CA RAVI KUMAR

STRATEGIC COST
MANAGEMENT –
DECISION MAKING
Weightage
20%
 STRATEGIC COST MANAGEMENT
TOOLS AND TECHNIQUES

Weightage
50%
 STRATEGIC COST MANAGEMENT –
APPLICATION OF STATISTICAL
TECHNIQUES IN BUSINESS DECISIONS

Weightage
30%
CA RAVI KUMAR
 CA RAVI KUMAR

Strategic Cost Management is the process of reducing total

costs while improving the strategic position of business.

The basic goal of strategic cost management is to achieve

sustainable competitive advantage through product
differentiation and cost leadership.

In order to achieve the above, cost have to be managed

strategically.

LAKSHYA
Institute of Professional Studies
 CA RAVI KUMAR

FC 5 Potato

LAKSHYA
Institute of Professional Studies
 CA RAVI KUMAR

Product differentiation

Product differentiation is a marketing strategy designed to distinguish a

company's products or services from the competition.

LAKSHYA
Institute of Professional Studies
9030-193-190
 CA RAVI KUMAR

Cost Leadership

In business strategy, cost leadership is establishing a competitive advantage by

having the lowest cost of operation in the industry.

LAKSHYA
Institute of Professional Studies
9030-193-190
STUDY NOTE 1 – COST MANAGEMENT CA RAVI KUMAR

1.1 Life Cycle Costing

1.2 Target Costing

1.3 Kaizen Costing

1.4 Value Analysis and Value Engineering

1.5 Throughput Costing

1.6 Business Process Re-engineering

1.7 Back – flush Accounting

1.8 Lean Accounting

1.9 Socio Economic Costing

1.10 Cost Control and Cost Reduction

 CA RAVI KUMAR

1.1. LIFE CYCLE COSTING

Introduction

Cost = ₹ 3,00,000 Cost = ₹ 10,00,000

Maintenance p.a = ₹ 50,000 Maintenance p.a = ₹ 30,000
Life = 5 Years Life = 10 Years

LAKSHYA
Institute of Professional Studies
9030-193-190
 CA RAVI KUMAR

1.1. LIFE CYCLE COSTING

MEANING

a) Life Cycle Costing aims at cost ascertainment of a product, project etc. over its
projected life.

b) It is a system that accumulates the actual costs and revenues of product from
its inception to its abandonment.
c) Traces research, design and development costs for each individual product and
compared with product revenue.

LAKSHYA
Institute of Professional Studies
9030-193-190
 CA RAVI KUMAR

Meaning of product life cycle

Product Life Cycle is the time span from initial R&D to when customer servicing is no
longer offered for the product.

Example: For motor vehicles,

this time-span may range from
5 to 7 years.

LAKSHYA
Institute of Professional Studies
9030-193-190
 CA RAVI KUMAR

Phases in Product Life Cycle

LAKSHYA
Institute of Professional Studies
9030-193-190
 CA RAVI KUMAR
Importance of Product Life Cycle Costing

a) Time based analysis

b) Overall Cost Analysis
c) Pre-production costs analysis
d) Effective Pricing Decisions
e) Better Decision Making
f) Long Run Holistic view
g) Life Cycle Budgeting
h) Review

LAKSHYA
9030-193-190
 CA RAVI KUMAR

Illustration 1
Wipro is examining the profitability and pricing policies of its Software Division. The Software
Division develops Software Packages for Engineers. It has collected data on three of its more
recent packages - ( a) ECE Package for Electronics and Communication Engineers, (b) CE
Package for Computer Engineers, and ( c) IE Package for Industrial Engineers.
Summary details on each package over their two year cradle to grave product lives are

Package Selling Price Number of units sold

Year 1 Year 2
ECE Rs. 250 2,000 8,000
CE
Rs. 300 2,000 3,000
IE
Rs. 200 5,000 3,000

LAKSHYA
9030-193-190
 CA RAVI KUMAR

Assume that no inventory remains on hand at the end of year 2. Wipro is deciding
which product lines to emphasize in its software division. In the past two years, the
profitability of this division has been mediocre.

Wipro is particularly concerned with the increase in R & D costs in several of its divisions.
An analyst at the Software Division pointed out that for one of its most recent packages
(IE) major efforts had been made to reduce R&D costs.

Last week, Amit, the Software Division Manager, decides to use Life Cycle Costing in his
own division. He collects the following Life Cycle Revenue and Cost information for the
packages -Amount (Rs.)

LAKSHYA
9030-193-190
 CA RAVI KUMAR
Particulars Package ECE Package CE Package IE
Year 1 Year 2 Year 1 Year 2 Year 1 Year 2

Revenues 5,00,000 20,00,000 6,00,000 9,00,000 10,00,000 6,00,000

Costs

R&D 7,00,000 - 4,50,000 - 2,40,000 -

Design of Product 1,15,000 85,000 1,05,000 15,000 76,000 20,000

Manufacturing 25,000 2,75,000 1,10,000 1,00,000 1,65,000 43,000

Marketing 1,60,000 3,40,000 1,50,000 1,20,000 2,08,000 2,40,000

Distribution 15,000 60,000 24,000 36,000 60,000 36,000

Customer Service 50,000 3,25,000 45,000 1,05,000 2,20,000 3,88,000

Present a Product Life Cycle Income Statement for each Software Package. Which package
is most profitable and which is the least profitable? How do the three packages differ in their
cost structure (the percentage of total costs in each category)?
LAKSHYA
9030-193-190
 CA RAVI KUMAR
Solution:
Life cycle Income Statement (in ₹000s)
Particulars Package ECE Package CE Package IE

Y1 Y2 Total % Y1 Y2 Total % Y1 Y2 Total %

Revenues 500 2000 2500 100 600 900 1500 100 1000 600 1600 100

Costs

R &D 700 - 700 28 450 - 450 30 240 - 240 15

Design 115 85 200 8 105 15 120 8 76 20 96 6

Manufacturing 25 275 300 12 110 100 210 14 165 43 208 13

Marketing 160 340 500 20 150 120 270 18 208 240 448 28

Distribution 15 60 75 3 24 36 60 4 60 36 96 6

Customer 50 325 375 15 45 105 150 10 220 388 608 38

service
Total Costs 1065 1085 2150 86 884 376 1260 84 969 727 1696 106

Profit 350 14 240 16 (96) (6)

LAKSHYA
Institute ofPackage ECE
Professional is most
Studies profitable, while package IE is least profitable.
9030-193-190
 Illustration 2 CA RAVI KUMAR
A2Z p.l.c supports the concept of tero technology or life cycle costing for new investment decisions
covering its engineering activities. The financial side of this philosophy is now well established and its
principles extended to all other areas of decision making. The company is to replace a number of its
machines and the Production Manager is torn between the Exe Machine, a more expensive machine with
a life of 12 years, and the Wye machine with an estimated life of 6 years. If the Wye machine is chosen
it is likely that it would be replaced at the end of 6 years by another Wye machine. The patter of
maintenance and running costs differs between the two types of machine and relevant data are shown
below:
Exe (Rs.) Wye (Rs.)

Purchase price 19,000 13,000

Trade-in 3,000 3,000
value/brakeup/scrap
Annual repair costs 2,000 2,600
Overhaul costs ( at year 8) 4,000 ( at year 4) 2,000
Estimated financing costs averaged over machine life
10%p.a -Exe; 10% p.a. -Wye
You are required to: recommend with supporting figures, which machine to purchase, stating any
LAKSHYA
Instituteassumptions
of Professional Studies
made.
 CA RAVI KUMAR

Solution:
Calculation of Equated Annual Cost (EXE Machine)

Year Particulars Cash Flow PVAF/PVF @ 10% DCF

0 Purchase 19000 1 19000

Price
1 – 12 Annual 2000 6.814 13627
Repairs
8 Overhaul 4000 0.466 1864
12 Scrap (3000) 0.318 (954)
Value
Sum of Discounted Cash Outflows 33537

Sum of Discounted Cash Outflow

Equated Annual Cost (EAC) =
PVAF
=
33537
6.814

= ₹ 4921
LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Calculation of Equated Annual Cost (WYE Machine)

Year Particulars Cash Flow PVAF/PVF @ DCF
10%
0 Purchase 13000 1 13000
Price
1 –6 Annual 2600 4.36 11336
Repairs
4 Overhaul 2000 0.68 1360
6 Scrap (3000) 0.56 (1680)
Value
Sum of Discounted Cash Outflows 24016

Sum of Discounted Cash Outflow

Equated Annual Cost (EAC) =
PVAF
24016
=
4.36

= ₹ 5508
As the Equated Annual Cost is less for Exe Machine, it is better to purchase the same.
LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Illustration 3
X is forced to choose between two machines A and B. The two machines are designed
differently, but have identical capacity and do exactly the same job. Machine A costs Rs.
1,50,000 and will last for 3 years. It costs Rs.40,000 per year to run. Machine B is an
‘economy’ model costing only Rs. 1,00,000, but will last only for 2 years, and costs Rs.
60,000 per year to run. These are real cash flows. The costs are forecasted in rupees of
constant purchasing power. Ignore tax. Opportunity cost of capital is 10%. Which machine
Company X should buy?

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR
Solution:
Calculation of Equated Annual Cost (Machine A)
Year Particulars Cash Flow PVAF/PVF @ 10% DCF
0 Purchase 150000 1 150000
Price
1 –3 Running 40000 2.487 99474
Cost
Sum of Discounted Cash Outflows 249474

Sum of Discounted Cash Outflow

Equated Annual Cost (EAC) =
PVAF

=
249474
2.487

= ₹ 100311

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Calculation of Equated Annual Cost (Machine B)

Year Particulars Cash Flow PVAF/PVF @ DCF
10%
0 Purchase 100000 1 100000
Price
1 –2 Running 60000 1.735 104100
Cost
Sum of Discounted Cash Outflows 204100

Sum of Discounted Cash Outflow

Equated Annual Cost (EAC) =
PVAF

=
204100
1.735

= ₹ 117637

As the Equated Annual Cost is less for Machine A, it is better to purchase the same.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Illustration 4
Computation of Equivalent Annual Cost and Identification of Year to Replace the Machine A & Co. is
contemplating whether to replace an existing machine or to spend money on overhauling it. A & Co.
currently pays no taxes. The replacement machine costs Rs. 90,000 now and requires maintenance of Rs.
10,000 at the end of every year for eight years. At the end of eight years it would have a salvage value
of Rs. 20,000 and would be sold. The existing machine requires increasing amounts of maintenance each
year and its salvage value falls each year as follows:
Amount (Rs. )
Year Maintenance Salvage
Present 0 40,000
1 10,000 25,000
2 20,000 15,000
3 30,000 10,000
4 40,000 0

The opportunity cost of capital for A & Co. is 15%. When should the company replace the machine?
(Notes: Present value of an annuity of Rs. 1 per period for 8 years at interest rate of 15%
LAKSHYA
Institute :of
4.4873; present
Professional value of Rs. 1 to be received after 8 years at interest rate of 15%9030-193-190
Studies : 0.3269)
 CA RAVI KUMAR
Solution:
Calculation of Equated Annual Cost of New Machine
Year Particulars Cash Flow PVAF/PVF @ 15% DCF
0 Purchase Price 90000 1 90000
1 –8 Running Cost 10000 4.4873 44873
8 Salvage Value (20000) 0.3269 (6538)
Sum of Discounted Cash Outflows 128335

Sum of Discounted Cash Outflow

Equated Annual Cost (EAC) =
PVAF

=
128335
4.4873

= ₹ 28600

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Calculation of Equated Annual Cost of Existing Machine

Year Particulars PVF @ Year 1 Year 2 Year 3 Year 4
15%
C F DCF C F DCF C F DCF C F DCF
0 Purchase Price 1 40000 40000 25000 25000 15000 15000 10000 10000

1 Running Cost 0.8696 10000 8696 20000 17391 30000 26087 40000 34783

1 Salvage Value 0.8696 (25000) (21739) (15000) (13043) (10000) (8696) 0 0

Sum of Discounted Cash Outflows 26957 29348 32391 44783

Equated Annual Cost 31000 33750 37250 51500

Conclusion: Since the equivalent annual cost of new machine is lesser than that of the existing machine(in

all the 4 years), it is suggested to replace it with the new machine.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR
Illustration 5
A company is considering the purchase of a machine for Rs. 3,50,000. It feels quite confident
that it can sell the goods produced by the machine as to yield an annual cash surplus of Rs.
1,00,000. There is however uncertainly as to the machine working life. A recently published
Trade Association Survey shows that members of the Association have between them owned
250 of these machines and have found the lives of the machines vary as under:

No. of year of machine life 3 4 5 6 7 Total

No. of machines having given life 20 50 100 70 10 250

Assuming discount rate of 10% the net present value for each different machine life is follows:
Machine life 3 4 5 6 7
NPV (Rs.) (1,01,000) (33,000) 29,000 86,000 1,37,00
0
You required to advice whether the company should purchase a machine or not.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR
Solution:
Calculation of Expected NPV of Machine
Machine Probability NPV Expected Value (a x b)
Life (a) (b)
3 20/250 = 0.08 (101000) (8080)
4 50/250 = 0.2 (33000) (6600)
5 100/250 = 0.4 29000 11600
6 70/250 = 0.28 86000 24080

7 10/250 = 0.04 137000 5480

Expected NPV 26480

Conclusion: Since the expected NPV is positive, Machine should be purchased.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

1.2 TARGET COSTING

Target costing popular among Japanese firms such as

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

1.2 TARGET COSTING

1. It is a management technique wherein prices are determined by market

conditions.

2. The company is a price taker rather than a price maker.

3. It aims at profit planning.

4. It is a part of management’s strategy to focus on cost reduction & effective cost

management.

LAKSHYA
Institute of Professional Studies 9030-193-190
CA RAVI KUMAR
 CA RAVI KUMAR

Steps in Target Costing:

1. Identity the market requirements.

2. Set target selling price.
3. Set target production volume.
4. Set target profit margin.
5. Set allowable cost (Target selling price- Target profit margin).
6. Determine current cost of produce.
7. Set cost reduction target.
8. Identify cost reduction opportunity using VE, VA & ABC Costing
9. Implement cost reduction opportunity to achieve target.
10. Focus on further possibilities of cost reduction.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Advantages of Target costing

1. Innovation

2. Competitive advantage.

3. Market driven management.

4. Cost reduction.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Illustration 6

B manufacturing company sells its product at Rs.1,000 per unit. Due to competition, its
competitors are likely to reduce price by 15%. B wants to respond aggressively by cutting
price by 20% and expects that the present volume of 1,50,000 units p.a. will increase to
2,00,000. B wants to earn a 10% target profit on sales. Based on

Particulars Existing Target

(Rs.) (Rs.)
Direct material cost per unit 400 385
Direct manufacturing labour per unit 55 50
Direct machinery costs per unit 70 60
Direct manufacturing costs per unit 525 495
Manufacturing overheads:
No. of orders (Rs.80 per order) 22,500 21,250
Testing hours (Rs.2 per hour) 4,500,000 30,00,000
LAKSHYA
Units reworked (Rs.100 per unit) 12,000 13,000
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Manufacturing overheads are allocated using relevant cost drivers. Other operating costs per
unit for the expected volume are estimated as follows:

Amount (Rs. )

Research and Design 50

Marketing and customer service 130
180
Required:

i. Calculate target costs per unit and target costs for the proposed volume showing break up of
different elements.

ii. Prepare target product profitability statement.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR
Solution:
(i) Calculation of target cost per unit
Particulars ₹
Target Selling Price (1000 less 20%) 800
Less: Target Profit 80
Target Cost per unit 720

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Statement showing breakup of Target Cost per unit

Particulars
₹
Direct Materials 385
Direct Labour 50
Direct machining costs 60
Direct Manufacturing Costs 495
Add Manufacturing OH:
Ordering and receiving (21250 x 80)/200000 8.5
Testing and Inspection (3000000 x 2)/200000 30
Rework (13000 x 100)/200000 6.5 45
Total Manufacturing Costs 540
Add Other Operating Costs:
Research and Design 50
Marketing and Customer Service 130 180
Target Cost Per Unit 720

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

(ii) Statement showing Target Product Profitability

Particulars Per Unit ( ₹ ) 2,00,000 Units ( ₹ )
1. Sales 800 16,00,00,000

2. Cost of goods sold:

Direct materials 385 7,70,00,000
Direct labour 50 1,00,00,000
Direct machining costs 60 1,20,00,000
Manufacturing Overheads 45 90,00,000
540 10,80,00,000
3. Gross Margin (1 – 2) 260 5,20,00,000
4. Operating Costs:
Research and Design 50 1,00,00,000
Marketing and Customer Service 130 2,60,00,000
180 3,60,00,000
5. Operating Profit (3 – 4) 80 1,60,00,000

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR
Illustration 7
Desktop Co. manufactures and sells 7,500 units of a product. The full Cost per unit is Rs.100.
The Company has fixed Its price so as to earn a 20% return on an Investment of Rs. 9,00,000

Required

I. Calculate the Selling Price per unit from the above. Also, calculate the mark-up % on the
Full Cost per unit.

II. If the Selling Price as calculated above represents a mark- up% of 40% on Variable Cost per
unit. calculate the Variable Cost per unit.

III. Calculate the Company’s Income if it had changed the Selling Price to Rs.115. At this price,
the Company would have sold 6,750 units.

IV. In response to competitive pressures, the Company must reduce the price to Rs.105 next
year, in order to achieve sales of 7,500 units. The company also plans to reduce its
investment to Rs. 8,25,000. If a 20% return on Investment should be maintained, what is
LAKSHYA the Target Cost per unit for the next year?
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Solution:

(i) Calculation of selling price & Markup percentage:

Investment = 9,00,000

Target profit = 9,00,000 X 20% = 1,80,000

Target profit per unit =

180000
= ₹ 24
7500

Target selling price = Full cost + Target Profit

= 100+24 = 124

Markup Percentage = = 24 %
24
100

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

(ii) Calculation of Variable cost per unit:

Target selling price = ₹ 124

Markup = 40% on variable cost.

V.C S.P

100 ------ 140

? ------ 124

Variable cost per unit = 100 = ₹ 88.6

124
𝑥
140

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

(iii) Calculation of Company Income – If selling price decreased to ₹ 115

Particulars Amount (₹)

Sales(6750x115) 7,76,250
(-) Variable Cost(6750x89) 6,00,750
Contribution 1,75,500

(iii) Calculation of Target cost per unit:

Target Selling Price = ₹ 105

Target Profit (8,25,000x20%) = ₹ 1,65,000

Target Profit per unit = = ₹ 22

165000
7500

Target Cost = 105-22 = ₹ 83

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR
Illustration 8
ABC Enterprises has prepared a draft budget for the next year follows:

Quantity 10,000 units

(Rs.)
Sales price per unit 30
Variable costs per unit:
Direct Materials 8
Direct Labour 6
Variable overhead (2 hrs × 0.50) 1
Contribution per unit 15
Budgeted Contribution 1,50,000
Budgeted Fixed costs 1,40,000
Budgeted Profit 10,000

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

The Board of Directors is dissatisfied with this budget, and asks working party to com up
with alternate budget with higher target profit figures.
The working party reports back with he following suggestions that will lead to budgeted
profit of Rs. 25,000. The company should spend Rs. 28,500 on advertising, & set the
target sales price up to Rs. 32 per unit. It is expected that the sales volume will also rise,
inspite of the price rise, to 12,000 units.
In order to achieve the extra production capacity, however, the workforce must be able to
reduce the time taken to make each unit of the product. It is proposed to offer a pay and
productivity deal in which the wage rate per hour in increased to Rs. 4. The hourly rate for
variable overhead will be unaffected.

Ascertain the target labour time required to achieve the target profit.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Solution:
WN: 1 Calculation of Target labour & Variable overhead cost per unit
Particulars Amount ( ₹)
Sales (12,000x32) 3,84,000
Less: Target Profit 25,000
Target Cost 3,59,000
Less: Fixed Cost (1,4,0000+28,500) 1,68,500
Target Variable Cost 1,90,500

Target Variable Cost per unit (

190,500
) 15.875
12,000
Less: Material Cost 8
Target labour & Variable Overheads per Unit 7.875

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

(i) Calculation of Target Time to Achieve target profit:

Labour & Variable overhead cost per hour = 4+0.5 =4.05

Time required per unit = = 1.75 hours

7.875
4.5

Total hours required = 12000x1.75 = 21000 hours

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Illustration 9

You the manager of a paper mill (M Ltd) and have recently come across a particular type of
paper, which is being sold at substantially lower rate (by another company - ABC Ltd) than the
price charged by your ow mill. The value chain for one of tonne of such paper for ABC Ltd is
follows,

ABC Ltd.⟶ Merchant ⟶ Printer ⟶ Customer

ABC Ltd sells this particular paper to the merchant at the rate of Rs. 1,466 per tonne ABC Ltd
pays for the freight which amounts to Rs. 30 per tonne

Average returns and allowances amount to 4% of sales and approximately equal Rs. 60 per
tonne.

The value chain of your company, through which the paper reaches the ultimate customer is
similar to the of ABC Ltd. However, your mill does not sell directly to the merchant, the latter
receiving the paper from a huge distribution center maintained by your company at Haryana.
LAKSHYA
Shipment
Institute costs from
of Professional the mill to the Distribution Center amount to Rs. 11 per9030-193-190
Studies
 CA RAVI KUMAR

tonne while the operating costs in the Distribution Center have been estimated to be Rs.
25 per tonne. The return on investments required by the Distribution Center for the
investments made amount to an estimated Rs. 58 per tonne.

You are required to compute the “Mill manufacturing Target Cost” for this particular
paper for your company. You may assume that the return on the investment expected by
your company equals Rs. 120 per tonne of such paper.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR
Solution:
Calculation of Target cost per unit for Paper Mill
Particulars Amount ( ₹)
Target Selling Price 1466
Less: Target Profit 120
Target Cost 1346
Less: Freight 30
Sales returns 60
Shipment cost to distribution centre 11
Operating cost in the distribution centre 25
Profit to distribution centre 58
Target Manufacturing cost 1162

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

1.3. Kaizen Costing

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Toyota’s experience of kaizen costing

Toyota aggressively implemented kaizen costing to reduce costs in a manufacturing

phase.

1. Kaizen goals have been set by top management.

2. About 2 millions suggestions were received from

Toyota employees in 1 year. 95% of them were

adopted.

3. This is a prime example of employee empowerment.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

1.3. Kaizen Costing

1. It refers to ongoing continuous improvement

program that focuses on the reduction of

waste in the production process.

2. It is a cost reduction technique.

3. Kaizen costing is applied to products that are

already in production phase, whereas Target

costing is applied when the products are in

development phase.
LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Difference between Kaizen Costing and Standard Costing

Standard Costing Kaizen Costing

1. It is used for cost Control. 1. It is used for cost reduction.

2. The aim is to meet cost standards. 2. The aim is to achieve cost reduction targets.

3. Employees are often viewed as the 3. Employees are viewed as source to find

cause of problems. solutions.

4. It is assumed that current 4. It assumes continuous improvement.

manufacturing conditions remains

unchanged.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

1.4. Value analysis and Value Engineering

1. It is an approach to improve the value of a

product, by understanding components and
their associated costs.
2. It then seeks to find improvements to the
components by either reducing costs or
increasing the value of product.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR
The rules governing VA
1. No cost can be removed if it compromises the quality of the product or it’s
reliability.
2. Saleability is another issue that cannot be compromised.
3. Any activity that reduces the maintainability of the product, can lower the
value.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Value
𝐹𝑢𝑛𝑐𝑡𝑖𝑜𝑛
Value =
𝐶𝑜𝑠𝑡

Any attempt to improve the value of a product must considered 2 elements.

Use value Esteem value

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Key success factors of Value Analysis

a) Gain approval of senior management.
b) Enlist a senior manager as a champion of the project.
c) Establish the Reporting Procedure.
d) Present the VA concept and objectives of the team to all the middle and senior
managers.
e) Provide an office space and co-locate the team members.
f) Select the product for first study.
g) Train the team etc.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

1.5 Throughput Costing

Chicken required per unit = 100 Raw Material Available Chicken required per unit =
Grams = 10,000 Grams 200 Grams
Demand -100 Units
Demand-80 Units Cost per kg = ₹500
Selling Price: ₹150 per unit Selling Price: ₹250 per unit

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Calculation of contribution per unit of bottleneck

Particulars Burger Chicken Fry
Selling Price 150 250
(-) Material Cost 50 100
Contribution 100 150
Material required per unit 100 g 200 g
Contribution per unit of Bottleneck (₹) 1 0.75

Optimum Mix:

Product Bottleneck available Production Bottleneck Used Bottleneck balance

Burger 10,000 g 80 Units 8000 g (80x100) 2000 g

Chicken Fry 2000 g 10 Units 2000 g (10x200) -

 CA RAVI KUMAR

Meaning:
Throughput accounting is defined as follows:
“A management accounting system which focuses on ways by which the maximum

return per unit of bottleneck activity can be achieved” -CIMA Terminology

Throughput- Excess of sale value over totally variable cost.

Totally variable cost- Only Direct Material.

- Direct labour is not totally variable, unless piece rate wages
are paid.

Bottleneck or constraint - Resource that limits output.

9030-193-190
 CA RAVI KUMAR

Throughput or cycle time- Time required to convert raw material into finished goods
ready to be shipped to customer. It includes

a) Material Handling
b) Production Processing
c) Inspection and Packaging

Through put Efficiency =

𝑇ℎ𝑟𝑜𝑢𝑔ℎ𝑝𝑢𝑡 𝐶𝑜𝑠𝑡
𝐴𝑐𝑡𝑢𝑎𝑙 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝐶𝑜𝑠𝑡

Through put Time Ratio =

𝑇𝑖𝑚𝑒 𝑆𝑝𝑒𝑛𝑡
𝑇𝑜𝑡𝑎𝑙 𝐶𝑦𝑐𝑙𝑒 𝑇𝑖𝑚𝑒

Total Factory Cost = Except material costs, most factory costs are fixed these are
called total factory cost.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Return per factory hour =

𝑇ℎ𝑟𝑜𝑢𝑔ℎ𝑝𝑢𝑡
𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝐶𝑜𝑠𝑡

Cost per Factory Hour =

Total Factory Cost
𝐹𝑎𝑐𝑡𝑜𝑟𝑦 Hours

TA Ratio =
Return per Factory hour
Cost per 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 Hour

Throughput Costing , Absorption Costing & Marginal Costing

It assigns only It assigns It assigns only

direct material Variable & Fixed Variable Cost
costs to the Cost
products.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Steps to increase Throughput

1) Identify Bottleneck

2) Decide how to exploit bottleneck effectively.

3) Subordinate everything else to the decision made in step (2)

4) Increase Capacity of bottleneck with minimum capital input.

5) Identify new bottleneck and repeat the process.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Illustration 10
Modern Co produces 3 products, A, B and C, details of which are shown below:
There are 3,20,000 bottleneck hours available each month. Required:
Particulars A B C

Selling price per unit (Rs.) 120 110 130

Direct material cost per unit (Rs.) 60 70 85

Variable overhead (Rs.) 30 20 15

Maximum demand (units) 30,000 25,000 40,000

Time required on the bottleneck 5 4 3

resource (hours per unit)

Calculate the optimum product mix based on the throughput concept

9030-193-190
 CA RAVI KUMAR

Solution:
(i) Statement showing ranking of three products based on throughput per unit of
bottleneck
Particulars A B C
Selling Price 120 110 130
Less: Direct Material Cost 60 70 85
Throughput Contribution per 60 40 45
unit
Time required per unit 5 4 3
Throughput for factory hour 12 10 15
Ranking 2 3 1

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

(i) Statement showing optimum mix:

Particulars Available Optimum Hours Balance
Hours production utilized Hours
Product C 320000 40000 120000 200000
(40000 x3)

Product A 200000 30000 150000 50000

(30000 x5)

Product B 50000 12500 50000 -

(50000/4) (12500 x4)

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR
Illustration 11
Cat Co makes a product using three machines – X, Y and Z. The product has to pass through all the
three machines.

The capacity of each machine is as follows: X Y Z

Machine capacity per week (in units) 800 600 500

The demand for the product is 1,000 units per week. For every additional unit sold per week, profit
increases by Rs.50,000. Cat Co is considering the following possible purchases (they are not mutually
exclusive):
Purchase 1 Replace machine X with a newer model. This will increase capacity to 1,100 units per
week and costs Rs. 60 Lakhs.
Purchase 2 Invest in a second machine Y, increasing capacity by 550 units per week. The cost of
this machine would be Rs. 68 Lakhs.
Purchase 3 Upgrade machine Z at a cost of Rs. 75 Lakhs, thereby increasing capacity to 1,050
units.
Required:
Which is Cat Co’s best course of action under throughput accounting?

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR
Solution:
The product has passes through all the machines. Hence, machine capacity is bottleneck

Bottleneck resource in order of preference

1) Machine - Z
2) Machine - Y
3) Machine - X

Statement showing best course of action

Particulars X Y Z Maximum Investment Inc.
production Contribution
Current Capacity 800 600 500 500 - -
Buy Z 800 600 1050 600 75 Lakh 50,00,000
Buy Z & Y 800 1150 1050 800 143 Lakh 1,50,00,000
Buy Z,Y & X 1100 1150 1050 1000 203 Lakh 2,50,00,000

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Problem- 12
A factory has a key resource (bottleneck) of Facility A which is available for 31,300 minutes per
week. Budgeted factory costs and data on two products, X and Y, are shown below:
Product Selling Price/Unit Material Cost/Unit Time in Facility A

X Rs. 35 Rs. 20.00 5 minute

Y Rs. 35 Rs. 17.50 10 minutes
Budgeted factory costs per week:
₹
Direct labour 25,000
Indirect labour 12,500
Power 1,750
Depreciation 22,500
Space costs 8,000
Engineering 3,500
Administration 5,000

9030-193-190
 CA RAVI KUMAR

Actual production during the last week is 4,750 units of product X and 650 units of product
Y. Actual factory cost was Rs. 78,250.
Calculate:
(i) Total factory costs (TFC)
(ii) Cost per Factory Minute
(iii) Return per Factory Minute for both products
(iv) TA ratios for both products.
(v) Throughput cost per the week.
(vi) Efficiency ratio

9030-193-190
 CA RAVI KUMAR
Answer:

(i) Total factory cost = Total of all costs except material

= 78,250
𝑇𝑜𝑡𝑎𝑙 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝐶𝑜𝑠𝑡
(ii) Cost per factory minute =
𝑀𝑖𝑛𝑢𝑡𝑒𝑠 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒

= 2.5
78,250
=
31,300

(iii) Return per factory minute

=
35−20
For Product X =3
5

=
35−17.5
For Product Y = 1.75
5

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

(iv) Throughput accounting ratio =

Return per Minute
𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑀𝑖𝑛𝑢𝑡𝑒

=
3
For Product X =1.2
2.5
=
1.75
For Product Y = 0.7
2.5

(v) Throughput time = 4750x5 + 650x10

= 30,250 Minutes

Throughput C𝑜𝑠𝑡
(vi) Efficiency % =
Actual Factory Cost
75,625
= = 96.6%
378,250

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR
Problem- 13
Given below is the basic data relating to New India Company for three years:
Year1 Year 2 Year 3
Production and Inventory data
Planned production (in units) 2,500 2,500 2,500
Finished goods inventory (in units), J an 1 0 0 750
Actual production (in units) 2,500 2,500 2,500
Sales (in units) 2,500 1,750 3,250
Finished goods inventory (in units), Dec 31 0 750 0
Revenue and cost data, all three-years Rs.
Sales price per unit 48
Manufacturing costs per unit 12
Direct material Direct labour 8
Variable manufacturing overhead 4
Total variable cost per unit
Used only under absorption costing: 24
Fixed manufacturing overhead = Annual fixed OH / Annual Production= Rs. 12
30,000 / Rs. 2,500
Total absorption cost per unit 36
9030-193-190
 CA RAVI KUMAR

Variable selling and administrative cost per unit 4

Fixed selling and administrative cost per year 5,000
You are required to Prepare:
a) Absorption Costing Income Statement
b) Variable Costing Income Statement.
c) Reconciliation of Income under Absorption and Variable Costing.
d) Throughput Costing Income Statement and Comment how it is relatively more
useful.
Draw your conclusion.

9030-193-190
 CA RAVI KUMAR
Answer:
Actual production is 2500 units in each year.
(a) Absorption Costing Income Statement
New India Company
Income Statement as per Absorption Costing
Particulars Year1 Year2 Year3
Sales revenue (at ₹ 48 per unit) 1,20,000 84,000 1,56,000
Less: Cost of goods sold (at absorption cost of ₹ 36 90,000 63,000 1,17,000
per unit)
Gross margin 30,000 21,000 39,000
Less: Selling and administrative expenses:
Variable (at ₹ 4 per unit) 10,000 7,000 13,000
Fixed 5,000 5,000 5,000
Operating Income 15,000 9,000 21,000

9030-193-190
 CA RAVI KUMAR
(b) Variable Costing Income Statement
New India Company
Income Statement as per Variable Costing
Particulars Year1 Year2 Year3
Sales revenue (at ₹ 48 per unit) 1,20,000 84,000 1,56,000
Less: Variable expenses:
Variable manufacturing costs (at variable cost of ₹24 60,000 42,000 78,000
per unit)
Variable selling & admn. Costs (at ₹ 4 per unit) 10,000 7,000 13,000
Contribution margin 50,000 35,000 65,000
Less: Fixed expenses :
Fixed manufacturing overhead 30,000 30,000 30,000
Fixed selling & admn. Expenses 5,000 5,000 5,000
Operating Income 15,000 0 30,000

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR
(c) Reconciliation of Income under Absorption and Variable Costing

New India Company

Reconciliation of Income under Absorption and Variable Costing
Particulars Year1 Year2 Year3
Fixed Manufacturing overheads under Absorption Costing 30,000 21,000 39,000
(2500x12) (1750x12)(3250x12)
Fixed Manufacturing overheads under Marginal Costing 30,000 30,000 30,000
Difference - (9,000) 9,000
Add: Income under absorption costing 15,000 9,000 7,000
Income under Marginal costing 15,000 9,000 16,000

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

The following table shows, this difference in the amount of fixed overhead expenses explains the
difference in reported income under absorption and variable costing:
Year Change in Fixed Overhead Difference in Fixed Absorption Costing
Inventory (in units) Rate Overhead Expenses Income Minus Variable
Costing Income
Year 1 0 x ₹ 12 = 0 = 0
Year 2 750 increase x ₹ 12 = ₹ 9,000 = ₹ 9,000
Year 3 750 increase x ₹ 12 = (9,000) = (9,000)

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR
(d) Throughput Costing Income Statement

New India Company

Reconciliation of Income under Absorption and Variable Costing
Particulars Year1 Year2 Year3
Sales revenue (at ₹ 48 per unit) 1,20,000 84,000 1,56,000
Less: Cost of goods sold (at throughput cost) 30,000 21,000 39,000

Throughput 90,000 63,000 1,17,000

Less: Operating costs:
Direct labour 20,000 20,000 20,000
Variable manufacturing overhead 10,000 10,000 10,000
Fixed manufacturing overhead 30,000 30,000 30,000
Variable Selling & Admn. Costs 10,000 7,000 13,000
Fixed selling & Admn. Costs 5,000 5,000 5,000
Total Operating costs 75,000 72,000 78,000
Operating Income 15,000 (9000) 39,000

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Notes:

1. Standard direct-material cost per unit of ₹ 12 multiplied by sales volume in units.

2. Assume that management has committed to direct labour sufficient to produce the
planned annual production volume of 2500 units; direct labour cost is used at a rate of `
8 per unit produced.
3. Assumes management has committed to support resources sufficient to produce the
planned annual production volume of ₹ 2500 units; variable overhead cost is used at a
rate of ₹ 4 per unit produced. Fixed overhead is ₹ 30,000 per year.
4. Variable selling and administrative costs used amount to ₹ 1 per unit sold. Fixed selling
and administrative costs are ₹ 5,000 per year.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR
Problem- 14
T Ltd, produces a product which passes through two processes - cutting and finishing. The following
information is provided:
Cutting Finishing
Hours available per annum 50,000 60,000

Hours needed per unit of product 5 12

10,00,000 10,00,000
Fixed operating costs per annum excluding direct material

The selling price of the product is Rs. 1,000 per unit and the only variable cost per unit is direct
material, which costs Rs. 400 per unit. There is demand for all units produced.
Evaluate each of the following proposals independent of each other:
•An outside agency is willing to do the finishing operation ot any number of units between 5,000 and
7,000 at Rs. 400 per unit.
•An outside agency is willing to do the cutting operation of 2,000 units at Rs. 200 per unit.
•Additional equipment for cutting can be bought for Rs. 10,00,000 to increase the cutting facility by
50,000 hour, with annual fixed costs increased by Rs. 2 lakhs.
LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR
Answer:

Cutting process capacity = 50,000 hours/5 = 10,000 units

Finishing process capacity = 60,000 hours/12 = 5,000 units
Throughput contribution per unit = Selling price - Material cost
= ₹ 1,000 - ₹ 400 = ₹ 600p.u.
Alternative-I If an outside agency is willing to do the finishing operation
Increase in throughput contribution
= (Throughput contribution - Subcontracting charges) x No. of finished units
= (₹ 600 - ₹ 400) x 5,000 units = ₹ 10,00,000
Alternative-ll If an outside agency is willing to do the cutting operation
Already the cutting process has got surplus capacity. It is not a bottleneck. It is
not suggested to outsource cutting operation, since there is no benefit to TP
Ltd. from outsourcing, and outsourcing of cutting process will reduce the
throughput contribution of outsourced activity.
Alternative-Ill Installation of additional equipment for cutting process.
The cutting process has surplus capacity. It is not suggested to increase non-
LAKSHYA bottleneck capacity.
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

1.6 Business Process Re-Engineering

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

1.6 Business Process Re-Engineering

It refers to the fundamental rethinking and redesign of business processes to

achieve improvement in cost reduction, quality, service, speed and
customers satisfaction.

Features of BPR:
i) Several jobs are considered into one
ii) Often workers make decisions
iii) The steps in the process are performed in a logical order
vi) Work is performed, where it makes most sense
v) Quality is built in.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

1.7 Back Flush Accounting:

It is when you wait until the manufacture of a product

has been completed, and then record all of the related
issue of material.

This system records the transaction only at the

termination of the production and sales cycle. It is usually
employed in parallel with JIT.

JIT is a system where production is pulled by customer

demand. Theoretically there are zero stocks.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Problem- 15
H Ltd. manufactures three products. The material cost, selling price and bottleneck resource details per
unit are as follows:
Particulars Product X Product Y Product Z

Selling price (Rs.) 66 75 90

Material and other variable cost (Rs.) 24 30 40
Bottleneck resource time (minutes) 15 15 20

Budgeted factory costs for the period are Rs. 2,21,600. The bottleneck resources time available is
75,120 minutes per period.

Required:

1) Company adopted throughput accounting and products are ranked according to

‘product return per minute’. Select the highest rank product.

2) Calculate throughput accounting ratio and comment on it.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Answer:
(i) Statement showing rank according to return per minute
Particulars X Y Z
Selling Price (₹ ) 66 75 90
Less: Variable Cost (₹) 24 30 40
Throughput Contribution (₹ ) 42 45 50
Minutes per unit 15 15 20
Contribution per minute (₹) 2.8 3 2.5
Ranking 2 1 3

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

(ii) Calculation of Throughput Accounting Ratio

Particulars X Y Z
Factory cost per unit (₹ 2.95 2.95 2.95
2,21600
)
75,120

Contribution per minute (₹) 2.8 3 2.5

Throughput Accounting Ratio 0.95 1.02 0.85
Ranking 2 1 3

Comment: Product Y yields more contribution compared to average factory

contribution per minute, whereas X and Z yields less.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Problem- 16
Dandia Ltd. follows JIT system. It had following transactions in May, 2014:

(i) Raw materials were purchased for Rs.2,00,000.

(ii) Direct labour cost incurred Rs.36,000

(iii) Actual overhead costs Rs.3,00,000

(iv) Conversion costs applied Rs.3,16,000

All materials, that were purchased, were placed into production and the production was also
completed and sold during the month. The difference between actual and applied costs is computed.

You are required to pass both Traditional journal entries and Backflush journal entries.
 CA RAVI KUMAR

Answer:

(i) In the books of Dandia Ltd Journal Entries (Traditional)

Particulars Debit (₹) Credit (₹)
Material A/c Dr 2,00,000
To Accounts Payable A/c 2,00,000
(Being purchase of raw material)
WIP A/c Dr 2,00,000
To Materials A/c 2,00,000
(Being materials issued to production)
Direct Wages A/c Dr 36,000
To Wages Payable A/c 36,000
(Being direct labour cost incurred)
WIP A/c Dr 36,000
To Direct Wages A/c 36,000
(Being direct labour cost applied)

9030-193-190
 CA RAVI KUMAR

In the books of Dandia Ltd Journal Entries (Traditional)

Particulars Debit (₹) Credit (₹)
Overhead Control A/c Dr 3,00,000
To Accounts Payable A/c 3,00,000
(Being overhead cost incurred)

WIP A/c Dr 2,80,000

To overhead control A/c 2,80,000
(Being overhead costs applied)

Finished Goods A/c Dr 5,16,000

To WIP A/c 5,16,000
(Being completion of goods)

Cost of sales A/c Dr 5,16,000

To Finished Goods A/c 5,16,000
(Being cost of finished goods sold transferred)

Cost of sales A/c Dr 20,000

To Overhead Control A/c 20,000
(Being variance is recognised)

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

(ii) In the books of Dandia Ltd Journal Entries (Back Flush)

Particulars Debit (₹) Credit (₹)
Raw Material in Process A/c Dr 2,00,000
To Accounts Payable A/c 2,00,000
(Being purchase of raw materials)
Conversion Cost Control A/c Dr 3,36,000
To wages payable A/c 36,000
To Accounts Payable A/c 3,00,000
(Being wages and overhead costs applied)
Finished Goods A/c Dr 5,16,000
To Raw Material in Process A/c 2,00,000
To WIP A/c 3,16,000
(Being completion of goods)
Cost of sales A/c Dr 5,16,000
To Finished Goods A/c 5,16,000
(Being cost of finished goods sold transferred)
Cost of sales A/c Dr 20,000
To Overhead Control A/c 20,000
LAKSHYA
(Being variance is recognised)
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

1.7 Lean Accounting:

It is a general term used for the changes required to a company’s accounting to support
lean manufacturing and lean thinking.
Lean strategies focuses on producing more with less input. Thus, it seeks to eliminate
waste throughout the entire manufacturing process.

It is a management tool that focuses on reduces waste and maximizing customer value.
It is characterized by delivery.

a) The right product.

b) In the right quantity.

c) With the right quality(Zero defect)

d) At the expect time the customer needs it.

e) At the lowest possible cost.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Few form of waste:

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Lean Accounting Vs Standard Costing

1) Quick, Simple and timely 1) Complex and wasteful processes

2) Clear and easy to understand 2) Difficult for people to understand

3) Provides information for effective decisions 3) Leads to bad decisions

4) Enables value based pricing 4) Enables Cost + pricing

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Key components of lean accounting

1) Over production
2) Waiting
3) Transportation
4) Extra processing
5) inventory
6) Motion
7) Defects

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

1.9 Socio Economic Costing

Socioeconomics is the social science that studies

how economic activity affects and is shaped by
social processes.

Examples of causes of socioeconomic impacts are new technologies,

change in laws, ecological changes and demographic changes.

Socio economic impact is a major predictor of

business success.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

1.10 COST CONTROL AND COST REDUCTION

a) Efforts made towards achieving target or goal. a) Effort made to achieve reduction in cost

b) It lacks dynamic approach b) It is a continuous improvement process

c) Focus on past and present c) Focus on present and Future

d) It is preventive function d) It is corrective function

e) Assumes the existing standards can not be e) Assumes no standards permanent.

challenged.

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR
Problem- 17
Ever Forward Ltd is manufacturing and selling two products: Splash and Flash, at selling
prices of Rs.3 and Rs.4 respectively. The following sales strategy has been outlined for the
year 2015.
1) Sales planned for year will be Rs.7.20 lakhs in the case of Splash and Rs. 3.50 lakhs in
the case of Flash.
2) Break-even is planned at 60% of-the total sales of each product.
3) Profit for the year to be achieved is planned at Rs.69,120 in the case of Splash and
Rs.17,500 in the case of Flash. This would be possible by launching a cost reduction
programme and reducing the present annual fixed expenses of Rs.1,35,000 allocated
as Rs.1,08,000 to Splash and Rs.27,000 to Flash.
The selling price of Splash and Flash will be reduced by 20% and 12.5% respectively to
meet the competition.
You are required to present the proposal in financial terms giving clearly the following
information.
a) Number of units to be sold of Splash and Flash to break-even as well as the total
number of units of Splash and Flash to be sold during the year.
b) Reduction in fixed expenses product-wise that is envisaged by the cost Reduction
LAKSHYA Program
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

Answer:
(i) Calculation of total sales and Break even sales:
Particulars Splash Flash Total
Sales (₹) 7,20,000 3,50,000 10,70,000
Selling Price (₹) 2.4 3.5
No. of units to be sold 3,00,000 1,00,000 4,00,000
Break even units 60% 1,80,000 60,000
Break even sales (₹ ) 4,32,000 2,10,000 6,42,000

LAKSHYA
Institute of Professional Studies 9030-193-190
 CA RAVI KUMAR

(ii) Calculation of product-wise reduction in fixed expenses

Particulars Splash Flash Total
Margin of safety (₹) (Total sales – BE Sales) 2,88,000 1,40,000 4,28,000
Profit planned (₹) 69,120 17,500 86,620
P/v Ratio (Profit/MoS) 24% 12.5%
Fixed Cost (Break even sales/ P/v Ratio) 1,03,680 26,250 1,29,930
Previous Fixed Cost (₹) 1,08,000 27,000 1,35,000
Reduction in Fixed Cost 4,320 750 5,070

LAKSHYA
Institute of Professional Studies 9030-193-190