questionable. The floors were watery and smelt nasty, the
tables seemed to have contained foods, oils and spilled over sauces. The guests carrying their
kids were nervous about their small ones slipping over the floor. On a total, it raised concerns

about cooking and cleaning habits of the staffs working there, thereby escalating the health
risk of the guests.
The business saw its doom and the customers began looking for dining options in the
surrounding area.
Consider yourself as the family advisor of Mr. Bean, the owner and successor of his father’s
business. He is aware that you have a cost management degree and are working in one of the
multinational firm’s accounting department. Luckily, he has had the chance to hear about your
achievements of successfully implementing strategies to assist the firm in rejuvenating its
struggling business and now he wants you to work on turning things around for his restaurant
business. He had tears in his eyes while narrating the entire story.
Required
(i) DISCUSS which managerial technique could be used to “turn things around” as Mr.
Bean wants?
(ii) How could this be done? RECOMMEND improvement techniques in each area of
disparity.
Solution
The current situation of Welcome Foodies, a small family-owned restaurant, resembles lot like
that of dissociation of staff efforts, unplanned activities and need for reengineering of business
activities. The processes there contain lot of known defects that are being continuously
overlooked. There are several quality issues as well, not just in some phases of the service
but holistically in series of activities. So, when defect is the prime issue to focus upon, we look
for total quality management to render the product/ service defect free to ensure the long run
success of the business, but here we need to take a step further discussing the roots of the
issue rather than just simply working on the symptoms. For example, long wait time of guests
is considered as symptom, while the root cause is disorganized staff team and non-strategic
output towards a destined focus, i.e., customers. Frankly, we are talking about Six Sigma
strategy to get the changeover done.
While people often relate six sigma methods to manufacturing firms and the industry itself,
service industry could very well adapt it pragmatically. The forerunners of the technology were
Motorola and General Electric who gave a scientific solution to the all-pervasive quality issue
evidenced in the day today businesses. Quality issue in physical product means compromise
in the shape, size, color, design, taste, or any other form that reduces its true expected utility.
Quality issue in service on the other hand means variation in the customer's standard
experience set as per industry norms. Defect therefore means a quality issue that leads to the
failure of any product or process. Six Sigma entices one not just to deliver defect free product/
services but also to reduce waste by eliminating errors. The steps involved to improve existing
business processes are define phase, measure phase, analyze phase, improve phase, control
phase. Now let us see how we can implement each phase to improve the WF’s business
situation.

Define Phase
This is the foundation of other phases of the methodology on which they rest. Under this
phase, we identify the processes that need improvement, the goals and scope of
improvement. In WF’s case, the goals of improving the service process are below:
a. Exuberating the customers’ overall dining experience including reduction of total wait
time.
b. Achieving enhanced staff communication and coordination ensuring unclogged flow of
information.
c. Ensuring the rendering of ordered food items as per description in the menu card.
d. Kitchen chefs to prepare and process food items as per their skill set.
e. Reduction of the overall processing time of food items once orders are received.
f. Resolving hygiene concerns.
Measure Phase
Under this phase, we are primarily concerned with gauging the problem, meaning seeking a
quantitative tool to define the problem so that it can be used to measure the current
performance.
Moreover, we also need to employ effective data collection techniques to obtain data about
the current performance. The success of this phase depends on the validity of the data
collected.
We must keep in mind that only when the current performance is quantifiable, we could
compare it against the standards to identify the variation. These are the traditional steps to
bring about an improvement in any process.
We catalogue numerous basis to measure each issue to be improved as indicated in the goals
above.
a. Number of customers leaving the restaurant for having to wait too long.
b. Number of unhappy customers not returning back.
c. Number of complaints reported against staff misbehavior.
d. Average wait time per customer.
e. Average food processing time per simple item and per complex item.
f. Number of accidents due to nasty floors.
g. Number of complaints against food quality and order mismatch to description in the menu
card.

Analyze Phase
This phase involves establishing the root cause of the symptoms palpable in the deficient
service process.
In WF, it would be vital to itemize the entire restaurant service processes in the order of their
occurrence. This can help firm to look at things in a serial manner rather than taking plethora
of activities all at once.
a. Customers enter the restaurant.
b. Receptionist greets and asks them to wait in the waiting area until their names are called
upon.
c. Cleaning team clean the tables once the guests are done eating.
d. Receptionist calls the guests in the order of their arrival.
e. They enter the dining area, seat on the indicated table, place order of the food items of
their choice from the menu card.
f. The waiters take the order to the chefs in the kitchen for preparing the ordered stuff.
g. Kitchen chefs prepare and process the food ordered, served on plate, to be taken up by
waiters.
h. Waiters serve the food to the guests and check with them for coming requests.
i. Waiters keep visiting kitchen and serving stations to get the requested stuff on the table.
j. Finally, guests finish their dine; request the staffs to furnish the bill of the service.
k. The cashier prepares the bill, taken to the guests for payment.
l. Guests pay the bill and leave the restaurant.
m. Cleaning team again starts the cleaning process to make room for other guests in the
waiting area.
In this way, the whole process gets broken down into small sub processes. This is the true
effort involved in analyze phase. Once all the activities carried out are identified we need to
bifurcate them into value added and non-value-added activities, basically we need to pull the
bottlenecks out of the entire process to bring efficiency.
Improve Phase
This phase is all about recommending alternatives and implementing them to resolve the
established issues. For example, if the issue at hand is about two cars falling short for picking
up the employees to render an effective pick drop facility, the alternative is to employ more
buses or cars to do the same. Where the firm is unable to do so, it can resort to third party
services who deliver this form of service. It will end up in choosing the alternative that is
financially more feasible.

In our case, we can clearly perceive humungous scope of improvement. First of all, we must
keep in mind that the effective wait time of customers in the service business is a critical
factor for success. The long wait time of customers in the waiting area can be directly ascribed
to age old cleaning techniques of the staff. The idea here is to introduce innovative techniques
of cleaning the tables such that it takes hardly any time to get the table ready for oncoming
guests.
Next it is also evident that staffs of WF are not well groomed and lack appealing
strategies to enhance the dining experience of their guests. Organizing frequent training
sessions to boost their marketing skills like placid smile and greeting the guests with warm-
heartedness; keeping up a continuous check of their requests and fulfilling them on timely
basis; making them aware of any special coupon or discount that the restaurant puts up; can
all bring a drastic change in the customer’s apprehension of the WF’s services. Hiring people
with supervisory acumen will help staffs to be aware of their scope for improvement and rule
out their possibility of repeating same mistakes.
Now let us see what could be done on improving staff coordination. Staffs should be
motivated to work as a team rather than on stand-alone basis since it is the combined effort
that is representative of WF identity. Any bottleneck in unbound communication should be
outrightly removed so that things flow in a streamlined fashion. It is also necessary that WF
hire additional staff to meet the growing need of the city such that manager can dedicate
himself to the top priority matters rather than playing multiple roles. An efficient reward system
should be put in place to ensure each staff’s effort in the process is recognized and rewarded
for. This will motivate them and push their determination to work productively rather than
missing on peak weekends and returning on Tuesdays. If they work with efficacy during their
normal hours, the need of overtime would also reduce.
Finance requirements can be fulfilled by building up good creditability among customers
such that an effective business plan itself can propel the lender to provide the required
finances.
Further, more kitchen equipment will have to be purchased and cleaning techniques have to
be explored such that kitchen staff work productively rather than working laboriously.
Just three chefs sound like a real short supply of cooks, driving them to prepare things they
are not trained for. The WF should adopt strict food processing policies such that chefs are
allowed to prepare only cuisines for which they are groomed. This will ensure complying with
strict food quality standards to accentuate no compromise in food quality. Moreover, a fixed
processing time of both simple and complex items should be specified and it should be the
policy of the restaurant to abide by the same.
Organizing kitchen equipment and food ingredients would eliminate the additional time
required to locate them. WF can apply 5S methodology here to cleaning out the working
area and maintaining the cleanliness to improve process quality. 5S means sort, set in order,
shine, standardize, and sustain. WF needs to ensure that no unnecessary items like perished
ingredients/food items, old equipment, and old cleaning tools are seating in the kitchen (Sort).

To bring in more efficiency, we must place frequently used items in easily accessible locations
and place occasionally used items at bay (Set in order). For example, a veggie sandwich
making store can organize its veggie counters near to its ordering and processing center, so
that it takes them less time to prepare sandwiches once order is received. Scientific
arrangement helps not just in saving time, it also boosts workplace cleaning. With order comes
cleanliness in the workplace (Shine). WF should adopt best practices of the industry or make
one to be adopted as the constitution (Standardize). For example, in present case, we need
chefs to prepare food items only for they are specialized. Monitoring the adopted practices
under 5S model is also no less important. This ensures that we can upgrade those practices if
situation demands (Sustain).
Prefixing startup items like sauces, pickles and serving them with starters will help eradicate
the wait time once guests are ready with their orders. Employing advanced food processing
machineries will drive efficiencies and help meet new standards of WF.
The hygiene concerns can be easily dealt with by applying planned and innovative cleaning
ideas to clean the dining and waiting area and using sign boards to warn the subsisting guests
of the ongoing cleaning process.
Bringing in automatic scanners and advanced technology will eradicate the manual entry of
order details and their prices to prepare the bills, thereby ruling out the possibility of manual
errors and thefts.
The Control Phase
This phase deals with adequate determination to put into practice the policies developed
under the “Improve Phase” and ensure its persistent compliance in the rendering of the
service. Once the policies become culture of the people, it would be hard to be discern them
without such policies. As part of control phase, the changed performance is measured at
regular intervals to establish any variances from the expected standards.
Case Study 9
Mrs. Kates is a retired dedicated mom taking care of her family and doing every bit to give the
best of the upbringing to raise her son. Back in Mrs. Kates graduation days, career in
accounting business and economics used to grow but there is a drastic change since those
times. It was then not so troublesome task to clear the graduation and get an alluring job. One
could easily leap in and land up to a nice little 9 to 5 job as what we say. Life was easy as no
one was busy. Records were all in the real physical books which were disappearing in modern
times with the advent of internet and it is the Mac generation. Eyes were less strained and
brain at placidity. No emails to check and no formalities to make. No exaggerations of staying
late in office to get rewards and promotions. Moreover, people were easy to deal with, they
had patience to listen till end and would react after giving a deep thought.

Days changed, months passed and went thereby a couple of decades when Mrs. Kates had a
full-grown son, Mr. Dude needing to be admitted to a college in this rapidly changing and
booming era. She wanted Dude to be in a college that had “history of good academics”,
focusing on all round development of student, also meeting the needs of being flexible for a
busy student life. She was low on her budget and therefore wanted someone or if the college
itself could help her in financing the college education of her son. She was born and brought
up in a small town called Dohapur and lived there all along her life. She was lucky to go on a 5
days tour outside of her country, visiting metropolitan cities of United States like New York and
California. She was taken aback by the speed and transcendency of the states she visited.
She wanted her son to learn some aspects of that life so that he could adjust with the fast
pace and stride with passing time. Therefore, Kates started looking for education opportunities
in her nearby city called Vilaspur which was just couple of miles away. There were two
eminent colleges in the city each providing accounting, economics and taxation courses. Dude
had little interest in economics, so Kates did not force him to jump in.
Dayawan College of Commerce (DCC) and Hridyam Commerce Institute (HCI) stood in direct
competition to each other and met most of the characteristics expected of by Kates. She was
excited to know about them and that they had a well renovated huge college campus where
student outside of the city could stay and accomplish their education goals. The city was
expensive and so were the colleges. Now she started pondering about the educational cost
and began to seek sources that could lend her son educational assistance. To the much of her
try she came to know from her close friends, that DCC took in students with weak financial
standing but with strong academics. Actually, the college was named after the founder
Dayawan Desai who was a great social activist of his time and during the last few years of his
life he vouched to build a great co-ed college in his city for lower middle-class students who
get left behind only because of their economic condition. The efforts from his history and the
legacy created successful businessmen and women, tax consultants and economic scholars.
HCI College on the other hand was also down to earth and did not bias among lower and
higher class. They charged relatively low fees compared to DCC was popular among youth
and gave great professionals who after their graduation from the college pursued further
studies.
From last few years, many students were complaining about the rapidly increasing tuition
rates, to which they went on a student strike demanding rate cut. Colleges had been very
specific in relation to quality and touted that teaching fees and academic development cost
had been increasing enormously which had to be substantiated by increase in costs of books
and tuition. Failing all attempts, many students decided to switch to a mix of part time lectures
and part time job through which college cost can be met and the burden on their families can
be balanced. They required college to plan the class schedules innovatively so that students’
studies do not get hampered and at the same time they can continue their jobs. Both of the

colleges were trying to come up with online courses and distance learning materials to assist
their students in the event their student failed to attend any lectures. In addition, HCI is also
planning on hiring additional freelancers to work with students during evening time to groom
their skills and assist them do well in their studies.
The reward system of the colleges is not clear and there is less information on how teachers
are being motivated to serve the students to the best of their interest. However, college image
and brand totally depend on the efforts of the teachers/professors. The total revenue
generated in the city from college business is around 500 lakh. The revenue generated by
DCC in the most recent year is 180 lakh and by HCI is 110 lakh.
Dude developed a solidarity among his class friends and decided to go to DCC as this was the
college where his other friends were wanting to go. However, Kates was concerned that Dude
could spoil his career if he concentrated on picking things other than his studies. She wanted
someone to guide her based on facts and figures of both the colleges so that an informed
decision could be reached. She had modest savings from her job and wanted to spur her son
to value those and understand the sheer importance of her precious student life which once
gone will never be back. To harness all the information she had, and relying on your
omnipotent knowledge, Kates went to you and provided you with facts (Annexure) about the
two colleges.
In a nerve-racking voice, she remarked would you need any other information for your
research to be extensive and serving my purpose? She continued, it was her serendipity to
have gone through many troubles and find such detailed information and that she will try to
gather more if she could. You in a calming and consoling voice said her that information was
more than needed and it was really appreciative of her to pull in so much detail. It was all her
love and care for her son that transpired on to the papers. She went by thanking you for
considering her case and agreeing to help her son, Dude to make an informed choice.
Now you began contemplating of what could be done and exactly which models to be
employed to get the job done and render a research driven analytical advice. After a day of
pondering, you recollected of having learned the Fitzgerald and Moon's “Building Block Model”
and started to gather all the facts she provided. Now you gave a thought, that basically there
are two questions to be answered for her enquires to be resolved.
Required
(i) Could ‘building block model’ be applied to her case and if yes EXPLAIN the model in
brief?
(ii) EVALUATE the performance of the two prominent colleges.

Annexure
DCC and HCI facts and figures for the most recent year 2019
Dayawan College of Hridyam Commerce
Commerce (DCC) Institute (HCI)
Budgeted Actual Budgeted Actual
Number of enquiries for admission
Accounting 5,000 4,000 4,200 4,000
Taxation 4,000 3,800 4,100 3,900
Total 9,000 7,800 8,300 7,900
Students turning up for application
Accounting 3,500 3,000 3,500 3,800
Taxation 3,200 3,000 3,850 3,800
Total 6,700 6,000 7,350 7,600
Percentage increase in revenue 10% 7.90%
Net profit 50,00,000 27,00,000
Number of lecturers
Accounting 14 11
Taxation 12 8
Total 26 19
Number of teachings days in a
year 250 250
Number of days lecturers received 240 230
Students passing 5,700 7,500
Students getting jobs 5,100 7,000
Solution
(i) Fitzgerald and Moon's building block model commonly known as building block model is
a performance management theory model developed by Fitzgerald and Moon. This model
has been built on the premise that service industries could employ this model to evaluate
their already in place performance standards and make hence forth improvements or
could start from scratch building performance measurement criteria using this model.
Since both colleges are engaged in rendering educational services to students, they very
well fall within the ambit of service industries.
This model is named as building block since it has been built on three blocks which are
namely:

Dimensions
Think “Dimensions” as both financial and non-financial goals of any organization since
both these goals serve as the factors critical for its long run success. Dimension
commonly means attributes to be measured and here we measure two financial attributes
and four non-financial attributes of any organization which can be enumerated below:
Dimensions
Financial (Results)
Competitive performance
Financial performance
Nonfinancial (Determinants)
Quality
Flexibility
Resource Utilization
Innovation
Standards
Think standards as targets that are to be achieved based on which performance
attributes as listed will be measured. For the standards to be aggregable and acceptable
by the concerned department or the responsible individuals, such standards must
possess three features which are ownership, achievability, and equity.
Rewards
Think rewards as source of motivation that can drive the staffs to work wholeheartedly
towards the achievement of set targets, so that the organization can successfully achieve
both its financial and non-financial goals in the long run. Now the reward structure/
system again should possess three qualities which are clarity, motivational and
controllability.
(ii) Mrs. Kates wants us to evaluate two prominent colleges of Vilaspur city and come up with
some conclusion. Going by the facts provided by Mrs. Kates it appears that both the
colleges are doing well overall. However, the exact position of the colleges can be known
from a detailed analysis of both qualitative and quantitative information available to us.
This means we have to count both the financial and non-financial goals of each
organization to precisely state how have been doing.

Financial performance can be measured by percentage increase in revenue and net

profit margin. DCC remains the best performer on absolute revenue and profit although it
performs so inadequately on other measures. This suggests that it may not be making
the necessary investment in service and quality to satisfy the students’ needs.
Competitiveness can be measured by relating number of students enquiring and finally
turning up as an applicant, i.e. how successful the organization is at converting enquiries
into applications. The take up rate for HCI is higher as compared to DCC. This could be
due to relatively low fees charged by HCI.
This can also be assessed in terms of sales growth, market share and growth in
customers. We cannot measure year on year growth for revenue and profit as prior year
data is not available, but we can compare present market share which is greater for DCC.
Quality of college tutoring can be measured by relating number of students passing out
of total students and then by comparing students getting job from total students passing.
In this aspect HCI is a lot better college than DCC.
Flexibility means responsiveness to changed demand and here we notice HCI is
planning to hire freelance lectures to help students during their evening time once they
are off from their work. This aspect is really appreciative and suggests a farsightedness
of the college management.
Resource utilization means the productivity of the service staffs and in this case, they
are lectures/ professors. This aspect can be measured using the relation between
teaching days available and number of days actually served. DCC has higher resource
utilization ratio compared with HCI.
On the other hand, we apprehend some form of staff shortage in HCI when considering
the total number of students served in HCI comparative to DCC.
Innovation suggests coming up with new and innovative mode of service delivery in
context with the changing demand/environment. In present case we know that most of
the students are working simultaneously to meet their college education cost. In regard to
this situation, there is a need to bring in more online courses and distance courses,
virtual classes so that time cannot be the barrier in learning. Both colleges are striving for
the same and they stand in close competition as this regard.
Considering both the financial and non-financial goals of each college we can
claim that HCI delivers a superior quality service, flexibility, making innovative
attempts at comparatively lower price to meet the emerging needs of the students,
which acts as a competitive edge over its direct competitor DCC.

Workings
Dimensions Measurement DCC HCI
criteria Budget Actual Rise Budget Actual Rise
Financial (Results)
Competitive
performance
Accounting No. of 70.00% 75.00% 7.14% 83.33% 95.00% 14.00%
application/
No. of
enquiries
Taxation No. of 80.00% 78.95% -1.31% 93.90% 97.44% 3.77%
application/
No of
enquiries
Market Share 36.00% 22.00%
(in Revenue)
Financial % increase in 10.00% 7.90%
performance revenue
NP margin 27.78% 24.55%
Nonfinancial (Determinants)
Quality Students 95.00% 98.68%
passing/ total
students
Students 89.47% 93.33%
getting jobs/
students
passing
Flexibility See
explanation
Resource Teaching 96.00% 92.00%
Utilization days/ days
served
Innovation See
explanation
Note
We do not get into discussing the standards and the rewards block of the model since
Mrs. Kates was not able to provide much college information on these aspects.

Case Study 10
Pariksha Commerce Test Ltd. (PCT) is an organization which provides service of test series
of various commerce courses to facilitate students who are going to appear for such
examination. PCT provides test series for 11th & 12th standard (Commerce) for CBSE as well
as various other state boards; B.Com., B.B.A., M.Com., and M.B.A. of various universities;
CA, CS and CMA. Company’s Head Office is placed at Delhi NCR with branches and Test
Series Centers (TSCs) in various cities of India. Now it is the only organization which provides
test series of various courses and guidance of study and has students across India. It has also
started online test series facility for students of remote locations who do not have access to
travel at any of the TSC. In addition to Test Series, it provides support in preparing a reading
plan, providing guidance on paper writing and counselling students, if required.
You are appointed as Cost Management Officer (CMO) of the PCT. In the Introduction
Meeting, CEO, Mr. Parikshak, after brief introduction of organization addressed you, “We are
rapidly growing education empire and having large student base across India. To reach here,
we have faced lot of problems, but it has been overcome. I want to share few of them to make
you better understand the organization. Recently, at the biggest TSC, in Delhi, printer was not
working and there were almost 450-500 students sitting and waiting for question paper.
Outsourcing of print was costly and time-consuming option, so that we had mailed question
paper to all of them to save time and cost. Now this approach has been applied at the most of
the TSCs i.e. students come at TSC, we mail them question paper and they appear for test. It
saves our printing cost. Irony is that non-maintenance of Printer can also save the cost! It may
be little difficult for students to read question papers from their mobile phone or tablet, but they
will be comfortable soon as “Change” is the law of life and Business too! Further to reduce
advertisement cost, we have dropped the contract with Ms. Takshi Sharma, famous film star.
We had contracted with her for advertisement on TV for 3 years. She was brand ambassador
of ‘Pariksha’. Though we got many students due to TV advertisement, we decided to drop the
contract as we have enough students and as of now, there is no competition, as such, hence
no need to advertise for coming 1-2 years.
Further, we have reduced cost of question paper preparation. Up to last month we had,
preciously, 57 members in question paper preparation team. They were drafting new
questions for every test. Now we are having, preciously, 22 members in such team, less than
half of we had. They are drafting less new questions and preparing paper with questions from
past papers and other material of respective course. In our student support and student
counselling team we had, preciously, 68 members, 42 for face-to-face counselling and 26
available on phone call. Now there are only 30 members, 12 for face-to-face counselling, and
18 available on phone call at our most profitable TSCs. This may require less infrastructure
facility at our few TSCs which is cost beneficial for us.
Oh, I forgot to tell one of the reasons behind reducing advertisement cost is that, after analysis
of financial statement, our CFO had suggested that our advertisement cost was comparatively
higher than other companies working in education field as well as with our previous years.

These are the major problems we faced and changes we made during the year. Hope this set
of information will be helpful to you to commence your work. Till now, we have managed cost
management department very well, as you can see from the instances I narrated, however
due to heavy workload and growing organization, now we are unable to handle these all alone,
so we need your support in success of the organization. Thanks for listening me and you are
free to ask anything, anytime. Thanks.”
After conclusion of his speech, you thanked him back and moved to your office to start work.
You were thinking about strategy of paper less question paper, misuse of mobile phone or
tablet during test and other matters as told to you.
In that moment, your phone had buzzed, a notification from Newsagram, an application
providing news across world. Notification was about the contract between Abhyas Education
Ltd., giant educationist of India and Mr. Shamkar Datta, a film star having one of the highest
fans following all over India, regarding advertisement of newly introduced test series by it for
commerce and science stream across India.
After proper analysis of new competitor and its products, you informed to the CEO. Discussion
and various meetings had been called and after that CEO decided to do more marketing to
defeat the competitor. For that the CEO approached new brand ambassador, namely Mr.
Prakash Rao, more famous film star than Ms. Takshi Sharma and Mr. Shamkar Datta. This
deal was little costlier, still to be in market it was required.
Now the CEO is feeling that some blunders have been made by him in handling of cost
management department. Hence, he approached you to analyse various decisions made.
Further, he asked you to apply any of the value chain analysis or value shop model to deal
with the situation, as he thinks both are the same.
Required
In this regard, you have been asked following questions:

(i) Whether approach of the organization to manage the cost is of the Traditional Cost
Management system or the Strategic Cost Management System? EXPLAIN.
(ii) LIST out the general limitations of cost management system identified in (i) and then
correlate them by identifying the problems faced by the organization.
(iii) EXPLAIN the differences and similarities of Value Chain Analysis and Value Shop
Model to CEO and IDENTIFY which model can be applied in the organization.
(iv) DISCUSS importance of Strategic Cost Management.
Solution
(i) Traditional cost management system involves allocation of costs and overheads to the
production and focuses largely on managing costs through cost control or cost reduction.
The underlying assumption was that with reduced costs (direct) and overheads a firm
could earn better profits. Strategic cost management is the application of cost
management techniques to improve the strategic position of the business, reduce its

costs and maintain the effective control of costs. It also involves integrating cost
information with the decision-making framework to support the overall organisational
strategy. It is not limited to managing costs but using cost information for management
decision making. The cost management techniques should be such that they improve the
strategic position of a business apart from focusing on managing costs.
In the case of PCT, approach is of managing costs by reducing number of employees,
switch to paper less question paper, reduction of advertisement expenses etc. It focuses
on managing costs only and not on improving strategic position of business. Hence, it
can be said that the approach the organization to manage the cost is of the Traditional
Cost Management System.
(ii) Following are the limitations of the Traditional Cost Management System:
 The focus is on managing costs approached via responsibility centres or product
cost issues. However, a broad cost reduction programme does not work effectively
in today’s business environment.
The PCT focuses on managing costs by switching to paper less question papers,
reduction of employees and reduction of advertisement cost without thinking of
requirement of business environment.
 Traditional cost management system has internal focus and does not look at the
external factors of competition, market growth, customer requirement etc.
At the time of dropping contract, with Ms. Takshi Sharma of advertisement, was
ignorance of competition. ‘Enough students at the organisation’ was just internal
focus which leaded to ignorance on entry of new competitor. Additionally, other cost
reduction decisions may not fulfil requirements of students.
 A broad cost reduction programme could lead to inferior quality of products &
services which might drive away customers resulting in lower sales and profitability.
Due to reduction in members of paper preparation team, quality of question paper
may also degrade. Further, reduction in members of student counselling team may
lead to heavy workload on employees and due to that quality of service may also
degrade.
 The expectations of modern customer are quite different. An excessive focus on
cost reduction could impact the quality of product and services and alienate the
customers.
Degraded quality of question papers and reduced student counselling team may
lead to dissatisfaction in students. Further, question papers on mobile phone or
tablet may be misused by students who are forced to give test. This may lead that
students get higher marks in test series, however actual marks in exam may be
lesser; this may lead to dissatisfaction to students’ parents, ultimate customers of
the organisation.

 Traditional cost accounting systems rely on accounting data which can be

misleading at times. Financial statements can be a great reporting tool but might not
be able to assist in strategic decision making. It does not consider dynamics of
marketing and economics.
One of the reasons of reduction in advertisement cost was relying on financial
statements, as suggested by CFO which might be less helpful in cost management
decisions.
 There is a limited focus on review and improvisation of existing processes and
activities.
Non-maintenance of printer was lack of review by the management and to overcome
such problem they had mailed question paper to students, sitting at Delhi TSC, was
an improvisation of activity.
 Traditional cost management is a reactive approach to cost management.
When it got the information of arrival of new competitor, it approached to Mr.
Prakash Rao for advertisement, at higher cost which was reactive approach of
situation.
 It has a short-term outlook e.g., saving costs on an annual basis.
At the time of dropping the advertisement contract, it thought that they did not
require advertisement for 1-2 years. Approach was to save cost for short term and
that approach leaded to higher cost by approaching new brand ambassador, Mr.
Prakash Rao.
In general, PCT has been caught in the narrow-minded approach and decided for
broad cost cutting. It also compromised on the fundamental business aspects like
human capital development, quality, research and development (R&D), operational
competitive edge, and other qualitative aspects which are of strategic nature.
(iii) Value Chain Analysis:
Value-chain analysis is a process by which a firm identifies and analyses various
activities that add value to the final product. The idea is to identify those activities which
do not add value to the final product/service and eliminate such non-value adding
activities. The analysis of value chain helps a firm obtain cost leadership or improve
product differentiation. Resources must be deployed in those activities that are capable
of producing products valued by customers.
The concepts, tools and techniques of value chain analysis apply to all those
organisations which produce and sell a product or provide a service.
The various activities undertaken by a firm can be broadly classified into Primary
activities and Secondary activities. Primary activities are those which are directly involved
in transforming of inputs (Raw Material) into outputs (Finished Products) or in provision of
service. Secondary activities (also known as support activities) support the primary
activities.

Though, secondary activities are not directly involved in creation of product, it doesn't
mean that they are of less importance as compared to primary activities.
Value Shop Model:
This concept aims to serve companies from service sector. In value shop principle, no
value addition takes place. It only deals with the problem, figure-out the main area
requires its service and finally comes with the solution. This approach is designed to
solve customer problems rather than creating value by producing output from an input of
raw materials. Value shops mobilizes resources (say: people, knowledge or money) to
solve specific problems such as curing an illness or delivering a solution to a business
problem. The ‘problem’ could also be how to exploit an opportunity. The shop process is
iterative, involving repeatedly performing a generic set of activities until a solution is
reached. The model has the same support activities as Porter’s Value Chain, but the
primary activities are described differently.
In the value shop they are:
 Problem finding and acquisition
 Problem solving
 Choosing among solutions
 Execution and control/evaluation
It is advisable to apply Value Shop Model in the PCT, as priority should be given to
solve problems faced by the students. Satisfaction of students is only way to grow.
Case Study 11
DIC is one of several insurance companies which offer insurance policies covering general
risks relating to individuals and his/her family members. Since past three years DIC has seen
the volume of business increase, but profits have remained static due to declining margins.
Cost efficiency is a major factor in the success of the companies in this industry, because
competition within the industry is high.
Some of the processes within DIC are computerised. However, many of the processes which
involve communication with customers are still paper based. Responses to telephonic queries
from customers involve paper-based communications. Additionally, sales staff visits potential
customers in their homes to try to sell them insurance policies for their homes and their
possessions. These transactions are again paper based. This process is often slow and has
led to complaints from both customers and the company's sales staff. DIC has also been
receiving regular complaints from current and potential customers about errors in the
paperwork that they receive. The number of complaints is increasing day by day.
The Board is worried about growing popularity of new style of business using the Information
Technology. The Board intends to streamline the business model as much as possible, re-
engineer the business processes and to increase the profitability of the company. It was finally
decided that there is a need for a Business Process Re-engineering (BPR) programme to be
conducted and the Board has asked the management accounting department to help with the
planning and implementation of the programme.

DIC intends to computerise fully, all of the work done. However, while some members of the
staff are welcoming the BPR programme, others have expressed concern about business
process reengineering and its implications for them.
Required
(i) How BPR can be implemented? ADVISE.

(ii) DISCUSS the improvements that might be expected from introducing BPR.
(iii) RECOMMEND, performance targets which DIC could introduce to ensure that the re-
engineered processes enable it to achieve its key business objectives.
(iv) Why DIC's staff might be concerned about BPR and its implications for them?
EXPLAIN.
Solution
(i) To implement BPR, firstly, each business process of DIC needs to be divided into a
series of processes. Then each business process requires to be documented and
analysed to find out whether it is essential, whether it provides support to other valuable
processes and whether it is adding value. Any process which does not add value or does
not provide essential support to the value adding activities must be removed. Those
processes remain; require to be re-engineered/re-structured, so that can be as efficient
as possible. For DIC, technology should be introduced to improve these processes.
However, DIC must ensure that the statutory compliances regarding these processes are
not undermined.
DIC is facing a hyper-competitive marketplace where customers expect superior
benefits. BPR activities would help DIC in understanding those processes which DIC’s
customers value the most and remove those that are not valued. It is likely that BPR may
increase costs in short-term as investment in technology. However, this would also
reduce substantial levels of manual activities and processes, thereby providing speedy
services to customers. In long term, this would result in high levels of efficiency,
profitability and better levels of customer satisfaction and retention.
(ii) Improvements expected by implementation of BPR
Fast information processing and error reduction – The processes at DIC have not
been updated to take advantage of the Information Technology systems that are widely
available today. In particular, relying on a predominantly paper-based system makes
DIC's processes much slower than they need to be and it also increases the chances for
errors as information is manually recorded and then transferred between departments. A
new electronic database-led system is the need of the hour, where any information can
be entered into the central database on a real time basis, and the system can then be
continually updated for other staff to use. Therefore, no paper-based transfers of
information will reduce delays in systems and reduce the risk of errors occurring.

For example, if an enquiry is received over a telephone, staff can access the database
and gather all the relevant information of that particular customer. This faster response
time and error free feedback should lead to improved customer satisfaction.
Better facilities for salesperson – Having an online real time database and improved
technology might also help the sales staff when they visit potential customers. If the
salesperson can access the database remotely from their laptops, they can get every
minute detail of policies and premiums and so could potentially make a decision about a
policy application then and there. Thus, speeding up the process should directly address
the complaints of slow processing of files.
For example, If a sales person goes to sell the X policy to the potential customer,
however if the customer is interested in Y policy, the same can accessed immediately
online.
Motivating staff leading to overall improvement – The advance technology provided
to the salesperson will not only encourage them to do their job more effectively, but it will
also motivate them. Moreover, customers are likely to have a more favourable impression
of the salesperson if they provide a quick and efficient service more importantly which is
error free. This, in turn, will lead to the salesperson making more sales and likely to
increase their motivation still further. Therefore, leading an overall improvement.
Parallel processing – The paper-based nature of DIC's current system means that tasks
have to be done sequentially. However, one of the principles of BPR is that linked
activities should be conducted in parallel rather than sequentially. In this case, if DIC
improves its Information technology systems and stores customer details digitally, staff
may be able to deal with different aspects of a customer transaction in parallel, thereby
speeding up the transaction process.
For example, if a customer wants to pay premium for its existing policy at the same time
wants to enquire about a new policy, both can be done.
(iii) Key business objectives
The areas of concern of DIC are reducing the time taken to process transactions and
improving the quality of the paperwork and so it is likely that it will have business
objectives relating to these areas.
DIC should have performance measures looking at these areas, in order to assess how
well the re-engineered processes have helped to improve performance in relation to
them.
Performance targets
Speeding up the process
The slow speed of the current process is a major source of complaints; therefore, DIC
desires to speed up the process. Slow work pace can be among the most difficult
problems to resolve unless organisation/(s) have standards or goals against which to
compare actual performance. ‘Number of transactions completed within a given time

needs to be measured’. For example, Data entry people may be expected to process so
many entries each day from the paper-based data however on real time data entry this
task will be done immediately without any delay. In changed environment, performance
can be measured by computing various metric such as number of policies issued on time,
number of transactions completed successfully, number of claims settled on time.
Error free Work
The impact of errors may be in increased cancellations or lapses, financial compensation
payments to customers, and a poor market image leading to reduced sales and market
share. Reducing the number of complaints about errors in paperwork should be the main
motive. One of the key aims behind the BPR exercise is to help DIC reduce the number
of errors in the paperwork which a customer receives. Setting a target to reduce the
number of complaints about errors will help to achieve its key objective. Target could
include a percentage decrease in complaints, lapse rates, or cancellations, an increase
in business growth.
(iv) Perception of BPR programmes
Generally, people are not susceptible to change. Although the main aim of BPR
programmes is to increase business efficiency, there is often a general perception that
organisation just wants to do some cost-cutting exercises and this could lead to
redundancies or could threaten jobs and prospects. It is likely that this is a major reason
in DIC behind the staff's concern.
Resistance may be encountered from the staff as they are concerned about the change
and are uncertain about their jobs in near future.
Even if the programme does not actually lead to redundancy, the fact that it will result in
the fundamental redesign of business processes is still likely to lead to significant
changes which affect staff. For instance, BPR may lead to new patterns of work, changes
in people's roles or changes in the composition of work teams or may bring changes in
the pattern of working. This uncertainty about how the programme could affect them is
likely to make staff concerned about it and may lead them to resist it. Resistance may be
exacerbated because the out-of-date processes are likely to have been in place for quite
some time and have therefore become ingrained in the staff. This ingrained habit needs a
change, which is not acceptable by the staff.
Case Study 12
“W” is a ‘scented decorative items’ manufacturing company. “W” has always traded profitably
due to targeting the niche market for high-value, decorative items. Decorative items often use
waxes other than beeswax and paraffin. Bayberry wax is derived from the fruit of the bayberry
bush and has a distinctive aroma making it popular for manufacture of scented items. The
market for scented decorative items is a saturated one, but the CEO has identified that “W”
could begin selling online. None of “W”’s competitors have a major online presence and “W”
itself only has a simple website that lists locations of its stores as well as products information.

The Managing Director is unhappy about this move. He is aware that “W” has had issues in
implementing IT systems in the past. Most recently, “W” planned to implement an online
inventory system, which would have allowed stores to check inventory levels in other, nearby,
“W” stores. The system was discarded due to increasing costs and issues with the operating
system and application software, which were developed in-house by “W”’s small IT team.
The CEO feels that the issues with the earlier IT plans were because of lack of control. “W”
has never employed an IT Director and the CEO has therefore recommended that if “W”
decides to expand into ‘online retailing’, this role will require to be filled.
CFO who recently joined the “W” mentioned that operating across large number of states
through ‘online retailing’ involves cumbersome data-intensive exercise for this “W” needs to be
integrated through cloud-based ERP program, in addition to other operational requirements.
For this, there will also be need for additional budget.
Required
(i) IDENTIFY the issues that “W” may face when launching ‘online retailing’.
(ii) EXPLAIN the requirement for IT to be a strategic decision within “W”.
Solution
(i) There will be issues that “W” will face with its proposed move into ‘online retailing’. These
may include:
Lack of in–house IT resources
“W” is presently short of an IT Director to manage the project. While the “W” may be able
to hire someone quickly to fill this role, he/ she will lack experience of “W”’s business by
the time the ‘online retailing’ is started.
“W” is having IT team. They may well lack the time or experience for this online project.
This shows further investment will be needed to hire additional resources or to buy the
new systems from external agencies.
It is also important to note that an ‘online retail’ system would also be required to have
accurate information about inventory levels in “W”. It currently does not have an
automated inventory control system as this was abandoned. This problem can be
resolved with additional investment in cloud-based ERP program.
Setup and running costs
More than anything, investors want to see a return on their investment. However, the
cost of setting up and running an ‘online retailing’ system in “W” may be high. Therefore,
in the short term the setup costs may mean that shareholder returns fall.
“W” will need to analyse whether the additional profit it can make by ‘acquiring’ new
customers online will exceed these costs.

Any further investment in human resources will also increase the IT costs.
Technophobia
Staff at “W” may be concerned about not being able to carry out the new jobs required of
them or being able to carry out the new jobs required of them but unconvinced of their
skills to use new IT system. Therefore, they may resist the introduction of a change that
makes them feel or appear incompetent.
In addition, the MD has expressed concerns about the launch of a new IT system, given
the issues “W” has faced in the past. ‘Online retailing’ will need top management support
in order to be successful.
Lack of customer interest
It is likely that “W”’s customers will not be interested in purchasing decorative items
online. They may, for instance, wish to try out or physically see it for themselves rather
than buying it online. Moreover, these decorative items may require very high shipping
and handling costs. This will also encourage the purchase at a physical location.
It is not clear from the scenario whether the CEO has undertaken any market research.
This would be important before making the decision about beginning ‘online retailing’, to
avoid launching a costly website that fails to catch customers.
Security issues
As “W” will be processing transactions through its website, it will require to ensure that
customers are protected from credit card fraud or data errors. Their online stores are also
likely to face phishing attacks, distributed denial of service attacks, man-in-the-middle
attacks etc. This problem can be resolved by taking steps to offer secure connections
and internal data protection.
(ii) It is vital that “W” has IT systems represented at the strategic or board level for various
causes:
Competitive advantage
The market in which “W” operates is described as ‘saturated’. It will be hard for “W” to
capture additional market share unless it identifies a way to differentiate itself.
If the ‘online retailing’ is a success, it will give “W” a competitive advantage over its
opponents and as such it should be part of “W”’s strategic decision–making process.
Stakeholders
‘Online retailing’ is looking good from the long-term perspective, as online selling is in
trend now. Therefore, expansion of “W” is of great interest to “W”’s shareholders. As such
it is crucial that the directors monitor its progress.
In addition, customers are presently unable to check the inventories within “W”. They
may be very concerned in an IT system that would enable them to save needless
journeys into “W”’s stores for items that are not in inventory.

Cost of IT system
Setting up an ‘online retailing’ will involve high levels of expenditure for “W”. There is the
risk of costly mistakes if it is not carefully ‘controlled’. This is evidenced by the failure of
its inventory control system.
Failure of such a key project could have a major impact on the “W”’s financial position.
Fast moving
Technology is a fast-moving area and even if “W” becomes a successful first mover in the
market by selling online, rivals are likely to follow “W” into the ‘online retailing’.
In this environment, “W”’s IT systems will need to be continually monitored and kept up-
to-date to ensure it remains competitive.
Case Study 13
Safe and Wise Advisory Limited (SWAL) is well established financial planning & risk
advisory firm of the country with nation-wide presence. SWAL is engaged in selling third party
products be it financial products or insurance products (life assurance only). Financial advisory
business of SWAL is doing well and contributing to the half of gross revenue of group and two-
third of overall group’s bottom line, but insurance brokerage business is not performing as per
expectation. ‘Independent and impartial advice’ to client is unique selling point of SWAL.
SWAL was established by Mr Kaushal Jaiswal around two decade ago (when life-assurance
business goes private), at then it was one division business i.e., assurance brokerage
business. Mr. Kaushal Jaiswal is dynamic leader and presently leading the company as CEO,
apart from being major shareholder of the company.
SWAL is widely acknowledged in market for two distinct features, first being presence wide
across the nation, in form of ‘sub-agency offices’ equipped with professionally trained sale
staff headed by financial planner or advisor, where customer can take advise and discuss
opinion prior to investing/ buying any insurance or financial product. SWAL has ‘sub-agency
offices’ in 580 cities, towns and blocks. Locations are semi-commercial in nature but
prominent. SWAL has practice to sign 30-year lease, when so ever taking and ‘sub-agency
office’ on lease in order to reduce the lease cost and bring stability.
Secondly, SWAL sold product of all third parties, hence provide a range of products to its
client to choose from. In 2010, SWAL signed a 15-year agency agreement with all 23 life
insurance companies recognised then. SWAL’s tagline is also depicting the same ‘we are
ethically committed to understand and deliver your needs’. SWAL believes in organic growth
and listed on stock market 3 years back to float additional capital to fund more ‘sub-agency
offices’.
22 out of these 23 life assurance companies are private and registered themselves with
regulatory between the year 2000-2009 for a period of 25 years. Considering the default by
few insurance firms and increasing customer complaints, regulator of insurance business in
country tighten the registration criteria and harden the norms.

Typically each of ‘sub-agency office’ comprises three regular and one contractual employee.
One being financial planner/ advisor, 2 sales and relationship officer and contractual worker in
role of support staff and vested with miscellaneous clerical responsibilities. The on-roll number
of employees engaged in assurance brokerage business has been increased to 1,564 from
720 five year ago (up-till 3 year ago number was 845 but since expansion of ‘sub-agency’
office division it is around 1,500).
Market trend is changing, since the SWAL commence the business. Each of such insurance
company, now has their own network of branch offices to sale their insurance product directly;
that too at more prominent locations. SWAL counter this, by highlighting its ‘independence and
impartial advice’ practice, although SWAL managed to retain the revenue at same level, but
this result in low profitability of ‘sub-agency office’ business. Now these insurance companies
are not authorising any new agent.
Being in service industry and further in order to ensure wider market reach to compensate the
loss of profitability in ‘sub-agency office’ business, SWAL has established own ‘E-platform’-
‘Policy at you click’ to sell the insurance product with total staff of 50 professionals, as a
separate division under insurance brokerage business from ‘sub-agency office’ division. ‘E-
platform’ division is prospering but ‘sub-agency office’ business is certainly in trouble.
Supported by revenue figures given below (in ‘000 Crores), analysts reach to conclusion that
growth in the assurance brokerage business is slowing down both for SWAL and industry
overall:
Market Size/Year 2019-20 2018-19 2017-18 2016-17 2015-16
SWAL’s assurance brokerage 326 320 312 298 280
business
Total market size of life 2,240 2,198 2,122 2,004 1,960
assurance
Revenue earned by each division of assurance brokerage business (in term of age of the
client), is shown in table below for year 2019-20:
Division/Age 20-30 30-40 40-50 50-60 60+ Total
‘Sub-agency office’ division 2 25 38 164 51 280
‘E-platform’ division 8 28 8 2 0 46
Total Business of SWAL 326
Since the profitability of ‘sub-agency office’ division is declining, hence the strategic review
committee of board of directors are concerned about the company's declining profitability due
to poor performance of ‘sub-agency office’ division and suggest that the ‘sub-agency office’
division should be sold off and that SWAL shall re-position its assurance business as an
online solution.

Extract from financial statement for agency office division only (figures in ‘000 Crores)
Particulars/Year 2019-20 2018-19 2017-18
Revenue 280 272 250
Profit before interest and tax 18 16 31
Shareholder’s’ Equity 156 150 150
8% Long term debt 78 64 50
Current Liabilities 455 437 395
Current Assets 605 565 540
Applicable tax rate is 22%. The nature of cost incurred by ‘sub-agency office’ division is more
or less balanced between the variable and fixed. Fixed costs are largely committed in nature.
But the CEO is not agreed to the suggestion made by strategic planning committee, because
CEO is of belief that SWAL’s USP or original business model is ‘sub-agency offices’ through
which they ensure ‘independence and impartial advice’ to their clients.
In next board meeting, board is expected to pass resolution on this agenda item in order to
decide either to continue or sale the ‘sub-agency office’ division.
Required
(i) ASSESS the competitive environment of life-assurance business of SWAL (including

‘sub-agency office’ division).
(ii) EVALUATE the case for holding the ‘sub-agency office’ division, backed by financial
viability among other criteria.
Solution
(i) Michael E Porter, in 1980 in his book “Competitive strategy: Techniques’ for analysing
industries and competitors” suggested five force model to assess the competitive
environment of an industry. The five forces which are enumerated by this model are the
bargaining power of suppliers; the bargaining power of customers (buyers); the threat of
new entrants; threat of substitute products; and the level of rivalry among current
competitors in the industry.

This model is also named as porter’s five force analysis. Since each of these five forces
affect the competitiveness of business, hence can be used to assess the potential of any
organisation or entity; life-assurance business of SWAL (including ‘sub-agency office’
division) is not an exception to this.
The bargaining power of suppliers
Number of suppliers will decide the dominance they possess in term of bargaining power
regarding the price of good and service they supply to business. In case of ‘sub-agency
office’ division following factors will affect the suppliers’ power–
Control over Value Chain – By adopting the strategy of forward integration the insurance
companies them-selves getting into the direct sale through own network of branch offices
in order to enhance their margin or reducing the margin earned by SWAL’s ‘sub-agency
office’ division. Since number of insurance companies are neither too less nor too much,
hence bargaining power of insurance companies; in terms of percentage brokerage they
offered to SWAL is moderate.
Importance of product – SWAL is also dealing in financial product’s marketing and
advisory, which contribute 50% of group sales and around 67% of group’s profit; thus
assurance business which is no doubt significant but only choice (business) available to
SWAL. Hence, bargaining power of supplier is moderate.
Substitution among the brand – Life assurance product offers similar utility to client;
hence easily substitutes among the brands, means if insurance company 1 charge lesser
premier then insurance company 2, client will buy assurance of company 1. No doubt
switching is less viable once policy subscribed. Since SWAL’s ‘sub-agency’ division is
offering the product from all 23 insurance companies, hence bargaining power of
suppliers become low.
Supply of other factors – Other factor such ‘sub-agency offices’, which are largely on
lease, has 30-year lease, this will reduce the lease cost as well as bargaining power of
land-lord apart from bringing stability.
The bargaining power of customers
Whether seller is price taker or makes, this is outcome of bargaining power of customers
(true sense competition). If the bargaining power is high seller will become price taker,
else he is price maker. Following factors affect the bargaining power of customers of
SWAL’s ‘sub-agency’ division–
Number of buyers – In assurance industry the buyers are large (in comparison to few
number of suppliers) and diversified, hence their bargaining power is low.
Standardised products – Since the life assurance is the product, which is standard from
prospective of core functionality, hence buyers can easily substitute brands and can
negotiate to reasonable extent.

Switching – Once policy subscribed cannot be easily switched with another, hence due to
high switching cost bargaining power reduced to some extent at-least.
The threat of new entrants
Although entry of a new firm to the industry/ market depends upon the level of entry
barriers, but if new entity enters into the industry; it will surely bring additional capacity
which enhance the stiffness of competition; hence become a kind of threat. In case of
‘sub-agency office’ division, there are some major barriers to entry–
Less number of new life-assurance licenses by regulator due to tough regulations – As
mentioned in the case that after considering the default by few insurance firms and
increasing customer complaints, regulator of insurance business in country tighten the
registration criteria and harden the norms; hence this may act as entry barrier and reduce
the threat of new entrants.
Less number of new insurance agent due to no new authorisation by insurance
companies – As market is revamping, the agents is becoming competitor to the insurance
companies and as mentioned insurance companies stopped authorising new insurance
agents, hence this will act an entry barrier for new insurance agents, which is a great
positive for SWAL’s ‘sub-agency office’ division and intact the competitive advantage.
Learning curve and economies of scale – Since all the 23 insurance companies dealing
in life assurance and SWAL are 10- to 20-year-old organisations; hence learning curve
and economies of scale (shared services for the 580 offices - presence in 580 cities)
which they are enjoying may become entry barriers for new firm. Since new firms require
huge capital to be at par to such learning curve and economies of scale.
Threat of substitution
Substitution means the product from some other industry which can render the same
function which life assurance is rending. The threat of substitute product is quiet low.
Competitive rivalry
The level of competition among the players to acquire or retain the market share directly
affects the profitability in an industry. Following factor is affecting the competitive rivalry–
Number of competitors and respective market size – Since there are good number of
competitors, hence competition will be intense; may cutthroat rivalry. Presently SWAL’s
insurance business represent 14.55% of market share (in 2019-20) in comparison to
14.29% of market share five year ago, without any major variation, hence possibility of
gaining new market share is limited that too at high cost (in form of advertisement and
more after sale services).
Lack of differentiation – Standardise product results in high rivalry, since the life
assurance is standard product hence rivalry may be high on account of easy substitution
effect among the different brands.

Slow market growth – If market is growing at high rate, rivalry may be stiffer or may be
moderate; because everyone has reasonable opportunity to grow. The moment growth
stagnated rivalry become stiffer because no one wish to lose market share. The industry
life cycle curve is flatter here, because during last four years overall industry wide CAGR
(compounded annual growth rate) of life assurance business is 3.39%, whereas year-on-
year growth from 2018-19 to 2019-20 is 1.91%. Although potential is limited, but
competition is still high.
Exit barriers – If the exit cost for player to move out of industry is high, it will have to be in
industry and fight for survival, which may make competition tougher. Since agency
agreement and lease agreement is already signed by SWAL hence, it becomes difficult to
exit from the business, hence need to participate in competition to retain the share.
(ii) Case for holding the ‘sub-agency office’ division
The strategic review committee suggests that the SWAL’s ‘sub-agency office’ division
should be sold off and that SWAL shall re-position its assurance business as an online
solution, but the same suggestion firstly needs to be evaluated in terms of financial
perspective among the other criteria.
The growth in life assurance business is stagnated and industry is in maturity stage of
industry life cycle. This is evident from industry size and growth in the same. During last
four years overall industry wide CAGR (compound annual growth rate) of life assurance
business is 3.39%, whereas year-on-year growth from 2018-19 to 2019-20 is 1.91%. The
moment growth stagnated rivalry become stiffer because no one wish to lose market
share. Hence, there is intense competition in market. In cases where market witnesses
intense competition, operating efficiently is essential and reduction in cost become key
success factor; in order to offer competitive deals to clients and retain market share.
Hence, it becomes need of hour, that we review the operating processes followed at ‘sub-
agency offices’ to check whether they are efficient or not, in order to ensure greater
profitability rather thinking to sale off the entire ‘sub-agency office’ division.
Now, move to financial analysis, which suggests it is beneficial to hold back ‘sub-agency’
division.
Contribution to the group – Insurance business is contributing 50% of top-line of overall
group revenue (and 1/3 rd of bottom line), and around 86% (280/ 326) of this comes from
‘sub-agency office’ division and ‘E-platform’ division contribute only remaining 14%.
Profitability – Margins are positive. There are two major parameters to evaluate
profitability further on–

 Operating profit (EBIT/ Revenue) – No doubt, operating profit shrink from 12.4% to
6.43% in three years’ time frame. But as earlier quoted, margin is positive and
secondly, there is sign of recovery as well. EBIT increased in absolute terms (from
16 to 18).
 Return on capital employed (ROCE) [EBIT / (Equity + Long Term Debt)] – No doubt,
ROCE shrink from 15.5% to 7.69% in three years’ time frame. But reduction in EBIT
is not only a reason, another major reason for decline is change in capital structure.
Long term debt is increased in absolute terms (from 50 to 78).
Liquidity – Current ratio (Current Assets / Current Liabilities) being reasonable measure
of liquidity indicates enough liquidity in ‘sub-agency office’ division to meets it obligation.
There is minor decline from 1.367 times to 1.33 times. Component analysis of working
capital can be performed for greater insight.
Gearing (Debt / Equity) – Gearing ratio depicts the financial leverage, a measure of risk.
Gearing ratio no doubt increased as result of introduction of debt, from 1/2 to 1/3, but
under control.
Some other quasi-finance and significant factors relevant to the decision of sale of ‘sub-
agency office’ division and full focus on ‘E-platform’ division–
Client’s demography – Clients from all age groups from 20 to 60+ are clients of SWAL’s
assurance brokerage business. 66.56% (217/326) of revenue coming from clients with
50+ years of age, and 99% (215/217) out of them are associated through ‘sub-agency
offices’, hence holding of ‘sub-agency’ division become essential. Secondly, clients from
all age group may not find it convenient to shift to ‘E-platform’ ‘Policy at you click’ and
their resistance may result in losing business. Thirdly, they have easily available
substitute, because competitors also have branch offices which will give them same feel.
Resistance from employees – Out of 1,564 on-roll employees of assurance brokerage
business, only 50 are associated in ‘E-platform’ division- ‘Policy at you click’, rest all in
‘sub-agency office’ division. If SWAL re-structure itself fully as online solution for life
assurance then also cannot absorb all the employees, many of them need to be
retrenched. Resistance will be there in both the cases because transferred employee
may not have requisite skill set, result in poor quality of service and no job satisfaction to
employee. Whereas in case of retrenched workers redundancy cost will become
additional financial burden. This can be seen as exit barrier.
Legal aspect in term of pre-closure of lease - SWAL has practice to sign 30-year lease,
when so ever taking and ‘sub-agency office’ on lease in order to reduce the lease cost
and bring stability. It started the business 2 decades ago and expanded it 3 years ago
and many of leases are active right now, in case of pre-closure, it may be possible to
bear additional financial burden as per terms of lease agreement.

Loosing USP – ‘Independence and impartial advice’ with presence wide across the
nation, in form of ‘sub-agency offices’ equipped with professionally trained sale staff
headed by financial planner or advisor, where customer can take advise and discuss
opinion prior to investing/ buying any insurance or financial product is USP for SWAL’s
assurance brokerage business. By disposing the ‘sub-agency office’ division this central
idea, with which SWAL was established may be washed out.
In nutshell, the life assurance market has matured in recent years, and result in low
growth potential and lower profitability but still yielding positive numbers. Hence,
sale of ‘sub-agency’ division will adversely hit the revenue as well as profitability.
Case Study 14
A preliminary investigation for the Vidyut Dam Project was completed in 1962 in a South-
Asian country (here-in-after referred as country) and its design was completed in 1973 with a
600 MW capacity power plant. Construction began in 1979, but was delayed due to economic,
environmental and social impacts. In year 1987, technical and financial assistance was
provided by the neighbouring country to said country after signing of MoU, but this was
interrupted just a year later with political instability. Hence, said country was forced to take
control of the project and at the first, it was placed under the direction of the irrigation
department of concerned home state of said country. However, in July 1989 the Vidyut Hydro
Development Corporation Limited (VHDCL) was formed to manage 1,900 MW Vidyut Hydro
Power Complex; wherein 75% stake held by union government and remaining 25% stake by
concerned home state government. The 1,900 MW Vidyut Hydro Power Complex comprises of
Vidyut Dam & 1,000 MW Vidyut Hydro Power Plant (250MW×4), Beejuree HEP (400 MW),
and Vidyut PSP (500 MW).
The Vidyut Dam is a 260.61 m (855 ft) multi-purpose high rock and earth-fill embankment
dam on the Karaka River near Chapala town. Its length is 574.85 m (1,886 ft), crest width
20.11 m (66 ft), and base width 1,128.06 m (3,701 ft). The dam creates a reservoir of 4.0
cubic kilometres (⁓32,00,000 acre ft).
The 1,000 MW Vidyut Hydro Power Plant (Vidyut HPP) was commissioned in 2007-08 as a
multipurpose project, with variable speed features which can optimize the round-trip efficiency
under varying water levels in its reservoirs. Power is distributed to 10 northern states
(including concerned home state) of said country. The complex will afford irrigation to an area
of 2,71,139 hectares (=6,70,000 acres), irrigation stabilization to an area of 6,07,028 hectares
(=15,00,000 acres), and a supply of 270 million imperial gallons (1.23×106 m3) of drinking
water per day. 162 million gallons of drinking water for around 4 million people of the
neighbouring state, apart from 108 million gallons of drinking water for around 3 million people
of the concerned home state. Due to regulated releases from the Vidyut storage reservoir, the
existing downstream hydro projects are also benefited by way of augmentation in generation
at no additional cost to them. Concerned home state also gets 15% of generated power as
free. The total expenditure for this project was USD 1 billion. Since 2007-08, which was the
first year of operation, VHDCL has been a profit making company.

The Vidyut Dam has been the object of protests by environmental organizations and local
people of the region. The protest was against the displacement of town inhabitants and
environmental consequences of the weak ecosystem. "We don't want the dam. The dam is the
mountain's end" was the prominent slogan.
The relocation of nearly 1.5 lakh people or may be even more, from the area has led to
protracted legal battles over resettlement rights and, ultimately, resulted in the project's
delayed completion despite the fact that land acquisition was started in 1980. There is no
master plan for rehabilitation nor even a clear estimate of the number of people affected.
According to the 2003 status report of the public work department of Chapala town, the Dam
replaced 15,550 families. This estimate excludes a large number of people who lost their lands
but have not been officially recognised as project affected. Among those officially recognised,
allotted with land of poor quality or with multiple ownership claims.
Near to year 2006, while filling of the reservoir has led to the reduced flow of Karaka River’s
water from the normal 1,000 cu ft/s (28 m 3/s) to a mere 220 cu ft/s (6.3 m3/s). This reduction
has been central to local protest against the dam, since the Karaka River is considered sacred
river whose waters are crucial to religious beliefs.
Old Chapala town shifted and named as New Chapala Town (NCT) which is semi-ultra-
modern hill station at height of 1,555-1,855 m above MSL, with better road network and district
head quarter (shifted to NCT, earlier about 65 kms away from Chapala). NCT equipped with
better health (got 80 bed modern hospital against 25 bed hospital in old Chapala, and also got
5 primary health centres with additional 75 bed facility in total) and education facilities (hostel
facility of 900 students, degree college with university campus which can accommodate 440
residential students and faculties, and against 1 inter college in old Chapala, 5 inter-college
established (one in NCT and 4 in nearby villages). This all done at project cost.
In addition to the human rights concerns, the project has spurred concerns about the
environmental consequences of locating such a large dam in the fragile ecosystem of the
foothills of great mountain range. There are further concerns regarding the dam's geological
stability. The Vidyut dam is in a major geologic fault zone. This region was the site of a 6.7
magnitude earthquake in September 1992, with an epicentre 55 km (34 mi) from the dam.
Dam proponents claim that the complex is designed to withstand an earthquake of 8.4
magnitude, but some seismologists say that earthquakes with a magnitude of 8.5 or more
could occur in this region. Were such a catastrophe to occur, the potentially resulting dam-
break would submerge numerous towns downstream, whose populations total near half a
million.
In spite of concerns and protestation, operation of the Vidyut Dam continues and is completed.
But VHDCL was aware of these and tried to respond in a constructive way. The spirit of CSR
initiative is depicted by its CSR initiative title ‘VHDC Sahridaya’ (Corporate with a Human
heart), wherein focus areas are:

 Shiksha - Education Development

 Svasth - Nutritional Health and Sanitation and Drinking Water Projects
 Nipun - Livelihood Generation and Skill Development Initiatives
 Unnaati - Rural & Infrastructure Development
 Yogy - Empowerment Initiatives
 Srrishti - Environment Protection Initiatives
Out of these ‘VHDC Srrishti” has some special mentions, ‘Environment Focused Initiatives’ is
working with three objectives Soil & Water Conservation, Green Energy Generation &
Technology Promotions and Environment Protection & Promotion.
To conserve soil and water VHDCL is working on water harvesting and water harvesting tanks
(capacity 3,000 litres each) were installed in the project affected villages for rainwater
harvesting. Through this activity, beneficiaries were able to store almost 9 lakh litres of
rainwater during monsoon. In addition, VHDCL under this program installed more than 730
LED based Solar Street Lights and more than 180 LED based Solar High Mast Lights in near-
by towns and villages in year 2019-20. Moreover, to promote plantation of different fruit,
fodder, and medicinal plants, VHDCL planted 2,70,202 plants/sampling till now.
VHDCL has won many awards in last decade in different categories including CSR domain,
but most recent and relevant (for case study) among them are→
 HR Platinum Award for Training Excellence in 2019-20
 National CSR Leadership Award 2020
 CSR Innovation and Leadership Award 2020
It not only recognition in term of awards, VHDCL has obtained following Certifications:
 ISO 9001:2015 Certification (Quality Management System).
 ISO 14001:2015 Certification (Environment Management System).
 OHSAS 18001:2007 Certification (Occupational Health and Safety Management System).
Required
As part of policy initiative, if VHDCL is willing to implement the Triple Bottom Line (TBL)
reporting initiative; then ADVISE the management regarding dimensions of TBL, and what
are perspectives composed by different dimensions of TBL. Also, enumerate the
challenges, expected benefits, and initiatives under each dimension in context of Vidyut
Dam & Vidyut Hydroelectric Power Plant (1,000 MW).

Solution
British business author John Brett Elkington in year 1994 coined the term TBL. Every
business needs to be sustainable, rather than only profitable. A business is said to be
sustainable, when management makes sustainable business decisions. To consider
sustainability of business decision there are three bottom lines i.e. People, Planet and Profit
(also known as dimensions of TBL), instead of single bottom line (i.e. Profit).
Here-in VHDCL, shows strong commitment for CSR through the certification (regarding
quality, environment and safety) they obtained and also through the awards they won (in the
domain of CSR and Training).
Dimensions (sets) of TBL
(i) People, the social equity bottom line relates to corporate governance, motivation,
incentives, health and safety, human capital development, human rights and ethical
behaviour.
The project has major concerns about the displacement of town inhabitants, followed
by reduction in flow of Karaka River from the normal 1,000 cu ft/s (28 m 3/s) to a mere 220
cu ft/s (6.3 m3/s). Former concern is more significant than the later concern, because
later was of short duration; it is obvious when the reservoir is filled to its maximum
capacity, the flow of the river will again become normal. Regarding the displacement, it is
mentioned in the case itself that according to the 2003 status report of the public work
department, the Dam replaced 15,550 families. Further, this estimate excludes a large
number of people who lost their lands but have not been officially recognised as project
affected. Even those officially recognised, allotted with land of poor quality or with
multiple ownership claims. This concern substantiates in absence of a full-proof master
plan.
It is not the case that local resident were/are in complete distress, they were/are
compensated with alternative and better facilities and remedies as well that too at
project cost, which includes the:
 Development of hill station to attraction for tourism – The New Chapala Town (NCT)
is developed with semi-ultra-modern facility at height of 1,555-1,855 m above MSL
as pre-planned hill station which will attract the tourist. By creation of lake due to the
impoundment of the reservoir of Vidyut Dam, scope of water sports is there. Hotels,
Guides and Tour and travels will cause employment opportunities for locals.
 Better road network leads to ease of living and improved communication channels
which also help in establishing suitable industries according to environmental
aspects.
 Shifting of district head quarter to NCT results in reduction of distance of travel by
town residents to reach to district head quarter for any task by about 65 kms, hence
life of locals will be further eased.

 Improved health facilities - NCT equipped with better health facilities. It got 80 bed
modern hospital against a 25-bed hospital situated in old Chapala town. Apart from
this also got 5 primary health centres with additional 75 bed in total.
 Improved Education facilities in term of hostel facility of 900 students and increase
in number of inter-colleges.
Not only the local resident (directly affected), other too got benefit from project, such
as 250 cusecs (⁓162 million gallons per day) of water supply to neighbouring state,
which will meet drinking water need of around 4 million people, apart from 167 cusecs
(⁓108 million gallons per day) of water supply to concerned home state, which will meet
the drinking water need of around 3 million people. Power is also distributed to 10
northern states (including concerned home state) of said country.
VHDCL showed social commitment through Shiksha, Svasth, Nipun, Unnaati, and Yogy
as part of their CSR initiative.
(ii) Planet, the environmental bottom line measures the impact on resources, such as air,
water, ground and emissions to determine the environmental impact and ecological
footprints.
The project has spurred concerns about the environmental consequences of locating
such a large dam in the fragile ecosystem of the foothills of great mountain range, which
will result in weak ecosystem and concerns over a catastrophe to occur (due to
earthquake - the potential dam-break). Regarding the later concern, it is also mentioned
in the case that the Vidyut dam is in a major geologic fault zone. This region was the site
of a 6.7 magnitude earthquake in September 1992, with an epicentre 55 km from the
dam. In response to which the Dam proponents claim that the complex is designed to
withstand an earthquake of 8.4 magnitude, but some seismologists say that earthquakes
with a magnitude of 8.5 or more could occur in this region. Were such a catastrophe to
occur, the potentially resulting dam-break would submerge numerous towns downstream,
whose populations total near half a million.
The major environmental benefit is generation of 1,000 MW (3,532 MU of Annual
Energy) of environment friendly peaking power.
In order to leave improved environment footprint and to trade-off the environmental loss
caused during construction, VHDCL through initiative ‘VHDC Srrishti’ working on:
 Rainwater Harvesting – It has installed the necessary infrastructure in the affected
areas to harvest almost 9 lakh litres of rainwater during monsoon.
 Green Energy Generation & Technology Promotions through installing LED based
Solar Street Lights and LED based Solar High Mast Lights.
 Environment Protection & Promotion through plantation of 2,70,202 samplings so
far, of different fruit, fodder, and medicinal plants.

(iii) Profit, the economic bottom line refers to measures maintaining or improving the
company’s success in terms of adding value to shareholders.
It is an inherent feature (rather project specific concern) of hydro power projects that the
duration of construction is quite lengthy and huge capital outlay is involved. In case of
Vidyut Dam too, Construction began in 1979, but was delayed due to economic impact
apart from social and environmental pressure. In 1987, technical and financial assistance
was provided by the neighbouring country, but this was interrupted years later with
political instability. Project then placed under the direction of the irrigation department of
concerned home state of said country. However, in July 1989 the Vidyut Hydro
Development Corporation Limited (VHDCL) was formed to manage such 1,900 MW
Vidyut Hydro Power Complex; wherein 75% stake held by union government and
remaining 25% stake by concerned home state government. The total expenditure for
this project was USD 1 billion. Since 2007-08, which was the first year of operation,
VHDCL is a profit making company.
The initiative includes the feature of variable speed, the 1,000 MW Vidyut HPP has
variable speed features which can optimize the round-trip efficiency under varying water
levels in its reservoirs to keep the cost of operation low.
The quantifiable economic benefits include:
 The generation of 1,000 MW (3,532 MU of Annual Energy) of environment friendly
peaking power. This will no doubt lead to industrial and agricultural growth in the
northern region.
 15% of generated power will be given free to the concerned home state, apart from
power as per their share, where the distress is caused due setting up of the project.
Hence, the state has economic benefit from the project too.
 Irrigation of 2.71 lakhs hectares of area, beside irrigation stabilization of 6.07 lakhs
hectares. Hence, supporting other economic activities as well indirectly.
To conclude, the project largely seems sustainable as running in profit since it was
operational, leaving minimal and positive environmental footprint, and also payback society
(especially directly affected local population) with alternate better facilities and compensation
(may be with few minor exceptions or irregularity on case-to-case basis).

Case Scenarios
Case Scenario 1
Corner is an online Pizza delivery business. Corner is one of the QSR that created its own
system, website, and app. Corner’s pizza baking points having a home delivery system. Due to
popularity of E Commerce awareness among the customers, online food order system come
up with new opportunity for food business. Corner has grown rapidly due to boom in online
platform. It is now operating around 1,000 points.
Corner’s vision is to increase shareholder wealth by making and timely delivery of quality
pizza. Corner provides customize pizzas as per customer’s taste. People choose to order pizza
online for different reasons not wanting or having time to cook, do not have to wait in a queue
for order or taking delivery. During happy hours from 4pm-7pm, baking points have a great
deal on both pizzas and beverages. The customers can call, text or order pizzas online.
Corner’s collection and delivery service uses delivery motorcycles and scoters to transport
pizza parcels.
The process consists of a customer choosing the restaurant of their choice, scanning the menu
items, choosing an item and finally choosing the place of delivery. Payment is then managed
by cash on delivery, or with a credit card, debit card etc. when the delivery boy delivers the
pizza at the customer’s place of delivery.
Issue
Corner’s delivery service is slow. It uses an automated reminder service like Dial My Calls to
send updates to customers about the status of their order - when it goes into the oven, when it
comes out, when it is out for delivery, and so on. Customers are willing to wait a little longer if
they know that pizza is on its way. Slow delivery reduces the taste, aroma and flavor of pizzas
delivered.
Recently, financial performance and market share of Corner has deteriorated. The CEO of
Corner believes that reductions in customer satisfaction and flexibility, caused by a decline in
operational performance, may have led to the recent deterioration. It has been suggested that
to use the Lynch and Cross’s Performance Pyramid to reverse this deterioration and four new
measures for operational performance have been suggested.
Measure Description
Live tracking system/ GPS driver tracker (to Number of successful deliveries per day
choose the best and the shortest routes for food
delivery vehicles and to guide the drivers in real
time basis)
On-time delivery % of pizzas delivered within 30 minutes of
the booking time
Fuel consumption Average fuel consumption per km travelled
Improving the taste (It is proposed to use pizza % of positive feedback
delivery bags to keep the pizzas hot and fresh)

Required
EVALUATE the extent to which the suggested new measures can be used to manage
operational performance at Corner.
Solution
The performance pyramid covers not just only financial performance but also a broad range of
underlying processes of business organization which drive financial performance. It facilitates
to set financial and non-financial performance measures. Non-financial measures are
important indicators which can help to attain long-term financial performance. The elements of
the pyramid are interconnected, and each level in the pyramid backs the one above it. For
example, on-time delivery of pizzas will increase customer satisfaction, which will eventually
lead to greater market share, one element of the vision.
The left side of the performance pyramid covers external effectiveness, such as customer
satisfaction, while the right side of the pyramid covers internal efficiency, such as flexibility and
productivity. Operational performance is signified by the four elements, which are quality,
delivery, cycle time and waste, at the bottom level of the performance pyramid. Operational
performance measure can help the organization to achieve the vision of the organization.
Reduction in pizza delivery time and delivery of fresh hot delicious pizza i.e., quality can help
Corner to achieve its vision.
Cycle time can be reduced by using live tracking system. Live tracking system is a key to
improve productivity and profitability. It can help in taking well-versed decisions and schedule
pizza delivery more efficiently.
GPS driver tracker will allow real time monitoring of vehicles and offer detailed insights of fuel
usage, driver’s behavior, engine’s idle time, etc. using this data efficiently; money saving areas
for pizza delivery can be identified. Through this tracking system idle delivery vehicles can also
be identified. This may lead to an increase in the number of deliveries per day and more
deliveries, translated into more business.
It can also assist Corner to reduce the fuel consumption and unnecessary overtime costs.
Reducing fuel consumption would lead to an improvement in financial performance. Measuring
average fuel consumption per km travelled does not, however, relate directly to activity, for
example, to the number of pizzas delivered. Average fuel consumption will vary between type
of vehicle used for delivery i.e., scooters or motorcycles and conditions of roads in the areas of
delivery. Average fuel consumption per km is not a good measure of waste or any other aspect
of operational performance of business organization. To be useful in managing operational
performance, this measure should be changed to average fuel consumed per pizza delivered
which would be an appropriate measure for waste.

A loyal and satisfied client is paramount to success of a food delivery business. With the
assistance of tracking system, pizza delivery vehicles will respond to service calls quickly and
reach their destination on time. Customers are likely to value on-time pizza delivery very much,
this will be one of the main causes, and they will choose pizza from Corner. The proportion of
on-time delivery is a measure of operational performance i.e., key driver for customer
satisfaction.
Moreover, use of pizza delivery bags to keep the pizza hot and fresh will improve the taste,
aroma and flavor of pizzas, which is also related to the quality element of the performance
pyramid and is key driver of customer satisfaction.
Case Scenario 2
Surmount Cable Cars (SCC) engaged in assembly of cabin used on ropeways. In order to
assemble cabin, 3 major parts of different shapes and sizes are used. These parts are
assembled with help of specially designed dome nut and bolt made of brass (Product Code –
Brass DIN 85), which are manufactured by Reliable Hardware and Metal Works. Plant layout
design of SCC comprises assembly line, where multiple products are assembled at one point
of time. Hence there are multiple workers, who are using such nut and bolts simultaneously.
Such nut and bolts come in set along with washer and all three spares collectively consider as
set.
Since the plant facility of SCC is situated in remote area hence majority of worker are either
unskilled or semi-skilled and literacy rate is also low among workers. This causes variety of
problems including not informing production supervisor, about the re-ordering of such (Brass
DIN 85), a class of store and spares items. Due to ignorance in workers towards
understanding of the stock levels and their relevance, many a times stock of such spares
ordered later then it should be, hence got out of stock. This further leads to stock out situation
in some of the cases, which result in contribution loss.
Reliable Hardware and Metal Works (RHMW) is long standing supplier of Brass DIN 85 to
SCC, hence reliable in term of both quality and delivery time. RHMW took single day as lead-
time to deliver the re-ordered quantity. Despite the reliability of supplier SCC wish to maintain
safety stock equivalent to 3 (three) days consumption for production facility. SCC is using
latest version of SAP as enterprise resource planning, which is installed just 3-4 month back.
Employees are being trained to use the respective modules of SAP and integration among
various function/modules is ongoing.
Plant of SCC works for 6 days in a week and during a week period 1,200 units of Brass DIN 85
is required for production. Consumption of Brass DIN 85 in order to assemble the cabin cars
are constant through-out the year. SCC during first phase of its drive to implement lean
manufacturing, is working on its operational efficiency and tries to reduce inventory by
introducing a Kanban system.

Required
(i) EXPLAIN the Kanban in inventory management for entity like SCC? Also, EXPLAIN
Kanban be applied to non- manufacturing entities?
(ii) CALCULATE is Kanban size and number of Kanban required in case of SCC?
(iii) LIST the factors to be considered and specific precautions/pre-requisites, prior to SSC
took task of applying Kanban system.
Solution
(i) Kanban system is a visual signal-based workflow management technique. Taiichi Ohno
an industrial engineer, developed the first Kanban system for Toyota automotive in
Japan.
Kanban in inventory management
Kanban can be used in pull system of inventory, where supplier supplies the material
based upon consumption. Kanban (a yellow line, originally used in Toyota) is visual cue
to worker (may be unskilled or even illiterate) to understand that further material is
required. Kanban reduce the cycle time and enhance the predictability, in order to
promote value to customer. Kanban system hold specific amount of material (divided in
Kanban Size). Kanban system also maintain information regarding quantity, storage
location, vendor and details on product/part.
While calculating Kanban size and number of Kanban required following assumption
need to be taken–
 Consumption is constant throughout the period; else smoothing factor need to be
used in calculation of Kanban size.
 The supplier will deliver material directly to the point of use area (assembly line) and
 Requirement in term of space to store number of Kanban is met.
Kanban in non-manufacturing facilities
Kanban originally designed for manufacturing entities but can be applied to non-
manufacturing concern as well, for smoothening of workflow rather inventory
management. In Kanban, signal based dashboard is used to manage and improve the
flow of work to be followed and also categories the work into to do, on-going and done
(in some of cases backlog category also be added).
(ii) Kanban Size and Number of Kanban
Kanban Size can be calculated using formula i.e. (C) x (LT) x (L) x (SF)
Whereas C stands for consumption,

LT stands for lead time (Note – Lead Time should be in terms of consumption pattern
means if consumption is considered for week/s time then lead time shall also be
considered in term of week/s)
L stands for location of Kanban (Note - When so even any entity implement the Kanban
then keep one container of material at both the location (entity it-self and supplier), hence
L is 2 unless otherwise provided)
SF stands for smoothing factor, which is used to set-off seasonal variations in
consumption; obviously if consumption and level of stock throughout the period remain
same then smoothing factor can be one.
Calculation of Kanban Size
C – Consumption per day is 200 i.e., 1,200/6
LT – Lead time is 1 days
L – Locations are 2 (RHMW and SCC) and
SF – Smoothing Factor is 1
Therefore, the Kanban Size is 200×1×2×1 = 400 Units in each Kanban.
Note – EOQ can also be practice as Kanban size
Number of Kanban depends upon the maximum quantity of inventory which comprises
of demand/consumption during lead period and quantity of safety stock. It can be
determined using following formula–
Number of Kanban =
Calculation of numbers of Kanban

Quantity of safety stock in given case is 3 days × 200 (daily consumption) i.e., 600
Consumption/demand during lead period is 1 days × 200 (daily consumption) i.e., 200
Therefore, maximum inventory under Kanban system is 800 i.e. (600+200)
Number of Kanban is 2 i.e., 800/400
(iii) Factors to be considered and specific precautions/pre-requisite to Kanban system
Kanban try to smoothen the workflow process by ‘visualise the flow of the work,
reducing WIP, managing process, making process policies explicit, incorporate feedback
and using scientific techniques’. In order to do so, while applying Kanban system SCC
need to consider following factors–
1. Will supplier ready to supply material in the lot size equal to Kanban Size?
2. Will supplier participate in pull system of inventory and agree upon Kanban
Stocking program? – reliability on supplier.
3. Will supplier agree to supply material directly at point of use i.e., assembly line?

4. Is the consumption pattern comprising significant variations or constant

throughout?
5. What is requirement regarding handling and storage of material?
6. Contribution margin on sale of product in which raw material is used.
Note – these factors have major impact on calculation of Kanban size as well.
Some specific precautions for SCC
1. Since the worker are unskilled and literacy rate is low among them hence it is
needed to be assured that worker must understand the visual cue. Training can
be provided to them.
2. Demand/Consumption need to be predicted with reasonable assurance in order
to implement Kanban, although one thing, which is in favour to SCC is that it knows
the consumption of Brass DIN 85 is constant throughout the period.
3. SAP which is used as ERP system in SCC, need to be integrated with suppliers
system in order to practice pull system of inventory and various modules of SAP
need to be tightly integrated.
Case Scenario 3
Shakti Automobiles Limited (SAL) is a leading battery-based e-rickshaw manufacturing firm,
under brand ‘Shah Swaari’ in three models – Super, Star, and Speed. SAL started this
business around 5 years back when it was only manufacturer of such e-rickshaw. SAL
manufactures all assembly components themselves, irrespective of fact that these
components can be acquired from market at a cheaper rate. Major component of total costs in
manufacturing of such e-rickshaw is variable in nature. Company was performing well, earning
reasonable and enjoyed large market share up-till two year ago majorly due to first mover
advantage. But due to increasing competition as new entrant coming into market and rough
macro-economic conditions, market share starts shrinking; resultantly profit starts declining. If
no major steps taken, then company may run into red in year to come.
Mr. Pillai, CEO attended some workshop last week, where he learned about the lean
management and techniques of cost management. He asked Mr. Reddy, Chief Management
Accountant to report on underlying reasons behind current performance with available set of
possible solution. Mr. Reddy immediately convened a meeting of top ranked officers, which is
chaired by CEO, at meeting.
Mr. Swami, VP Marketing mentioned that it is difficult to maintain same level of sales in
upcoming years because price of Shah Swaari is much higher than price offered by all the
competitors in market. Quality and features of other are also similar.
Mr. Dutta, Customer Relation Officer also supported Mr. Swami and said that the popularity of
their product is declining, he quoted that he receives lot of complaints from buyers in e-mails

and tele-calls due to manufacturing defects, which arise in product within a month period of
purchase and frequency of such calls and emails have increased in recent years. He also
mentioned that in some cases, customer reported that assembled part did not belong to model
they purchased, and some customers say, assembly is not as per specification provided.
Mr. Sodhi, Head Workshop & Repairs agrees that the repair issues in case of recently sold
vehicle have been increased.
Mr. Murthy, VP Production & Operations who recently joined the SAL replied, firstly large
percentage of worker are unskilled; secondly due to large amount and categories of raw
materials, dumped by store at production floor; that’s too well prior to need. These two
reasons cause worker fails to differentiate among parts which appear similar. He also
mentioned entire business process, especially production process is quite old and contains
certain activities which are purely unnecessary, he also highlight importance of industry 4.0
and give stress on business re-engineering through artificial intelligence, machine learning,
etc.
Mr. Naidu, VP Purchases immediately responded about economics of discount involved
behind purchase of large quantity and also mentioned buying too less may lead to stock-out
situation.
Required
You were also presented at meeting as deputy to Mr. Reddy. Post meeting you came back
to your desk and start working. Mr. Reddy called to you to his cabin, on reach to his cabin;
he asked you to prepare draft of report (ADVISE) seek by CEO; and meet him with copy of
draft after half an hour from now.
Solution
Report
Addressed to:
Office of CEO,
Shakti Automobiles Limited (SAL).
Dated – 19th Jan 2021
Report on underlying reasons behind current performance and Lean Management, Cost
Management tools
(i) First reason behind weak financial performance is highlighted by Mr. Swami i.e., Price of
SAL’s Product Shah Swaari is much higher than price offered by all the competitors in
market. Quality and features of other products are also similar.

Target Costing as cost management technique can be applied. Since market condition
are stiff and bargaining power of customers is high due to multiple competitors, and these
competitors are selling the product at price lesser then price offered by SAL. Hence,
price offered by such vendors should be considered as ‘Target Price’ and after reducing
‘Target Profit’ from same ‘Target Cost’ can be identified. Production, operations facilities
along with product need to be reengineered to achieve such ‘Target Cost’.
(ii) Second reason is that SAL manufactures all assembly components themselves,
irrespective of fact that these components can be acquired from market at a cheaper
rate.
Relevant cost of both, ‘Make or Buy’ needs to be compared. As mentioned, that major
component of total costs in manufacturing of such e-rickshaw is variable in nature,
hence, such major component of costs can be controlled if SAL buy the all the
components instead of Making them.
Only those products need to be made in house whose variable cost of manufacturing is
less then market price and vice versa.
(iii) Third and major reason is popularity of their product is declining, this is evident from
declining in market share and lot of complaints from buyers in e-mails and tele-calls for
manufacturing defects.
Since these defects arise in product within month period of purchase. Hence, product
needs to be looked at. Further, some of cases customer reported that assembled part is
not belonging to model they purchased and some customers say assembly is not as per
specification provided. Hence, quality is needed to be ensured in the product delivered.
One of way to look at ‘Quality’ is conformance to need of customer, to ensure same
Total Productivity Management/ Total Quality Management supported by Six Sigma need
to be applied as part of Lean System Management.
Total Quality Management is management of entire process, including planning
process, to meet customer’s requirements. PRAISE analysis can be used in order to
achieve improve quality.
Using DMAIC (Define, Measure, Analyse, Improve and Control) methodology of Six
Sigma, existing business process can be improved to ensure customer satisfaction,
reducing cycle time and reduction in waste also.
(iv) Fourth reason being large percentage of worker are unskilled. Each worker should be
provided with requisite training. Though Kaizen, workers should be involved into
improvement of existing process so that they become able to address small problems or
improve a process.

(v) Fifth and second major reason is large amount and categories of raw materials, dumped
by store at production floor; that’s too well prior to need. This reason may be root cause
of one of complaint by customer that assembled part is not belong to model they
purchased.
JIT can be implemented as part of lean system. JIT is pull system of production, with
single piece flow after considering takt time. In JIT, production facility needs to be
integrated with vendor system for signal (Kanban) based automatic supply which
depends upon demand-based consumption. Under JIT system of inventory storage cost
is at lowest level due to direct issue of material to production department as and when
required and resultantly less/no material lying over in store or production floor.
Note - Takt time is the maximum time to meet the demands of the customer, this will help
to decide the speed of/at manufacturing facility. Heijunka can be applied in order to
reduce variation between takt times over the production.
Cost benefit analysis of ‘reduction in storage cost along with opportunity cost saved’
and ‘increase in ordering cost, purchase cost along with stock-out cost’ need to be made.
(vi) Sixth reason for low performance is old established businesses processes, especially
production processes and contains certain activities which are purely unnecessary.
Value Analysis needs to be applied in order to ensure maximum value to customer by
eliminating activities which are not value generating, this will control cost also, that’s too
strategically.
Process Innovation and Business Process Re-engineering can also be applied. Re-
engineering is rethinking and radical design of business process in order to achieve
improvement. It will help the SAL to keep them at par with changing technology by
synchronization along with redesign, retool the business process.
Further details can be tabled on requisition basis.
Closure of Report
Mr. Reddy,
Chief Management Accountant
(For Management Accounting Division)
Shakti Automobiles Limited

Case Scenario 4
A-One Automobile is manufacturer of Motor Bikes. A-one is based in a country which recently
became liberal and global economy. Hence till the time, when businesses in country was
controlled by government and the government, in order to maintain price and domestic
demand, regulates the market to maintain the uniformity in the prices determined by the
entities.
The country is large enough with widespread populations with high density; there is high
demand for motor bike as large population of country is in the age group of 18-24 years. A-one
automobile enjoys reasonable market share. The new government in country believes in
deregulating markets and allows the imports of foreign motor bikes.
Management team at A-One acknowledge that it utmost needs to make changes to its process
in order to respond the competition from foreign manufacturers. Further, A-One's Motor Bikes
are now being seen as expensive product in comparison to the foreign competition, because
A-One motor bikes are costly. Currently, finance department uses traditional standard costing
and budgetary variance analysis on the basis of standards set semi-annually in order to
monitor and control production activities. Management at A-One plans to improve its
performance through the use of Kaizen costing.
Required
(i) RECOMMEND key changes significant to A-One’s traditional costing system to

support the adoption of ‘Kaizen Costing Concept’.
(ii) LIST the impact of implementation of the Kaizen costing approach on the employee
management at A-One.
Solution
(i) Key changes to support the adoption of ‘Kaizen Costing Concept’–
Kaizen Costing implies that small, incremental changes routinely applied and sustained
over a long period, results in significant improvements. It aims to involve workers from
multiple functions/ levels in the organization to work together to address a problem or
improve a particular process. In other words, it is a costing technique to reflect
continuous efforts to reduce product costs, improve product quality, and/or improve the
production process after manufacturing activities have begun.
Adopting Kaizen costing requires a change in the method of setting standards. Kaizen
costing focuses on "cost reduction" rather than "cost control". It emphasizes on small but
continuous improvement. Targets are updated continuously to reflect the improvement
that has already been achieved and that are yet to be achieved.
The suggestive changes which are required to adopt Kaizen Costing concepts in A-One
are as follows:

Cost Control System to Cost Reduction System: Traditionally Standard Costing

system assumes stability in the current manufacturing process and standards are set
keeping the normal manufacturing process into account thus the whole effort is on to
meet performance cost standard. On the other hand, Kaizen Costing believes in
continuous improvements in manufacturing processes and hence, the goal is to achieve
cost reduction target. The first change required is the standard setting methodology i.e.,
from earlier Cost Control System to Cost Reduction System.
Reduction in the Periodicity of Setting Standards: Under the existing control system
followed by the A-One, standards are set semi-annually and based on these standards
monthly variance reports are generated for analysis. But under Kaizen Costing system
cost reduction targets are set for small periods say for a week or a month. So, the period
covered under a standard should be reduced from semi-annually to monthly and the
current practice of generating variance reports should be reduced to a month or a week.
Participation of Executives or Workers in Standard Setting: Under the Kaizen
Costing system, participation of workers or executives who are actually involved in the
manufacturing process are highly appreciated while setting standards. So, the current
system of setting budgets and standards by the finance department should be changed.
(ii) Impact of implementation of the Kaizen costing approach on the employee
management–
 Role of Employees – The relation between management and employees, apart
from role of employees will change drastically, because under any system of
costing, employees are seen as cost centre and real cause of problem, but in kaizen
costing employees are seen as solution provider.
 Implementation aspects of Kaizen – It may be possible that at time of
implementation of Kaizen due to change in role of employees, they may be not self-
motivated to command, control and suggest possible improvement themselves. But
this is sure that after reasonable time Kaizen system will increase staff motivation
through empowerment.
 Changes in Culture – From government regulated culture to employee self-
empowered work-culture, will be dramatic change for A-One. Under Kaizen
employee group will be assigned with power to make continuous changes rather
than just executing the changes approved from management.
Case Scenario 5
Smooth Connect Telecom (SCT) is the private sector telecom company. SCT is second
largest player in telecom sector of country, with subscriber base of more than 10 million. SCT
achieved this magnificent growth by acquiring competitor in recent years. SCT deals in fixed
line telephone services, corporate services and mobile (cellular) services. SCT is meeting all
the requirements from regulator in efficient and timely manner.

SCT is known for continuous innovation in its services, with changing pace of technology and
business need like wise use of Optical Fiber Wire and VoLTE (Voice over Long-Term
Evolution) etc. This helps the SCT in acquisition of many corporate clients.
The largest player in telecom industry is Voice Telecom, which is resulting company out of
corporate restructuring of state-owned telecom corporation. Voice Telecom still own largest
market share due infrastructural advantage over other players in the market. SCT is also
facing tough competition from Voice Telecom on pricing and customer volume.
Majority of telecom operators, including SCT and Voice Telecom, usually criticized by
customers for poor customer services, misallocation of call duration and call drop; but majority
of complaints are on account of–
a. Calculating wrong tariff, and
b. Dull and delayed response from customer care executives.
Hence by focusing on customer services, if SCT improves its billing process and handles the
customer complaints wisely; then SCT can gain competitive advantage over other players
including Voice Telecom. In order to improve the quality of customer services, SCT decide to
practice Six Sigma initiative.
Required
Enumerate the modus operandi that ‘how SCT can APPLY DMAIC method to implement Six
Sigma’.
Solution
Six Sigma was first used by Mr. Bill Smith of Motorola Corporation in 1986 for improvement of
manufacturing process & elimination of defects. Six-Sigma seeks to improve the quality of
process by identifying and removing the cause of defects (defect can be anything, which lead
to customer dissatisfaction). Six Sigma uses quality management and statistical methods with
special infrastructure of people. Six-Sigma can be implemented through two methodologies–
1) DMAIC (Define, Measure, Analyse, Improve and Control) - Improve existing business
process (remove defect).
2) DMADV (Define, Measure, Analyse, Design and Verify) - Create new business process
(defect free).
DMAIC methodology of Six Sigma implementation at SCT
Define – Define the improvement area
Define include definition of customer requirement or problem faced by customer
First and foremost, requirement of is to ensure customer must be billed correctly, because
wrong billing may lead to either of–

a. Delayed revenue – due to litigation for wrong billing

b. Loss of revenue – due to porting to alternate telecom operator by customer
Customer care executives need to be trained, so that they can guide the customer in most
appropriate way and ensure lowest possible wait time to solve customer complaint.
Measure – Existing process for comparison
Existing performance need to be measured
Since performance need to be measured specially in two domains ‘billing processes’ and
‘customer complaint handling’, hence SCT needs to have a system through which it can collect
reliable information (likewise number of complaints as percentage of total customers, similarly
wrongly billed customers against total customers; is there any process of reissue the correct
bill? – if yes –than in how many cases it is issued? and average time to solve complaints) in
order to measure existing performance.
Performance is required to be measured against each of critical success factors (which will
create value for customer).
Analyse – Cause effect relationship between factors of process
Existing process needs to be mapped in order to determine the root cause of problem
SCT should further analyse the information collected in second point (measure) above for
determining the performance, in order to reach to root cause of customer complaints and
wrong billing; So that necessary preventive and corrective steps then can be taken.
Improve – Plan improvement on basis of analysis
Existing process need to be improved in order to mitigate the root cause threats
Once the SCT done with the analysis, it has to identify the possible solution to root causes, in
order to improve the performance.
Any improvement, which is so ever is suggested; needs to be both feasible from SCT
prospective and valuable from customers’ perspective.
Improvement can be done by reissue of bill where it was wrongly issued earlier, if already
process of revision of bill is in existence than wait time for reissue need to be curtailed.
Control – Continuous control to identify and correct the process variance
Improved processes need to be controlled continually in order to assure enhanced
performance shall be maintained
Post improvement in process (issue of bill and handling of customer complaints), the manager
who is responsible for such process at SCT need to assure continuous control over the
process, so that customer services should create same value for customer and keep them
satisfied.

For monitoring, KPI against CSFs can be established and reported on daily basis, likewise
number of complaints (especially which remain unresolved at day end) and wrong billing
cases. These KPI will also act as early signal to Line Manager or Senior Management.
In order to implement Six Sigma as per DMAIC method, SCT need to form a team of line
managers from different processes which need to be improved (or critical from prospective of
customer services). Team and implementation project should lead by some senior
management person (may be CEO him-self).
Case Scenario 6
Star Tiles Production Limited (STPL) is large manufacturer of floor tiles and interlocking tiles.
STPL enjoyed reasonable market share and brand reputation up till couple of year ago. Since
then, STPL is facing problem of decline in productivity. STPL deals in variety of tiles with
different brand-name, some of their brands are in development stage and some in maturity.
Majority of customer are from middle class, who are price sensitive; hence cost of production
is critical aspect for STPL and resultantly productivity too become critical factor.
Workers at STPL are allocated with specific roles and responsibilities. Workers are supposed
to work strictly according to specific set of guidelines provided by superior. Workers used to
complain about job role allocations, because allocations are not as per skill set of workers. In
some of case task become monotonous; as learning curve exhausted. Management and
operational decision are centralised in nature, participation of workers is limited up-to day end
report only.
Remunerations at STPL are paid based on hourly rate. Hourly rate is fixed based upon
number of years of working in STPL, irrespective of importance of task allocated to such
worker. Since payment are fixed in nature hence workers at STPL are hardly concern about
quality. Some of skilled workers are getting less pay in comparison to other staff. STPL
recently retrench some of senior workers, who possess reasonable operational skills; but not
good in technology part which is essential to operate machines; recently installed at STPL
plant.
Since there are varieties of tiles available in stock that’s too with different design, hence in
past there are handful instances where material delivered to customer was different from what
being ordered. Due to large volume of inventory at store, some category of tiles is further
manufactured even lying available in store and stock of some remains always short.
Required
You are newly appointed to Management Accounting Department of STPL, Management

Accountant asked you to draft a report for CEO, containing brief explanation to–
(i) Productivity, stating in context of what it should be measured?
(ii) Productivity enhancement techniques, which can be applied at STPL in order to
enhance productivity?

Solution
Report
Addressed to:
Office of CEO,
Star Tiles Production Limited (STPL).
Dated –11th Apr 2020
Report on Productivity Enhancement Techniques
(i) Productivity - Productivity is all about efficient and effective use of all resources.
Resources can be time, people, knowledge, information, finance, equipment, space,
energy and material.
Productivity is usually linked to ‘time and motion’, in order to
 Put pressure on worker to perform faster.
 Increase the productivity either by increasing the value or reducing the time required
to create that value.
Note - Responsibility of productivity is largely on the person who organising the work
rather individual worker.
(ii) Productivity Improvement Techniques
a) Value Analysis/ Engineering – Value engineering improve value of product at
every state of product life cycle; Since products of STPL is lying either in
development stage or in maturity stage, hence
 At development stage – STPL can reduce cost without reducing quality by
establishing design and processes accordingly.
 At maturity stage – STPL can reduce cost by replacing costly component with
cheaper one. But may result in reduction in quality to some extent, hence
consumer behaviour is important. Since customer base is price sensitive hence
this strategy may work.
b) Quality Circles – Quality circle is small group of employees, usually in size of 5-6
members in order to–
 Meet regularly to identify, analysis and solve problem of their departments.
 Advice the management to implement new methods to solve work-related
problems.
Since STPL facing criticism from worker class and method of working is selected by
superior hence quality circle can be solution to these problematic aspects.
Note – This technique originated in Japan in 1960s

c) Financial & Non-Financial incentives – Incentives are real cause of motivation to

worker and may be financial and non-financial in nature.
 Financial incentive includes better wages and salaries, bonus etc.
 Non-financial incentive includes better working condition, welfare facilities,
worker participation in management.
Since the incentive scheme is not linked to employees’ productivity and skill hence
redrafting of incentive schemes incorporating financial and non-financial incentives
can promote productivity.
d) Operations Research – Management at STPL need to incorporate operation
research and technique thereof in the decision-making process. Use mathematical &
scientific methods may solve the problems of productivity (by using techniques such
as LPP etc).
e) Training – Rather than retrenching the employees who are operationally sound and
weak in using the technology, they must be trained on technological part. Training is
process of knowledge & skill enhancement of employee and will result in increased
efficiency of employee.
f) Job Enlargement & Job Enrichment – Job Enlargement is horizontal expansion
of job which increase the varieties of job & work knowledge (make job interesting
and satisfying), whereas Job Enrichment is vertical expansion of job which makes
routine job more meaningful and satisfying. With this STPL can solve the problem of
monotonous nature of task and can enhance the productivity.
g) Job Evaluation – In order to enhance the productivity, STPL should do job
evaluation. Fixing value of each job in the organisation. This is essential for moral
boosting for employees.
h) Inventory Control & Material Management – Optimum usage of material in
manufacturing process need to be ensured by STPL, whereas overstocking and
under-stocking should be avoided, through–
 Scientific Purchase
 Systematic Store Keeping
 Proper Inventory Control, etc.
Because overstocking may result in blockage of fund, chance of misuse/
mishandling & spoilage of material and under-stocking results in shortage or sale
out situation which result in loss of contribution.
i) Quality Control – STPL should ensure identification of causes of quality deviation &
correction thereof, in order to produce goods with quality at lowest prices & to
reduce wastage.

j) Human Factor Engineering – Understanding of technology and human

requirement (psychological & physiological character), of task and worker both; in
order to ensure fitment of job to men; to increase human efficiency & wellbeing.
STPL can do skill mapping as part of this technique.
Closure of Report
Signature
(For Management Accounting Division)
Star Tiles Production Limited.
Case Scenario 7
ABC Limited specializes in the manufacture of chemical intermediaries in a very competitive
business environment. ABC is a public listed company, with majority of its shareholders being
institutional investors like mutual funds, banks and insurance companies.
It is located in a water scarce zone in Tamil Nadu. There are restrictions on the tapping and
usage of groundwater under the relevant laws. Penal provisions of the law will apply in case of
violations. The production process requires water and the amount of water that the company
can draw is limited to 19,000 kilo-litres (1 Kilo-litre is 1,000 litres). Purchase of water is not an
option as availability is highly erratic and exorbitant on cost.
The company manufactures two types of chemicals “A” and “B” and these are sold in
kilograms. The company is in the process of making the business plan for the year 2021.
Based on the actual operating data for 2020 and taking into consideration the inflation and
possible price increases that it can obtain from the market, the following product costing
details have been arrived at:
Product A B
Capacity Volume kg. (not inter-changeable) 8,25,000 9,30,000
Selling Price per kg. ₹2,000 ₹1,000
Variable Cost per kg. ₹1,500 ₹650
Water (litre/ kg.) 12.5 10
Under the relevant income tax laws prevalent, companies with a turnover of ₹250 Cr. (Crores)
or less are taxed at a lower rate of 25% as against the normal 30%. The company intends to
keep its sales for 2021 equal to ₹250 Cr. or slightly lesser to avail this concessional income
tax benefit.

With capacity constraints, the company has calculated that it would be still beneficial for the
company to stick to ₹250 Cr. as only a marginal increase in turnover is possible over ₹250
Cr.; after a higher tax @30%, the PAT would be still lower than the PAT arrived at after doing
just ₹250 Cr. and availing the lower income tax rate.
CFO asked management consultant to work out the volumes in kg. of products “A” and “B”
which would give an optimal (maximum) contribution given the constraints on capacity, water
usage and turnover to avail the concessional income tax benefit.
Consultant work out with the following product mix using Linear Programming. She also
proposes another mix which does not meet the constraint on water usage where the company
could end up drawing excess water than permitted by 113 kilo-litres but would result in an
increase of ₹30 lacs in contribution. She says that it is easily possible to do this by managing
reporting to the water authorities.
Product Optimal Suggested
A (Volume in kg.) 8,00,000 7,85,000
B (Volume in kg.) 9,00,000 9,30,000
Contribution in ₹Cr. 71.5 71.8
Constraints
Sales <= 250 Cr. 250 250
Volume of "A" in kg. <= 8,25,000 8,00,000 7,85,000
Volume of "B" in kg. <= 9,30,000 9,00,000 9,30,000
Water usage (in KL) <= 19,000 19,000 19,113
Required
The CFO is not satisfied with the calculations. He wants you (Sr. Finance Manager) to come
up with a proper DISCUSSION.
Solution
Primary goal of investor –owned firms is shareholder wealth maximisation, which translates to
stock price maximisation. Management Consultant’s plan is looking good for the ABC as there
is a positive impact on the profitability ( 30 lacs) of the company. Also, ABC operates in a
competitive environment so for its survival, it has to work on plans like above.
There is second side of coin that cannot also be ignored i.e., business ethics. It is easily
possible to manage drawing of excess water, but it is not an ethical practice as the company
has responsibilities towards use of natural resources like water and protecting the
environment.

Besides, a whistle-blower complaint to the water authorities can land the company into trouble
in terms of penalties, a financial impact and also such penalties are disallowed for income tax
purposes. It is possible that such a violation may be reported in the media causing disrepute
to the name of the company. It can also make investors in the share market stay away from
the company as it has ethical governance issues. The company will face challenges in
obtaining other government approvals when it will plan expansion as this violation may have to
be reported on the applications seeking approvals.
Overall
May be ABC would be able to earn profit due to this plan in short run, but it will tarnish the
image of the ABC which would hurt profitability in long run. Therefore, before taking any
decision on this plan, ABC should analyse both qualitative and qualitative factors.
Case Scenario 8
Fashion industry prospered more than any other industry and it kept blooming with new trends
being brought weekly and almost all being sold in no time. The NextGen clothing (NGC) into
the fashion industry, situated in the outskirts of Deshipur, had several textile plants, nurturing
the needs of the community. NGC had a good base of laborers and farmers, few of them aged
under 14, from nearby locations enrolled into the program. They had no source of employment
past the clothing plants. It gave boost to their living avenues with receptivity to all modern
facilities of living. They worked overtime to get NGC to where it wanted to be.
The raw materials did not cost much to NGC, given the local availability and the cheap quality.
The low financial cost and the low sale price it offered to its customers allowed it to churn out
cotton and viscose fabricated clothes in humungous quantities. The citizens loved the
articrafts brought out by the designers and the cotton material pleased them.
NGC had no history of reporting sustainable efforts to build up a strong environment to work
in. It reported phenomenally huge profits in past three years, paid out impressive dividends to
its shareholders, bonuses and lucrative overtime pays to its laborers. All were happy and no
one complained about the sustainability aspect, the duty it owes to its surroundings and the
greater environment.
The community focused on the form rather than the substance of it. It kept overlooking the
brutal effects of producing cotton and viscose in local farms which was the primary source of
raw material for NGC. One day NGC learnt that a scholar born and brought up in Deshipur,
studied in Northern America, returned to his hometown. He presented brain storming sessions
to the civilized people which made them rethink on their clothing habits. His sessions were
summarized below:
Cotton
First of all, the production of cotton involves enormous water usage, which is already a scarce
resource globally. Just to manufacture cotton enough to make a t-shirt, involves using liters of
water. Above that fertilizers and pesticides employed takes a toll on farmers’ health. They

become ill often than not. Not just the cotton producing process is environmentally non
tenable, it involved tons of water for spinning the cotton and dying the fabric to make the cloth.
The chemical composed water then flows to the nearby rivers and hampers the life of water
beings and people around.
Viscose
This is a semi synthetic matter derived directly from wood pulp and converted into cloth by
application of chemicals and water. Most of the deforestation can be ascribed to the paper
production and rayon production. The greedy merchants overlook even the protected areas to
get the required pulp. The sprouting air pollution and water pollution has left community
residents forsaken to cry over their fate. The use of harmful chemicals leads to diseases like
cancer and heart strokes.
We, the Customers
The ridiculously low prices of the clothes with the advent of the internet have created a
desperate demand of clothes and have led to surge in its buying frequency. Hardly few of us
contemplate on how a t-shirt or jeans we are wearing was made, what processes they had to
undergo before it took that shape and the extent of loss and injury it caused persistently.
In a nutshell, his sessions were about the ideas hinting at the destructive impacts on
environment that NGC is bringing to their plate. They gave a patient listening to all his talks,
well fabricated in their native language, free from any fictions.
The training sessions of the scholar, Raghu picked up many ears, it was all over the country
and NGC started to perceive this as the verge of its downfall. NGC had to give a rethinking on
the way clothes were made.
Required
RECOMMEND ways to bring a turnaround in the reporting framework and go extra miles to
do something “sustainable” for the environment.
Solution
Sustainability is a wider phenomenon in itself and cannot be narrowed to just the environment
and its people. Ensuring sustainability in a profound context means not just to make the
present secure but also considering the needs of the future for the resources. This can be
done when there is well blend of demand and supply of such resources.
As per the triple bottom line approach, in the context of fashion, sustainability is interpreted
as using environmentally ethical means of producing wearables like clothes, footwears, and
other apparels. This approach considers the challenges that a production process brings to
the people and the planet even if of less intensity to the firm itself, in the short run. The triple
bottom line counts in the advantage of the greater stakeholders rather than the traditional
shareholders as noted down from a traditional reporting policy.

Therefore, a sustainable fashion is an undertaking to consider the implications of triple bottom

line pillars (i.e., environment or planet, the people, and the profitability of the firm) when
producing consumables. This holistic approach looks beyond just the term fashion and does
what is to be done to put in place an ecological balance.
Once we understand the term sustainability, we now catalog some of the sustainable efforts
that are recommended in the situation of NGC and they are:
Producing quality materials
Nowadays firms are resorting to producing cheap materials that cost them less to produce and
sell. Bearing the come and go fashion in mind, their produces have less longevity and are
more representative of use and throw stuffs. Given the environmental boost, NGC should use
materials that guarantee longer lasting textiles, thoughtfully designed and priced. This will
plunge the need to buy the clothes so often and will enhance the clothing experience of the
masses. The highly priced material will lower the demand and keep at bay its accessibility to
all. From a short-term perspective, this may sound a financial hit which in the long term will
prove a reputational boost to the firm, given the drastic change in quality it adapts to.
Spreading awareness among the customers
Though many expectations are just around the firms engaged in textile production and sale
thereof, the customers are no less responsible in turning down the clothes and discarding
them in less environmentally amicable manner. They do not discard the clothes in the right
time and at right place, rendering the clothes unsuitable for reuse. The thrift stores and
donation center are propelled to throw such unfit clothes. As per reports, only established
donation centers or processing centers are able to sell overwhelming quantities of
secondhand clothing and footwears. So, there is a strong relation between the conscious
buying choice of the customers and the sustainability in the fashion industry. With less
numbers of purchases of good quality pieces, they can support sustainability.
Using organic materials and addressing safety issues
Triple bottom line suggests that reducing financial expense at the cost of health of its people
can cost unimaginative money to the firm in the long run. A firm cannot be seen in isolation to
its people who work for its interest and the local residents that live around. As indicated from
the facts above, we are aware that producing cotton and viscose involved usage of enormous
pesticides and fertilizers that ultimately impaired the health of the farmers and other people
involved. They end up having life threatening diseases like cancer and heart strokes. Organic
material does not necessarily eliminate the application of pesticides and other toxic materials;
however, it will reduce its usage to an acceptably low level. Though restoring to organic
materials would not lead to reversal of harmful effects that occur once the cotton is harvested,
it will present considerable relief to the health of its people. The adversity occurring by way of
colossal use of water to produce organic cotton as compared to the ordinary cotton has to be
kept in mind though. This aspect will risk the sustainability of the water for the future
generation, an already scarce resource for the present as well.

Moreover, selling the produce for cheap prices, will mean an adjustment to the wages of the
laborers and farmers they receive for their hard work. Historically we have seen that firms with
an attempt to practice price competition, try to cut down their production cost by compromising
the quality of machines they use, providing below standard working environment to their
workers, undue firing of skilled people. All of these presents an ongoing challenge to the
wellbeing of those people such that they are forced to eke out their living.
Channelizing efforts towards recycling
NGC can introduce innovative recycling channels to ensure that customers are enticed to turn
over the used clothes rather than throwing them away. Having a recycling collector at its store
with a catchy slogan like 20% discount on fresh stocks for the used clothes, can help. This
effort directs people to resort to reusing their old stuffs so that the landfill pressure reduces
thereby reducing the emission of carbon gases in the environment. Few firms collect their own
products, and after working on them, are sold below normal prices.
Alternatively, NGC can seek the services of third party that can help them buying secondhand
clothes and sorting those based on their quality and resale the ones suitable for use and get
others to the recycling process. Such unsold clothes left over can be used as raw materials by
carpet manufacturers or other textile manufacturers.
Compliance to local labor laws
The true cost of any firm is not just the perceivable financial cost that is reported in its annual
publications, it also comprises of the non-financial cost not counted in the context of financial
reports. As mentioned above, the low quality of machines can cause myriad accidents at
NGC’s plant thereby putting it into legal liabilities which is although a financial cost for the firm
but will prove to be reputational risk in the long run, a non-financial cost.
Ethical manufacturing also means complying by the local laws of the country pertaining to
usage of labor. We see that NGC are pulling in children of age below 14 years to get their job
done. Rather than defending the rights of its workers, it puts an imminent risk to the local kids.
It is against the local labor laws to hire child labor and provoke them to work when it is their
right to receive educational and nutritional support at this age.
Producing Poly clothes
We see the most expensive sportswear made out of recycled polyester materials, which
comes as no surprise. Thanks to the ethically aware multinational firms. It is suggested that
NGC should direct its effort in reducing the negativity of plastic remnants brought into the
cycle. The plastic materials like ketchup bottles, pickle and oil containers are processed to a
liquid consistency which is then turned into reusable fabrics. The demand for cotton clothes is
surging globally and polyester made clothes appears to bring a switch over. Poly clothes have
less ecological impacts compared to cotton and are easily recyclable; and consume less
water.

Reducing the usage of water consumption

As evidenced from the facts, each cloth made to wear consumes liters of water. This usage of
water can be controlled by manufacturing as per the just in time approach rather than churning
out humungous quantities. This will allow controlled production of raw material on need basis
and in turn the limited manufacture of the clothes. NGC can adapt the policy of taking
customized order made to manufacture what is ordered for. This will also ensure limited flow
of hazardous chemically composed water to the nearby rivers, thus managing the risk of
commoners’ lives.
Overall
Considering the above approaches, it is perceived that NGC can bring a significant positivity
to its environment. Being a socially responsible part of the community, it owes a duty to its
surrounding and not just to its capital providers. Hence it is also recommended that it should
hire an expert who can assist it in presentation and preparation of sustainability report (or
reporting as per the triple bottom line framework). This report satisfies the informational needs
of the larger stakeholders i.e., the government, regulatory authorities, employees, local
residents and community, and the customers and suppliers.
Once NGC implements some of the suggested sustainable approach to manufacturing clothes,
those policies and efforts can be reported in the triple bottom line framework reporting. This
will provide a reputational advantage and also a competitive edge over its competitors in the
industry which will bring in financial gains.
Case Scenario 9
Toys Limited manufactures toys and games for the children in the age group 6 to 14 years.
They have recently shifted to STEM i.e., Science, Technology, Engineering and Mathematics
learning approach. The major games under this category are DO IT YOURSELF (DIY) Kits.
Each kit is designed with a specific learning objective. This kit comprises of all the elements
which are essential to build the specific project. The number of elements in a kit range from
200 to 350 elements. There is an instruction booklet in the kit which guides the user
throughout the project. The users can also use the video support which is provided with
specific user login.
In last two months, the customer support division has reported a major increase in the
consumer complaints. A critical study revealed that the major complaints were under the
category “missing elements” in the kits. Further study revealed that most of these complaints
were for the products which had some common elements in the kits. On the other hand, the
customer feedback and reviews have been very positive on the “quality of the elements”
provided with the kits.
Since innovation is the core competency for this game industry, the company has a dedicated
Research and Development team which focuses on three areas-

a. Identification of new learning techniques

b. Development of new games
c. Upgradation of existing games
Under the current system, the games are sold online. The final product is delivered from the
central warehouse located in Bangalore. The company holds a minimum inventory of the
games at the central warehouse.
The manufacturing facility is located in the industrial area which is around 50 kms from the
Central Warehouse. The production plan is based on the demand as per the instructions from
the Central Warehouse. The Chief Quality Officer is responsible for the quality of the product
right from the procurement of the raw material till the final product is delivered to the customer.
The CEO has called a meeting of the heads of all the departments and suggested them to
implement of Lean Management and integrated the same with the innovation in the
organisation. After a series of brainstorming sessions, they have agreed to implement 5S lean
management system.
Required
ADVISE on implementation of 5S in Toys Limited.
Solution
The current problem emphasises on “missing elements” in the kits as one of the major reasons
of customer complaints. This highlights that there are issues related with workspace
organisation. The positive feedback on the “quality of the elements” reflects that the
production related process is robust. Considering the above two factors, Toys Limited is
required is to maintain high quality work environment. Therefore, the 5S concept should be
used. 5S explains how a workspace should be organized for efficiency and effectiveness by
identifying and storing the items used, maintaining the area items, and sustaining the new
order. The 5S lean management system comprises of the five S's Sort, Set in Order, Shine,
Standardize, and Sustain.
Sort
This will focus on identifying necessary elements of the kit, remove the unwanted items and
ensure that all the elements of a particular kit are available. The unwanted items can be
provided with RED FLAG so that these can be removed at the earliest.
Set in Order
It will ensure that the elements of the kit are placed at the properly allocated space for the kit.
It will also help in assigning fixed places and fixed quantity of elements at each space. It is
always recommended to have it compact so that it is easy to access.

Shine
One of the reasons why elements might be missing would be mismanaged and untidy
workplace. Shine aspect of 5S focuses on keeping the workplace clean on regular basis, and
also ensuring it is easy to work at the particular workplace. It focuses on keeping tools and
equipment clean and in top condition, ready for use at any time.
Standardise
The best practices of the particular work area are standardised. The focus is on maintaining
high standards through orderliness and as per the required quality and quantity. This includes
steps which make it easy for everyone to identify the state of normal or abnormal conditions.
This can be achieved by placing photos on the walls, to provide visual reminder about the
elements properly placed in the kits.
Sustain
For a long-term success, it is important to sustain the set standards and processes. This
involves establishing and maintaining responsibilities amongst the team leaders and members.
Ensure that members follow the rules and it becomes a part of their work habit. There should
be periodic audit and review of the process for early identification of any issues.
Considering the above aspects of 5S lean management system, its proper implementation will
strengthen the way the kits are being packaged and will ensure that the issue of missing
elements can be brought down significantly.
Case Scenario 10
Dewar Bikes (DB) is large national bike manufacturing company established in the year 2003.
The company has a strong position in the market and has also traditionally achieved a good
market share however facing tough competition. The Board of DB recognises that it needs to
make fundamental changes to its production approach in order to combat increased
competition from foreign manufacturers. DB is now being seen as non-lucrative, pollutive and
with less safety features in comparison to the foreign bikes. The Board plans to address this
by improving the quality of its bikes as well as financial performance.
The components are sourced directly by DB. Suppliers are located worldwide. Suppliers are
evaluated on an ongoing basis, including an assessment of whether to utilise new or
alternative suppliers to improve capacity and performance. The company is having lot of
components piled up in stock and few of them are becoming obsolete. There is lots of
reworking as both internal and external failure are more, so the wastage of resources in
reworking needs to be controlled. The Board is convinced that Lean Manufacturing is the best
approach to be adopted.
In DB, production process is grouped by function and production teams comprised a
number of permanent members, who had acquired their positions through seniority and
a few newly selected specialist staff who had yet to discuss their position in any team.

The process of making a bike can be roughly divided into stamping, welding, painting,
assembly and inspections, which takes about 11-12 hours in total. The standard time to
manufacture a similar bike in industry is 8-9 hours. The nature of end product demand is
unstable due to economic factors. However, DB forecasts demand based on its internal
policies and historical trends. DB sells its bikes in retail stores located in over 10 metro cities.
It focuses on building close relationships with retailers, working with them to sell its bikes in a
compelling manner.
Enclosed Annexure
Required
You are newly appointed to Management Accounting Department of DB, Chief Management
Accountant asked you to draft a report for CEO, containing–
(i) ANALYSIS of quality costs and ADVISE on two measures to reduce the non-
conformance cost,
(ii) ADVISE on implementation of just-in-time purchasing and production.
Annexure
Statement Showing ‘Total Quality Costs’
Particulars of Costs `
Prevention Costs
Supplier Review 2,50,000
Appraisal Costs
Equipment Testing ( `36 × 1,600 hrs.) 57,600
Internal Failure Costs
Down Time 15,40,000
Manufacturing Rework (`456 × 3,200 bikes) 14,59,200
External Failure Costs
Customer Complaints (`70 × 2,000 hrs.) 1,40,000
Warranty Repair ( `3,120 × 2,600 bikes) 81,12,000
Total Quality Costs 1,15,58,800
Solution
Report
Addressed to:
Office of CEO,
Dewar Bikes
Dated –06th May 2020

Analysis of Quality Costs

The reporting of quality costs highlights the cost of quality activities at DB. The total quality
costs statement clearly displays the relationship between conformance costs (prevention and
appraisal costs) and non-conformance costs (internal failure and external failure costs) and
the drivers of a reduction in the overall spending on quality. Statement indicates that only
2.16% of the total quality cost is the cost of preventing quality problems while 0.50% is the
cost of appraisal activities. Thus, prevention and appraisal costs make up only 2.66% of total
quality costs. In contrast, 97.34% of quality control costs are incurred for internal and external
failure costs.
Two measures to reduce nonconformance cost
Total Productive Maintenance (TPM) is a system of maintaining and improving the integrity
of production and quality system through keeping all equipment in top working condition so as
to avoid breakdowns and delays in manufacturing processes. It involves identifying machines
in every division (including planning, manufacturing, maintenance) and then planning &
executing a maintenance programme covering their entire useful life.
In this case, TPM will help in reducing internal failure cost (i.e., downtime and manufacturing
rework cost), which constitutes 25.95% of total quality cost, by keeping all equipment in good
working conditions so that there is no downtime or machine breakdown and ensuring that all
equipment run smoothly. If machines work properly, the chances of rework will reduce,
ultimately will also reduce chances of warranty repair and customer complaints (comprising
71.39% of total quality cost which is a major part of total quality cost).
Total Quality Management (TQM) aims at improving the quality of organisational output,
including goods and services, through continual improvement of internal practices. Its
objective is to eradicate waste and increase efficiency without compromising with the quality. It
requires maintaining quality standards in all aspects of business by ensuring that things are
done right the first time so that defects and waste are eliminated from operations.
It appears that DB is not a TQM company at present, due to huge disparity between
conformance costs and non-conformance costs. In order to make DB to be successful, all staff
at DB must be engaged in the improvement process and share in the continuous improvement
ethos. In order to establish a reputation as a high- quality bike manufacturer DB must ensure,
staff is having attitude towards the importance of conformance activities, for instance, DB can
conduct third party inspection of components at supplier’s workplace leading to maintenances
of quality standards.
Overall, while applying above two measures, in the DB, consideration must therefore be given
to the optimum balance between the costs of conformance and the costs of non-conformance.
Implementation of Just in Time
Just in time purchasing and production technique will put an end to the harrowing task of
inventory management. In this form of pull system, purchasing of components and production
of bikes will be based on customer demands and DB will have to accordingly coordinate with
its suppliers to supply the right quantity of components required at the right time. JIT inventory

management calls for having the inventory as and when needed also taking care of massive
holding cost suffered related to large build ups. In this environment, DB will also be able to
reduce the manufacturing time around 3 hours by streamlining the flow of information in entire
supply chain.
Dewar is assessing alternative suppliers on continuous basis to improve capacity and
performance. It means it is changing sources of material regularly or using multi-suppliers. In
contrast, JIT is based on reduced number of supplier and move towards single sourcing. It is
easier to develop long term cooperative relationships with a smaller number of suppliers. The
quality of internal services and an organisation’s ability to provide quality products or services
to its customers depends upon this relationship. However, this relationship is obviously
missing in DB.
DB has close relationship with the retailers but relationship with suppliers is equally important.
It appears that firm is also importing its requirements from abroad. In JIT environment, it is
important that suppliers are, to the extent practical, located in close proximity to the
manufacturing plant. Carefully selected suppliers are capable of delivering high quality
materials in a timely manner, directly at the shopfloor, reducing the material receipt time.
Therefore, selection of right supplier located in close proximity to the manufacturing plant is
vital for the proper implementation of JIT.
It is also important to note that every supplier is different, but the DB has to be able to view
each as one of its part only. The supplier’s network must be able to call up and communicate
directly with the DB’s network, obtaining manufacturing schedules and product specification in
real time. ERP and other sources of electronic data interchange between supplier and DB will
act as backbone in supporting the JIT activity.
On the whole, DB’s management has to treat suppliers as partners with significant influence
on the success of the organization.
The functional division is less appropriate in JIT environment. JIT production requires multi-
skilled teams. In DB, teams need to be formed to work by product i.e., type of bike rather than
by the type of work performed. In addition, staff will need training to work in the new teams,
measures surrounding the amount and effectiveness of training will be required. A JIT system
works best when employees pitch in with suggestions for improvements. The performance can
be measured by computing the number of ideas per worker, the number of ideas suggested in
total, the number of ideas implemented, or the proportion of ideas suggested that are
implemented.
DB forecasts demand based on its internal policies and historical trends. Today
demand in every sector of the market changes by leaps and bounds, so using
historical data is not at all recommended. Demand forecasts should be pulled by
current market trends and prediction of future market sentiments. However, in case of
DB, demand is unstable. In this case, in order to prevent stock-outs, inventory
managers can only increase the Kanban numbers of each product; the greater are the
variations, the greater is the need of Kanban cards and, thus, the higher is stock level
and need more working capital per rupee of sales.

Conclusion
The Board desires to improve the quality as well as financial position which can be achieved
through successfully implementation of quality control and lean system. However, the factors
discussed above should be taken care of. It is worthwhile to note that any return on
investment in proposed system must be viewed long term rather than short term since
optimum results may not be realized until the system has been in place for some time.
Closure of Report
Chief Management Accountant

(For Management Accounting Department)
Dewar Bikes
Case Scenario 11
ABC is a medium size Chartered Accountancy firm having five branches in India. Their
major revenue segments are statutory compliances, taxation practice, audit &
assurance and consulting services. Their founder partner, in a recently organized year
end closing meeting with all working partners, has given the following vision statement
for the next year:
‘The next financial year, ABC should use results and determinants-based framework
for each revenue segment and the current rewards scheme to be remodeled to a clear
result oriented one’.
Required
(i) DESCRIBE management strategy, the founder partner of the firm referring to.
(ii) LIST some performance measures that might be used.
Solution
(i) The management strategy that the founder partner of the firm referring to is the
‘Building Block Model’ as proposed by Fitzgerald and Moon. The model was
proposed as a solution to performance measurement in service industry but can
also be extended manufacturing field to evaluate business performance. The
model requires the establishment of results and determinants-based framework,
wherein ‘determinants’ are the performance areas and the ‘results’ reflects the
success or failure of the determinants. This model also requires setting the fair
standards against which performance will be measured and linking the same to
controllable factors in order to motivate the staff.

(ii) Some performance measures that might be used in ABC are as follows:
Financial Performance in ABC can be measured through computing gross/ net profit
margin, margin per partner, change/ increase in revenue over previous year.
Growth in revenue, success rate in converting enquiries into revenue, retention rate of
clients, relative market share and position are measures of competitiveness.
Statutory compliances segment will be having characteristics of recurring work,
and strict adherence to return filing timelines; hence it is essential to ensure optimum
and effective resource utilization. In order to measure the productivity of the staff, hour
charged as percentage of total available hour/ total hour paid can be computed. This ratio
will also signify the peak and off period.
Consulting Services segment will be having characteristics of analytical skills,
inter-personal skills and ability to close on prospective clients; therefore, quality
of services is critical factor for success. Customer rating and proportion of number
of errors/ defects to number of compliances submitted can be taken as KPI for
quality of services.
Flexibility is important from the prospective from delivery of service, the manner and
timing and of delivery. Some performance measures that might be used for this
dimension are number of returns submitted on time to total returns, actual number of
visits to number of visits planned for specific assignment, number of technical areas like
accounting, auditing, taxation handled by each team member.
Although the scope of innovation is not much available in accounting firms, but still use
of IT tools can improve the utility for client. Moreover, innovation can be seen, as offering
new range and category of services. Number of new services offered with in the previous
year or three years can be a performance measure of innovation.
Case Scenario 12
‘Digital Computers’ is a manufacturer and wholesale dealer of electronic goods. In the initial
years, the company was performing excellent and was improving year after year. However,
from past three years, the performance of the company is towards decreasing trend. In a
report, the sales manager stated that sales had been disappointing, and company’s sale has
gone down drastically. However, the sales manager pointed out that some orders had been
lost because the production department had been unable or unwilling to adapt product
specifications to the requirements of the customer. Also, one of company's larger customers
had returned goods which it claimed did not meet its requirements, and the customer has
subsequently not placed any further orders with Digital Computers. In addition, a delay in the
completion of another large order meant that some revenue originally budgeted for this year
would not now be earned until next year. The employees and managers are not motivated to
perform at their best nor are the cycle time and waste at production department monitored.

Summary of Annual performance figure

in Lacs
Particulars Actual (CY) Budgeted (CY) Actual (PY)
Sales 605 640 603
Less: Cost of Sales 343 365 341
Gross Profit 262 275 262
Less: Other Costs 173 183 175
Net Profit before tax 89 92 87
The CEO believed that company's performance measures needed to link operations to
strategic goals more closely, and they needed to focus on non-financial as well as financial
measures. The CEO has suggested that Digital Computers should use a structure for setting
targets based on the concept of the performance pyramid and should not focus only on
financial performance.
Required
(i) LIST, how the system of performance measurement within Digital Computers could
be improved?
(ii) ASSESS how the implementation of a performance pyramid might help Digital
Computers achieve its stated objectives for sales and profit growth.
Solution
(i) The performance reporting system of Digital Computers appears to have focus
exclusively only on financial performance and does not provide information about
effectiveness and efficiency issues which may be affecting the company's performance.
Digital Computers can improve its performance by establishing a range of operational
measures which should include both financial and non-financial performance targets.
Some of the key pointers which can improve the performance measure at Digital
Computers:
 Be allied to corporate strategy, which needs to be linked to day-to-day operations of
Digital computers.
 Focus on customer satisfaction which is of foremost importance as orders have
been rejected as it did not meet the requirement of customers, hence increase in
flexibility needs to be adopted.
 Consider internal as well as external measures in the company i.e. internal such as
waste and cycle time can be monitored at production department as well external
measures like customer’s requirement can be assessed.

 Make explicit the trade-offs between different dimensions of performance i.e. in

order to increase performance on non-financial performance dimension it has to
decrease performance on the financial dimension.
 Consider all important factors to assess the performance whether difficult to
measure.
 It appears that ‘Digital Computers’ is having poor communication and information
sharing between departments. Therefore, having an integrated communication
system across the organisation is recommended.
(ii) Establishing corporate level objectives – Establishing a performance pyramid
structure should begin with the overall corporate objective or corporate vision. In Digital
Computer, there may be the objective of increasing profit by a fixed percentage each
year and increasing market share. The overall objective should then be used to establish
targets at the next level down in the performance hierarchy.
Strategic business unit objectives – At the business strategy level, performance
targets should then be created for both internal efficiency which includes financial targets
and external effectiveness which includes marketing targets. The financial and marketing
targets should be consistent with each other.
External effectiveness – The marketing success is associated with the achievement of
customer satisfaction. The success will need an efficient business operating system for
all aspects of the cycle from product design to after sales service to customers. Customer
satisfaction is linked with improved quality as well as focus on delivery of goods provided
as per customer specifications.
Internal efficiency – The financial success is linked to the achievement of high
productivity. This can be gained through reduced cycle time and decreased levels of
waste. Quantitative measures of these factors are:
 The average total cycle time from customer enquiry to delivery.
 Waste in the form of idle machine capacity.
Setting targets – Targets should be identified for productivity, customer satisfaction and
flexibility. Targets for flexibility may be qualitative in nature, relating to Digital Computer's
ability to adapt product specifications to customer requirements. Targets for measuring
customer satisfaction may include targets for reducing the volume of customer returns.
For instance, specific quality targets may help Digital Computers to reduce the volume of
customer returns. Targets for cycle time and delivery may help the company to complete
customer orders more quickly, thereby increasing the amount of orders it can complete in
a year and hence achieving its sales target and thereby its profit.

Skill Assessment Based Questions

Question 1
First Source (FS) is a firm engaged in making glass based high value exotic artefacts
targeting premium segment market. Its major supplies thus go to retail shops in shopping
malls in cities like New Delhi, Mumbai, and Chennai where such artefacts put on display with a
premium price tag.
FS sources most of its glass ware components from a local supplier in Delhi and assembles
the same in small dimensional structures within its shop floor. Later these artefacts are given
exotic designs, and embedded with glitter stones, fritter and such other items by five well
trained artisans in the shop floor.
The sales in the past six months have not shown an encouraging trend and working capital is
in crunch position. The management of FS has received the feedback from most the mall
owners that this demand crisis is due to reduced footfalls.
The current position of FS is provided as follows:
Artefact1 Artefact2
Maximum retail price per unit (MRP) 3,000 6,000

Rent to be paid to malls per unit 50 55
Facilitation costs to be paid to malls per unit 10 15
Present lower selling price per unit 2,350 4,800
Cost of glassware per unit 900 1,120
Cost of assembly per unit 500 650
Artisan costs per unit 700 1,000
Variable overhead 200 240
Fixed overheads per unit 600 900
Inventories in malls (in number of units) 621 units 121 units
Good artisans are hard to find, and the artisans that are employed with FS are associated on
long term basis, so giving any temporary layoff is also not possible.
Required
ADVISE the management on profitability in current scenario.
Answer
From the circumstances in the present scenario, it is clear that FS is facing a muted demand
for its products, due to reduced footfalls. This may be primarily due to a slowdown in the
associated market for premium products that have only exotic (as opposed to actual) value.

Artefact 2 is having a positive contribution margin even at low selling prices. Artefact 1 is
having a negative contribution margin. Therefore, the management of FS should consider the
following points:
To renegotiate with the mall owners on rental costs. If that is not possible, then the
management has no choice but to sell the Artefact 1 at present price at earliest possible way.
To promote Artefact 1 by making a combination offer with Artefact 2 at a discounted price,
taking advantage of the fact that Artefact 2 is still able to generate profit on a standalone
basis. Hence a combined offer may help to boost its sagging sales.
Discontinuance of further production of Artefact 1 should be done only for a temporary period.
The work in progress (if any) should be put on hold, and the management should rigorously
find out cost cutting methods in its assembly shop. In striving to reach the cost goal, myriad
managerial techniques and tools like Vale Analysis, Kaizen Costing, Six Sigma etc. can be
used. These techniques are being used to control cost in order to meet the target without
compromising the quality and value to be derived from the product.
Computation of the Contribution in Current Scenario
Particulars Artefact1 Artefact2
Inventories in malls (in units) - (a) 621 121
Rent to be paid to malls per unit - (b) 50 55
Rental Cost - (a) × (b) – I 31,050 6,655
Facilitation costs to be paid to malls per unit - (c) 10 15
Gross facilitation cost - (a) × (c) – II 6,210 1,815
Total variable costs (refer W.N.1) – III 14,28,300 3,64,210
Marginal Costs (I + II + III) 14,65,560 3,72,680
Present Lower Selling Price per unit 2,350 4,800
Present Sales 14,59,350 5,80,800
Contribution margin (+ / -) -6,210 2,08,120
W.N.1
Cost of glassware per unit 900 1,120

Cost of assembly per unit 500 650
Artisan costs per unit 700 1,000
Variable overheads per unit 200 240
Total Variable Costs 2,300 3,010
Units 621 121
Total Variable Costs 14,28,300 3,64,210

Question 2
The Soup Ltd. offers a range of beauty parlor services like hair care, body care, manicures/
pedicures, skincare, etc. It has 150 Centre/s across the country. The business of beauty parlor
is extremely competitive in all region. Each centre operates autonomously and managers are
able to offer customize services.
Soup’s mission statement is “to inspire and enhance beauty by using knowledge and
experience”. To establish long term relationship of trust and commitment with clients, Soup
wants to provide their client highest level of satisfaction with emphasis on–
- Service Customization
- Professionalism, Work, and Clinical Responsibility
- Client’s Feedback
Company has developed a website where it creates blogs, post high-quality content related to
beauty tips. Website is also connected to social media to reach customers. If a customer
searches Soup’s services on search engine, it automatically redirects to the place of nearest
service center. Soup’s all services are presently booking through online channel.
Results for one of the centre, “Roop”, are given below. The column headed “Centre” shows the
average figures for all Centre/s:
Particulars Roop Centre
Oct’20 Oct’20
Revenue ( ) 91,26,000 1,08,66,900
Gross profit ( ) 48,50,400 51,37,740
Number of senior Beauticians 90 110
Number of junior Beauticians 60 55
Number of website hits 15,010 19,260
Total number of services booked online and completed 9,915 12,270
Number of services taken from repeat customers 1,510 1,605
Total time spent completing jobs (hours) 24,120 25,880
Number of new service packages 3 2
Customer percentage in terms of feedback forms showing score of 86% 77%
9 or 10
Notes
(1) Beauticians are categorized as ‘senior’ if they have been qualified for more than three
years.
(2) ‘Junior’ Beauticians includes both trainee beauticians and beauticians who have been
qualified for less than three years.
(3) The Roop launched three new service packs during the year:

free coupon of worth 600 for services over and above 1,200.
-
- a head massage costing only 240, instead of the usual 480, for 10 days
advanced bookings.
- a haircut 120 will be charge, which usually costs 360, for all customers booking
hair spa.
These three new service packs produced revenues of 7,92,000; 6,96,000 and
6,48,000 respectively. Two comparable new service packs developed by other centre/s
produced revenues of 5,28,000 and 5,04,000.
(4) Customers to rate the particular centre from 1 to 10 in an online feedback form with 10
being the best.
Required
The Chief Executive Officer (CEO) of Soup has recently attended a webinar and heard
about Building Block Model of Performance Management. The CEO is interested to know
how the dimensions block could be applied at Soup Ltd.
(i) ANALYZE Roop’s performance relative to the other Centre/s.
(ii) EXPLAIN how the Standards and Rewards blocks support the Dimensions block in
case of Building Block Model.
Answer
(i) Analysis
Competitiveness
Roop Centre/s Average
Website hits converted into 66.06% 63.71%
orders (in percentage) (9,915/15,010) × 100 (12,270/ 19,260) × 100
This ratio shows whether Roop’s services are attractive compared to its competitors,
which is essential if it is going to persist in such a competitive market.
It has performed considerably better than Centre/s average, having converted 66.06% of
website hits into jobs, compared to the 63.71% converted by other Centre/s. This is a
good outcome.
Financial Performance
Gross profit ratio 53.15% 47.28%
(48,50,400/ 91,26,000) (51,37,740/ 1,08,66,900)
× 100 × 100

Gross profit ratio is the measure for financial performance. It indicates the percentage of
revenue which exceeds the cost of goods sold.
Roop’s gross profit ratio is 5.87% higher than the average, which is a good result. This
could be because of new service pack sales. It is also likely to be because of ratio of
senior beauticians to junior beauticians (1.5), which is lower than the average (2) and
junior beauticians will invariably be paid less than senior ones.
Quality of Service
Jobs from repeat customers 15.23% 13.08%
(in percentage) (1,510/ 9,915) × 100 (1,605/ 12,270) × 100
Quality is a key aspect of Roop’s service to customers and if it is poor, customers will not
return.
Again, Roop has surpassed the other Centre/s on average by 2.15 percentage points.
Though, it has a lower ratio of senior beauticians to junior beauticians (1.5) than other
Centre/s (2), it might be possible that Roop has a portfolio of enthusiastic staff. So, the
quality of work is probably better, thus the higher level of repeat customers.
Flexibility
Time taken per job (hrs.) 2.43 2.11
(24,120/ 9,915) (25,880/ 12,270)
The comparison shows that Roop takes longer time to complete a job than the other
Centre/s average, which is not really good, and is probably because of they have slightly
less experienced staff on the whole, but it could also be that they do a more
comprehensive job than other Centre/s. Given the fact that they have a higher % of
return customers than the other Centre/s and they are also graded 9 or 10 by most of the
customers (86%). Therefore, this cannot be viewed as too adversely.
Revenue per beautician ( ) 60,840 65,860
(91,26,000/ 150) (1,08,66,900/ 165)
The crucial resource in a service company is its staff and so these indicators measure
how this resource is being utilized.
Roop’s utilisation of its staff is lower than that of the other Centre/s by 5,020 per
beautician. This clearly links in with the point that the average time to complete a job is
longer at Roop than other Centre/s. However, given that Roop uses a slightly less
experienced staff than other Centre/s and the fact that its gross margin is higher than the
average, this should not also be viewed too adversely.

Innovation
Revenue generated from 23.4% 9.5%
new service packs (in {(7,92,000 + 6,96,000 {(5,28,000 + 5,04,000)/
percentage) +6,48,000)/ 91,26,000} ×100 1,08,66,900} × 100
Roop is offering a wide variety of service packs to its customers. The ratio of 23.4%
indicates that Roop has really outperformed other Centre/s on this front, generating a far
larger part of its revenue by the introduction of new service packs, which must have
attracted customers. This is a really good performance.
(ii) The standards block fixes the target for the performance indicators chosen for each of
the dimensions. The targets must meet three criteria – they must be achievable, fair
and encourage employees to take ownership. The performance of the organization
could suffer if the targets set do not meet these criteria.
The rewards block makes sure that employees are motivated to attain the standards. It
also examines the properties of good reward schemes which are that they should be
clear, motivating and based on controllable factors.
If standards and rewards are set appropriately, the staff will be engaged and motivated
and it is then more likely that the goals, i.e., dimensions, of the organisation will be
achieved.
Question 3
Micro Lite Limited engaged in manufacturing of casting and capping of PVC pipes used for
electronic fittings, which they supplied to various part of country using a well-diversified
network of distributors. MLL was established by Mr. Rejul Raheja around 10 year back, since
then competition is continually increasing in market as new players entered in market who are
ready to sell similar product at relatively lower prices. Mr. Raheja is actively participating in
business and hold position of CEO and being a CA by profession; he conducts regular
meetings with management accounting department.
In order to beat the competition, MLL decided to reduce the cost and enhance the efficiency
by implementing the strategic cost management techniques, such as cellular manufacturing
using lean manufacturing.
Mr. Rastogi who joined the company recently as management accountant, is very enthusiastic
about cellular manufacturing and consider same as scientific way of production. He added it
will enhance the value creation over value chain. According to him, cellular manufacturing is
significant tool to achieve process cycle efficiency.
Mr. Rastogi makes a plan of rearranging the existing machine and human resources who are
working on these machines. He tenders such plan (of implementing cellular manufacturing) to
Mr. Raheja. Process is also reengineered along with restructuring of production layout. Mr.
Rastogi is of belief that with minimal cost (including loss of contribution on account of down
time) on rearranging existing resources processing cycle efficiency can be enhanced.

Mr. Raheja is skeptical in respect of expected benefit, so in his reply to Mr. Rastogi agreed to
rearrangement plan, but in phased manner rather than pilot implementation. Mr. Rastogi asked
to implement his plan (on test run basis) to the one of production engineering department,
which is tiny in comparison to other 3 production engineering department. Such selected
department is contributing around 12% of total production capacity of MLL. Mr. Raheja in his
reply also quoted that go green for next phase will be granted only if during testing phase
processing cycle efficiency improved by minimum of 15%.
Mr. Rastogi and his team implement the rearrangement plan on such selected department and
practice the reengineered process and rearrangement of machines along with men for 30
days. Recordkeeper provide following PCE data before and after rearrangement.
Activity (part of process) Before (in minutes) After (in minutes)
Moving 70 25
Inspection 40 15
Storage 60 10
Processing 80 40
Required
(i) EXPLAIN why Mr. Rastogi considers cellular manufacturing as scientific way of
production?
(ii) ASSESS, whether out-come of testing phase at MLL is sufficient or not as to
expectation of Mr. Raheja, for implementation similar rearrangement (cellular
manufacturing) to remaining production departments.
Answer
(i) Cellular manufacturing as scientific way of production
In cellular manufacturing, production workstations and machines are queued in specified
sequence to ensure seem-less flow of material over entire production line (Straight Line,
U-Shaped or Inverted U-Shaped etc.) to eliminate delay (Time) in production and also to
eliminate the transportation (Motion) of various parts of single product from one
production facility to another.
Hence Mr. Rastogi is right in equating ‘cellular manufacturing’ as a ‘scientific way of
production’ because, it largely rests upon principles of scientific management, suggested
by Fredric Winslow Taylor based upon ‘Time Study’ and ‘Motion Study’.
Since in cellular manufacturing one-piece at a time moves across production line,
hence provide the scope for customisation to product features on the production line in
view of specific customer demands. Hence in this cellular manufacturing add value to
customer over value chain.

(ii) Assessment of Mr. Rastogi’s plan (cellular manufacturing) for further

implementation (to remaining production departments)
Mr. Raheja seeks 15% improvement in PCE during testing phase, in order to implement
the same for remaining production department. Means if PCE is 10% in existing layout, it
shall increase to 11.5% or beyond in cellular manufacturing environment.
There is improvement in Process Cycle Efficiency by shifting to cellular manufacturing
system from existing system by 12.44% in absolute term. If we measure percentage
increase (relative measure), it will be 38.87% (i.e., 12.44%/32.00%).
Since relative improvement in PCE is by 38.87% against the yardstick of 15% hence it is
advantaged to implement cellular manufacturing to remaining production
department also.
Workings
Computation of the PCE (Time in minutes)
Sr. Before After

Activity Category
No. Rearrangement Rearrangement
A. Moving 70 25
B. Inspection 40 15
C. Storage 60 10
D. Processing 80 40
E. Value added time ...(D) 80 40
F. Cycle time ...(A+B+C+D) 250 90
G. Process Cycle Efficiency ...(E/F) 32% 44.44%
Question 4
Cona Precise Solutions (CPS) manufactures switchgear and specifically designed the
electricity boards, which are sold to customer through wide-spread retailers and distributors
network across the country.
CPS enjoys the high reputation among the stakeholders, specifically workers. The attrition rate
at CPS is relatively lower than of other players in the industry; reason for low attrition rate is
employee friendly policies, specifically in regard to sharing of profit and employee participation
in decision making. Cona Precise Solution applied a profit-sharing plan around three ago. The
terms of profit share plan of CPS can be read as follows–
1. The CPS will be responsible to make available the profit share pool, which will be
equivalent to the minimum of following of three limits–

a. 30% of Earning before taxes, to the extent it is excess of the minimum acceptable
target profit margin, or
b. 0.75% of Gross Revenue, or
c. Absolute amount of 2.5 Crores
2. Minimum acceptable target profit margin will equivalent to the average of last three year’s
net operating profit of industry group.
3. The individual employee will be participated in profit share pool in proportion to ratio of
that employee salary to the total salary of all employee of that division.
Additional Information for year just closed are–
1. CPS’s earning before tax is 40 Crores.
2. Net operating assets employed by CPS are 120 Crores.
3. During the year, CPS records the revenue of 360 Crores.
4. Total relevant payment of salary for the year was 42 Crores.
5. Industry’s average last three year’s net operating profit rate is 8% of net operating
assets.
Required
(i) EXPLAIN profit sharing plan, as performance management tool and group incentive
plan.
(ii) COMPUTE the will the amount to be make available as profit sharing pool by CPS.
(iii) Mr. Vineet Shukla, who is one of the employee of CSP and eligible to participate in
profit share plan, if his annual salary is 36 lakhs, then COMPUTE the amount of his
profit share.
(iv) Synthesise profit sharing plan of CPS, in order to highlight major limitation.
Answer
(i) Profit Sharing Plan
Profit Sharing is a group incentive arrangement where cash bonus is paid to worker or
employees, calculated based upon the reported profit of concerned division
(responsibility centre) of entity or of entity as a whole. Since profit sharing is based upon
the profit, hence can be said a compensation plan based upon short – term performance.
Profit share plan must define the percentage of profit to be shared and who are eligible
employees for participation and what will the ratio of participation by each
employee/worker in the bonus pool and formula for computing each of these percentage
or ratio. The criteria for participation in share may be score or salary/wage.

Profit share plan may be used to boost the motivation among the employees to enhance
and promote their performance, hence profit-sharing plan can be considered as
performance management tool. Profit sharing plan can also be considered as pre-stage
of Kaizen Costing.
(ii) Amount of profit-sharing pool will be equivalent to the minimum of following of three
limits–
30% of Earning before taxes, which are in excess of the minimum acceptable target
profit margin,
30% of 40 Crores – 8% of 120 Crores
12 Crores – 9.6 Crores
2.4 Crores
or
0.75% of Gross Revenue,
0.75% of 360 Crores
2.7 Crores
or
Absolute amount
2.5 Crores
So, Amount of profit-sharing pool will be 2.4 Crores.
(iii) Share in profit sharing pool of Mr. Vineet Shukla
The individual employee will get share in proportion to ratio of his salary to the total
salary of all employee of that division.
𝐼𝑛𝑑𝑖𝑣𝑖𝑑𝑢𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑒 ′ 𝑠 𝑆𝑎𝑙𝑎𝑟𝑦
𝑃𝑟𝑜𝑓𝑖𝑡 𝑆ℎ𝑎𝑟𝑖𝑛𝑔 𝑃𝑜𝑜𝑙 ×
𝑇𝑜𝑡𝑎𝑙 𝐺𝑟𝑜𝑠𝑠 𝑆𝑎𝑙𝑎𝑟𝑦
0.36 𝐶𝑟𝑜𝑟𝑒𝑠
2.4 𝐶𝑟𝑜𝑟𝑒𝑠 ×
42 𝐶𝑟𝑜𝑟𝑒𝑠
= 0.0205714 Crores i.e., 2, 05,714
(iv) Profit Sharing is a group incentive arrangement, where each member of group will
participate in profit sharing pool in ration of either score scored by him/her in reference to
total score; then it is valid. But if share of profit-sharing pool is calculated based upon
wages likewise in case of CPS, then a worker who may be under performing getting the
share despite his performance is not acceptable; In similar way, an efficient worker may
not get due reward/share. Hence major limitation of profit-sharing plan is due to inherent
nature of it.

Question 5
Delight Engineering Solutions (DES) (a hypothetical company) is manufacturing product
CAF-5 from use of single raw material CAI-100. The two major departments operational in
Delight Engineering Solution are purchase and production. DES is facing high competition due
to large number of competitors in market. Demand of CAF-5 is fluctuating, therefore high
storage cost is prime cause of low financial performance. DES Company decided to move
from traditional system to JIT system.
From purchase and store following data is collected. Annual consumption is of 1,800 units of
CAI-100. List Price of each unit of CAI-100 is 4,000. The cost of placing order is 2,000
and cost of carrying one unit of CAI-100 for a year is 2%. Company presently use EOQ model
of ordering.
Purchase Manager further estimated that, if JIT system of inventory is implemented, ordering
cost will increase by 50% from current level, whereas carrying cost can be avoided up-to 90%.
But there is prospective order of 5 units of CAF-5 which can’t be served, due to non-
availability of stock and failure of delivery by supplier. Contribution from each unit of CAF-5 is
1,200. Stock insurance cost will reduce by 400 on annual basis. There will also be
reduction in working capital requirement, which will result in interest saving of 500 on annual
basis.
Further, Production and Engineering department supported by marketing department provide
details that presently average production of CAF-5 is 150 units of per month, although for next
4 months expected demand will be 120, 160, 140, 180 units. Maximum capacity from man-
hours perspective is 150 units. 20 man-hours required for producing each unit and labour rate
per hour is 3. Casual labour is not available in market. Overtime rate will be 200%. Average
monthly cost of storage of each item of CAF-5 is 65.
Required
(i) EXPLAIN the JIT purchasing and JIT production and the effect of its introduction.
(ii) COMPUTE cost savings if it moves to JIT Purchasing.
(iii) COMPUTE cost savings if it moves to JIT Production.
Answer
(i) Just-in-time (JIT) is a collection of ideas that streamline a company’s production process
activities to such an extent that wastage of all kind viz., of time, material and labour
systematically driven out of the process.
JIT purchasing suggests that materials should only be purchased as and when required.
While JIT production shows that finished products should only be produced as and when
required by customers. Whereas in traditional manufacturing system, to smooth out
production and to meet forecasted demand, materials and finished goods are stored in
advance.

JIT Purchasing reduces the inventory level which will result in reduction of carrying cost
of inventory, as well as reduces the level of working capital which will save the
opportunity cost in form of interest expenditure. On the other hand, JIT Production gives
opportunity to customize the product as per customers’ needs, conformance to
customers’ need is essential to quality. It also reduces the level of working capital which
save the opportunity cost in form of interest expenditure.
Prerequisite of JIT purchasing or production is integration with vendor, if vendor is not
integrated properly or less reliable, then situation of stock out can arise and which can
result into loss of contribution.
Multitasking by employee is another key feature of JIT, group of employees should be
made based upon product instead based upon function. Hence, functional allocations of
cost become less appropriate.
Overall, JIT enhance the quality into the product by eliminating the waste and continuous
improvement of productivity.
(ii) Cost Savings in JIT Purchasing
Reorder Size under present regime:
Under current scenario reorder size of CAI-100 will be EOQ. Formula for EOQ is
mentioned below–
2×𝐴×𝑂
𝐶
Where:
A = Annual Consumption i.e., 1,800 units of CAI-100
O = Ordering Cost per order i.e., 2,000 per order
C = Carrying Cost per unit per annum i.e., 80 (2% of 4,000) per unit per annum
2 × 1,800 × 2,000
80
EOQ (reorder size under present regime) of CAI-100 is 300 Units
Cost Comparison under present and JIT regime (annual basis)
Particulars Present JIT
System System
Ordering Cost (1,800 units/ 300 units) × 2,000 12,000

JIT-150% of present cost 18,000
Carrying Cost (300 units/2 × 80) 12,000
JIT- Reduced by 90% in comparison to present cost 1,200

Stock-out Cost (5 units × 1,200) - 6,000

JIT- Reduction in Stock Insurance Cost on annual basis - (400)
Opportunity Cost (saved) on reduced amount of working - (500)
capital on annual basis
Net Cost of Inventory Management 24,000 24,300
Incremental Cost in shifting to JIT (300)
Since implementation of JIT Purchasing results in incremental cost of 300 per annum
basis, hence it is not economically worth to move to JIT system of inventory purchase.
(iii) Cost Savings in JIT Production
Carrying Cost in Present Scenario (for next four months)
Month I II III IV
Opening Stock - 30 20 30
Add: Production 150 150 150 150
Less: Demand 120 160 140 180
Closing Stock 30 20 30 -
Average Stock* 15 25 25 15
Carrying Cost ( 65 per unit) 975 1,625 1,625 975
Total Carrying Cost for 4 months 5,200
*Average Stock = Opening Stock + Closing stock/2
Overtime Cost in JIT Scenario (for next four months)
Month I II III IV
Demand 120 160 140 180
Production 120 160 140 180
Bottleneck 150 150 150 150
Shortfall* - 10 - 30
Labour hrs. as overtime required
- 200 - 600
(20 hours for each unit of CAF-5)
Overtime Cost - 1,200 - 3,600
(Payment at rate of 6 per hour)
Total Overtime Cost for 4 months 4,800
*Shortfall good need to produce in overtime, due to limited man-hour available and casual labour
is not available in market.
Based upon comparative cost for upcoming four month under present and JIT scenario,
there is cost saving of 400 ( 5,200 vs. 4,800) in move to JIT system production.
Hence, it is economically worth to move to JIT Production.

Question 6
XEE Ltd. is a company which manufactures two types of material for engineering applications.
It makes these two types of materials in two production lines: Line 1 and Line 2. Line 2 has a
different process and is easier in terms of ‘getting this fixed at the customers end’ and has
longer life (1.5 times the life of Line 1 product).
These are sold in kg. Line 1 has a capacity to produce 6,50,000 kg. per annum and Line 2 has
a capacity to produce 2,40,000 kg. per annum.
The company management has given a directive to the CEO, CFO and the Sales Head that in
no circumstance the Contribution Margin to Sales shall fall below 40%.
Currently, Line 1 is running at about 92% capacity (3 shifts) and Line 2 at about 33% capacity
(1 shift).
The Capacity, costs and profitability data for the year 2018-19 are as follows:
Particulars Line 1 Line 2 Total
Capacity kg. 6,50,000 2,40,000
Production/ Sales kg. 6,00,000 80,000
Unit Price/ Costs per kg. in
Selling Price 180 315
Variable Cost (108) (189)
Contribution 72 126
Contribution% 40% 40%
Lacs Lacs Lacs
Selling Price 1,080.00 252.00 1,332.00
Variable Cost (648.00) (151.20) (799.20)
Contribution 432.00 100.80 532.80
Overheads (240.00)
Depreciation (93.00)
Profit 199.80
Profit % 15%
Scenario 1
At a meeting of the CEO, Sales Head and the CFO; the Sales Head informs the team that
there is a potential of a one-time 80,000 kg. of Line 2 product order from a large customer who
can commit on delivery schedules for the whole of 2019-20 kg. at a price of 250 per kg.
The Sales Head also informs that the new customer is aware of the price of product from Line
one, the fact that the line capacity is full and the Line 2 product can deliver life which is 1.5
times of the Line 1 product.

The Sales Head also informs that he may have to reduce price by 10 per kg. for the existing
customers i.e., from 315 per kg. to 310 per kg.
To a question from the CEO that this would involve additional overheads, the CFO checks on
his laptop and informs that for an additional shift of operation of line 2, the incremental
overheads would be 6.20 Lacs p.a. per shift (shift supervisors, lighting etc.) and depreciation
will increase by 16.00 Lacs p.a. per shift.
The CEO poses the following questions to both the CFO and the Sales Head:
1. Given that the order is one time, what will happen to the fixed overheads committed in
2019-20 and the loss of profits due to reduction in price to existing customers which
cannot be increased in the subsequent years?
2. The CEO is also concerned about the reduction in contribution % from the management
stipulated 40%. To address the issue the CEO asks both the CFO and the Sales Head to
come up with an acceptable pricing for Line 2 for the new one-time customer. He
indicates to them that the price should be such that the % to Sales to Profit achieved in
2018-19 is maintained.
3. Further, the CEO mentions that the new customer should also be convinced of the price
to be quoted. He also mentions that the sales from Line 1 for 2019-20 will be at the same
level (6,00,000 kg.) and at the same price. There are no changes in costs (both variable
and fixed) too.
Required
You are the deputy to the CFO and you are requested to come up with
RECOMMENDATIONS on:
(i) Ideal Price to be quoted for the new customer with reasons to be proposed by Sales
Head to the new customer to convince him to accept the price so quoted.
(ii) Reasons to be mentioned to the management on why the price to be so quoted is
acceptable despite the fact that it would result in a lower contribution margin % than
that prescribed by the management.
(iii) Recommend a strategy in consultation with the Sales Manager to make up for the
fixed overheads and loss of profits due to reduction in price for the existing customers
of Line 2 product for subsequent years.
(iv) Also arrive at a price to the new customer at or below which it does not make financial
sense to quote and get the order from the new customer with explanations.

Scenario 2
In a different scenario where volumes for the year 2019-20 are assumed to be exactly same
as in 2018-19 but price of raw material has increased by 12 per kg for both products
manufactured out of Line 1 and Line 2. A price increase by 12 kg for each of the products
will result in a drop in contribution % below 40% for both the products. Calculations indicate
that the contribution margin can be retained at 40% if the prices are increased by 20 per kg.
Required
You are requested to indicate which price increase; 12 per kg or 20 per kg has to be
obtained from the customer and why?
Answer
Scenario 1
(i) The ideal price would be 260 per kg to be quoted to the customer. While the customer
has asked for a price of 250 per kg, the price of 260 per kg is still beneficial to the
customer as the life of Line 2 product is 1.5 times Line 1 product priced at 180 per kg.
1.5 times 180 is 270 and the customer would benefit even at a price of 270 per kg. but
is getting a good bargain at 260 per kg. This has to be explained to the customer to get
him accept the price of 260 per kg. as against 250 per kg sought by him.
(ii) At this price while the contribution for Line 2 product drops to about 34% but the overall
Profitability at profit level is maintained at 15%. The reason for profitability remaining at
15% despite the drop in contribution to about 34% is because overheads and
depreciation increase only incrementally and the accretion to contribution at the price of
260 form the new customer is at 56.80 lacs is far higher than the incremental
overheads plus depreciation which is 22.20 lacs ( 6.20 lacs + 16.00 lacs). This has to
be explained to the management.
(iii) As this is a one-time order, the company would be saddled with 6.20 lacs
(predominantly manpower supervision cost) and a loss of contribution of 4.00 lacs due
to sale of Line 2 product at 5 less per kg. in subsequent years too. Also, a price once
reduced cannot be increased easily. To make up for this, the Sales Head should sell at
least 15,000 kg. of Line 1 product. This is arrived at by dividing 10.20 lacs ( 6.20 lacs +
4.00 lacs) by contribution per unit of Line 1 product which is 72, 14,167 kg. (10.20
lacs/ 72), rounded off to 15,000 kgs for which capacity is available (50,000 kgs) within the
3rd shift. Depreciation cost for the 2nd shift will not be incurred as Line 2 will be back to
single shift operation after 2019-20.
(iv) The incremental costs are the variable costs plus loss of margin on existing customers
plus the incremental overheads and depreciation totaling to 26.20 lacs. If these are
recovered, then there is no loss. The price to be obtained will be 221.75. This will be
variable cost of 189 per kg plus 32.75 per kg which is 26.20 divided by 80,000 kgs. At
this price there is no loss or gain but it is not worth the effort of running the 2nd shift. If

the customer is a hard negotiator and has alternatives, the price to be accepted for
reasons other than profits (for example gaining a big customer where there is a possibility
of big orders in future) cannot be less than 221.75.
Scenario 2
With a raw material price increase at 12 per kg, no customer will pay more than 12 per kg
as the XEE Ltd will have to justify. Though there is a fall in contribution %, to there is no loss
to the company as the price increase in variable costs amounting to 12 per kg is fully
recovered.
Workings
Line 1 Line 2 Line 2 Total
Existing New
Customers Customers
Capacity kgs. 6,50,000 2,40,000 2,40,000
Production/ Sales kg. 6,00,000 80,000 80,000
Unit Price/ Costs per kg. in
Selling Price 180 310 260
Variable Cost (108) (189) (189)
Contribution 72 121 71
Contribution% 40% 39% 27%
Lacs Lacs Lacs Lacs
Selling Price 1,080.00 248.00 208.00 1,536.00
Variable Cost (648.00) (151.20) (151.20) (950.40)
Contribution 432.00 96.80 56.80 585.60
Overheads (246.20)
Depreciation (109.00)
Profit 230.40
Profit % 15%
The price of 260 per kg. has been derived as follows:
Assume the price to new customer be “X”. Hence
Sales less Variable costs less Overheads less Depreciation = 15% of Sales
(1,080.00 + 248.00 + X×0.80) - 950.40 - 246.20 - 109.00 = 15% of (1,080.00 + 248.00 +
X×0.80)
Or 22.40 + 0.80X = 199.20 +0.12X
Or 0.68X = 176.80
Or X = 176.80/0.68= 260

Question 7
NFC Limited is a company engaged in the manufacture and supply of forgings and castings
for automotive and industrial applications. Automotive contributes to 60% of its revenues while
the balance (40%) can be traced to industrial applications which amongst others include,
Power, Oil and Gas and General Engineering. The company has an R&D set-up which
includes new product development. The company recently concluded successfully a Long-
Term Settlement with the workmen with an increase in productivity numbers in terms of output
per man per day more than offsetting the increase in wages offered to workmen. The company
has just completed (October 2018) its strategy and business planning exercise for Calendar
year 2019 and beyond. The following is the data on 2018 (estimate) and the business plan for
2019.
Balance Sheet Estimate 2018 Budget 2019
Million Million
Equity 3,000 3,000
Reserves (Opening) 1,000 2,250
Transfer (Current year surplus) 1,250 730
Debt @10% (pre-tax) 2,000 1,500
Trade Creditors 600 700
Total 7,850 8,180
Plant and Machinery 4,000 3,500
Inventories 1,500 1,630
Debtors 1,600 1,770
Cash 750 1,280
Total 7,850 8,180
Profit and Loss Account
Sales 9,000 10,800
Less: Expenses 6,000 7,000
Less: Depreciation 500 500
Less: Interest 200 200
Profit 2,300 3,100
Less: Tax @ 30% 690 930
Profit After Tax 1,610 2,170
Less: Dividend and Dividend Distribution Tax 360 1,440
Transfer to Reserves 1,250 730

Assumptions/objectives drawn up in the making of the strategy and business plan document
are as follows:
1. To improve shareholder value by attempting to grow EVA substantially over 2018.
2. To de-risk exposure to few sectors further by looking at other diverse applications
through new technologies, tie-ups etc. This could be in the areas of Defense and
Aerospace or even new areas like Electric Vehicles which would be the future in the
mobility space.
3. To keep investing in R&D to ensure that the company keeps pace with changes in
technologies and in meeting customer requirements by developing new products in
accordance with their needs
4. Financials:
a. An increase of 20% in Sales has been assumed over 2018. This includes an
expected market growth of 12%, 3% from a new product “NP” to a large
manufacturer (a new customer) for 9 months in 2019. It is expected that the new
customer will approve the product by March 2019 (3 months from January 2019
when the approval process will start) so that 9 months sale can be realized. It
normally takes 5 months for the approval. The company expects the balance 5%
growth from normal new products, new customers, improved service levels in terms
of delivery etc. Capacity is sufficient, also aided by the productivity improvement
from the Long-Term Settlement with the workers.
b. Inventories: A reduction in number of days inventory held by 5 days has been
budgeted. Without this reduction, the inventories would have been 1,800 Million
as against 1,630 Million budgeted.
c. Debtors: A reduction in number of days sales outstanding by 5 days has been
budgeted. Without this reduction, the debtors would have been 1,900 Million as
against 1,770 Million budgeted.
d. Expenses have been budgeted at 7,000 Million taking into consideration cost
savings. It should have been 7,500 Million taking into consideration, increased
activity levels (Sales), cost inflation including the wage increase from the Long-Term
Settlement but without cost savings.
e. No reduction or increase in creditors budgeted except for the increase in activity
levels (Sales).
f. Repayment of debt 500 Million on 31st Dec 2019.

Required
Your superior, the CFO of the company has asked you to:
(i) PREPARE a Balanced Score Card for Calendar year 2019 including objectives to be
included for achieving long term goals of the company. He informs you that the
company wants to use EVA as an overall performance measure and a driver to
achieve improved shareholder value.
(ii) The CFO also wants you to indicate metrics where possible and but ignore weightages
for the perspectives and clearly EXPLAIN the inclusion of the objectives in each
perspective of the balance score card.
(iii) You have therefore been also entrusted with the task of PREPARING the Economic
Value Added (EVA) with assumptions for the previous year 2018 (estimate) and also
for the budget year 2019 and ensure that this forms the predominant basis for the
balanced scorecard. Cost of Equity is 14%.
Answer
(i) Balanced Score Card
Perspectives Objective Measures Targets Initiatives
Financial
EVA ( Millions)  Grow EVA  Absolute  1,435  Repay 500
Million Million of debt
 Reduce working
capital
 Improve profit
through top line
growth and cost
reduction
Working Capital  Reduce  Reduce  300  MIS on
working inventory Million inventory and
capital and debtors reduction debtors on real-
by 5 days ( 170 + time basis
each 130)  Weekly short
meetings on
inventory and
debtors to
monitor and
initiate actions
to achieve
targets

Customer
New Products  Increase over  As a % to  From x %  Meet existing
2018 Sales to y % customers with
new product
offerings
 Meet new
customers and
find out their
requirements
 Participate in
exhibitions
On time  Increase over  % of  From x %  Strengthen
Delivery 2018 deliveries on to y % production
time to total planning and
deliveries control
process
 Leverage IT
systems for
accurate and
timely
information flow
on orders,
delivery dates
Internal
Process
Manpower  Increase  As agreed  From XX to  Training of
Productivity output per under the YY employees
man per day long-term  Improved
settlement communication
 Improved
supervision
Cost Reduction  Reduce cost  Raw  500  Alternate
of material Million sources for raw
Production costs Reduction material
 Outsourcing  Improve yields
costs through value
 Overheads engineering
 Make or buy on
certain high-
cost outsourced
components

 Reduction in
travel costs (use
video
conferencing),
 Monitor other
costs to save
New Product  For  Reduction in  By 2  Form a task
Approval by expediting time taken months force
Customer approval of for approval  Weekly
“NP” progress
monitoring by
CEO
 Use of
PERT/CPM
tools
Learning and
Growth
Train senior  To keep pace  Timeline  By MMYY  Specific training
technical staff with changing (e.g., Dec  Participation in
in new technologies 20) seminars on
technologies and to de risk new
(products for exposure to technologies
defense, few sectors
aerospace)
Explore  Future growth  Timeline  By MMYY  Appoint a
possibilities for Through (e.g., Jun consultant
tie-ups products for 20)  To look at
on products for Electric possible partner
Electric Vehicles  Prepare a road
Vehicles. map to achieve
the objective
(ii) Rationale for each of the above perspectives:
a. EVA has been included under “Financial Perspective” as this is what the company
intends to drive the same and it is a good measure of shareholder value as it takes
into consideration cost of equity which a normal profitability metric ignores. Working
Capital is included, as an improvement in the working capital measure would affect
cost of capital and hence EVA.
b. New products and improvements in delivery times have been included under
“Customer Perspective” as these have to be driven to achieve the sales volumes
beyond normal industry growth. This will ultimately improve sales, profits and hence
EVA.

c. Manpower productivity and cost reduction have been included under “Internal
Perspective” as these have to be monitored and further efforts taken to reduce other
costs to achieve the cost reduction planned to finally achieve the profits required to
deliver the EVA.
d. As the balanced score card is just not a short-term measure, initiatives on new
products, technologies and new markets have been included in the “Learning and
Growth” perspectives to plan for long term sustained growth and to ensure that the
company stays relevant in a changing business environment.
(iii) EVA Calculations
Particulars 2018 (Est.) Budget 2019
Million Million
PAT 1,610 2,170
Add: Interest adjusted for tax {Interest×(1-0.3)} 140 140
NOPAT 1,750 2,310
Capital Employed (see assumptions below)
Equity (14%) 3,000 3,000
Reserves 1,000 2,250
Debt (10%) 2,000 2,000
Cost of Capital
Equity (14%) 420 420
Reserves (14%) 140 315
Debt {10%×(1-0.3)} 140 140
Cost of Capital 700 875
EVA (NOPAT – Cost of Capital) 1,050 1,435
Assumptions
For 2018 estimated, Capital Employed is opening equity, reserves and debt. Similarly, for
budget 2019, for calculating Capital Employed, opening equity, reserves have been
considered.
Economic and accounting depreciation were assumed to be the same.

Question 8
ABC Limited is an auto component manufacturer having a facility in Chennai. It has been in
the business for the past 7 years supplying a range of gaskets for automotive applications. It
predominantly supplies to car manufacturers in and around Chennai but also in a small way to
a few manufacturers based in Pune and Bangalore.
The promoters have worked previously in automotive industry and have several years of
experience in the auto industry.
Quality is of paramount importance in gaskets especially for cylinder head gaskets as any leak
(considered a major defect) could severely damage the engine. While the company is certified
for TS 16949 standard of quality systems, the PPM (parts per million of defects) of finished
products of the company are yet to reach “Zero PPM” levels which are the levels reported by
its nearest competitor.
As the supplies are made to auto OEMS (original equipment manufacturers), just in time
supplies are a must to avoid line stoppages at the customer end. It has signed purchase
agreements with a few auto manufacturers with a clause amongst various others to pay for
line stoppages at customers end.
The procurement function plays a critical role as the quality of input raw material can obviously
significantly impact the quality of gaskets produced. Also, input material has to be made
available in time to avoid stocks outs of raw materials, loss of production and hence line
stoppage at customers end.
While the company has taken a conscious decision to keep stock of finished goods at a rate
higher than industry to avoid stock outs, it has decided to keep input raw material stocks at
low levels to partially manage the impact of inventory holding costs as it has to maintain low
working capital levels to save on interest cost.
The sales function besides having the challenge of finding new customers, offering new
products and collection of dues is faced with a daunting task of getting price increases arising
out of input cost increases from tough auto customers.
Gaskets in general apart from automotive find use in refineries, power generation, chemical
processing, industrial machinery, pulp & paper, food & pharmaceuticals and a few other
industries viz. textiles and wastewater treatment.
The CFO met the CEO and they discussed declining growth, operating and net margins as
well as loss of customers due to price and quality considerations. The CEO indicated that the
Board wanted the company to grow double the turnover by 2024 with 2019 as the base. He
wanted the CFO to make out a draft Balanced Score Card for 2020 addressing the challenges
faced by the company and also its objective of doubling the turnover by 2024, so that this can
be discussed with the Senior Management Team and finalized.

Required
You are a Senior Finance Manager of the company and the CFO asks you to draft brief
report and he also provides you with newspaper reports on India's move towards BS VI
emission norms, the India's plans to move to Electric Vehicles and also about the current
slowdown faced by the economy including a severe one in the automotive industry
Annexure
2019 2018 2017 2016 2015
Revenue growth over 8.1% 8.8% 9.7% 1.6% ---
Previous year
Revenue ( Cr.) 400 370 340 310 305
Expenditure ( Cr.) -359 -326 -297 -277 -265
Operating Profit ( Cr.) 41 44 43 33 40
Interest ( Cr.) -14 -13 -12 -11 -10
Depreciation ( Cr.) -14 -13 -12 -8 -8
PBT ( Cr.) 13 18 19 14 22
Operating Profit % 10.3% 11.9% 12.6% 10.6% 13.1%
PBT % 3.3% 4.9% 5.6% 4.5% 7.2%
Additionally, the following information is to be noted:
1. PPM has deteriorated to 115 in 2019 from the best of 25 achieved in 2017.
2. Working Capital turns (Sales/ Working Capital) have deteriorated to 34 times from 67
times in 2017.
3. The company also lost three of its customers who cited quality and price considerations.
4. The company’s attrition at middle management was high at 13% compared to industry’s
10%. The predominant reasons attributed to this are lack of challenging work and career
growth prospects.
Answer
Report
Addressed to:
Office of CEO,
ABC Limited,
Dated – 24 th April 2020
Report on Balanced Score Card for 2020 addressing the challenges faced by the
company

The challenges faced by the company can be categorized as follows:

1. Financial: Declining profitability and hence reduced returns to shareholders. Possible
causes; Declining sales growth, challenges in getting price increases, increasing cost of
quality due to increasing defects (PPM), higher interest costs due to higher working
capital.
2. Top-line (sales) related: Declining sales, slowdown in economy, dependence on auto
industry, lack of- new products, new customers, and loss of customers.
3. Operations including procurement: Increasing PPM levels, input cost increases.
Balanced Score Card
Perspectives Measures/ Targets
Financial  Grow Sales by 10% (over 2019) by December 2020.
Perspective  PBT Margin for 2020 not to be less than 10%.
 NWC turns to be 60 by December 2020.
Customer  Bring down PPM levels to 50 by March 2020.
Perspective  Bring down Cost of Product by 5% and share 50% with customer.
 Carry out a Customer Satisfaction Survey by March 2020 and implement
actions by December 2020.
Internal  Launch and adopt Total Productive Maintenance.
Perspective 1. Complete training by April 2020,
2. Launch and adoption from May 2020
 Form a cross functional team for working on, monitoring and improving
NWC; through reduction of inventory (reduce number of days FG from xx
to yy), speedy collections (reduce number of days receivables from aa to
bb), negotiating higher credit from raw material suppliers (increase credit
from x to y days).
 Reduction in time to launch new products from xx days to yy days.
Learning  Conduct a market study for entry into manufacture of gaskets for sectors
and Growth other than automotive as a de-risking and growth strategy. Complete
study by June 2020 and action viability study and CAPEX by December
2020.
 Revisit and rehash Human Resource Development program to bring in
new talents, train existing resources on new technologies, new products
by June 2020.
 Adopt latest Information technologies for speedy and accurate data
analysis and Management Information System for quick decision making,
speedier internal operations and quick customer service.

Rationale for the above

1. Tasks included in the Learning and Growth perspectives will help the company’s growth
as it will de-risk the threat from Electric Vehicles which will eliminate the need for internal
combustion engines used in fossil fuel driven automobiles. It will also enable the
company to enter into other industries where gaskets find use. The Human Resource
Development Program will address the dual challenge of attrition and making the current
employees ready for new markets and technologies. With Information Technology space
changing, adoption of new technologies will help the company staying ahead or in
tandem with competition.
2. Including Total Productive Maintenance will help the company address quality issues and
productivity of machines. This along with NWC initiatives will not only improve customer
satisfaction but also improve bottom line.
3. Inclusion of PPM, cost reduction and customer surveys will improve Customer
satisfaction, customer retention, bring in new customers and stop loss of customers
4. Inclusion of growth in sales targets will help achieve the company's growth objectives.
Others like net profit improvement and improvement in NWC will automatically flow from
the initiatives in the other three perspectives.
Closure of Report
Chief Financial Officer

ABC Limited
Question 9
Mother Co. Ltd has two business units, viz. a BPO unit engaged into telemarketing, and a
KPO unit focusing on business analytics. Recently the CEO was reviewing the half yearly
financial data which had the following key indices:
Turnover of BPO unit at 90% capacity utilization 250 Lakhs
Turnover of KPO unit at 60% capacity utilization 550 Lakhs
Profit Margin of BPO and KPO units respectively 18% and 15% respectively
Present number of shared employees from the BPO 10 employees
unit to the KPO unit on requirement basis
Number of hours required on cross training of one Approx.10 hours at 3,000 per
employee and the rate per hour hour
The CEO’s next half year overall target for the company is 1,200 Lakhs with a profit margin
of 18% for the company as a whole. However, the BPO unit head has told categorically to the

CEO that he cannot spare any additional employee as the BPO is working at optimum
capacity. The KPO unit head, on the other hand, finds it cost effective to cross train
employees of the BPO for specific tasks instead of hiring directly from the market.
Required
(i) Analyze the strategic problem that Mother Co Ltd is facing.

(ii) LIST few suggestions in brief.
Answer
(i) The present position of the units and the overall company is as under:
BPO KPO Combined
Turnover (in Lakhs) 250 550 800
Capacity 90% 60% 67%
Turnover at full capacity (in Lakhs) 278 916 1,194
Profit Margin 18% 15% 16%
Present Profit (in Lakhs) 45 83 128
Profit at full capacity (in Lakhs) 50 138 188
In Mother Co. Ltd., both unit heads are focusing only on their respective unit
performances rather than strategizing on the company’s performance growth as a whole.
Calculations revealed that the BPO unit is a low margin high manpower-oriented unit as
its overall contribution is just 35% share of the overall company, whereas the KPO is a
high margin low manpower-oriented unit as its share is 65%.
It is clear that the strategic problem being faced by Mother Co. Ltd is concerned with
divisional performance measures in terms of goal congruence. The CEO’s target for the
next half yearly is really ambitious, and this can be achieved only if goal congruence is
met by the heads of both units.
(ii) Few brief suggestions are given below:
 Overall revenue target of 1,200 thousand to be achieved by cranking up the
utilization for each division at 100% (still there will be a gap of 6 thousand).
 Company’s profit margin of 16% calculated at full capacity, to be increased by 2%
through means of cost cutting techniques.
 Cross training can be helpful in proper utilization of work force.
 The KPO should focus on further cost reduction and improve its % of profit margin.


Question 10
An apparel manufacturing company has a factory in Ahmedabad, making denim clothing for
customers of all ages. It sells its clothing from its factory outlet store located within the city.
Until 6 months back, the company had a business model wherein the products manufactured
at its factory would be sent to its factory outlet store. Customers would visit the store and
choose apparel suiting their tastes. Production was based on prediction of customer demand.
This “made to stock” model has been placed for many years.
Few months back, the store manager noticed many customers exiting without making any
purchases. Tracking this and after obtaining feedback from customers over sometime, it was
found that many products were unacceptable to the customers’ tastes - either the shade or
design of denim was not what they wanted or that the apparel was not of the correct fit for
them. The management then decided to provide customers a choice of either choosing from
their standard apparel range that has already been made (“made to stock” model) or to offer
them a “made to order” option.
The company now displays its range of denim material at the factory outlet. Customers can go
through the samples and choose the material of their choice. Company certified tailors would
then take measurements based on the customers’ preferences. A detailed order customized to
the customers’ needs would then be drawn up. The factory has set up a separate tailoring
division that would stich the apparel specifically for these “made to order” sales. For this new
machines and production line resources have been put in place.
Customized products are manufactured and be made available to the customer within 3
working days’ time from the date of placing the order. The customer comes to the store and
picks up the apparel ordered. For delays beyond this timeline, the customer gets to pay 5%
less on the order value. This is done to attract and maintain customers, who would otherwise
choose to purchase apparel offered by rival competitors. Therefore, speed of delivery of the
customized product is critical for the company. This is the main selling point for the company
to operate the “made to order” business model.
If further modifications are needed due to errors on part of the company (quality / finishing
issues), the apparel would need to be modified / re-stitched once again. The company will
bear the cost of modification or replacement of garment.
This new “made-to-order” has been in place for the past 6 months. At the stage of project
proposal, the management found it a lucrative option for the company because:
(i) Customers are willing to pay a higher price to have customized clothing as compared to
the standard fitting.
(ii) It would attract more customers to the store
(iii) If the model works well, the dependence on the “made to stock” model can reduce.
Savings in inventory stock, obsolescence and warehousing costs will benefit the
company’s bottom-line.

Customers have been very enthusiastic in availing this customization facility offered by the
company. Sales have increased manifold in the last few months. Therefore, the management
is interested to understand the metrics related to their “made to order” business mode to
assess its success and risks. Some of the non-financial metrics are:
Metric Month
1 2 3 4 5 6
Orders needing modification on account of errors in order 15% 12% 10% 8% 5% 4%
taking or manufacturing process (% of sales orders made
under "made to order" model)
Orders delivered beyond the 3 working days timeline (% 5% 4% 3% 6% 7% 5%
of sales orders made under "made to order" model)
Production downtime (hours) 44 88 22 141 132 123
Labour idle time due to unavailability of 25 22 17 13 24 22
material (hours)
Ratio of "made to order" to total sales from the factory 16% 22% 25% 32% 34% 38%
outlet (Ratio of sales value)
Repeat orders by customers availing this facility (% of 4% 21% 33% 54% 60% 63%
customers giving repeat order / total customers availing
"made to order" facility)
Required
ANALYZE the non-financial measures of quality of the division over the six-month period.
Focus on the production performance, delivery cycle performance and customer
satisfaction.
Answer
Analysis of the operating data of the “made to order” at the business store revealed the
following:
Production Performance:
(i) Modifications to orders: This company has to bear the cost of modification / replacement
of the garment incurred on account of error in its order taking or manufacturing process.
Therefore, orders needing such modification should be kept at the minimum. Such
instances were higher than 10% in the first three months. With experience, either in the
order taking process or manufacturing process, these errors have reduced substantially
in the later months. The managers of the order taking and manufacturing departments
need to understand and constantly keep track of these errors in order to keep them at a
bare minimum. Management may want to set a benchmark, financially in terms of the
cost of modification and non-financially in terms of the acceptable threshold for such
instances. Monthly tracking of this metric will help detection of errors earlier.

(ii) Production downtime: Production downtime normally occurs either due to break down of
machinery or plant maintenance. It is unproductive time, reducing the machine’s
capacity. It must be kept minimum. Downtime hours have been steadily increasing in the
past 3 months, the overall monthly average being 91.67 hours. The production manager
has to analyze and take corrective action at the earliest. Urgency of the issue can be
compounded by the fact that sales orders under the “make to order” model have been
increasing steadily over the last few months. In the latest month, 38% of the overall sales
was from this model. Therefore, the production capacity should be utilized optimally to
ensure ability to meet delivery deadlines.
(iii) Labor Idle time: Labor Idle time due to unavailability of material is another unproductive
waste of resource. The procurement department can address unavailability of material.
On an average 20.5 hours of labor time is idle due to unavailability of the appropriate
material. Appropriate steps with suppliers can lead to agreements to ensure seamless
supply of material when required. This will enable the company to meet delivery
deadlines given to customers.
Delivery Cycle Performance:
(i) On-time delivery: The orders need to be delivered to the store within 3 working days of
placing order. The customer picks up the order from the store. Speed of delivery is
critical to the company. Any delay beyond this timeline, the customer benefits by a 5%
reduced price on the order as compensation for delay. Prompt delivery is also the
company’s selling point to attract customers, who would otherwise patronize its rivals. On
an average 5% of the orders are not delivered within time. Therefore, average delivery
success rate is only 95%. The management has to take steps that this is kept to the
minimum in order not to stem loss of revenue as also to build brand loyalty with the
customer base.
Customer Satisfaction:
(i) Repeat orders by customers: Prompt, quality delivery of the customized order would
ensure that customers return in future with further orders. Statistics shows that repeat
orders have steadily increased, which is a very positive signal to the management.
Initially, only 4% of the customers under this model placed repeat orders. This increased
substantially. Now almost 63% of the customers who purchase under this model come
back with more orders!
(ii) Sales mix: Popularity among customers for customized services is further validated by
the steady increase in the ratio of such sales to the overall sales of the company from the
factory outlet. Now, this model generates an average of 28% of the total sales from the
outlet, with a likely projection of having a higher share in the overall sales mix. Therefore,
the “make to order” model can be termed a success.

Workings
Metric Month Monthly
1 2 3 4 5 6 Average
Production performance
Orders needing modification on account of 15% 12% 10% 8% 5% 4% 9%
errors in order taking or manufacturing
process (% of sales orders made under
"made to order" model)
Production downtime (hours) 44 88 22 141 132 123 91.67
labour idle time due to unavailability of 25 22 17 13 24 22 20.50
material (hours)
Delivery cycle time
Orders delivered beyond the 3 working days 5% 4% 3% 6% 7% 5% 5%
timeline (% of sales orders made under
"made to order" model)
Customer satisfaction
Repeat orders by customers availing this 4% 21% 33% 54% 60% 63% 39.17%
facility (% of customers giving repeat order /
total customers availing "made to order"
facility)
Ratio of "made to order" to total sales from 16% 22% 25% 32% 34% 38% 28%
the factory outlet (Ratio of sales value)
Question 11
Kristin LLP sells wide range of household products. The firm has recently received few
negative feedbacks about the product and customer services. CEO is not happy with this. As
per the opinion of CEO –
“Nowadays when social media play such an important role in making decisions, its crucial to
keep an eye on the quality of customer service you provide. If you don’t care about customers’
satisfaction, don’t expect them to care about your services or products. When customer share
their story, they’re not just sharing their problems. They are actually teaching you how to make
your product, service, and business better.”
There has been considerable discussion at the corporate level as to improve ‘Customer
Satisfaction’. Convinced with this logic, firm has invested heavily in customer satisfaction and
adopted the following plan of action–
- providing helpline 24/7 in order to develop personal relationship with customer;
- redesign its online platform in order to make it more customer friendly;
- rewarding loyal customers by giving them experience, they would not forget for life; and

- ease the return and refund policy, offering no questions- asked guarantee is a smart
move over competitors.
The CEO was initially delighted to see that their efforts pay off in the form of higher customer
satisfaction score index, however he is anxious to see the corresponding financial results.
Required
Does the seeming lack of improvement in financial performance with customer satisfaction,
Kristen LLP should stop investing a superior customer experience? DISCUSS.
Answer
In this case we can see that there are two considerable sides of the question one is customer
satisfaction and another one is profitability. By adopting the proposed plans firm manage to
get higher customer satisfaction score card and it is expected that with high customer
satisfaction, the firm’s financial result will improve i.e. increase ROA. However, increasing the
customer satisfaction is costly. Plans which are used to increase customer satisfaction will
increase the cost of the firm. This additional cost will weaken the firm’s ROA by lowing profit
and increasing the asset base. The optimum level of customer satisfaction is where the
incremental benefits are equal to incremental costs of increasing satisfaction.
While observing the pattern of data, the customer satisfaction has increased from 86 points to
91 points in first three quarters of 2019. At this level, the additional benefits seem to more
significant than the additional cost. However, in subsequent quarters, additional cost has
increased more rapidly than the additional benefits. Therefore, there is decrease in ROA as
we move forward on the index. However, toward the end of 2020, we see a marginal increase
in ROA. This is due to the lead-lag relation between satisfaction and ROA. Increased
satisfaction might take some more time, some more quarters to result in higher ROA and the
relation might not be linear. However, toward the end of 2020, the customer satisfaction score
stabilizes at current levels (93-96 points).

Overall, Kristin should not stop investing in superior customer experience, the lack of apparent
pattern in customer satisfaction and profitability could stem from several causes as discussed
above. Instead, firm should take decision considering current satisfaction levels, the cost to
increased satisfaction, and perception of the increased benefit. Moreover, the firm should also
consider the current sales, otherwise it might lose its share to competitor if they do nothing!
Question 12
Olderhelp India is a leading charity working with and for the disadvantaged elderly for over 5
decades. Olderhelp advocates for their needs for universal pension, quality healthcare, action
against elder abuse and many more. Olderhelp collects donations and funds and utilises them
for the welfare of elders. The governing body of Olderhelp has setup four performance
objectives for the three months to 30 Sep 2020:
- to achieve a level of donation of ₹30,00,000
- to keep advertisement cost not more than 3% of donation
- to keep welfare cost more than 85% of donation
- to achieve 90% of respite care requested from the community
Actual results were as follows:
July Aug Sep
Donation (₹) 7,00,000 13,00,000 11,00,000
Advertisement Costs (₹) 17,500 52,000 33,000
Elder’s welfare cost (₹) 5,74,000 10,92,000 979,000
Respite care requests (days) 1,120 1,140 1,200
Respite care provided (days) 896 1,003 1,104
The aim is to serve elder needs in a holistic manner, enabling them to live active, dignified and
healthier lives.
Required
PREPARE a statement to assist the manager in evaluation performance against objectives

and COMMENT on the performance.
Answer
Statement Showing Performance
July Aug Sep
Advertisement cost as a percentage of donation 2.5% 4% 3%
Target percentage of Advertisement cost of donation 3% 3% 3%
Welfare cost as a percentage of donation 82% 84% 89%
Target percentage of welfare cost as a percentage of donation 85% 85% 85%
Respite care provided 80% 87.98% 92%
Target percentage of respite care 90% 90% 90%

Comment
Total donation received ₹31,00,000 (=₹7,00,000+₹13,00,000+₹11,00,000) have exceeded
the target ₹30,00,000. Though there is no fix trend of receiving fund while it is noticeable that
there were special fundraising activities in Aug which generated highest receipt.
Advertisement costs have been within the target of 3% in July and Sep but exceeded the
target in Aug, more information is needed to establish why this occurred.
For the month of July and Aug the welfare cost are less than the target, while for the month of
September Olderhelp have exceeded the target of expenditure of cost.
The improvement in the respite care provided by Olderhelp has been steady and for the month
of September the target has exceeded.
Question 13
Innovation Ltd. has entered into a contract to supply a component to a company which
manufactures electronic equipment.
Expected demand for the component will be 70,000 units totally for all the periods. Expected
sales and production cost will be
Period 1 2 3 4
Sales (units) 9,500 17,000 18,500 25,000
Variable cost per unit 30 30 32.50 35
Total fixed overheads are expected to be `14 lakhs for all the periods.
The production manager has to decide about the production plan.
The choices are:
Plan 1: Produce at a constant rate of 17,500 units per period. Inventory holding costs will be
` 6.50 per unit of average inventory per period.
Plan 2: Use a just-in-Time (JIT) system
Maximum capacity per period normally……………..18,000 units
It can produce further up to 10,000 units per period in overtime.
Each unit produced in overtime would incur additional cost equal to 30% of the expected
variable cost per unit of that period.
Assume zero opening inventory.
Required
(i) CALCULATE the incremental production cost and the savings in inventory holding cost
by JIT production system.
(ii) ADVISE the company on the choice of a plan.

Answer
(i) Workings
Statement Showing ‘Inventory Holding Cost’ under Plan 1
Particulars Pd. 1 Pd. 2 Pd. 3 Pd.4

Opening Inventory …(A) --- 8,000 8,500 7,500
Add: Production 17,500 17,500 17,500 17,500
Less: Demand/ Sales 9,500 17,000 18,500 25,000
Closing Inventory …(B) 8,000 8,500 7,500 ---
 A B 
Average Inventory   4,000 8,250 8,000 3,750
 2 
Inventory Holding Cost @ `6.50 26,000 53,625 52,000 24,375
Inventory Holding Cost for the four periods = `1,56,000

(`26,000 + `53,625 + `52,000 +
`24,375)
Statement Showing ‘Additional Cost-Overtime’ under Plan 2 (JIT System)
Particulars Pd. 1 Pd. 2 Pd. 3 Pd.4

Demand/ Sales 9,500 17,000 18,500 25,000
Production in Normal Time 9,500 17,000 18,000 18,000
Production in Over Time …(A) --- --- 500 7,000
Variable Cost per unit 30.00 30.00 32.50 35.00
Additional Cost – Overtime per unit …(B)
9.00 9.00 9.75 10.50
(@ 30% of Variable Cost)
Additional Cost – Overtime …(A) × (B) --- --- 4,875 73,500
Total Additional Payment (Overtime) = `78,375

(`4,875 + `73,500)

Statement Showing ‘Additional Variable Cost*’ under Plan 2 (JIT System)

Particulars Pd. 1 Pd. 2 Pd. 3 Pd.4 Total
Production (Plan 1) 17,500 17,500 17,500 17,500 70,000
Variable Cost …(A) 5,25,000 5,25,000 5,68,750 6,12,500 22,31,250
Production (Plan 2, JIT) 9,500 17,000 18,500 25,000 70,000
Variable Cost …(B) 2,85,000 5,10,000 6,01,250 8,75,000 22,71,250
Total …(B) – (A) 40,000
* excluding overtime cost
Incremental Production Cost in JIT System = `78,375 + `40,000
= `1,18,375
Therefore, Saving in JIT System (Net) = `1,56,000 – `1,18,375
= `37,625
(ii) Advise
Though Innovation Ltd is saving `37,625 by changing its production system to Just-in-
time but it has to consider other factors as well before taking any final call which are as
follows:
― Innovation Ltd has to ensure that it receives materials from its suppliers on the exact
date and at the exact time when they are needed. Credentials and reliability of
supplier must be thoroughly checked.
― To remove any quality issues, the engineering staff must visit supplier’s sites and
examine their processes, not only to see if they can reliably ship high-quality parts
but also to provide them with engineering assistance to bring them up to a higher
standard of product.
― Innovation Ltd should also aim to improve quality at its process and design levels
with the purpose of achieving “Zero Defects” in the production process.
― Innovation Ltd should also keep in mind the efficiency of its work force. Innovation
Ltd must ensure that labour’s learning curve has reached at steady rate so that they
are capable of performing a variety of operations at effective and efficient manner.
The workforce must be completely retrained and focused on a wide range of
activities.
Question 14
Venice Light Works (VLW) manufactures multicolour glow bulb (MCG-10) used for lighting
and decoration. MCG-10 considered as reliable product in market due to zero-defect. VLW
sells MCG-10 through retail-chains and individual shopkeeper apart from factory outlet. MCG-
10 has demand throughout the year but there is high demand during festival seasons
especially ahead of Diwali. Company follows the lot purchase system and manufacture the
product ahead of peak season of festivals. Presently the VLW is working at 80% of capacity
and manufacture 4,00,000 bulbs annually, at following per unit cost:

Particulars Behaviour Amount (In )

Direct Material Variable 22
Direct Labour Variable 6
Factory Overhead
1. Engineering Cost Fixed 10
2. Machining Cost Fixed 5
3. Inspection Cost Variable 5
Administration Overheads Fixed 12
Selling and Distribution Overheads Fixed 12
Total Cost 72
Recently the competition in decorative lights & electronic markets has escalated, due to goods
imported from Chinese manufactures at cheap rates. Such imported light bulbs are also sold
through same shops at which MCG-10 is available for sale. Due cheaper in rate customer
prefer imported light bulb rather MCG-10.
To be competitive in market, the marketing department of VLW conducted applied research
and suggested that price should be 12.5% lower than the current prices. VLW during last three
financial years and during current year records the pre-tax profit @ 10% rate of sale,
management of VLW wish to earn the same rate of profit (margin) in upcoming years too.
Production and operation manger is of opinion that cost reduction, in order to be competitive in
market may result in reduction in quality, whereas Manger - Quality control suggest, if number
of inspection staff increased, then inspection can be performed at each stage and defect can
be curtailed at the earliest stage to eliminate rework cost.
Management accountant is of opinion that since MCG-10 is mature product, hence majority of
cost associated in production of MCG-10 are committed in nature, price cutting seems difficult;
it may hit the top line and bottom line adversely. In response to him, Chief engineer suggest
product (MCG-10) can be redesigned; but marketing manager shown his resistance on the
suggestion of redesigning of product because according to him ‘existing product appearance
and features are key reasons for popularity of product in market and leads to sale’.
Required
(i) CALCULATE the price suggested by marketing department.

(ii) COMPUTE the target cost and new margin, appraise percentage decline in margin.
(iii) If proportionate cost reduction plan is applied, then
(a) CALCULATE planned cost reduction for each cost category.
(b) EXPLAIN proportionate cost reduction plan.
(iv) Based upon discussion taken place among the functional manger, EVALUATE the
possibility of cost reduction in order to analyse the possibility of application of target
costing. Also suggest course of action to adopt.

Answer
(i) Price suggested by marketing department (Target Price)
Current cost per unit – 72 per unit
Profit (Margin) @10% of sale price
Sale Price = 72 + 10% of Sale Price
So, let presume sale price is ‘x’
X = 72 + 10% of X
X = 72 + 0.1X
X - 0.1X = 72
0.9X = 72
X = 72/ 0.9
X = 80
New price will be 12.5% less than current price
80 – 12.5% of 80
80 – 10 = 70
(ii) Target cost and new margin
Target Price – Margin (i.e. 10% of sale price) = Target Cost
Target Cost = 70 – 10% of 70
70 – 7 = 63
New Margin (under target costing) is 7
Percentage decline in margin
𝐸𝑥𝑖𝑠𝑡𝑖𝑛𝑔 𝑀𝑎𝑟𝑔𝑖𝑛 – 𝑁𝑒𝑤 𝑀𝑎𝑟𝑔𝑖𝑛 (𝑢𝑛𝑑𝑒𝑟 𝑡𝑎𝑟𝑔𝑒𝑡 𝑐𝑜𝑠𝑡𝑖𝑛𝑔)
∗ 100
𝐸𝑥𝑖𝑠𝑡𝑖𝑛𝑔 𝑀𝑎𝑟𝑔𝑖𝑛
8−7
= ∗ 100
8
= 12.5%
Note
There is decline in margin in absolute term, whereas in relative term the margin remains
same i.e., 10% of sale price.

(iii) Planned cost reduction for each cost category under proportionate reduction plan
Amount in
Particulars Existing Cost Target Cost
Direct Material 22 19.25
Direct Labour 6 5.25
Factory Overhead
1. Engineering Cost 10 8.75
2. Machining Cost 5 4.375
3. Inspection Cost 5 4.375
Administration Overheads 12 10.5
Selling and Distribution Overheads 12 10.5
Total Cost 72 63
Under proportionate reduction plan cost for each category is proportionately reduced in
proportion of existing weight. Here, a presumption is needed to be taken that all the cost
are avoidable in nature, where as in case of every business; there are some of cost
categories which are true sense unavoidable and committed in such a way that, these
continue to occur even in shut down situation (e.g. salary to guard, minimum rental for
electricity and water meter etc.); same is pointed by Management Accountant, that
product is matured in nature (means not in designing or research phase) hence
committed cost may be unavoidable in nature.
Note
Student must note that fixed costs are not as same as unavoidable cost. Fixed cost may
be avoidable in nature.
(iv) Possibility of cost reduction & Suggested course of action for VLW
Target costing comprises four stages. First being determining the product target price,
quality, and functionality; second determine the target cost; thirdly designing the product
and production process to achieve the target costing, and fourth use pilot project to
evaluated feasibility. Based upon discussion taken place among the functional managers,
it is evidential that VLW is presently moving towards third stage.
As stated by management accountant that product MCG-10 is mature nature hence
majority of cost are of committed nature, hence may be unavoidable in nature. Product
MCG-10 is material-oriented product and raw material cost is around 30% of total cost.
So, if gain sharing arrangement can be entered with vendor then surely VLW can save
some portion of material cost.

As said by production and operation manager, cost reduction may lead to compromise
with quality. He may be right, but he needs to look for scientific way to reduce the cost of
operations like change in batch size (if required can shift to JIT) or outsource some part
of operations; scientific management can also be applied in order to curtail motion time
and reduction in labour cost.
Quality Manager is of opinion with extra inspection staff, quality can be assured, but
appointment of additional inspector and supervisor will also lead to increase in cost;
hence effective way to ensure quality while reducing cost of application of practice of
TQM and Kaizen. Kaizen costing will be great help to management of VLW to cut the
cost, with support and participation from worker.
Chief engineer suggestion is appreciable, because target costing is most beneficial in
those case where the product is in designing and planning phase. As per research
around 70-80% of cost is committed at stage of designing of product. It is important to
note that the word ‘committed' is used as ‘not incurred’; therefore, cost being committed
(i.e., not incurred cost) will be incurred when it became due in course of production. But
redesigning is not feasible from the prospects of marketing of product as per the
statement made by marketing manager.
Marketing manager can conduct applied research in order to develop understanding the
temperament of customer of MCG-10, whether they are price sensitive or conformance to
need is their priority. If customer found price sensitive (existing recommendation of
marketing team shows high possibility of this, because marketing team feels customers
can be retained is price is reduced by 12.5%) then product redesign may be opted. But if
conformance to need is their (customers) priority, then value chain analysis can be used
to identify the activities which creates value to customer and other than these activities
(which are not creating the value) can be eliminated in order to reduce the cost.
So, there are possibility to reduce the cost, even if not in all the cost category then surely
in some of categories; so that target cost can be achieved.
Question 15
Impax Electronic Limited (IEL) is manufacturing wide verities of torches operated on power
batteries, specially designed for trekking and travelers, apart from domestic use. For which
they purchase bulbs from Glow Lights and Bulbs (GLB), mostly G3 1M Screw 7.5V bulb is
used in torches. Due to lockdown and outbreak of COVID the demand of torch falls
significantly, and factories allowed to work at 1/3rd of capacity. Considering the same
production department slows down the production, causing a huge piled-up inventory of raw
material. This will be expected to result in high storage costs. Hence to attain cost-
effectiveness; IEL decided to move from tradition system to Just-in-Time (JIT) system in a
phased manner. There are two major departments operating in IEL, purchase, and production.
In the first phase, the purchase department is considering the adoption of JIT purchasing.

The annual demand for G3 1M Screw 7.5V bulb (bulb) is 24,000 units at IEL. Presently, the
purchase price is 80 per bulb. Currently, the annual demand is ordered in 24 orders of equal
size, and the cost of placing an order is 10 which is expected to remain same in JIT regime
too. Material handling, insurance, and other carrying cost is 2, 1, and 1.5 respectively
per unit per annum.
Under the JIT system, the price expected to increase to 80.05 per bulb. GLB is a reputed
company for the quality of its products and timely delivery. As a result of frequent orders, the
number of orders increased to 120 under the JIT regime, and order size decrease
proportionally. Material handling cost is expected to reduce to 1.2, whereas other carrying
costs will reduce by 0.5 and insurance costs remain at the same level. Lower inventory level
will cause a stock-out cost of 5 per unit on 0.25% of annual demand.
The required rate return for IEL is 16%.
Required
(i) (a) Is the JIT process is different for the purchase and production department?
STATE the reason to support your opinion.
(b) STATE any three areas in which JIT purchasing may reduce cost significantly to
bring the cost efficiency.
(ii) COMMENT, whether purchase department of IEL should move to JIT Purchasing,
presuming the same annual demand.
Answer
(i) (a) Just-in-time (JIT) is the management philosophy based upon demand pull system
(rather than supply-push) throughout the plant in order to reduce cost, with a single
piece flow after considering takt time.
JIT process is different for purchase and production department, due inherent
nature of the function they render; despite the purpose of both is to de-clutter
store/assembly line at the production floor and reduce the cost.
JIT if applied in purchases by purchase department then known as JIT purchasing,
which meant materials should only be purchased, when required for production.
Whereas if JIT applied by the production department, it will be termed as JIT
production and meant that finished products should only be produced, as needed
to meet actual customer demand.
(b) The areas, where JIT purchasing expected to reduce cost significantly are:
1. Interest cost of working capital – JIT purchasing will reduce the level of raw
materials, which cause a reduction in the amount blocked as working capital;
hence interest cost (either actual or opportunity) will reduce too.

2. Reduction in storage cost – As we know JIT purchasing reduce the level of

raw material stored, hence storage cost is expected to reduce.
3. Since JIT purchasing reduced the inventory level of raw material, hence
sorting (first S out of 5S) become easy and motions (as per motion study)
also reduced, which reduce labour and overhead cost as well.
4. Material is purchase as and when required hence wastage and scarp will be
less due to a relative reduction in evaporation and tendency to obsolete.
(ii) Chart of cost comparison under present and JIT regime (annual basis)
(Amount in )
Particulars Present JIT system
Purchase Costs
= 24,000 units × 80 19,20,000
= 24,000 units × 80.05 19,21,200
Ordering Costs
(number of orders × ordering cost per order)
= 24 orders × 10 240
= 120 orders × 10 1,200
Opportunity Carrying Costs
= order quantity/2 × (purchasing cost per unit × 0.16 per
year)
= 1,000 units/2 × 80 × 0.16 6,400
= 200 units/2 × 80.05 × 0.16 1,280.80
Other Carrying Costs (insurance, material handling etc.)
= order quantity/2 × carrying costs per unit
= 1,000 units/2 × 4.50 2,250
= 200 units/2 × 3.20 320
Stockout Costs
= contribution lost × units not delivered/ produced
= 5 × (0.25% of 24,000) - 300
Total Cost of Inventory Management 19,28,890 19,24,300.80
Incremental savings in shifting to JIT 4,589.20
Decision
Since the implementation of JIT Purchasing results in an incremental savings of
4,589.20 on a per annum basis, hence it is economically viable to move to JIT system
of inventory purchase.

Working Note 1 - Average Inventory

Particulars Present JIT system
Annual Consumption …(A) 24,000 24,000
Number of orders …(B) 24 120
Order Size …(C = A/B) 1,000 200
Average Inventory …(D = C/2) 500 100
Working Note 2 - Carrying Cost per unit
Particulars Present JIT System
Material handling (reduction of 0.8) 2 1.2
Insurance 1 1
Other carrying cost (reduction of 0.5) 1.5 1
Carrying Cost per unit per annum 4.5 3.2
Question 16
Royal Bakers is famous for cakes and cookies. Mr. Das the owner at Royal Bakers is
interested in offering affordable products to their customers, hence keen to capture the small
scope of cost-effectiveness. Royal Bakers located in the centre of the city where space has a
huge cost and royal baker is running out of space during peak hour causing loss of sale. Most
of the customer are regular to Royal Bakers. Royal Baker is known for fast service, Mr. Das
wish to be true to the tagline ‘Close your eyes to wish and open them to find it cooked for you’.
The hurdle rate is 12%.
Non-availability of skilled worker and high attrition rate of worker including chef is the cause of
worry for Mr. Das. In order to retain worker, Royal Baker is paying a higher salary than industry
standards. The raw material is easily available as and when it is required. Royal Bakers is
considering two different models of baking oven machine to replace its old oven. The baking
capacity of both machines are the same and both will occupy a similar amount of space.
The first model is the automatic oven which will cost about 10,00,000. Another model is the
semi-automatic oven which will cost at 5,60,000. The annual operating cost (including
depreciation) is 40% of the acquisition cost and 4,20,000 in case of automatic and semi-
automatic oven respectively. After 3 years of use, the automatic oven can be salvage at
70,000, whereas semi-automatic oven will fetch 20,000 only. The automatic oven is more
advanced and equipped with latest technologies to speed up the baking, because only
ingredients need to be inserted in right proportion and mix. Whereas in semi-automatic
machine some part of the process needs to be performed manually by the workers.
Required
ADVISE which oven shall royal baker acquire.
Note- You can ignore taxes but need to consider the time value of money; decimal accuracy
up-to two digits is expected.

Answer
Statement of the Comparable Life Cycle Cost
Particulars Automatic Semi-Automatic
Acquisition Cost 10,00,000 5,60,000
PV of Entire Life Cash Operating Cost (W.N.2) 2,16,000 5,76,000
PV of Salvage Value (W.N.3) (49,700) (14,200)
Total Cost of the Oven over the life cycle 11,66,300 11,21,800
Note – Hurdle rate of 12% (marginal cost of capital rate) is considered, for purpose of
application of time value of money.
Working Note 1 – Depreciation
Acquisition Cost 10,00,000 5,60,000
Salvage Value 70,000 20,000
Depreciable Value 9,30,000 5,40,000
Useful life in a number of years 3 3
Depreciation on SLM basis 3,10,000 1,80,000
Working Note 2 – Present Value of Entire Life Cash Operating Cost
Annual Operating Cost 4,00,000 4,20,000
Depreciation (see W.N. 1) 3,10,000 1,80,000
Annual Cash Operating Cost 90,000 2,40,000
Cumulative PV factor @ 12% for 3 years 2.40 2.40
PV of Entire Life Cash Operating Cost 2,16,000 5,76,000
*Annual operating cost is 4,00,000 i.e., 40% of 10 Lakhs, in case of automatic machine.
Working Note 3 – Present Value of salvage value
Salvage Value 70,000 20,000
PV Factor @ 12% for 3rd year 0.71 0.71
PV of Salvage Value 49,700 14,200

Advise
Based upon life cycle cost, Royal Bakers are advised to acquire semi-automatic oven,
because it causes a saving of 44,500. The cost has qualitative implications too, apart from
quantitative or monetary implications. Similarly, a management decision is also impacted by
qualitative and non-monetary quantitative factors. Hence, decision taken in part a above may
differ if Royal Bakers consider-
Finishing of bake products – the look and taste
It is obvious the presence, which one important feature for bakery product in order look
delicious and tempting; will be way different if cooked in the automatic and semi-automatic
machine. The taste may also be different, which is more critical from prospective of customer
retention because a large number of the customers are regular to the royal baker, hence
maintaining the principal customer is maybe a key consideration. This factor may go in favour
of any of version oven. If look goes in favour of automatic oven, then taste may be in semi-
automatic due to corrections by the worker during baking and relatively authentic preparation.
Manpower
Availability of skilled worker and retention of worker is the cause of worry presently. In order to
operate an automatic oven obviously fewer workers are required; hence money can be saved
by cutting down recruitment cost and excess salary paid to the worker in order to retain them.
On another hand, skilled workers are already in scarcity, automatic machine obviously
requires a more technically competent operator. But largely this factor moves in favour of
automatic machine despite is costlier.
Space
Royal Bakers located in the centre of the city where space has a huge cost and royal baker is
running out of space during peak hour causing loss of sale. Although the size of both the oven
s are same, the number of worker and space required for them surely be less in case of the
automatic oven. Hence this factor again moves in favour of automatic oven.
Power consumption & availability
Although the power consumption cost is presumed to already include in annual operating cost
hence considered as a monetary factor but need and availability of power is a very important
factor; in order to ensure uninterrupted baking. In absence of stand-by power back-up, power
cut may lead to downtime. It will complete downtime for the automatic oven and to a certain
extent in the case of semi-automatic (because the manual process will keep going on). Stand-
by power back-up will also have an additional cost.
Customisation
In case of cookies, it may ok to produce the standard product; but the cake needs to base
upon the order of the customer, who may seek customisation. Scope of customisation needs
to evaluate. In the case of the semi-automatic oven, the scope of customisation and ethnicity
will be relatively high.

Speed
Royal Baker is known for fast service, and Mr. Das wish to be true to tagline ‘Close your eyes
to wish and open them to find it cooked for you’. The automatic oven is more advanced and
equipped with latest technologies to speed up the production. Hence this factor moves in
favour of automatic oven.
Detection of the defect
If speed thrills, then it kills too. In case of the bakery, rework and reprocessing is hardly
possible, even if possible then at a huge cost; hence it is essential to keep vigil control over
quality and detection of defect at the earliest stage. In the semi-automatic oven, there is the
scope of reviewing the material after stage/s and improvisation can be done.
Overall, Royal Bakers should take the decision only after due and careful consideration of
above factors.
Question 17
Sacred Heart Hospital (SHH), a renowned multispecialty hospital offering affordable
healthcare service to one and all. Despite charging reasonable prices SHH is offering the best
possible services to its clients, hence SHH is the undisputed choice among the resident for
healthcare services. Since SHH is charging a reasonable fee, hence controlling and managing
cost becomes critical for them, especially the cost involved in non-value activities or activities,
not of principle nature. SHH has a core team of 32 specialist doctors and some among them
are resident doctors. The staff comprises an administration team of 15 members, apart from
around 120 nurses supported by 40-50 grade-four employees, some of these support staff are
casual workers and some are the resident staff.
SHH is running an in-house subsidies canteen for Doctors and Staffs exclusively, operates on
all calendar days. This canteen was established during initial days of SHH because then the
nearby areas are not fully developed; only a few eateries were there and either they are un-
hygienic or excessively costly. Due to extending urban municipal limits scenario is changed
now. Management at SHH is considering the two alternate first being ‘downsize the operation
by cut-down the choices to eat and reduction in subsidy’ or ‘outsource canteen to some
external caterer’. Patients’ food is prepared by the dietary department and there is a separate
canteen for attendant and visitors of patients.
Current scenario
On daily basis around 160 coupons for meal @ of 40 and 120 coupons for snacks
(accompanied with either tea or cold drink) @ of 20 is sold apart from the sale of 2,000 for
juices & biscuits etc. These supplies costs 70% of sale prices. Canteen also incurs 25,000
for utilities and maintenance each month. Canteen works around the clock, with mutual
rotation among the staff. The meal is served during specified hours, whereas snacks, juices
and biscuit are available throughout.

Presently canteen has a staff of 7 members, including a chef, helpers, and cleaner. The
monthly salary of these 7 staff members is 1,40,000. SHH also contributes 9,120 per
month, as statutory labour benefits. Only those employees registered for such benefits, whose
salary are below to threshold limit prescribed under respective labour legislation.
Downsize the operation by cut-down the choices to eat and reduction in subsidy
With the aim to reduce the subsidy by at-least 50%, the operation can be downsized by cut-
down the snacks from menu. The price of Meal will also be increased by 5%. Cutdown will
reduce the staff requirement, resultantly monthly salary expenditure expected to reduce by
63,500; whereas SHH contributes to statutory labour benefits also reduced to 5,420. The
average cost of supplies is increased by 3% of the sale price. There is an increase in the sale
of meal coupon by 30 coupons, largely due to the absence of alternate choice. The sale of
juice and biscuit is also increased by 10%. Other aspects of operation remain the same.
Outsource canteen to some external caterer
Against the advertisement of expression of interest, 4 proposals are received, out of which
only found suitable by the screening committee, which also meets all the established criteria.
Such a proposal is from ‘Annapurna Caterers’. They offered an annual lease value of
1,68,000 and share of 2% in revenue. Only 20% of monthly utility and maintenance
expenditure pertaining to canteen will be recovered from Annapurna Caterers. It is expected
by Annapurna Caterers that it will be able to sale 150 meals @ 50 each, 100 snacks @ 30
each apart from juice and biscuits of 2,500 on daily basis.
Required
(i) ADVISE the management of SHH supported with following points-

a) Whether downsizing operation by cut-down menu is acceptable or not?
b) Whether SHH able to reduce the subsidy by 50%?
c) What qualitative factors SHH need to consider?
(ii) ADVISE the management of SHH supported with following points-
a) Does proposal from Annapurna Caterers is beneficial than downsizing or not?
b) Highlight any two non-monetary factors which SHH need to consider prior to
outsourcing (in brief).
Assuming it is a non-leap year, comprising 365 days.

Answer
(i) a) Considering the statement of comparative costs and benefits mentioned below as
table 1, from monetary aspects it is strongly advice to management at SHH to
downsize the operation by cut-down the menu; because it will result in saving
of 6,27,039 (by reducing loss from 9,06,840 to 2,79,801)

Table 1 - Statement of comparative costs and benefits

(on year basis, the amount in )
Particulars Current After Cut-back
Annual Revenue (W.N. 1) 39,42,000 37,15,700
Less: Costs
Material/Supplies (70/73% of revenue) 27,59,400 27,12,461
Labour/Salaries (W.N. 3) 17,89,440 9,83,040
Utility and maintenance 3,00,000 3,00,000
Loss (Subsidy by SHH) (9,06,840) (2,79,801)
b) Considering the table 1, it is observed that loss (which is in form of the subsidiary) is
currently 9,06,840. If SHH downsizes the operation by cutting down the menu then
such loss is also reduced to 2,79,801; hence saving in cost/subsidy is 6,27,039;
which amounts to 69.15% of current subsidy.
Hence, SHH is able to reduce the subsidy by 69.15% against the target of 50%.
c) Management decisions has qualitative implications also apart from monetary
implications. Hence management needs to consider these non-monetary factors too.
In the present case SHH must consider the following factors→
Retrenchment of employees may have severe consequences – Cut-down will
reduce the staff requirement, the question arises here whether such staff members
are regular are casual, because based upon this fact they will be either absorbed in
some other department or retrenched. If transferred to some other department then
the cost impact on such department (responsibly centre) needs to be considered. If
retrenched then, whether the byelaws of SHH allow for the same? Does any
compensation need to be given? Even motivation of other employees may be jolted,
because job-security is one of the major factors.
Even minor price increase has an impact on the pocket – Subsidies food and
food coupons are usually part of employment benefits. The price of meal will also be
increased by 5%. Such a change of 5% may not bother doctors and nurses, but
Grade-four staff surely be impacted by such change. Staff may reach to the
conclusion that management is not employee-oriented they are concerned with their
profit only. This may lead to less participation and support from employees.
Resident doctors and resident Staff – Resident doctors and staff are key to any
hospital. In the service industry, the employee has a direct impact on the value
chain. The meal is available only during specified hours, currently beyond those
specified hours snacks are available, but if snacks cut down from menu then it will
be unjust for resident doctors and staff.

(ii) a) As per the statement of cost and benefit mentioned in table 2 below, the gain out of
outsourcing canteen facility is 22,900; whereas downsizing operation by cut-down
menu causing loss of 2,79,801, hence by outsourcing canteen facility SHH can
earn monetary gain of 3,02,701.
Yes, outsourcing offer from Annapurna Caterers is more beneficial then
downsizing operation, hence management at SHH is advised to accept
outsourcing proposal. Management may also give weight to qualitative and non-
monetary quantitative factors.
Table 2 - Statement of cost and benefit under outsourcing (canteen facility)
Particulars Amount in
Lease Rental 1,68,000
Share in Revenue (2% of 47,45,000) 94,900
Recovery on account of utility and maintenance (20% of 3 Lacs) 60,000
Less: Cost
Utility and maintenance 3,00,000
Gain out of outsourcing canteen facility 22,900
b) Major non-monetary factor which SHH must consider prior to outsourcing the
canteen facility are→
 Quality of food/eatable provided by Annapurna Caterers.
 Price-increased will be a burden for staff and doctors.
 Whether the staff, which is presently engaged in canteen facility will be
retrenched or transferred to another department.
 Legal implication and aspects of out-source agreement.
Working Note 1 – Annual Revenue
Meal 6,400 (160@ 40) 7,980 (190@ 42)
Snacks 2,400 (120@ 20) -
Juices & Biscuits 2,000 2,200
Daily Total Revenue 10,800 10,180
Annual Revenue 39,42,000 37,15,700

Working Note 2 – Annual Labour Cost

Monthly Salary 1,40,000 76,500
Statutory Contributions 9,120 5,420
Monthly Labour Cost 1,49,120 81,920
Annual Revenue 17,89,440 9,83,040
Working Note 3 –Annual Revenue of Annapurna Caterers

Meals (150 meals @ 50 each) 7,500
Snacks (100 snacks @ 30 each) 3,000
Juice and biscuits ( 2,500 on daily basis) 2,500
Daily Revenue 13,000
Annual Revenue 47,45,000
Note- It is important to note that non-value-added functions can be easily outsourced based
upon monetary aspects only, because they are not value generating, but it does not mean
they are not strategic. Here, in present case canteen facility is non- value adding activity but
seems strategic in nature.
Question 18
Ajanta Digital Solutions (ADS) is a renowned name for manufacturing a wide variety of
digital stationery products for office and academic use. The ‘Abacus division’ of ADS is
engaged in the production of basic calculators, capable of academic and commercial use.
Presently Abacus is manufacturing only three models, named C-100, C-125, and C-500. These
calculators are sold to customers through wide-spread retailers and distributors’ network
across the country.
During manufacturing process, each calculator needs to pass through various steps, before it
gets ready. PC-IA is the essential step and performed manually, where processing chip is
being installed, activated, and tested. The production capacity of Abacus is constraint by PC-
IA. The basic information pertaining to top-line and the prime cost is as follows (Amount in )-
Particulars C-100 C-125 C-500
Sale price per unit 140 200 450
Material cost per unit 72 104 200
Labour cost per unit 30 52.5 75

All the process and division at ADS are operating for a single shift of 8 hours in a day.
Conversion cost per hour (including labour cost) is 5600. The standard out-put for PC-IA
during a day is the processing of either 800 units of C-100 or 560 units of C-125, or 320 units
of C-500. ADS is capable of sale more than, what they are presently capable to produce in all
range of models. The CEO of ADS recently attended a science fair, Robo-tech 4.0; where he
saw a Robot developed by Synergy Robotics Limited, capable to assembly including
installation of processing chip to any sort of device.
Required
Management hired you as cost consultant, advice on following aspects→

(i) On a random day if 480 units, 140 units and 120 units of C-100, C-125, and C-500
respectively are produced and sold, CALCULATE at what efficiency level current
constraint (bottleneck) is operational. INTERPRET the same. COMPUTE profit earned
during such day.
(ii) FIND production of which model is more beneficial, considering the ranking (based
upon throughput performance ratio).
(iii) APPLY Goldratt’s five steps to remove the bottleneck at Abacus.
Answer
(i) Efficiency level can be measured with help of Efficiency Ratio, which is one among the
control ratios.
Efficiency ratio indicates the degree of efficiency attained in production. It is expressed
in term of standard hours for actual production as a percentage of the actual hours spent
in producing that work.
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 ℎ𝑜𝑢𝑟𝑠 𝑓𝑜𝑟 𝑎𝑐𝑡𝑢𝑎𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 ∗ 100
𝐴𝑐𝑡𝑢𝑎𝑙 ℎ𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑
= (9.8/8) × 100
= 122.5%
Working Note – Standard hour required for actual production.
Actual Standard Hourly Standard Hour

Standard Daily
Product output Output (Units) (c) Required
Output (Units) (b)
(Units) (a) (b)/8 (a)/(c)
C-100 480 800 100 4.8
C-125 140 560 70 2
C-500 120 320 40 3
Standard Time Required (in hours) 9.8

Interpretation – 122.5% signifies that efficiency (usage) of exploiting bottle-neck activity

is 22.5% better than the standard use. PC-IA is producing out-put which require 9.8
hours, in 8 hours.
Profit earned during the day
Revenue [(480×140) + (140×200) + (120×450)] 1,49,200
Less: Material Cost [(480×72) + (140×104) + (120×200)] 73,120
Less: Conversion Cost (including labour cost) [5,600 × 8hrs.] 44,800
Profit 31,280
(ii) Statement of ranking, based upon throughput performance ratio (using throughput
contribution)
Particulars C-100 C-125 C-500
Sale price per units …(a) 140 200 450
Material cost per unit …(b) 72 104 200
Throughput contribution per unit …(c) = (a) – (b) 68 96 250
Maximum possible production …(d) 800 560 320
Maximum possible throughput contribution …(e)= (c)×(d) 54,400 53,760 80,000
Conversion cost (including labour cost) (5,600×8hrs.) …(f) 44,800 44,800 44,800
Throughput performance ratio …(e)/(f) 1.21 1.20 1.78
Ranking II III I
Considering the throughput performance ratio (or TA ratio) and ranking above most
beneficial model to produce is C-500 followed by C-100 and C-125.
Throughput contribution
𝐓𝐀 𝐑𝐚𝐭𝐢𝐨 =
Conversion cost
Throughput accounting developed by Galloway and Waldron which use the term
factory cost and completely relay upon the Goldratt’s theory of constraints which use
the term operating expenses, but the meaning of factory cost and operating expenses
used at both places are identical.
Theory of constraints consider short-run time horizons and assume other current
operating cost to be fixed costs.
Higher the throughput performance ratio (or TA ratio) is better and beneficial.
All the products/models which have throughput performance ratio (or TA ratio) more
than one may be produced/continued to produce, depending upon constraint function.

(iii) Application of Goldratt’s five steps to remove the bottleneck at Abacus

Goldratt’s theory of constraints describes the following mentioned five steps process of
identifying and taking steps to remove the bottlenecks that restrict output.
1. Identifying the System Bottlenecks – At Abacus division of ADS, PC-IA is
bottleneck
2. Exploit the Bottlenecks – Bottleneck activities’ capacity must be fully utilised.
Although the efficiency of bottleneck activity is already 122.5% but further attention
on the possibility to enhance the flow of products from bottleneck activity is needful.
3. Non-bottleneck activities are subordinate – Bottleneck activity should setup the
pace for non-bottleneck activities. Abacus shall plan its production keeping PC-IA at
the centre point, because even if the efficiency of other activities which are non-
bottleneck enhanced beyond current level; the output can be maximum possible by
PC-IA.
4. Elevate the bottleneck – Eliminate the bottleneck by enhancing the capacity and
efficiency. Major change (business reengineering) or continuous minor change
(kaizen) may do. In the case of Abacus, the introduction of the robot may be a way
to elevate the bottleneck.
Note – There will always be one bottleneck in the system, if such bottleneck is
eliminated then a new constraint emerges as a bottleneck. Hence this process
continues. Ultimately improvement is a never-ending continues process.
5. Repeat the process – Apply step 1 to new bottleneck activity which emerges at
Abacus and repeat the process.
Question 19
‘Pristine Makers’ is one of the largest laundry service provider for Suits. The firm has set a
price of 510 for cleaning the “suit set”. ‘Pristine Makers’ derived this price as follows: cleaning
materials 35, labour (3 hrs. @ 50 per hr.) 150, variable overheads 70, fixed overheads
(3 hrs. @ 15 per hr.) 45 plus mark-up 70% on total cost. ‘Pristine Makers’ is known for its
quality work and timely delivery; hence, customers are willing to pay this premium price. Firm’s
employees receive a fixed salary. The “hourly rate” 50 is arrived by dividing the total salary by
the total number of hours available. Variable overheads depend on the number of suits cleaned
whereas fixed overheads rate is derived at by dividing the total cost of all related expenses by
the number of labour hours available. Fixed overheads generally include office rent and
administrative salary.
A local hotel approached ‘Pristine Makers’ as the regular cleaners of these suits are on strike,
about the possibility of cleaning 130 suits in coming week and they need the work done on a
rush basis. ‘Pristine Makers’ has sufficient quantity of required cleaning material in stock for
special order. It perceives that it could complete 60% of the special order during normal working
hours. However, to complete the remaining 40%, some employees will have to work overtime.
Overtime hours are paid at premium, which could be time and half the normal hourly rate.

Required
(i) ADVISE the price it shall quote for the special order?
(ii) Does special order decision deal with excess supply or excess demand? ANALYSE.
(iii) Whether such special order be accepted on rush basis? COMMENT.
Answer
(i) Firms can face situations where they are confronted with the opportunity of offering for a
one- time special order. In this situation only the incremental costs of undertaking the
order should be taken into consideration. Quote should be made at prices that exceeds
incremental costs. Any excess of revenues over incremental costs will provide a
contribution to committed fixed cost which would not otherwise have been gained.
‘Pristine Makers’ can use the incremental cost numbers for pricing the ‘rush order’. The
minimum price that firm would charge is 195 per suit (= 25,350/130). This price is well
below normal price of 510.
Particulars Amount (
Cleaning materials (130 × 35) 4,550
Labour (130 × 3 × 40% × 50 × 1.5) 11,700
Variable overheads (130 Suits × 70) 9,100
Incremental cost 25,350
However, in decision making other conditions are equally important. For instance, if this
is a one-time deal with no prospect of repeat business, then ‘Pristine Makers’ might
well charge a premium over the normal price. Long-term implications also matter. The
prospect of “getting a foot in the door” to quote for future business would push the price
downward. Therefore, ‘Pristine Makers’ can price based on both the short-run benefits
from accepting the order and the long-run consequences.
(ii) Such special order definitely gives ‘Pristine Makers’ opportunity to earn more profits,
however, other aspects also need to be analysed. There is excess of cleaning material, if
the current special order does not use up available stock, the firm could store the
cleaning material for later use. It is most likely that ‘Pristine Makers’ fixed overhead costs
will not change due to the special order which mainly consists of rent and administrative
salaries. If 60% of the special order could be completed during normal working hours,
then the firm clearly has some excess capacity in terms of labour hours. However, for the
remaining 40% of the special order, labour will have to work overtime and will be paid 1.5
times. This clearly indicates that different resources in the ‘Pristine Makers’ have differing
capacity levels; a decision may impose constraints on particular resource. It is necessary
to consider the opportunity cost of each resource when computing the total cost of a
special order.

(iii) There are two sides in this scenario. On the one side, firm can earn more profits by
taking the special order. On the other side, the order received needs to be delivered
urgently. Therefore, accepting such rush orders may affect the quality of service and also
timely delivery may not be complied with. Hence, the goodwill and brand name will be
affected which in turn will affect the future profitability. Though immediate monetary
benefits are seen, long time consequences also need to be analysed before accepting
such rush orders. The firm manager would need to consider both the short-run benefits
from accepting the order and the long-run consequences on profitability.
Question 20
During September 2020, Sandy offers bundling and item packing facilities (for standard size
24”×12”×10”) to give best facility to satisfy its industrial customers’ need at the Great Ocean
Warehouse. Sandy plans to pack 93,750 items at the rate of 4.50 per item. Sandy estimates
that variable cost (all resources) will be equal to 1.50 per item packed and that fixed costs
(rent, electricity, and maintenance charges) will be equal to 58,000 p.m. In September 2020,
Sandy packed 1,12,500 items and received 5,06,250 as total revenue. However, Sandy paid
1,80,000 on resources (including urgent purchase of tape at retail price). In addition, Sandy
paid 70,000 to the warehouse administration for rent, electricity, and maintenance charges.
(This past September was unusually hot, and Sandy is charged a percentage of the
warehouse’s actual electricity bill.)
Required
PREPARE a budget reconciliation report along with suitable analysis.
Answer
Workings
The following table shows Sandy’s budget profit and actual profit for the month of September
2020:
Particulars Budgeted Profit Actual Profit
Items packed 93,750 1,12,500
Revenue ( 4,21,875 5,06,250
Less: Variable Costs 1,40,625 1,80,000
Contribution Margin ( 2,81,250 3,26,250
Less: Fixed Costs 58,000 70,000
Profit ( 2,23,250 2,56,250
Analysis
Sandy’s standard selling (packing) price is 4.50 per item and her standard variable cost is
1.50 per item. Therefore, Sandy’s budgeted revenue = 93,750 × 4.50 = 4,21,875 and her
budgeted variable costs = 93,750 × 1.50 = 1,40,625. From the table, we can identify that

Sandy’s actual profit for September 2020 was 33,000 higher than his budgeted profit
( 2,56,250 – 2,23,250) i.e., Sandy’s total profit variance is 33,000 (F).
Sandy’s sales contribution volume variance equals to the difference between his standard
contribution and budgeted contribution. Each item is budgeted to contribute 3.00 toward
profit; since Sandy packed 18,750 more items than budgeted, the increase in volume should
have contributed 56,250 = 18,750 × 3.00 to actual profit. Therefore, Sandy’s sales
contribution volume variance is 56,250 (F).
Sandy’s overall variable cost variance equals to the difference between her standard
variable costs and her actual variable costs, or 1,68,750 – 1,80,000 = 11,250 (A). But
there is not adequate data to segregate Sandy’s variable cost variance into price and quantity
elements. To compute these variances, we would require the amount of resources Sandy
budgets to use per item packed and the actual & budgeted price of each resource (i.e., an
adverse variable cost variance can arise as Sandy used more resources per item packed
and/or She paid more than budgeted for the resources used). While the issue appears to
suggest that Sandy’s adverse variable cost variance arose due to spending more on tape than
planned, it is not sure that the entire 11,250 variance is attributable to this. In fact, it is likely
that the tape price variance was greater than 11,250 (A) and that Sandy had a favorable
resource quantity variance to offset this.
Sandy’s fixed cost expenditure variance equals the difference between budgeted and actual
fixed costs, or 58,000 – 70,000 = 12,000 (A).
We can now prepare the following budget reconciliation report:
Item Amount ( )
Budgeted Profit 2,23,250
Sales Volume Variance 56,250 (F)
Variable Cost Variance 11,250 (A)
Fixed Cost Expenditure Variance 12,000 (A)
Actual Profit 2,56,250
Question 21
Healthcare hospital provides medical care to patients to all strata of the society at nominal
cost. Hospital has been operating for the last 15 years. It gets grant from the government that
helps it sustain its operations. Each year an annual report is submitted to the officials in the
health ministry that is in charge of giving out grants to hospitals. Each year over the last 15
years, grants given to the hospital has been increasing. This increment was found necessary
to meet the increase in operational costs due to inflation. While operations have been
moderately successful in the recent years, the grants committee is of the opinion that the
hospital can manage its funds better.

To benchmark performance, performance of Healthcare hospital is being compared with the

performance of another government funded hospital within the same city, Lifeline hospital.
Both hospitals have similar scale of operations and get the same amount of grant. Given
below are some of the parameters that are tracked at both hospitals:
Healthcare Lifeline
Operational Parameters Hospital Hospital
Budget Actual Actual
Total inpatients 1,10,000 96,000 1,00,000
Delay in admission due to unavailability of beds
Number of inpatients waiting for more than 1 week 1,100 2,880 500
Number of inpatients waiting for more than 2 weeks - 960 -
Total outpatients 90,000 95,000 93,000
Delay in appointment due to unavailability of medical
staff
Number of outpatients waiting for more than 1 week 900 1,900 465
Number of outpatients waiting for more than 2 weeks - 475 -
Number of emergency admissions 400 600 500
Delay in providing medical care to emergency - 5 -
admissions
Number of medical staff shortages 3 5 1
(positions not filled for more than one month)
Cancelled or delayed operations (due to non-clinical 5 20 6
reasons)
Number of complaints received related to medical care 500 1,350 600
Number of complaints resolved within 15 days 500 1,080 550
Number of deaths post operation (all inpatients) 4,400 2,880 2,000
Number of medical negligence case that the hospital lost 2 5 -
Number of errors in prescription of drugs 15 45 10
Number of infection outbreaks within the hospital - 2 -
Bed occupancy rate 90% 85% 94%
Average patients stay (days) 4 6 5
Operating theatre utilization rate 95% 90% 95%
Revenue including government grant (in crores) 15 13 16
Operating expenses (in crores) 12 12 12
ROI 8% 5% 9%
Staff Training sessions (hours) 500 500 600
Research publications 5 3 6

- Both hospitals have 50 wards with 10 beds in each ward.

- Each hospital has 50 doctors from various specialties and 75 nurses.
- Both hospitals were open all days of the year.
Required
(i) The grants committee wants to ANALYZE performance of both hospitals with respect to:
- Access to services
- Clinical performance
- Efficiency of operations
- Financial management
- Innovations
(ii) While preparing the balanced scorecard, how will you CATEGORIZE the above
performance measures?
Answer
(i) Analysis of Performance with respect to:
Access to Services
Access to services is an indicator of whether patients are able to get medical care when
they need it. Better access to medical service will improve chances of recovery for the
patients. Given the information in the problem, this can be assessed using the following
parameters:
(a) Delay in admission to inpatients due to unavailability of beds.
(b) Delay in appointments to outpatients due to unavailability of medical staff.
(c) Delay in providing medical care for emergency admission.
(d) Number of medical staff shortages.
(e) Cancelled or delayed operations.
The hospital should aim at reducing the delay and shortages in order to provide patients
with better access to medical services.
(a) Delay in admission to inpatients due to unavailability of beds:
As per the hospitals’ policy, patients who need admission have to be accommodated
within 1 week to get access to services. Any delay beyond this period is tracked by
their information system. For delays, due to unavailability of beds, the hospitals are
tracking two-time lags, delay by more than a week and delay by more than 2 weeks.
Unavailability of beds shows that there are constraints in the capacity of patients to
whom the hospital can provide service.

Healthcare Lifeline
Total inpatients 1,10,000 96,000 1,00,000
Delay in admission due to unavailability of beds
Number of inpatients waiting for more than 1 week 1,100 2,880 500
Number of inpatients waiting for more than 2 weeks - 960 -
Percentage of inpatients denied access to service
by more than 1 week 1.00% 3.00% 0.50%
by more than 2 weeks 0.00% 1.00% 0.00%
As can be seen, Healthcare hospital has a target to provide admission within a week
to 99% of inpatients, delay beyond a week may happen only in 1% of cases. Delay
beyond 2 weeks should not occur. However, actual performance indicates that
Healthcare hospital could provide admission within a week only to 96% of inpatients.
There has been a time lag of more than a week in providing admission to 3% of the
inpatients. This is already 2% more than the target. Further, time lag beyond 2
weeks in providing admission has occurred in 1% of inpatients. Therefore, 4% of the
inpatients had to wait for more than a week, in some cases more than 2 weeks, to
get admission. In contrast at Lifeline hospital, only 0.5% of inpatient faced time lag
of more than a week in getting admission to the hospital. There were no instances
where patients requiring admission had to wait more than 2 weeks.
This shows that Lifeline hospital provides better access to services as compared to
Healthcare hospital.
(b) Delay in getting appointment due to unavailability of medical staff:
Healthcare Lifeline
Total outpatients 90,000 95,000 93,000
Delay in appointment due to unavailability of medical staff
Number of outpatients waiting for more than1 week 900 1,900 465
Number of outpatients waiting for more than 2 weeks - 475 -
Percentage of inpatients denied access to service
by more than 1 week 1.00% 2.00% 0.50%
by more than 2 weeks 0.00% 0.50% 0.00%

As per the hospitals’ policy, outpatients should be able to get appointment within a
week to meet the medical staff. Delay beyond a week is tracked by the hospital’s
information system as delay beyond a week and delay beyond two weeks.
Healthcare hospital targets to provide appointments to meet medical staff within 1
week to 99% of the outpatients. Delays due to unavailability of medical staff can
occur only in 1% of the cases. However, actual appointment schedule indicates that
2% of the outpatients had to wait for more than 1 week and 0.5% of the outpatients
had to wait for more than 2 weeks to meet the doctor. This indicates that Healthcare
hospital has not been able to meet its target. To improve performance, the reason
for unavailability of medical staff has to be understood. It might indicate that more
hiring is needed or high medical staff turnover.
In comparison, Lifeline hospital has provided better services to outpatients, only
0.5% of the patients had to wait beyond a week to get appointment with the doctor
(c) Delay in providing medical care to emergency admission patients:
In the case of Healthcare hospital, there were 5 instances when medical care could
not be provided to emergency admission patients immediately. The hospital aims
never to have such instances however this target has not been met. In case of
emergencies, medical care is required urgently, any delay may impact recovery of
the patient. Reasons for the delay in providing medical care to such patients have to
be investigated. Lifeline hospital has been able to provide medical care immediately
to all its emergency admission patients.
(d) Medical staff shortages:
The hospital should have enough doctors and nursing staff at any point in time to be
able to provide good quality of medical care to patients. If there are vacancies, the
existing staff have to bear extra patient load. This could lead to delays, some of
which have been outline above. This results in patients getting lesser access to
medical services when they need it. Healthcare hospital has 5 medical staff
vacancies that have been vacant for more than a month, as compared to the target
of 3. There are lesser resources available to provide patient care. In comparison,
Lifeline hospital has only 1 position that was vacant for more than a month.
(e) Cancelled or delayed operations due to non-clinical reasons:
When operations are cancelled or delayed are cancelled due to non-clinical
reasons, it indicates that there are administrative issues that deny patients access
to medical care. Possible reasons could be unavailability of operation theaters,
unavailability of medical staff or unavailability of required instruments or medicines.

Compared to an expected 5 such instances, the actual cancellations or delays have

been 20 in the case of Healthcare hospital. This is a huge variation that needs to be
investigated. Given in the problem that operation theaters are used only to 90% of
their availability. Possibly cancellations are not due to unavailability of operation
theaters. It could be due to medical staff shortage or unavailability of instruments.
Reasons have to be investigated to take appropriate action. Comparatively, such
instances are fewer in the case of Lifeline hospital.
Clinical Performance
Clinical performance can be evaluated by looking at the quality of actual work performed.
The parameters to look at are:
Healthcare Lifeline
Number of complaints received related to medical care 500 1,350 600
Number of complaints resolved within 15 days 500 1,080 550
Number of deaths post operation (all inpatients) 4,400 2,880 2,000
Number of medical negligence case that the hospital
lost 2 5 -
Number of errors in prescription of drugs 15 45 10
Number of infection outbreaks within the hospital - 2 -
(a) Number of complaints received related to medical care:
As can be seen from the table, the number of complaints received by Healthcare
hospital is more than twice the expected volume. Only 80% of these have been
resolved within the time frame of 15 days. Comparatively, Lifeline hospital gets
fewer complaints also the complaint resolution rate within the given framework is
much higher at 92%.
(b) Number of deaths post operation:
The actual deaths post operations are much lesser. While this is a good indication
of quality, the objective of the hospital should be to keep this as low as possible.
Lifeline hospital has a lower mortality than Healthcare. Good quality medical care
can contribute towards preventing deaths post operation.
(c) Number of medical negligence case that the hospital has lost:
The fact that the hospital has lost a case of medical negligence shows that the
quality of clinical care provided is questionable. In this case of Healthcare hospital,
the number of such cases lost is 5. This is in excess of an expected loss of 2 cases.
This indicates that quality of clinical care is found wanting at Healthcare hospital.
Lifeline hospital has not lost any case of medical negligence implying that quality of
medical care is better than Healthcare.

(d) Errors in prescription of drugs:

Prescription of drugs to cure an aliment should always be accurate. Any errors could
be disastrous to the patient’s health. Compared to the expectation, Healthcare has
three times the number of prescription errors. This shows that medical staff have
been negligent in providing their service. Again, Lifeline hospital has a better record
comparatively.
(e) Infection outbreak in hospital premises:
Outbreak of infection within hospital premises indicates that proper standards of
hygiene are not being maintained at Healthcare hospital.
Efficiency of Operations
Operating efficiency can be assessed using the following parameters:
Healthcare Lifeline
Bed occupancy rate 90% 85% 94%
Average patient stay (days) 4 6 5
Operating theatre utilization rate 95% 90% 95%
(a) Bed occupancy rate:
Bed occupancy is a factor that is dependent on the number of inpatient admissions.
While this factor cannot be controlled by Healthcare, it is important to track this ratio
to look at capacity utilization. The bed occupancy rate is lower than the expected
rate. If this persists over a longer period, the hospital may want to explore the option
of scaling down the number of wards and beds. The space freed up can be utilized
for some other productive purpose.
However, as explained in point (a) above, 4% of the inpatients at Healthcare
hospital are being denied admission due to unavailability of beds. This is a
contradiction that needs to be investigated. Possible reasons could be
administrative ones like inability to get the room and bed on time once the previous
patient vacates. Else there may be miscommunication between the department
discharging patients and the department admitting patients. Bed occupancy may not
be tracked on real time basis due to which these delays in admission have occurred.
Lifeline hospital has an occupancy of 94% that shows that it has just the sufficient
number of beds to meet demand.
(b) Average patient stay (days) in the hospital:
On an average a patient is staying in the hospital for 2 days more than the target of
4 days. While this factor is dependent on the type of ailment, lower the patient stay
the higher can be the bed occupancy rate. That means more patients can utilize the

same resources if patient stay is shorter. This may be needed when there is a
constraint on the beds available, which is not the scenario in the current case.
However, before taking action to improve bed occupancy rate, a hospital should
ensure that quality of medical care given is not compromised.
In the given problem, bed occupancy is only 90% at Healthcare hospital. Therefore,
the hospital can afford to have longer patient stay. Lifeline hospital has 1 lesser
patient stay day, only marginally different from Healthcare’s record. In both cases,
since there is no constraint on bed occupancy, higher average patient stay can be
managed without any constraint.
(c) Operating theater utilization rate:
Utilization of operating theater is subject to the nature of treatment, something that
cannot be controlled by a hospital. However, it is necessary to track this parameter
since it shows whether the facilities that are currently in place are sufficient and are
utilized properly. Again, at 90% Healthcare hospital has a lower operating theater
utilization rate compared to the expected usage. If this continues in the long run, the
number of operating theaters can be reduced to make resources available for other
uses.
Lifeline hospital has a higher utilization rate at 95%, indicating more efficient use of
resource.
(d) Medical staff shortage:
Medical staff is the most important resource at a hospital. Higher vacancies could
imply higher staff turnover. A possible reason could be dis-satisfaction with the
employer. Healthcare should understand the reason for have 5 positions that it has
not been able to fill in within 30 days. Since this reduces the number of staff
available, efficiency of the hospital will suffer. Comparatively, Lifeline makes better
use of its medical staff since only one position was vacant for more than a month.
Financial Management
Healthcare hospital has an actual surplus of `1 crore compared to a budget of `3 crores.
(Surplus = Revenue – Operating expense). ROI of 5% is below the target of 8%. The
grants committee feels that there is a wastage of funds at the hospital. Therefore, areas
of wastage should be identified such that operating expenses can be controlled better.
Lifeline hospital has a surplus of `4 crores. Since there are other hospitals like Lifeline
that are vying for grant, Healthcare has to make itself competitive in this respect.
Therefore, it has to be more efficient, effective and economical in its operations.
Innovations
Research publications indicate that newer discoveries have been made in fields that can
further the horizons of knowledge. Therefore, research publications are an important
indicator of innovation.
While staff training is not directly related to innovations, they do keep the experts up to
date in their subject area of expertise.

(ii) Performance Measures Categorized into the Balance Scorecard

- Customer Perspective would include availability of service measures and clinical
performance measures.
- Internal Processes Perspective would include measures used to determine
efficiency of operations.
- Financial Perspective would include details of the surplus generated and ROI.
- Learning and Growth Perspective would include staff trainings and research
publications.
Combined with other parameters that the grant committee finds important the balanced
scorecard can benchmark the hospital’s performance with its own targets and the
performance of Lifeline hospital. Decision to extend grants and its quantum can be
decided on this basis.
Students may note that this is comprehensive question covering various aspects of
performance measurement. While analyzing performance in this particular question
students may treat each part (like access to service, clinical performance, efficiency of
operations) as a separate question.
Question 22
Learning Horizons is an educational institute that conducts courses for students in accounting,
law and economics. The institute is partially funded by the government. The institute aims to
provide quality education to students of all backgrounds. The institute admits students who can
fund their education privately as well as those who get sponsorship from the government.
Knowledgebase is another educational institute in the same city providing courses similar to
Learning Horizons. It is entirely private funded college where students arrange to pay for their
own fees. It can be taken as a peer institution for comparison purposes.
Information about their operations for the year ended March 31, 2020 are as follows:
(1) Both Learning Horizons and Knowledgebase offer their courses that last the entire
year. All of them are regular classroom lectures conducted through the week.
(2) Budget and actual fee rate structure for the year are the same. Information about the
fees for each course are as follows:
Budget and Actual Fees in `
Learning Horizons Knowledgebase
Course
Privately Government Privately
Type
Funded Funded Funded
Accounting 1,20,000 75,000 1,00,000
Law 1,20,000 90,000 1,50,000
Economics 80,000 60,000 1,00,000

(3) Salary details for lecturers and administrative staff are as follows:
Salaries in `
Staff Type
Budget Actuals Actuals
Lecturers 5,00,000 5,50,000 6,00,000
Administrative staff 3,00,000 3,00,000 4,00,000
(4) Budgeted costs for the year based on 8,500 students per annum for Learning
Horizons are as below:
Costs Amount ` Variable Cost % Fixed Cost %
Tuition Material 40,00,00,000 100% ---
Catering 10,00,00,000 75% 25%
Cleaning 1,00,00,000 25% 75%
Other operating costs* 5,00,00,000 25% 75%
Depreciation 1,00,00,000 --- 100%
* includes cost of freelance staff
(5) Actual costs (other than salary costs) incurred during the year:
Costs Learning Horizon Knowledgebase
Tuition Material 42,00,00,000 40,00,00,000
Catering 10,00,00,000 13,00,00,000
Cleaning 1,00,00,000 1,50,00,000
Other Operating Costs* 6,00,00,000 5,00,00,000
Depreciation 1,00,00,000 1,50,00,000
* includes cost of freelance staff
(6) Keeping in line with latest technological developments, the management of
Knowledgebase is introducing on-line tuition support by its lecturing staff. Learning
Horizons on the other hand offers distance learning course. A general feedback
from prospective students has revealed that some students would like weekend
courses since during the week they focus on their regular jobs. Also, some students
have requested for intermediate qualification, in the event that they discontinue the
course halfway due to inability to complete the course or for other personal reasons.
(7) Both Learning Horizon and Knowledgebase have a policy to have a lecture staff of
50 throughout the year. When there is a shortfall in teaching staff available, instead
of recruiting a fulltime lecturer, Knowledgebase substitutes the requirement with
freelance staff for lectures. The cost of freelance staff is much lower than regular
staff.

(8) Appendix with further details:

Sundry Statistics
For the year ended 31st March 2020
Learning Knowledge-
Horizons base
Particulars
Budget Actuals Actuals
Number of students:
Accounting 4,000 3,800 4,100
Law 2,500 2,550 2,500
Economics 2,000 1,500 1,200
Total students 8,500 7,850 7,800
Student mix (%) for each course:
Privately funded 80% 70% 100%
Government funded 20% 30% 0%
Number of enquiries received:
Accounting 4,500 4,500 4,600
Law 2,800 2,700 3,050
Economics 2,200 1,600 1,225
Total enquiries 9,500 8,800 8,875
Number of lecturers employed during the year 50 50 50
Number of lecturers recruited during the year:
Accounting 2 4 1
Law 1 3 -
Economics 1 3 -
Total recruitment 4 10 1
Number of administrative staff 12 12 9
Pass Rate:
Accounting 95% 99% 93%
Law 95% 98% 90%
Economics 95% 95% 95%
Overall Pass rates for the courses 95% 97% 93%
Days in a year when freelance lecturers were
used - - 30
Number of new courses under development - - 6
You are the management accountant of Learning Horizons. The results for the year
are to be reviewed next week by the management. To assess performance, you
want to prepare the report as per the Fitzgerald and Moon model.

Required
(i) Using the “Results” dimension of performance as per the Fitzgerald Moon model
prepare a variance ANALYSIS of Learning Horizons actual and budgeted financial
performance. Also, based on the information given in the problem, collate the actual
financial figures for Knowledgebase, use it as a basis to prepare ANALYSIS of
competitiveness of Learning Horizons and Knowledgebase.
(ii) Using the “Determinants” dimension of performance as per the Fitzgerald Moon model
EXPLAIN
(a) Quality of service
(b) Flexibility
(c) Resource utilization
(d) Innovation
(iii) Course fees set by the government for various subjects cannot be increased beyond
an average of `75,000 per student. If the costs are maintained within this budget, the
government can provide more sponsorship or grants in future. ADVISE a method that
the management of Learning Horizons can use to resolve this.
Answer
(i) Analysis of the “Results” dimension of performance as per the Fitzgerald and Moon
model
Financial Performance of Learning Horizons and Knowledgebase
The original budget had been prepared for 8,500 students, while actual enrollments are
7,850 students. At the very onset, reasons for lower enrollments have to be found and
analyzed. For comparison of actual and budget, the budget of Learning Horizons has to
be flexed to scale. Hence the budget needs to be scaled down to 7,850 for preparing a
variance analysis.
Particulars Budget Actual Actual
Number Amount ` Number Amount ` Number Amount `
Revenue
(a) Private Funded
Accounting 2,955 35,46,00,000 2,660 31,92,00,000 4,100 41,00,00,000
Law 1,847 22,16,40,000 1,785 21,42,00,000 2,500 37,50,00,000
Economics 1,478 11,82,40,000 1,050 8,40,00,000 1,200 12,00,00,000
subtotal (a) 6,280 69,44,80,000 5,495 61,74,00,000 7,800 90,50,00,000
(b) Government
Funded
Accounting 739 5,54,25,000 1,140 8,55,00,000 --- ---

Law 462 4,15,80,000 765 6,88,50,000 --- ---

Economics 369 2,21,40,000 450 2,70,00,000 --- ---
Subtotal (b) 1,570 11,91,45,000 2,355 18,13,50,000 --- ---
Total Revenue (a)+(b) 7,850 81,36,25,000 7,850 79,87,50,000 7,800 90,50,00,000
Expenditure
Salaries
Lecturers 50 2,50,00,000 50 2,75,00,000 50 3,00,00,000
Administrative 12 36,00,000 12 36,00,000 9 36,00,000
staff
subtotal of 62 2,86,00,000 62 3,11,00,000 59 3,36,00,000
salaries
Tuition Material 36,94,11,765 42,00,00,000 40,00,00,000
Catering 9,42,64,706 10,00,00,000 13,00,00,000
Cleaning 98,08,824 1,00,00,000 1,50,00,000
Other Operating 4,90,44,118 6,00,00,000 5,00,00,000
Costs
Depreciation 1,00,00,000 1,00,00,000 1,50,00,000
Total Expenditure 56,11,29,413 63,11,00,000 64,36,00,000
Net Profit 25,24,95,587 16,76,50,000 26,14,00,000
Note
(1) Original revenue budget is for 8,500 students. Actual enrolments are 7,850 students. For
comparison, the budgeted revenue has also been adjusted to 7,850 students. The mix
between private and government funded students is 80:20 as per the budget. The adjusted
student strength is allocated between the courses based on the original budget student
strength.
For example, out of the total strength of 7,850 students, based on the budget ratio, 80% are
taken to be privately funded. This works out to 6,280 students. The strength for flexible budget
for accounting course will be = (6,280 × 4,000/8,500) = 2,955 students. Likewise, the strength
for flexible budget for other courses is calculated in a similar manner.
(2) The budgeted expenses are for 8,500 students. Actual students are 7,850. For comparison,
variable costs in the budget have been adjusted for 7,850 students. Fixed costs remain the
same. For example, tuition material has a budget of `40 crore for 8,500 students. This is
100% variable, therefore adjusted budget for 7,850 students would be `40 crore /8,500 ×
7,850 students. The total budgeted cost for 7,850 students is therefore 37 crore.
Semi-variable costs in the budget, are separated as fixed portion and variable portion for the
purpose of recalculation. For example, catering cost is ` 10 crore for 8,500 students, of which
`2.5 crore is fixed. The balance `7.5 crore is for 8,500 students are is variable. The budgeted
cost per student is therefore `8,823. For 7,850 students, the variable cost works out to `6.93
crore. Adding the fixed cost, the total budget for catering for 7,850 students is `9.43 crore.
Likewise, the budgeted cost for cleaning and other operating expenses is calculated in a
similar manner.

Analysis of Actual Financial Performance with respect to Budget

(a) Originally the student strength was expected to be 8,500 in comparison to an actual
number of 7,850. The reason for this shortfall in enrollment should be analyzed by
looking into non-financial performance measures.
(b) On the revenue side, actual revenue of `80 crore is marginally lower than the
adjusted budget of `81.4 crore. Since the budget and actual course fee rates are
the same, the reason for this difference is on account of the mix between the private
and government funded students. Actual enrollments had a greater ratio of
government funded students, for which the fees are lower. As per the flexed budget,
government funded students were expected to be 1,570 versus an actual of 2,355,
higher by 50%. Reasons for the change in student mix from a budget of 80:20 to
actual mix of 70:30 has to be analyzed.
(c) On the expenditure side, actual costs of `63 crore is 12% more than the
corresponding budget of `56 crore. The increase for salaries over budget is
because a higher market rate that has to be paid for a lecturer. Given that
Knowledgebase also pays a higher rate, the budget may need to be amended to
reflect a more realistic salary rate. The other major variance is on account of the
tuition materials procured for the students. While the budget for 7,850 students is
only `37 crore, the actual expenditure is `42 crore. Reasons for this large variation
has to be analyzed. Reasons could reflect the quality of education imparted. If in
reality better quality study materials costs more, the management has to decide
whether they would be willing to incur this additional cost. This might have a further
impact on the fees charged to privately funded students and the management may
also want to ask for increase in the government sponsored fee rate.
(d) Overspend is noticed in other operating costs as well, actual cost is `6 crore versus
`4.9 crore budget. As mentioned in the problem, 75% of this cost is fixed in nature,
amounting to `3.75 crore (75% of `5 crore original budget). This portion of the cost
should remain the same irrespective of variation in student enrollments. The
remaining portion of the budget `1.15 crore is variable. The actual spend is `6
crore, of which ideally `3.75 crore would be fixed. If there is any variation in fixed
cost, it should be looked into. If justified, future budgets need to be adjusted to
reflect the higher cost. The remaining variable portion should also be analyzed to
understand the reason for the higher spend.
(e) Overall, the impact of lower revenue and higher cost, has resulted in a shortfall of
`8.48 crore (34% shortfall) as compared to the adjusted budget for 7,850 students.
Action should be taken by further studying other parameters like competitor’s
performance and other non-financial factors like quality of education, pass rate,
innovation.
Competitive Performance of Learning Horizons and Knowledgebase
The average revenue and cost per student for Learning Horizons and Knowledgebase
are as below:

Average Revenue and Cost per student
Particulars Learning Horizons Knowledgebase

Total revenue (`) 81,36,25,000 79,87,50,000 90,50,00,000
Number of students 7,850 7,850 7,800
Revenue per student (`) 1,03,646 1,01,752 1,16,026
Total cost (`) 56,11,29,413 63,11,00,000 64,36,00,000
Number of students 7,850 7,850 7,800
Cost per student (`) 71,481 80,395 82,513
The cost per student at Learning Horizons is marginally lower than Knowledgebase.
However, the revenue per student at Knowledgebase is much higher. Analyzing the
components further:
(a) Student Mix: Knowledgebase has higher revenue by more than 10 crore,
almost 13.3% higher compared to Learning Horizons. Reasons could be on
account a higher fee rate structure at Knowledgebase as compared to Learning
Horizons, where part of the fee structure is government funded at a lower rate.
(b) Course Rate: Learning Horizons charges `1,20,000 per year for its
accountancy course which is higher compared to Knowledgebase’s rate of
`1,00,000 per year. This might be a reason for a higher enrollment at
Knowledgebase of 4,100 students compared to Learning Horizons enrollment
of 3,800 for the same course. The management has to verify if this higher rate
is sustainable.
(c) Course Rate: Learning Horizons charges `1,20,000 for its law course
compared to `1,50,000 at Knowledgebase. However, despite being lower, the
enrollment for the course is almost the same. The management has to look at
non-financial parameters related to quality, in order to improve enrollments for
this course.
(d) Course Rate: Learning Horizons charges `80,000 for its economics course
compared to `1,00,000 at Knowledgebase. Consequently, it is able to have
higher enrollment for its economics course.
(e) Compared to Learning Horizons, Knowledgebase is incurring `2 crore lesser
on tuition materials. As pointed out earlier, Learning Horizons must try to find
out reasons for its higher cost and try to economize on this expense, if
required.
(f) Knowledgebase has been using freelance staff for 30 days in a year to keep its
expenses lower. Therefore, although it has a higher pay scale for its lecturers,
it uses a lower cost resource to meet its teaching staff requirements.
Compared to 1 new recruitment by Knowledgebase, Learning horizons has 10
new recruitments during the year. Knowledgebase has substituted any

shortfall in teaching staff by hiring freelancers during the year. At the same
time, non-financial aspects like quality of education need to be assessed while
using the service of freelancers.
(g) The other indicator of competitive performance, the take up rate, the rate of
conversion of enquiries from prospective students into enrollments for the
course. Reference to the budget here is the original budget prepared for 8,500
students, which represents the capacity that Learning Horizons wants to
achieve.
Learning Horizons Knowledge.
Particulars
Accounting - number of students 4,000 3,800 4,100
Number of enquiries 4,500 4,500 4,600
Take up rate 89% 84% 89%
Law - number of students 2,500 2,550 2,500
Economics - number of students 2,000 1,500 1,200
Overall - number of students 8,500 7,850 7,800
The take up rate is lower for accounting course at Learning Horizons as
compared to Knowledgebase. As explained in point (b), this may be attributed
to the higher rate that Learning Horizons charges privately funded students.
The higher rate should be justifiable.
The take up rate for law is higher compared to Knowledgebase. As explained
in point (c) this could be due to the lower fee rate. Higher enrollment could
indicate the popularity of the course. At the same time the comparative pass
rate may have to be looked into to judge the quality of the course.
The take up rate for economics is marginally lower than Knowledgebase.
However, overall enrollment for this course is much higher compared to
Knowledgebase, possibly to the substantially lower rate offered for the course.
The management could look at better publicity to improve the take up rate.

(ii) Analysis of the “Determinants” dimension of performance as per the Fitzgerald

and Moon model
Quality of Service
The pass rate for each course indicates the quality of course offered. Summarizing
from the problem:
Pass rate
Accounting 95% 99% 93%
Law 95% 98% 90%
Economics 95% 95% 95%
Overall Pass rates for the courses 95% 97% 93%
The targeted pass rate of 95% has been met in all courses, thereby it indicates that
a satisfactory level of education is being imparted. In comparison with
Knowledgebase the pass rate for all courses is higher, which is a good indicator.
This could be a reason to justify the use of fulltime staff instead of substituting it with
freelancer staff.
In the case of accountancy, the management can use the higher pass rate to justify
the higher course rate, which may lead to better enrollments for the course. In the
case of law, it has the potential of becoming a very popular course, lower course fee
with higher pass rate. This can be used to improve enrollments. In the case of
economics, the pass rates are at par. The management may use the lower course
fee to attract students else may find other ways to make the course more attractive
to have higher enrollments.
Feedback from current students and the institute’s alumni also provide value
information about the quality of the courses and opportunities to improve.
Flexibility
The management of Learning Horizons has to consider the feedback from current
and prospective students in order to bring in flexibility to their services. While long
distance learning offers some flexibility, the management has to look at alternate
channels of delivery like online lecture support by faculty similar to the model that
Knowledgebase has developed. Also, offering weekend courses could help improve
enrollments. Providing the option to get an intermediate degree gives flexibility to
students who are not able to cope up with the course. While this cannot be a main
objective of the institute, it still can maintain its motto of imparting quality education
for students of all backgrounds.

The main resource of an educational institute is its staff. Management of Learning
Horizon has to look at the teacher student ratio and compare it to benchmarks of
peer institutes. Learning Horizons is having a higher recruitment of 10 lecturers for
the year as compared to a budget of 4 recruitments for the year. Reasons for the
same need to be looked into. One reason could be a higher turnover ratio among
lecturers due to lower salary paid in comparison to the market rate. In comparison,
Knowledgebase has a more stable staff, having a recruitment of only 1 lecturer
during the entire year. This might be due to the use of freelance teaching staff.
Learning Horizon can explore options of using freelance teaching staff to meet its
teaching needs, without compromising quality of education.
Innovation
From the information provided, Learning Horizons has a better quality of service in
terms of pass rates. However, Knowledgebase planning to offer 6 new courses in
the future. Learning Horizons has to explore options to improve on its current course
offerings in order to maintain its market share.
(iii) There is a limit to fees sponsored by the government. Currently, government funded
revenue is `18 crore, almost 23% of the total revenue of 80 crore. Average actual
cost per student, referring to the table above, is `80,395. Since the government is
unwilling to spend more than `75,000 per student, the management could look at
target costing methods to resolve this issue. This reduction of `5,395 per student
can be achieved by identifying opportunities to economize on costs. If feasible, the
cost per student can be calculated for each of the courses, to identify where these
economies can be achieved. This drive should encompass the administration and
support services too. Thus, using target costing approach, the cost can be reduced
below `75,000 to make government funded education profitable, within reasonable
limits.
Students may note that this is comprehensive question covering various aspects of
Fitzgerald Moon model. While analyzing performance in this particular question students
may treat each part/ sub-part (like financial performance, competitive performance
etc.) as a separate question.
Question 23
NEC Ltd. forms a Committee consisting of its Production, Marketing, and Finance Directors to
prepare a budget for the next year. The Committee submits a draft budget as detailed below:
Particulars `
Selling Price per unit 50
Less: Direct Material Cost per unit 9
Direct Labour Cost per unit 9

Variable Overhead per unit (3 hrs. @ `2) 6

Contribution per unit 26
Budgeted Sales Quantity 25,000 units
Budgeted Contribution (25,000 × `26) 6,50,000
Less: Budgeted Fixed Cost 5,00,000
Budgeted Profit 1,50,000
The Management is not happy with the budgeted profit as it is almost equal to the previous
year's profit. Therefore, it asks the Committee to prepare a budget to earn at least a profit of `
3,00,000. To achieve the target profit, the Committee reports back with the following
suggestions:
The unit selling price should be raised to ` 55.
The sales volume should be increased by 5,000 units.
To attain the above said increase in sales, the company should spend ` 40,000 for
advertising.
The production time per unit should be reduced.
To win the acceptance of the workers in this regard the hourly rate should be increased by ` 3
besides an annual group bonus of ` 30,000.
There is no change in the amount and rates of other expenses. The company has sufficient
production capacity.
As the implementation of the above proposal needs the acceptance of the work force to
increase the speed of work and to reduce the production time per unit, the Board wants to
know the extent of reduction in per unit production time.
Required
(i) CALCULATE the target production time per unit and the time to be reduced per unit.
(ii) IDENTIFY the other problems that may arise in production due to decrease in unit
production time and also suggest the remedial measures to be taken.
(iii) STATE the most suitable situation for the adoption of Target Costing.
Answer
(i) Target Production Time per unit
(`3 + `3 + `2) × hrs. × 30,000 units = `5,10,000
Hrs. = 2.125
Time to be reduced per unit = 3 hrs. – 2.125 hrs.
= 0. 875 hrs.

Workings
Statement Showing Target Cost (Direct Labour and Variable Overhead)
Particulars Amount (`)
Target Sales (`55 × 30,000 units) 16,50,000
Less: Target Profit 3,00,000
Less: Direct Material Cost (`9 × 30,000 units) 2,70,000
Less: Budgeted Fixed Costs 5,00,000
Less: Proposed Advertising 40,000
Less: Proposed Annual Group Bonus 30,000
Target Cost (Variable Overhead and Direct Labour) for 30,000 units 5,10,000
(ii) Problem
The target-costing method is applicable particularly for repetitive manufacturing. It should
however be recognised that some products often bear a high degree of repetition and
that there often are considerable repetitions where reduction targets could come into play
as a framework for improving design. Working under pressure to finish new design
assignments in a short time may take development resources away from efforts to
optimise or re-engineer production processes. If approaching product design as an
activity to be optimised independently there is a risk that target costing may not succeed
to satisfactorily addressing overall performance, so in short decrease in unit production
time may lead to unwanted pressure on design and its implementation stage.
Remedial Measures
As a remedial action organisation should retain strong control over the design teams
headed by a good team leader. This person must have an exceptional knowledge of the
design process, good interpersonal skills, and a commitment to staying within both time
and cost budgets for a design project. If the time is too short even an organisation may
reject a project for the time being. Later, it can be tried out with new cost reduction
methods or less expensive materials to achieve target cost and control overall production
activities.
(iii) Target costing is most useful in situations where the majority of product costs are locked
in during the product design phase. This is the case for most manufactured products, but
few services. In the services area, such as consulting, the bulk of all activities can be
reconfigured for cost reduction during the “production” phase, which is when services
are being provided directly to the customer. In the services environment, the “design
team” is still present but is more commonly concerned with streamlining the activities
conducted by the employees providing the service, which can continue to be enhanced
at any time, not just when the initial services process is being laid out.

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FINAL COURSE

(Revised Scheme of Education and Training)

CASE STUDY DIGEST

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Edition : February, 2021

Committee/Department : Board of Studies

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Happy Reading and Best Wishes!

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You are newly appointed management consultant with experience in non-finance

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(ii) Building Block Model

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(i) Is favourable variance being conclusive proof of efficiency, or investigation of

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So even favourable variances need to be investigated. To understand this statement a

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Log Y = 1.3010 – 0.152 × (0.6990)

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 Efficiency ratio indicates the degree of efficiency attained in production. It is

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(i) DRAW Value Chain and EXPLAIN briefly.

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(iii) Strategy at SDC

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Post conclusion of meeting, CEO requested you (Management Accountant) to–

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Non-Financial Performance Indicators are sustainable action-based indicators. For

Management of Human Quality of Product Brand Awareness &

Monitor & Control Staff Qualitative Product and In term of;

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 Financial Perspective – Already under consideration

Innovation, Learning & Growth Perspective

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Market & Financial Measures

Lower Level Departmental Indicators

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Standards must be linked to

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Performance Prism (By Andy Neely and Chris Adams)

Five Focus Area's

Stakeholder Satisfaction - Identify the stakeholder and understand their need

Strategies - Should be drafted in order to fullfill stakeholder's need

Process - Critical processes to fulfill such needs & strategies