Strategic Cost Management

1) The following information is available for a watch showroom.Calculate the following: a) Contribution b) PV Ratio c) BE Ratio (in no. of units and value) d) MOS at actual sales of Rs. 6,00,000/- e) Number of watches to be sold to get a profit of Rs. 20,000/- Sale Price Per unit (Rs.) 9800 Variable Costs Per unit (Rs.) 4905 Commission (variable) Per unit (Rs.) 500 Rent Per month (Rs.) 100000 Salaries Per Month (Rs.) 120000

SOLUTION:

To calculate the required values, let’s use the given information:

Sale Price Per unit (Rs.) = 9800 Variable Costs Per unit (Rs.) = 4905 Commission (variable) Per unit (Rs.) = 500 Rent Per month (Rs.) = 100000 Salaries Per Month (Rs.) = 120000 Actual Sales (Rs.) = 600000 Profit Target (Rs.) = 20000

a) Contribution: Contribution per unit = Sale Price per unit – Variable Costs per unit – Commission per unit Contribution per unit = 9800 – 4905 – 500 = 4395 Rs.

b) PV Ratio: PV Ratio (Profit Volume Ratio) = (Contribution per unit / Sale Price per unit) * 100 PV Ratio = (4395 / 9800) * 100 ≈ 44.94%

c) BE Ratio (in no. of units and value): Break-even point (in units) = Fixed Costs / Contribution per unit Break-even point (in units) = (Rent Per month + Salaries Per Month) / Contribution per unit Break-even point (in units) = (100000 + 120000) / 4395 ≈ 52.39 units

Break-even point (in value) = Break-even point (in units) * Sale Price per unit Break-even point (in value) = 52.39 * 9800 ≈ Rs. 5,13,262.00

d) Margin of Safety (MOS) at actual sales of Rs. 6,00,000/-: MOS = Actual Sales – Break-even point (in value) MOS = 600000 – 513262 ≈ Rs. 86,738.00

e) Number of watches to be sold to get a profit of Rs. 20,000/-: Required sales in value = Break-even point (in value) + Desired Profit Required sales in value = 513262 + 20000 = Rs. 533,262.00

Number of watches to be sold = Required sales in value / Sale Price per unit Number of watches to be sold = 533262 / 9800 ≈ 54.48 watches (rounded up to 55 watches)

To achieve a profit of Rs. 20,000/-, approximately 55 watches need to be sold.

Note: Please note that these calculations are based on the provided information, and assumptions have been made regarding the cost structure and pricing. It’s always recommended to cross-verify the calculations with detailed financial information for accuracy.

2) A Factory produces 3 types of shoes. While producing, for switching over from one type
to another, there is a shift-over process involved. Costs incurred are as follows:
Shift-over costs Rs. 50,000
Packing costs Rs. 20,000/-
Engineering Costs Rs. 30,000/-
Supervisor Costs Rs. 10,000/-
Quantity produced A- 1000, B – 2000, C- 4000
Allocate the costs to the 3 shoes (A, B and C) using Traditional Costing method and
Activity Based Costing. Some other information of the 3 products is as under:

SOLUTION:

To allocate the costs using the Traditional Costing method, we will allocate the costs based on a single cost driver, such as the quantity produced.

Total quantity produced = 1000 (A) + 2000 (B) + 4000 (C) = 7000 units

Shift-over costs allocation: A: (1000/7000) * 50000 = Rs. 7,143 B: (2000/7000) * 50000 = Rs. 14,286 C: (4000/7000) * 50000 = Rs. 28,571

Factory Overheads allocation: A: (1000/7000) * 100000 = Rs. 14,286 B: (2000/7000) * 100000 = Rs. 28,571 C: (4000/7000) * 100000 = Rs. 57,143

Packing costs allocation: A: (1000/7000) * 20000 = Rs. 2,857 B: (2000/7000) * 20000 = Rs. 5,714 C: (4000/7000) * 20000 = Rs. 11,429

Engineering Costs allocation: A: (30/90) * 30000 = Rs. 10,000 B: (40/90) * 30000 = Rs. 13,333 C: (50/90) * 30000 = Rs. 16,667

Supervisor Costs allocation: A: (10/32) * 10000 = Rs. 3,125 B: (12/32) * 10000 = Rs. 3,750 C: (10/32) * 10000 = Rs. 3,125

Using the Activity-Based Costing method, we will allocate the costs based on multiple cost drivers that are more closely related to the activities performed.

Cost drivers used:

• No. of switches
• Machine hours
• No. of receipts/packs
• Engineering hours
• Supervisor hours spent

Total cost driver quantity: Switches: 3 + 4 + 2 = 9 Machine hours: 20 + 18 + 15 = 53 No. of receipts/packs: 4 + 5 + 8 = 17 Engineering hours: 30 + 40 + 50 = 120 Supervisor hours spent: 10 + 12 + 10 = 32

Cost allocation per cost driver:

Shift-over costs allocation: A: (3/9) * 50000 = Rs. 16,667 B: (4/9) * 50000 = Rs. 22,222 C: (2/9) * 50000 = Rs. 11,111

Factory Overheads allocation: A: (20/53) * 100000 = Rs. 37,736 B: (18/53) * 100000 = Rs. 33,962 C: (15/53) * 100000 = Rs. 28,302

Packing costs allocation: A: (4/17) * 20000 = Rs. 4,706 B: (5/17) * 20000 = Rs. 5,882 C: (8/17) * 20000 = Rs. 9,412

Engineering Costs allocation: A: (30/120) * 30000 = Rs. 7,500 B: (40/120) * 30000 = Rs. 10,000 C: (50/120) * 30000 = Rs. 12,500

Supervisor Costs allocation: A: (10/32) * 10000 = Rs. 3,125 B: (12/32) * 10000 = Rs. 3,750 C: (10/32) * 10000 = Rs. 3,125

Please note that the values above are approximate and rounded to the nearest rupee. The cost allocation may vary based on the specific costing methodology and assumptions used.