Service Cost Management in Service industry - Mumbai-Pune Shivneri Bus

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Service Cost Management in Service industry - Mumbai-Pune Shivneri Bus

  1. 1. Prepared by Manohar M. M. IyerRef. No. VAS2010XMBA15P005Batch XMBA – 15Term IFaculty Mr. PhadkePrepared on January 11, 2011
  2. 2. Management Accounts Assignments January 2011Disclaimer:This document is prepared purely as an educational project assignment to be submitted as a component ofthe XMBA curriculum being conducted by ITM (Institute for Technology and Management) at Vashi, NaviMumbai. The information contained within this document is for sample representation purposes only.Though this document is prepared by taking due references from the “Cost Accounting” book, fourthedition, published by “The McGraw-Hill companies” and various websites, including the website of MSRTC.However, no information contained in this document should be considered by any individual, investor,share holder, group, organization, company or any other entity as true & correct information.The reader of this document is strongly advised not to use this document as a guide that may influence anyof your ideas/views/interests/feedback related to any of the companies/ business interests.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 2
  3. 3. Management Accounts Assignments January 2011Contents• List of Assignments....................................................................................................................................4• Individual Assignment – Analysis of service sector- Shivneri Bus, MSRTC. ..................................................5 Data Collected & Assumed:.......................................................................................................................5 Some Basic Calculations............................................................................................................................6 Operating Cost statement per month .......................................................................................................7 Charges & Rate per passenger KM ............................................................................................................7 Conclusions ..............................................................................................................................................8• Individual Assignment – Budgeting – ITM Case Study 10-06-2007- Mr. Zara. .............................................9 The problem ............................................................................................................................................. 9 Solution: Given data ............................................................................................................................... 10 Production Budget:................................................................................................................................. 11 Purchase Budget:.................................................................................................................................... 12 Monthly Cost Statements: ...................................................................................................................... 12 Cash Budget: .......................................................................................................................................... 12 Master Budget:....................................................................................................................................... 13 Suggestions for Mr. Gosh ........................................................................................................................ 13• Individual Assignment – CVP analysis - Marginal Costing - Pankaj Raina- XYZ Ltd. .................................... 14 The Problem: .......................................................................................................................................... 14 Solutions: Given data .............................................................................................................................. 14 Assumptions & Problem areas ................................................................................................................ 15 Arithmetic/ Accounting solutions & Results ............................................................................................ 15 Innovative ideas ..................................................................................................................................... 16• Group Assignment – Export Order received at rate lower than domestic market. .................................... 17 The problem: .......................................................................................................................................... 17 Solution .................................................................................................................................................. 17 Our Group conclusions were:.................................................................................................................. 18 Additional individual inputs: ................................................................................................................... 18• Group Assignment – Operate or Shut down a loss making manufacturing unit. ....................................... 19 The problem: .......................................................................................................................................... 19 Solution: ................................................................................................................................................. 19 Our Group conclusions were:.................................................................................................................. 19 Additional individual inputs: ................................................................................................................... 20Note from the author. ................................................................................................................................ 23Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 3
  4. 4. Management Accounts Assignments January 2011• List of AssignmentsIndividual Assignments 1. Individual Assignment-5 (Individual participation 20 marks) Analysis of service sector considering the cost of operation, number of customers, fees to be charged, pricing strategy etc. 2. Individual Assignment-1 (Individual participation 10 marks) Budgeting Case study. Ref: ITM Vashi case study 10-06-2007 related to Mr. Zara, the MD & Mr. Gosh the finance manager. 3. Individual Assignment-2 (Individual participation 10 marks) CVP analysis - Marginal Costing Case study. Ref: Pankaj Raina related to M/s. XYZ Ltd. that wishes to start a new project.Group Assignments 4. Group Assignment-1 (Group participation 10 marks, Individual participation 10 marks) Decision to be made on an Export order received at a rate lower than domestic market. 5. Group Assignment-2 (Group participation 10 marks, Individual participation 10 marks) Decision to be made whether to operate or shut down, a loss making manufacturing unit.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 4
  5. 5. Management Accounts Assignments January 2011• Individual Assignment – Analysis of service sector- Shivneri Bus, MSRTC.MSRTC’s (MaharashtraState Road TransportCorporation) has ShivneriAC bus service (Volvo B7R9400) plying on the Mumbai– Pune route.Data Collected & Assumed:On analyzing this service the following Facts & assumptions are arrived at: Particulars DataDistance between Mumbai & Pune 163 kmsNumber of buses 20 (10 from Mumbai, 10 from Pune)Bus time table from both Mumbai & Pune. From 4:30 am till Midnight every 30 minutesTrips made per bus 2 return tripsNo of Seats per bus 53Average Passenger load factor 79%The Standing Charges (Fixed) involved are: Particulars DataCost of Bus Volvo B7R 9400 Rs. 75 lakhsDepreciation 15% paSalary for support staff 9000 pmInsurance per annum per bus 15% of cost after depreciationPermit fee Rs. 1000 pm per busOther taxes Rs. 2000 pa per busMisc expenses Rs. 1000 pm per busThe Running Charges (Variable) incurred are: Particulars DataFuel average 4 KM per litreFuel cost Rs. 40 per litreOil & grease Rs. 100 per tripDriver’s Salary per bus 6500 pmConductors Salary per bus 3000 pmToll tax Rs. 410 per tripThe Maintenance Charges calculated are: Particulars DataRepairs & Maintenance Rs. 35 per kmOther Factors affecting Costs are:Passenger Tax 20% of net takingsProfit margin 50% of net takingsPrepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 5
  6. 6. Management Accounts Assignments January 2011Trip details From Mumbai 4:30 5:00 5:30 6:00 6:30 7:00 7:30 8:00 8:30 9:00 Bus no A1 A2 A3 A4 A5 A6 A7 A8 A9 A10 9:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00 13:30 14:00 b1 b2 b3 b4 b5 b6 b7 b8 b9 b10 From Pune 4:30 5:00 5:30 6:00 6:30 7:00 7:30 8:00 8:30 9:00 Bus no b1 b2 b3 b4 b5 b6 b7 b8 b9 b10 9:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00 13:30 14:00 A1 A2 A3 A4 A5 A6 A7 A8 A9 A10 From Mumbai 14:30 15:00 15:30 16:00 16:30 17:00 17:30 18:00 18:30 19:00 Bus no A1 A2 A3 A4 A5 A6 A7 A8 A9 A10 19:30 20:00 20:30 21:00 21:30 22:00 22:30 23:00 23:30 0:00 b1 b2 b3 b4 b5 b6 b7 b8 b9 b10 From Pune 14:30 15:00 15:30 16:00 16:30 17:00 17:30 18:00 18:30 19:00 Bus no b1 b2 b3 b4 b5 b6 b7 b8 b9 b10 19:30 20:00 20:30 21:00 21:30 22:00 22:30 23:00 23:30 0:00 A1 A2 A3 A4 A5 A6 A7 A8 A9 A10Based on the above data we will attempt to: - Do some basic calculations - Prepare Operating Cost statement for the month - Compute charges per passenger per KMSome Basic Calculations 1) Total KM covered per month Particulars Data Mumbai to Pune 163 kms x 4 trips x 20 buses x 30 days 391200 kms 2) Fuel Costs Particulars Data Diesel Required = (391200 kms / 4kmpl average) x Rs. 40 pl Rs. 39,12,000 Oil & grease = Rs. 100 per trip x 4 trips x 20 buses x 30 days Rs.2,40,000 Total Rs. 41,52,000 3) Total effective passenger Km per month Particulars Data Total effective passenger Km per month = 391200 kms x 79% 309048 kms 4) Calculation of Salary Particulars Data Drivers salary per month = Rs. 6500 x 20 buses Rs. 1,30,000 Conductors Salary per month = Rs. 3000 x 20 buses Rs. 60,000Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 6
  7. 7. Management Accounts Assignments January 2011 5) Calculation of Other costs Particulars Data Toll tax per month = Rs. 410 per trip x 4 trips x 20 buses x 30 days Rs. 9,84,000 Cost of 20 buses = (75 Lakhs x 20 buses) (A) Rs. 15,00,00,000 Depreciation per annum = (75 Lakhs x 20 buses x 15%) (B) Rs. 2,25,00,000 Depreciation per month = (75 Lakhs x 20 buses x 15%) / 12 Rs. 18, 75,000 Insurance per annum = ((A) – (B)) x 15% Rs. 1,91,25,000 Insurance per month = (((A) – (B)) x 15%) / 12 Rs. 15,93,750 Permit Fee per month = Rs. 1000 x 20 buses Rs. 20,000 Other Taxes per month = (Rs. 2000 x 20 buses)/12 Rs. 3,333.33 Misc Expenses per month = Rs. 1000 x 20 buses Rs. 20,000 Repairs & Maintenance per month = Rs. 35 per km x 391200 kms Rs. 1,36,92,000Operating Cost statement per month Particulars Rs. Rs. Fixed Charges Drivers salary 130000 Conductors Salary 60000 Salary of support staff 9000 Insurance 1593750 Other taxes 3333.33 Permit fee 20000 Misc expenses 20000 Total Fixed Charges (A) 1836083.33 Running charges Depreciation 1875000 Repairs & Maintenance 13692000 Toll tax 984000 Fuel cost 4152000 Total Running Charges (B) 20703000 Total Cost per month 22539083.33Charges & Rate per passenger KM Particulars Rs. Calculation of Net takings Let total takings X Profit is 50% of Total takings 0.50X Therefore X= Total Cost per month + Profit = 22539083.33 + 0.50X 0.50X = 22539083.33 X= 45078166.66 Total Takings (C) 45078166.66 Passenger Tax = Total takings x 20% (D) 9015633.332 Total Fare = (C) + (D) 54093799.99Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 7
  8. 8. Management Accounts Assignments January 2011Rate per Passenger KM Particulars Rs. Rate Per Passenger KM = Total Fare/ effective passenger KM per month Rs.54093799.99 / 309048 kms 175.03ConclusionsThus as per calculations based on data collected & assumed we can see that every passenger boarding anyAC Volvo bus service plying on the Mumbai - Pune route should be charged atleast Rs.175.03/- which willprovide a profit margin of 50% on total costs.In real life as on today it is seen that such passengers is charged between Rs. 200/- and Rs. 250/- which isvery close to our calculations. They also provide additional facilities like bottled water, music, Films, etc.Also industry news is that KSRTC, MSRTC and other transport companies have shown interest in placingfurther orders of Volvo B7R 9400 buses in bulk quantities.To service these orders the Sweden based bus company is planning to start a plant in Bangalore that willcreate the body parts for the bus & will assemble them. This will reduce the bus price from current Rs. 75lakhs per bus to Rs. 40 Lakh per bus.This in turn will further reduce the cost for the transport companies, giving rise to more profits.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 8
  9. 9. Management Accounts Assignments January 2011• Individual Assignment – Budgeting – ITM Case Study 10-06-2007- Mr. Zara.The problemMr. Zara the M.D. was asking his finance manager Mr. Patel don’t you have the budget? How our companysuffered a loss this year? Why there is heavy stock in our godown? Why there is huge recovery pending?Why people are saying we are not good pay masters? Why reputation of our company is on stake in yourarea only, when the other areas are giving profits. Mr. Patel resigned the same day & Mr. Gosh took thecharge.He called his deputy finance manager to organize a meeting of all department heads and ask them to comewith the past, present & future rates. All met at 5:00 pm in a conference hall. Mr. Gosh was ready with hiskey note address. He presented the segmented income statement of 31st March 2007. It reflected MaterialA Rs. 1.2 crs, Material B Rs. 3.6 crs & other material A Rs. 1.2 crs. The expenses on administration, selling &other expenses were Rs. 3 Cr out of these the establishment manager said 2.4 crs are for salaries. Bankcertificate was put on table which showed interest payment of Rs. 0.6 crs at the rate of 10% pa on CC10025397255. Sales achieved was Rs. 12 crs. Mr. Zara pointed out that the fixed assets of this segment areRs. 5 crs and depreciation @ 20% is not considered in above statement. Tax consultant Mr. Pandeyproposed to charge @ 30% income tax.Everyone was impressed with the action taken by Mr. Gosh.Mr. Gosh then explained the intention of the meeting and asked everyone to focus about his needs andestimate of April 2007.The production manager Mr. Zende came with pie chart of the material cost as follows 72 216 72Mr. Zende said his final product needs 2 units of material A and one unit of B.The purchase manager Mr. Thakur said that the prices for material A & B are Rs. 500 PU & Rs. 3000 PUrespectively.The inventory manager intimated that it is the policy of the company to maintain 20% of sale of finishedproduct in stock which is required to be sold in the next month and 25% of raw material required for thenext month production.The sales Manager forecasted that 1200 units of final product will be sold in April, 1500 units in May, 1000units in June and 800 units in July 2007. He also forecasted that sales in June 2007 will be Rs. 1 cr.Mr. Zara got confused and asked what is the cost of final product? Mr. Gomes advertising manager saidthat we are advertising the same price last year, since we had promised that price will remain constant forthe next year, also to compete with the attractive offer of our competitors, quoting “buy 2 get 1 free”.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 9
  10. 10. Management Accounts Assignments January 2011It was 7 pm & drinks entered the hall. Mr. Gosh everyone to join & assemble back at 8 pm. The meetingcontinued till 10pm but failed to conclude on budget for May 2007 & June 2007.At 11 pm the cashier stood up & started condemning others. He shouted loudly saying that he has to pay tocreditors after one month. Wages & other expenses are paid on the same month, but he does not haveenough cash from the bank at the required time.The recovery manager got angry on his statement and said what can be done if the debtors are paying onlyafter two months, when company has asked to pay in one month. By 1 am the meeting concluded with noconclusion. You are asked to help Mr. Gosh.Solution: Given data a. Income statement as on 31st March 2007 Particulars Annual Fixed assets 50000000 Sales 120000000 Material A 12000000 Material B 36000000 Other material 12000000 Salaries 24000000 Administration & Selling expenses 6000000 Bank Interest 6000000 Depreciation at 20% 10000000 Total expenses 106000000 NPBT 14000000 Tax at 30% 4200000 NPAT 9800000 b. Issues per Mr. Zara Issues Loss to company Heavy stock in warehouse Recovery pending from debtors Bad pay master c. Our objective To Prepare Production budget Purchase Budget Statements Master budget Suggestions d. Materials required to produce one unit of final product Materials Units Material A 2 Material B 1Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 10
  11. 11. Management Accounts Assignments January 2011 e. Price of purchase Cost Particulars Rs. Material A 500 Material B 3000 f. Inventory guidelines Particulars Qty With reference to Finished Product 20% of sales estimated next month Raw Material 25% of requirement for next month production g. Expected Sales Expect. Sales Apr-07 May-07 Jun-07 Jul-07 Units 1200 1500 1000 800 Amount 12000000 15000000 10000000 8000000 Calculated Selling Price per unit in Rs 10000 h. Selling price Guidelines Selling Price Should be same as last year Competitors offer is buy 2 get 1 free i. Payment Guidelines Particulars Period of Settlement Wages Same month Expenses Same month Creditors After one month j. Recovery Guideline & actual Recovery from Guideline Actual practice Debtors Within 1 month After 2 monthsProduction Budget:Particulars Mar-07 Apr-07 May-07 Jun-07 Jul-07Closing stock to be kept 240 300 200 160 0Units to be sold 0 1200 1500 1000 800Total units required 240 1500 1300 840 800Less opening stock 0 240 300 200 160Total to be produced 240 1260 1000 640 640Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 11
  12. 12. Management Accounts Assignments January 2011Purchase Budget:Particulars Mar-07 Apr-07 May-07 Jun-07 Jul-07Material AClosing stock to be kept 630 500 320 320 0Add units to be purchased 480 2520 2000 1280 1280Less opening stock 0 630 500 320 320Total to be purchased 1110 2390 1820 1280 960Amount @ Rs.500 555000 1195000 910000 640000 480000Material BClosing stock to be kept 315 250 160 160 0Add units to be purchased 240 1260 1000 640 640Less opening stock 0 315 250 160 160Total to be purchased 555 1195 910 640 480Amount @ Rs.3000 1665000 3585000 2730000 1920000 1440000Total Cost of purchase 2220000 4780000 3640000 2560000 1920000Monthly Cost Statements: Statement Mar-07 Apr-07 May-07 Jun-07 Jul-07 Sales 0 12000000 15000000 10000000 8000000 Received from Debtors 0 0 12000000 15000000 Paid to creditors 0 0 2220000 4780000 3640000 Paid to Salaries 0 2000000 2000000 2000000 2000000 Admin expenses 0 500000 500000 500000 500000 Other material Cost 0 1000000 1000000 1000000 1000000 Bank interest 0 500000 500000 500000 500000 Depreciation at 20% 0 833333.3 833333.3 833333.33 833333.333Cash Budget:Particulars Mar-07 Apr-07 May-07 Jun-07 Jul-07Opening balance 500000 8280000 4316667 786333.3 2179100Received from Debtors 0 0 0 12000000 15000000Bank overdraft 10000000 7500000 7500000 2500000 0Total A 10500000 15780000 11816667 15286333 17179100 Less Creditors 0 0 2220000 4780000 3640000 Materials 2220000 4780000 3640000 2560000 1920000 Salaries 0 2000000 2000000 2000000 2000000 Other materials 0 1000000 1000000 1000000 1000000 Bank interest 0 500000 500000 500000 500000 Admin expenses 0 500000 500000 500000 500000 Depreciation at 20% 0 833333.3 833333.3 833333.3 833333.3 Total B 2220000 9613333 10693333 12173333 10393333NPBT 8280000 6166667 1123333 3113000 6785767 Less Tax @ 30% 0 1850000 337000 933900 2035730NPAT 8280000 4316667 786333.3 2179100 4750037 Indicates AssumptionsPrepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 12
  13. 13. Management Accounts Assignments January 2011Master Budget: Particulars 31.3.2007 Apr-07 May-07 Jun-07 Jul-07 Sales 120000000 12000000 15000000 10000000 8000000 Less Material A 12000000 1195000 910000 640000 480000 Material B 36000000 3585000 2730000 1920000 1440000 other Material 12000000 1000000 1000000 1000000 1000000 Salaries 24000000 2000000 2000000 2000000 2000000 Other est. expenses 6000000 500000 500000 500000 500000 Bank Interest 6000000 500000 500000 500000 500000 Depreciation at 20% 10000000 833333.33 833333.33 833333.33 833333.33 Total expenses 106000000 9613333.33 8473333.33 7393333.33 6753333.33 NPBT 14000000 2386666.67 6526666.67 2606666.67 1246666.67 Less tax @ 30% 4200000 716000 1958000 782000 374000 NPAT 9800000 1670666.67 4568666.67 1824666.67 872666.67Suggestions for Mr. GoshA. Since the debtors are practically paying only after 2 months, to ensure sufficient amount of cash reserves, we need to take bank overdraft in the months of March(1st of April), April, May & June as mentioned in the Cash Budget.B. We can offer some discounts on early payments to debtors. This can helps us to avoid relying entirely upon the bank overdraft for our cash reserve requirements.C. We can either provide advance training on recovery skills to the recovery manager or replace him with a better resource.D. The above three points will ensure that there are enough cash reserves for making timely payments to creditors and thus reviving the pay master image of the company.E. We can see that the company is making an average monthly profit of Rs. 22,34,166.67/- per month. Even If we give a raise of 10% to all employees it will reduce the profit only by Rs. 2 Lakhs, but this will also help in reviving the pay master image of the company.F. We can show to Mr. Zara that he is under wrong impression & there are no heavy stocks kept in our godown as is evident from the production budget.G. When we compare the cost of production with the selling price per unit, as on 31st March 2007 we can see the profit margin is only 8%. It is advisable to revise the pricing strategy, with higher profit margins so as to be in a better financial position in future.H. To compete with the competitor’s offer of buy 2 get 1 free, we do not necessarily have to compromise on our pricing strategy. Instead we can publicize our product to be of a better quality and create a brand value to justify our pricing, just like NIKE, Mercedes, etc.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 13
  14. 14. Management Accounts Assignments January 2011• Individual Assignment – CVP analysis - Marginal Costing - Pankaj Raina- XYZ Ltd.The Problem:M/s XYZ ltd wish to start a new project. A meeting was organized with the Project Consultant, MarketingAgencies, and head of departments. The Marketing agencies are of the opinion that: 1. If selling price is Rs.40/-, then 1,00,000 units can be sold. 2. If selling price is Rs.25/-, then 4,00,000 units can be sold. 3. If selling price is Rs.20/-, then 5,00,000 units can be sold.The operations team found out that material cost per unit would be Rs.12/-, wages per unit will be Rs.2/-,other variable expenses per unit will be Rs.1/-, and fixed costs will be 20 lakhs.The project consultant have presented the data stating investments in the project will be Rs. 1 crore andreasonable rate of return can be expected to be 12%.This will be first year of the product in the market. Accordingly you are asked to calculate the strategy ofthe company and suggest proper sale price.Steps for case study 1. Facts of case 2. Problem areas 3. Assumptions 4. Result of Arithmetical/ accounting solutions 5. Innovative ideas.Solutions: Given data a. Expected sales Particulars Scenario A Scenario B Scenario C Selling price per unit 40 25 20 Units expected to be sold 100000 400000 500000 Total expected Sales in Rs. 4000000 10000000 10000000 b. Variable costs Particulars Data Material cost Per unit in Rs. 12 Wages Per unit in Rs. 2 Other variable expenses in Rs. 1 Total Variable Cost per unit in Rs. 15 c. Fixed Costs Particulars Data Fixed costs in Rs. 2000000 d. Project Investments Particulars Data Project cost in Rs. 10000000 Expected Rate of return in % 12Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 14
  15. 15. Management Accounts Assignments January 2011Assumptions & Problem areas • We will be using CVP analysis - Marginal costing for our calculations. • It is assumed that all costs involved are separated into variable costs & fixed costs. There are no semi-variable costs involved. • The total fixed costs and variable costs remain constant at all sales levels. • Volume is assumed to be only factor affecting the cost behavior and other factors like production efficiency; material costs, technology used, etc. remain unchanged. • The decisions are guided solely by Contribution. Other key factors are not linked. • Marketing agencies will tend to devise a pricing strategy solely on the marginal costs and not total costs, which may result in differences in projected profit & actual profit after audit. • Since this is the first year of the product, to devise a strategy, there are no historical data available for comparison. • Because of above mentioned assumptions & limitations, CVP analysis done below is just an approximation at best and may not be true always. The final financial results may vary.Arithmetic/ Accounting solutions & ResultsFor all scenarios, we will be calculating: A. Profit to Volume Ratio i.e. PV ratio, Break- even sales and Margin of safety B. Marginal costing income statement & Expected Return on investment A. PV ratio/Break-even sales/Margin of safety Particulars Scenario A Scenario B Scenario C Selling price per unit 40 25 20 Units expected to be sold 100000 400000 500000 Total expected Sales in Rs. 4000000 10000000 10000000 Material cost Per unit in Rs. 12 12 12 Wages Per unit in Rs. 2 2 2 Other variable expenses in Rs. 1 1 1 Total Variable Cost per unit 15 15 15 Contribution per unit 25 10 5 Fixed costs in Rs. 2000000 2000000 2000000 Break even volume = fixed costs/contribution 80000 200000 400000 Excess volume = units sold - break even 20000 200000 100000 Variable cost for number of units expected to be sold 1500000 6000000 7500000 Total Contribution in Rs. 2500000 4000000 2500000 PV ratio = Total contribution / expected sales 0.625 0.40 0.25 Break even sales = fixed costs/ PV ratio 3200000 5000000 8000000 Margin of safety = expected sales - break even 800000 5000000 2000000 B. Marginal Costing Income statement & Expected Return on Investment Particulars Scenario A Scenario B Scenario C Expected Sales in Rs. 4000000 10000000 10000000 Variable cost for number of units sold in Rs. 1500000 6000000 7500000 Fixed costs in Rs. 2000000 2000000 2000000 Total costs= Variable costs + Fixed costs 3500000 8000000 9500000 Net income = Expected Sales - Total costs 500000 2000000 500000 Project cost in Rs. 10000000 10000000 10000000 Expected Rate of return in % 5 20 5Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 15
  16. 16. Management Accounts Assignments January 2011 C. Results Thus we can see that: - If we keep the selling price of the product at Rs. 40/-, then the margin of safety is eight lakh rupees and Expected ROI is 5%. - If we keep the selling price of the product at Rs. 25/-, then the margin of safety is 50 lakh rupees and Expected ROI is 20%. - If we keep the selling price of the product at Rs. 20/-, then the margin of safety is 20 lakh rupees and Expected ROI is 5%. A better Margin of safety indicates that even if there is a drop in production, the business can still make profits. A better ROI indicates that the investments are recovered within a lesser period of time. As we can see, when the selling price is kept at Rs.25/- per unit we have a better Margin of safety and better ROI indicating that entire investment can be recovered within five such sales periods. Hence as per the CVP analysis we should keep selling price at Rs.25/- per unit.Innovative ideas A. If we take an average of all three scenarios discussed above we can approximately see that: 1. The average selling price comes to Rs. 28/- 2. The average expected sales comes to 333333 units. 3. The calculated PV ratio comes to 0.46 4. The Break- even sales comes to Rs. 4307692/- 5. The margin of safety comes to Rs. 5025631.69/- 6. The return of investment comes to 23.33% So keeping the selling price closer to Rs.30/- per unit will ensure better Margin of safety & better ROI and entire investment can be recovered almost within four such sales periods instead of five as indicated by the CVP analysis above.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 16
  17. 17. Management Accounts Assignments January 2011• Group Assignment – Export Order received at rate lower than domestic market.This was jointly done as a Group Assignment by Myself, Mr. Mohit Gupta & Mr. Surjit Grover.The problem: M/s XYZ ltd had received a fax from US client. Order of 1000 units confirmed @ Rs. 410 per unit. • Mr. Sam, the sales manager wish to accept the order and increase his commission which is based upon the sales. • The cost Accountant submits the data as below about the existing situation - Material cost per unit Rs. 220 - Wages per unit Rs. 100 - Variable expenses Rs. 80 - Factory rent (fixed cost) Rs. 25 - Total Cost Rs. 425 • Distribution manager added Rs. 5 as special packaging required for US client • The production manager wish to reject the order saying that presently we are manufacturing & selling 8000 units whereby 80% of the capacity is utilized. Additional order will force the worker to use the plant for more time. • The finance manager is also not in favor of the deal reason being the selling price in India is Rs. 500 per unit. Thus the export prices should be always double or triple depending upon the richness of the country. • MD is confused on the issue & wishes to consult you for this.Solution Facts of the case: Particulars Per Unit Export order received 1000 units Buying Price quoted 410 Cost Material 220 Wages 100 Variable 80 Total Cost 400 Factory rent 25 Special packaging 5 selling price domestic 500 Points to ponder: - Whether to accept the export order or not - If yes at what price - Sales manager wish to maximize his commission, all other managers wish to keep him away from his intention, nobody is worried about the companyPrepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 17
  18. 18. Management Accounts Assignments January 2011 Arithmetic Calculations: Before accepting After accepting Particulars export order order export order Units 8000 1000 9000 Sales 4000000 410000 4410000 Less material cost 1760000 220000 1980000 Wages 800000 100000 900000 Variable Costs 640000 80000 720000 Special packaging Costs 0 5000 5000 Total 3200000 405000 3605000 contribution 800000 5000 805000 less fixed cost 200000 200000 Surplus 600000 5000 605000 Thus we can see that after even after accepting the order we earn a profit of Rs. 5000Our Group conclusions were:We should take this order since: a. This will provide visibility of the company in the global arena b. The company can earn due to fluctuations in the foreign exchange rates.Other possibilities discussed in class: a. Due to export the company will get advantage of not paying excise duty, Vat, Cess, & other taxes b. We can request sales manager not to accept commissions on export orders c. Brand value in the domestic market will be increase if the export order is serviced d. Chance of bargaining cost price increasesAdditional individual inputs: A. Company after accepting the export order may apply for Advance Licence under Duty Exemption Entitlement Scheme (DEEC). - In this scheme advance licence, either quantity based (Qbal) or value based (Vabal), is obtained against which the raw materials and other components may be imported without payment of customs duty provided the manufactured goods are exported. - Also if the company does not have any import needs, then these licences are transferable in the open market at a price and additional revenue can be generated from it. B. After servicing the export order if the company wishes to go public or is already listed, then this order will influence the share price greatly. C. If this order is properly serviced, then this can be shown as a testimonial, which will increase the chances to grab future export orders from other foreign companies. More such orders will in the long run help to offset sales fluctuations in the domestic market.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 18
  19. 19. Management Accounts Assignments January 2011• Group Assignment – Operate or Shut down a loss making manufacturing unit.This was jointly done as a Group Assignment by Myself, Ms. Jigna Ganatra, Ms. Renuka Jaidka, Mr. MohitGupta & Mr. Saroj Kumar.The problem: M/s XYZ ltd is manufacturing Computers & calculators. Following is the information we have: Particulars Computers Calculators Total Units produced & sold 10000 90000 Material cost 2000 lakhs 27 lakhs Labor 1000 Lakhs 27 lakhs Inspection done per batch 100 units 10 units Units per batch for inspection 100 1000 Other expenses 100 Lakhs Selling price per unit 30500 100 • The cost accountant has allocated other expenses (Mainly relating to inspection & quality checking) on the basis of the units produced and sold. • He advises the management to shutdown the calculator plant since there is huge loss of Rs. 54 lakhs. • Management wishes to consult youSolution: Given Facts & calculations: Particulars Computers Calculators Sales in units 10000 90000 Selling price in Rs. 30500 100 Sales in Rs. 305000000 9000000 Material cost 200000000 2700000 Labor costs 100000000 2700000 other expense 1000000 9000000 Total expenses 301000000 14400000 Profit 4000000 -5400000 Profit per unit 400 -60Our Group conclusions were:We should operate the unit with following changes: - We should increase the production of computers - We should reduce the production of calculators - This is due to the fact that the ratio of cost of inspection w.r.t. earnings for calculators are very high compared to computers.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 19
  20. 20. Management Accounts Assignments January 2011Additional individual inputs: A. If this case is analyzed with profit before adding the cost of inspection & after inspection, we have the following data: Particulars Computers Calculators Sales in units 10000 90000 Selling Price 30500 100 Sales in Rs. 305000000 9000000 Material Cost 200000000 2700000 labor Costs 100000000 2700000 Total cost 300000000 5400000 Total cost per unit 30000 60 Before inspection Profit 5000000 3600000 Profit per unit 500 40 Profit margin 0.016 0.400 After inspection Inspection done per batch 100 units 10 units Units per batch for inspection 100 1000 Total inspection done 1000 900 Expense for inspection 1000000 9000000 Cost of inspection done for one unit 100 1000 Total expenses 301000000 14400000 Profit 4000000 -5400000 Profit per unit 400 -60 Profit margin 0.013 -0.600 B. The above data shows that the cost for inspecting one calculator is Rs. 1000/- which is absurd. Hence the assumption of the cost accountant of allocating other expenses (Mainly relating to inspection & quality checking) on the basis of the units produced and sold is wrong. C. Let us what happens if the allocation of other expenses (Mainly relating to inspection & quality checking) is done on the basis of actual units inspected w.r.t. to cost of production of that unit. Particulars Data Total expense for inspection 10000000 Total units inspected 10900 cost of production of 1000 computers (A) 300000000 cost of production of 900 calculators (B) 54000 Total cost of production for the inspected units= A + B 300054000 Ratio of Cost of inspection w.r.t. cost of production = C 0.033327334 Cost of inspection of 1000 computer = A x C 9998200.32 Cost of inspection of 900 calculators = B x C 1799.68 D. The above data shows that the cost for inspecting one calculator is approximately Rs.2/- which is acceptable.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 20
  21. 21. Management Accounts Assignments January 2011 E. Based on assumption mentioned in point c if the case is analyzed we get the following data: Particulars Computers Calculators Sales in units 10000 90000 Selling Price 30500 100 Sales in Rs. 305000000 9000000 Material Cost 200000000 2700000 labor Costs 100000000 2700000 Total cost 300000000 5400000 Before inspection Profit 5000000 3600000 Profit per unit 500 40 Profit margin 0.0164 0.400 After inspection Inspection done per batch 100 10 Units per batch for inspection 100 1000 Total inspection done 10000 900 Expense for inspection 9998000.40 1799.68 Cost of inspection for one unit 999.8000 1.9996 Total expenses 309998000.40 5401799.68 Profit -4998000.40 3598200.32 Profit per unit -499.800 39.980 Profit margin -0.016 0.400 F. We can note that the calculator plant does not show any losses. However the computer plant is loss. We can also note that the profit margin kept for calculators are 40% while for computers it is very low. Let us see what happens when the selling price of the computers are increased by 10%. We get the following data: Particulars Computers Calculators Sales in units 10000 90000 Selling Price 33550 100 Sales in Rs. 335500000 9000000 Material Cost 200000000 2700000 labor Costs 100000000 2700000 Total cost 300000000 5400000 Before inspection Profit 35500000 3600000 Profit per unit 3550 40 Profit margin 0.1058 0.400 After inspection Inspection done per batch 100 10 Units per batch for inspection 100 1000 Total inspection done 10000 900 Expense for inspection 9998000.40 1799.68 Cost of inspection for one unit 999.8000 1.9996 Total expenses 309998000.40 5401799.68 Profit 25501999.60 3598200.32 Profit per unit 2550.200 39.980 Profit margin 0.076 0.400Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 21
  22. 22. Management Accounts Assignments January 2011 G. Thus the solutions to this case are: 1. We can continue operating the calculator unit. 2. In the costing, the allocation of other expenses (Mainly relating to inspection & quality checking) should be done on the basis of actual units inspected w.r.t. to cost of production of that unit. 3. The selling price of the computer should be increased by at least 10%, to have a better profit margin.Prepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 22
  23. 23. Management Accounts Assignments January 2011Note from the author.Dear Reader & user of this document,I hope I was able to attempt to complete the Management Account Assignments correctly to the fullest ofmy knowledge, abilities and by taking due references from the sources mentioned in this document. Irequest the reader & user of this document once again to read and understand the disclaimer mentionedat the start of the document for your own best interests.I thank one and all who have provided me the knowledge & support to do this analysis including Mr.Phadke, The authors of “Cost Accounting” book, fourth edition published by “The McGraw-Hill companies”,various websites including website of MSRTC, the ITM management & my class mates from XMBA 15 batchat ITM & most Important of all my mom Mrs. Manjula M. Aiyer, my dad Mr. Mani P. Aiyer & My brotherMr. Manoj M. Aiyer.Please feel free to forward your valuable feedback, comments, queries and suggestions related to thisanalysis at mumbai_man1977@yahoo.com.Thank you,Warm regards,Manohar M. M. IyerPrepared by: Manohar M. M. Iyer, VAS2010XMBA15P005 Page 23

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