Strategic Cost Management

1) ABC Ltd. produces 3 products A, B & C. The following data is available for the year ended 31st March 2023.

Cost of Labour is Rs. 10 per hour and material cost Rs. 2/kg. Production Overheads (Fixed) were Rs. 99,450. ABC Ltd. used Traditional Costing method and absorbed the Overheads to products based on Labour hour rate. It is now considering to adopt Activity Based Costing method. The following information was digged out and analysed by the Cost Accountant. Overheads were comprised of the following: Material Handling Rs. 29,100, Storage Costs Rs. 31,200 and Power Cost Rs. 39,150. Further the area occupied for storage of materials was in the ratio of 2:1:3. Prepare Cost sheet showing Unit cost and Total cost of each product using both Traditional Costing and ABC methodology.

2) Sitaram Ltd. is an ice cream manufacturer company. Its current revenue is Rs. 650,000 a month and a 40% contribution margin. Its fixed costs are Rs. 200,000. Ghanshyam Ltd. is another player in the ice cream business with a current sale of Rs. 420,000 and a 30% contribution margin. Its fixed costs are Rs. 90,000.

a) What is the margin of safety for Sitaram and Ghanshyam Ltd? Compare the margin of safety in value between the two companies. Which is stronger?

b) Compare the margin of safety in percentage between the two companies. Now which one is stronger?

c) Prepare a budget for both companies showing their estimated profit at the current levels and at 75% of the current capacity. State your observations with respect to the Profit/Loss levels in both situations and their relation to Margin of Safety percentage.

3) a) Precision Limited is motor manufacturer. The company currently produces three different models of motors. It also produces all the blades of the motors as it requires. The requirement is of 3 different blades for each motor model (i.e. 9 different blades). Precision Limited received a proposal from a supplier who wants to sell the company blades for the motors line. The supplier would charge Rs. 25 per blade, regardless of blade type. For the next year the Company has projected the costs of its own blade production as follows (based on projected volume of 10,000 units):

Direct materials Rs. 75,000

Direct labour Rs. 65,000

Variable overhead Rs. 55,000

Fixed overhead

Factory supervision Rs. 35,000

Other fixed cost Rs. 65,000

Total production costs Rs. 2,95,000

Assume:

(1) The equipment utilized to produce the blades has no alternative use and no market value,

(2) The space occupied by blade production will remain idle if the company purchases rather than makes the blades, and

(3) Factory supervision costs reflects the salary of a production supervisor who would be dismissed from the firm if blade production is ceased. Determine the net profit or loss if the blades are purchased rather than manufactured.

b) Priya Motors is planning to coming up with a new electric car. The promotor of the company has been conducting research in this field on and off for the past 2 years. The approximate amount spent on the R&D till date is Rs. 2 lacs. The cost of production of the vehicle is estimated to be Rs. 3 lacs. Marketing and promotional expenses are to the tune of Rs. 50,000. Based on prior experience, car has a after sales service expenses of Rs. 25,000 on an average during its life time. Being an electric car, the cost is estimated lower at Rs. 20,000. If the company wants to earn a profit margin of Rs. 40,000 per car, at what price should Priya Motors price it? (Time value of money is ignored) What is the approach used for costing the car? Considering the stage of the product, what should be the considerations for spending on the following costs: a) Advertisement b) Maintenance cost.