Strategic Cost Management

December 2023 Examination

Ans 1.
Introduction

Strategic cost management is an expansive process that businesses use to change their
operations to meet their financial objectives. In the constantly pushing universe of fashion
organising, where models change quickly and customer propensities are dynamic, capacity
overseeing costs turns out to be focal. Shubham Limited, a conspicuous name in the fashion
organising industry, encapsulates the application of strategic cost management. With a
colossal solicitation from ABC Ltd. to convey 25,000 custom-made jackets, Shubham
Limited faces the challenge of pricing the jackets in such a way that arrangements are made
with the creation costs as well as guarantee profitability. The cost components incorporate
cloth, threads and decorations, work, factory overheads, and selling expenses. The connection
needs to make imperative decisions on pricing strategies, for example, cost-plus pricing,
variable cost pricing, target profit pricing, and value-based pricing. Every strategy has its
benefits and drawbacks, and the choice relies on the association's targets, money-related
conditions, and customer perceptions. The event of Shubham Limited fills in as a shocking
illustration of how businesses can utilise different pricing strategies based on their cost plan
and market positioning.
Concept and application
Strategic cost management is fanned out by sorting out the different cost components of a
thing and, by then, formulating pricing strategies that guarantee profitability while regulating
market components. Might we, in the long run, bounce deeper into the event of Shubham
Limited to fathom the different pricing strategies and the estimations being implied?
1. Cost Components:
To pick a sensible pricing strategy, it's important first to separate the costs associated with
conveying the jackets:
• Cloth: 2500 reams at Rs. 4000 per ream = Rs. 10,000,000
• Threads and Decorations: Rs. 12,50,000
• Work: 5000 hours at Rs. 500 per hour = Rs. 2,500,000
• Factory Overheads: Rs. 8,00,000
• Selling Expenses: Rs. 75,000
Total Cost = Rs. 10,000,000 + Rs. 12,50,000 + Rs. 2,500,000 + Rs. 8,00,000 + Rs. 75,000 =
Rs. 15,325,000
Cost per Jacket = Total Cost/25,000 Jackets = Rs. 613
2. Pricing Strategies:
a) Cost plus 10% margin on cost:
This strategy incorporates adding a particular percentage of profit margin to the total cost of
creation.
Price per Jacket = Cost per Jacket + 10% of Cost per Jacket
Price per jacket = Rs. 613 + Rs. 61.3 = Rs. 674.3
b) Variable Cost + 20% Margin:
Variable costs are those that change straightforwardly with the quantity of units conveyed.
For this current situation, the variable costs incorporate cloth, threads, and work.
Total Variable Cost = Rs. 10,000,000 + Rs. 12,50,000 + Rs. 2,500,000 = Rs. 14,750,000
Variable Cost per Jacket = Rs. 14,750,000/25,000 = Rs. 590
Price per Jacket = Variable Cost per Jacket + 20% of Variable Cost per Jacket
Price per jacket = Rs. 590 + Rs. 118 = Rs. 708
c) Target profit of Rs. 200 per jacket:
This strategy suggests achieving a particular profit per unit sold.
Price per Jacket = Cost per Jacket + Target Profit
Price per jacket = Rs. 613 + Rs. 200 = Rs. 813
To acquire capability with the PV (profit-volume) ratio:
PV Ratio = (Selling Price - Variable Cost)/Selling Price x 100
PV Ratio = (Rs. 813 - Rs. 590)/Rs. 813 x 100 = 27.43%
d) Value-Based Pricing:
Shubham Limited's choice to price the jacket at Rs. 2400, regardless of the way that
customers will settle up to Rs. 2500, is an illustration of value-based pricing. This strategy is
based on the perceived value of the thing to the customer rather than the guaranteed cost of
creation.

3. Tables for Better Visualization:

Table 1: Cost Breakdown

Cost Component Amount (Rs.)

Cloth 10,000,000
Threads & Decorations 12,50,000
Labour 2,500,000
Factory Overheads 8,00,000
Selling Expenses 75,000
Total Cost 15,325,000

Table 2: Pricing Strategies

Strategy Price per Jacket (Rs.)

Cost Plus 10% Margin 674.3
Variable Cost + 20% Margin 708
Target Profit of Rs. 200 per Jacket 813
Value-Based Pricing 2400

In summary, both comprehending the costs and modifying them to incorporate elements and
customer perceptions are part of strategic cost management. The Shubham Limited instance
makes it clear how various pricing tactics can be used while carefully weighing costs and the
item's suggested value. The choice of strategy can have a significant impact on profitability
and market positioning.
Conclusion
In summary, the pricing strategy of an association has a fundamental impact on both its
profitability and market positioning. The scenarios presented by Shubham Limited
underscore the importance of strategic cost management within the field of fashion planning.
By understanding the components of the market and researching the various cost
components, the association may make very informed decisions on prices. Any methodology,
whether it's based on perceived value pricing, focusing only on variable costs, recovering a
margin for the total cost, or keeping all profit per unit, has consequences. The final objective
is to ensure that customers' price requirements are fulfilled while maintaining the
organisation's profitability. Customers' willingness to pay extra for a brand also shows its
solidarity and perceived worth. Shubham Limited's pricing approach to win back customers
and demonstrate the worth of its brand is seen in the somewhat nibbled jackets, which aren't
precisely the most ridiculous amount that customers could wish to pay. Thus, strategic cost
management involves more than simply math; in order to achieve long-term success, it also
entails modifying company strategy with financial goals.

ANSWER 2:
Introduction

Costing methods are indispensable to the financial health and strategic course of a business.
They give pieces of data about how assets are consumed and help in picking the cost of a
product. M/s Priya Industries, a maker and vendor of lubes, offers various products, each with
its own entrancing production fundamentals. The test lies in accurately assigning costs for
every product to guarantee profitability and anxious assessment. Traditional costing and
activity-based costing (ABC) are two clear methods utilised in business. While traditional
costing disperses overhead based on a single cost driver, ABC utilises different cost drivers,
giving a more unequivocal and accurate cost allocation. The decision between these methods
can fundamentally impact the perceived profitability of products and, likewise, the strategic
choices associated with them. As per the perspective of M/s Priya Industries, we will research
these costing methods, their applications, and their implications.
Concept and application
Costing is an essential piece of managerial accounting, giving an establishment to surveying
choices, profitability evaluations, and strategic plans. Might we, whenever we bounce into the
occurrence of M/s Priya Industries, understand the complexities of traditional costing and
activity-based costing (ABC)?
1. Overview of Costing Methods:
a) Traditional Costing: This strategy conveys overhead costs based on a single cost driver,
often machine hours or work hours. It's an all-too-clear strategy; notwithstanding, it can
overall result in inaccurate cost allocation, particularly for relationships with different
products and fluctuating production processes.
b) Activity-Based Costing (ABC): ABC facilitates overhead costs based on various
exercises or cost drivers. It's a more point-by-point approach, giving a complete, even more
clear image of the affirmed costs connected with every product.
2. Cost Allocation for M/s Priya Industries:
Data Overview:
• Total Fixed Costs: Rs. 4,175,000
• Total Units Produced: 6,000
• Total Work Hours: 1,000
• Total Machine Hours: 1,250
a) Traditional Costing:
Taking into account machine hours, the cost driver is:
Overhead Rate = Total Fixed Costs/Total Machine Hours
Overhead Rate = Rs. 4,175,000/1,250 hours = Rs. 3,340 per machine hour.
Eventually, dispatching costs for every product are:
Product P1: 260 hours x Rs. 3,340 = Rs. 868,400
Product P2: 450 hours x Rs. 3,340 = Rs. 1,503,000
Product P3: 360 hours x Rs. 3,340 = Rs. 1,202,400
Product P4: 180 hours x Rs. 3,340 = Rs. 601,200
Cost per unit:
Product P1: Rs. 868,400/1,300 units = Rs. 668.00 per unit
Product P2: Rs. 1,503,000/2,000 units = Rs. 751.50 per unit
Product P3: Rs. 1,202,400/1,500 units = Rs. 801.60 per unit
Product P4: Rs. 601,200/1,200 units = Rs. 501.00 per unit
b) Activity-Based Costing (ABC):
Perceiving cost drivers:
1. Salaries and Wages: Based on Work Hours
2. Supervisor Cost: Based on the quantity of units produced.
3. Factory Overheads: Based on Machine Hours
4. Packaging Costs: Based on the quantity of units per group.
Allocation Rates:
1. Salaries and Wages: Rs. 2,500,000/1,000 work hours = Rs. 2,500 per work hour
2. Supervisor Cost: Rs. 75,000/6,000 units = Rs. 12.50 per unit
3. Factory Overheads: Rs. a million/1,250 machine hours = Rs. 800 per machine hour
4. Packaging Costs: Rs. 600,000/13 packets = Rs. 46,153.85 per pack
Assigning Costs for Every Product:
Product P1:
Salaries and Wages: 250 hours x Rs. 2,500 = Rs. 625,000
• Supervisor Cost: 1,300 units x Rs. 12.50 = Rs. 16,250
• Factory Overheads: 260 hours x Rs. 800 = Rs. 208,000
• Packaging Costs: 2 packets x Rs. 46,153.85 = Rs. 92,307.70
• Total Cost: Rs. 941,557.70
• Cost per unit: Rs. 941,557.70/1,300 units = Rs. 724.27 per unit
(Go over the above steps for Products P2, P3, and P4)
Comparison:
Traditional costing, including machine hours as the sole cost driver, apparently will not get
the subtleties of every single product's production cycle. For example, Product P1, which
requires more work hours than P4, may be undercosted, while Product P4 may be overcosted.
Obviously, ABC, with its different strategy, gives a more accurate cost allocation. It
considers different exercises like work, supervision, machine use, and packaging,
guaranteeing that every product's captivating production stray pieces are tended to.
3. Implications:
The decision between traditional assessment and ABC can, on an astoundingly major level,
influence the perceived profitability of products. For M/s Priya Industries, utilising ABC
could uncover that a couple of products are uncommonly profitable, while others may be less
profitable. Such pieces of data can help identify choices associated with product blend,
regard, and asset allocation.
Taking everything into account, while traditional costing offers straightforwardness, it can't
be ensured to give an accurate picture, particularly for relationships with composed products.
ABC, with its point-by-point approach, may be more asset-concentrated as of now, offering a
much more clear understanding of product costs. The decision between these methods ought
to concur with the partnership's targets, product gathering, and the different points of view of
production.
To summarise,
Costing isn't simply a financial activity; a strategic instrument can shape the course of a
business. For M/s Priya Industries, understanding the genuine cost of every single product is
pounding for regard, product blend choices, and asset allocation. Traditional costing, with its
straightforwardness, could show up plainly to attract, yet it can on occasion incite slanted
results, particularly for relationships with assembled products and changing production
processes. Obviously, ABC, with its arranged strategy, can give a considerably more clear
picture, yet it very well may be asset-concentrated. The decision between these methods
ought to be made resulting in pondering the opportunity of the business, the degree of
products, and the marvellous idea of production processes. Over the long haul, the objective
is to accomplish accurate cost allocation in an informed manner, guaranteeing the drawn-out
profitability and plentifulness of the business.

Ans 3a.

Introduction

Budgeting is the support of financial planning, permitting associations to figure out their
financial conditions and make informed choices. For get-together parts like Company XYZ,
setting up a budgeted profit and loss statement is squeezing to understand the standard
profitability of their products. By taking into account different cost parts like work, raw
materials, rent, and overheads and taking a gander at them against the drawn-out plans of
products, the company can expect its financial course for the year. We should dive into the
given information to encourage a general budgeted profit statement for Company XYZ.
Concept and application
To set up the budgeted profit and loss statement for XYZ Ltd., we truly need to choose the
total costs and revenues for every product and then total them.
1. Revenue Calculation:
Product P: 50 units x Rs. 700 = Rs. 35,000
Product Q: 45 units x Rs. 700 = Rs. 31,500
Product R: 80 units x Rs. 900 = Rs. 72,000
Product S: 90 units x Rs. 950 = Rs. 85,500
Total Revenue = Rs. 224,000
2. Cost Calculation:
a) Work Costs:
Product P: 50 units x 10 hours x Rs. 10 = Rs. 5,000
Product Q: 45 units x 12 hours x Rs. 10 = Rs. 5,400
Product R: 80 units x 8 hours x Rs. 10 = Rs. 6,400
Product S: 90 units x 4 hours x Rs. 10 = Rs. 3,600
Total Work Costs = Rs. 20,400
b) Raw Material Costs:
Product P: 50 units x 6 kg x Rs. 25 = Rs. 7,500
Product Q: 45 units x 5 kgs x Rs. 25 = Rs. 5,625
Product R: 80 units x 10 kg x Rs. 25 = Rs. 20,000
Product S: 90 units x 12 kg x Rs. 25 = Rs. 27,000
Total Raw Material Costs = Rs. 60,125
c) Fixed Costs:
Factory Rent = Rs. 1,00,000 Other Overheads = Rs. 20,000
Total Fixed Costs = Rs. 1,20,000
3. Budgeted Profit Calculation:
Total Costs = Total Work Costs + Total Raw Material Costs + Total Fixed Costs Total Costs
= Rs. 20,400 + Rs. 60,125 + Rs. 1,20,000 = Rs. 2,00,525
Budgeted Profit = Total Revenue minus Total Costs Budgeted Profit
= Rs. 224,000 less Rs. 2,00,525
= Rs. 23,475
Conclusion
Budgeting fills in as a financial association, assembling affiliations like XYZ Ltd. in their
obligations and key undertakings. The Budgeted Profit and Loss Statement reveals that, given
the projected plans and costs, Company XYZ ought to accomplish a profit of Rs. 23,475 for
the year. This projection can help the company make choices associated with production,
valuation, and asset course. Associations ought to dependably survey and change their
spending plans, taking into account admitted execution and changing financial conditions, to
guarantee they stay fixed on profitability and progress.

Ans 3b.

Introduction

Profit and loss statements address the financial performance of an organisation during a
specific time frame. This statement gives SRT and Co. bits of knowledge in regards to sales,
variable costs, fixed costs, and the profit that was made. This information can be used to get
key performance indicators, for instance, contribution per unit, PV (profit-volume ratio), and
what could be compared to the major endeavour evaluation. These assessments are vital for
getting a handle on the profitability of the organisation and pursuing informed business
decisions. To get these crucial indicators for SRT and Co., we should bounce emphatically
into the given information.
Concept and application
1. Contribution per unit:
Contribution is the separation between sales and variable costs. It will, when in doubt, be the
total that adds to administering fixed costs and making gains.
Total Contribution = Total Sales - Total Variable Costs
Total Variable Costs = Raw Material + Labour + Variable Overheads Total Variable Costs =
Rs. 250,000 + Rs. 345,000 + Rs. 150,000 = Rs. 745,000
Total Contribution = Rs. 1,250,000 (Sales) - Rs. 745,000 = Rs. 505,000
Contribution per unit = Total Contribution/Total Units Sold Contribution per unit = Rs.
505,000/25,000 units = Rs. 20.20 per unit
2. PV (Profit-Volume) Ratio:
The PV ratio, for the most part called the contribution margin ratio, shows the contribution
made on each rupee of sales.
PV Ratio = (Contribution/Sales) x 100
PV Ratio = (Rs. 20.20/Rs. 50) x 100 = 40.4%
3. No. of units to be sold to get a profit of Rs. 70,000:
To deal with the quantity of units required to get a particular profit, we utilise the formula:
Required Sales = (Fixed Costs + Desired Profit)/Contribution per Unit
Given: Fixed Costs = Rs. 400,000 Desired profit = Rs. 70,000 Contribution per unit = Rs.
20.20
Required sales concerning units = (Rs. 400,000 + Rs. 70,000)/Rs. 20.20 = 23,267 units
(changed)
Thusly, SRT and Co. are required to propose around 23,267 units to achieve a profit of Rs.
70,000.
To summarise
The metrics obtained from the profit and loss statement, for example, contribution per unit,
PV ratio, and the quantity of units required to accomplish a particular profit, offer important
snippets of information into the financial health and operational reasonableness of SRT and
Co. These indicators not only give a clearer understanding of the organisation's persistent
profitability, but they also help in forecasting and major preparation. For organisations
expecting to prosper in serious business sectors, it is dependably important to know these
metrics. They go probably as coordinating lights, guaranteeing that the organisation stays on
a sensible course of occasions and profitability.