Strategic Cost Management

December 2023

Answer 1

Introduction:

It is reported that two hundred thousand pieces of items would have required to be created
and sent in order to fulfil client demand if "ABC Limited has executed a substantial order
with Shubham Limited, an esteemed authority on fashion design." In order to fulfil consumer
demand for these clothing, Shubham Limited must determine the total cost of manufacture.
Everything is monitored, from the basic material cost to the overall cost after retail discounts
and wholesale markups are applied.

It seems to reason that the end product will be ridiculously expensive.

a) Cloth - 2500 reams of cloth at Rs. 4000 per ream.

b) Threads and other decoration - totaling Rs. 12,50,000/-

c) Labor cost - Rs. 500 per hour, with a total of 5000 hours required.

d) Factory overheads - Rs. 8,00,000/-

e) Selling expenses, including delivery charges - Rs. 75,000/-

The pricing strategy of Shubham Ltd. is to maximise earnings while retaining the company's
competitiveness in the clothing industry. This study compares the standard unit costs of all
four pricing groups. The following protocols are implemented:

Shubham Limited calculates its retail prices by adding 10% to its production costs.

After removing all variable production expenses, the expected net profit is 20%.

Shubham Limited has set the suggested retail price for each item of clothes at Rs. 200.

Shubham Limited has always followed established pricing standards. Shubham Limited, a
reputable retailer, sells apparel starting at Rs. 2500. This article investigates how effective
"Penetration Pricing" is.

The Shubham Limited Profit-Volume (PV) Ratio is also considered. The PV Ratio is a useful
measure for analysing the long-term profitability of various pricing strategies. Shubham
Limited evaluates and compares alternative pricing methods in order to maximise
profitability and customer satisfaction.
Application and concept:

If the following information and price parameters are given, the unit cost of each garment
made by Shubham Limited may be calculated.

Profitability grew by 10% as a consequence.

We can make some reasonable predictions regarding the cost of producing 25,000 units based
on the cost breakdown we just studied.

a) Cloth cost = 2500 reams * Rs. 4000 per ream = Rs. 10,000,000

b) Threads and other decoration = Rs. 12,50,000

c) Labour cost = Rs. 500 per hour * 5000 hours = Rs. 2,500,000

d) Factory overheads = Rs. 8,00,000

e) Selling expenses = Rs. 75,000

Total Cost = a + b + c + d + e

Total Cost = Rs. 10,000,000 + Rs. 12,50,000 + Rs. 2,500,000 + Rs. 8,00,000 + Rs. 75,000 =
Rs. 21,325,000

Now, calculate the price per jacket with a 10% margin on cost:

Price per Jacket = Cost + 10% Margin

Price per Jacket = Rs. 21,325,000 + 0.10 * Rs. 21,325,000 = Rs. 21,325,000 + Rs. 2,132,500
= Rs. 23,457,500 / 25,000 jackets = Rs. 938.30 per jacket

Variable Cost + 20% Margin:

The variable cost includes cloth, threads and decoration, labor, factory overheads, and selling
expenses. This was calculated as Rs. 21,325,000 in the previous calculation.

Price per Jacket = Variable Cost + 20% Margin

Price per Jacket = Rs. 21,325,000 + 0.20 * Rs. 21,325,000 = Rs. 21,325,000 + Rs. 4,265,000
= Rs. 25,590,000 / 25,000 jackets = Rs. 1,023.60 per jacket

Target Profit of Rs. 200 per Jacket:

In this case, you want to achieve a target profit of Rs. 200 per jacket. We already calculated
the total cost of producing 25,000 jackets as Rs. 21,325,000.

Total Target Profit = Target Profit per Jacket * Number of Jackets

Total Target Profit = Rs. 200 * 25,000 = Rs. 5,000,000

Price per Jacket = Cost + Target Profit

Price per Jacket = Rs. 21,325,000 + Rs. 5,000,000 = Rs. 26,325,000 / 25,000 jackets = Rs.
1,053 per jacket

Shubham Limited has established an absurdly high recommended retail price. This type of
pricing is known as "Penetration Pricing." In intensely competitive markets, prices must
regularly be reduced in order to preserve even a minor market share. Shubham bases his
product prices on the assumption that his customers will not spend more than Rs. 2,400.

When determining the PV ratio, the following elements should be considered. Methods of
Recognition To calculate PV, use the following formula:

PV Ratio = (Total Sales - Total Variable Costs) / Total Sales

For the pricing strategy in which the price per jacket is Rs. 2400 (as per Shubham Limited’s
strategy), you can calculate the PV ratio using the total variable cost we calculated earlier,
which is Rs. 21,325,000:

PV Ratio = (Total Sales - Total Variable Costs) / Total Sales

PV Ratio = (25,000 jackets * Rs. 2400 - Rs. 21,325,000) / (25,000 jackets * Rs. 2400)

PV Ratio = (Rs. 60,000,000 - Rs. 21,325,000) / Rs. 60,000,000

PV Ratio = Rs. 38,675,000 / Rs. 60,000,000 ≈ 0.6446 or 64.46%

The net profit margin for this firm is roughly 64.46 percent. This metric is crucial for
determining the long-term feasibility of pricing strategies.

Conclusion:

Given the potential consequences on customer behaviour, market perception, and

profitability, it is evident that a detailed investigation of Shubham Limited's pricing strategy
is required. Given the situation of the industry and the severe competition, Shubham Limited
must assess the benefits and drawbacks of each pricing strategy. Shubham Limited enhanced
its profitability and market share by utilising "Penetration Pricing" and the power of its well-
known brand. This is a critical choice for the company, therefore it must be carefully
researched and in accordance with its long-term goals.

Answer 2

Introduction:

Traditional costing methods are based on a single concept. One product may take an hour to
complete, while another may take two hours. The indirect expenses of the firm are then
summed.
Concept and application:

Pricing per unit will be determined using "Traditional Costing" and Activity-Based Costing
(ABC) approaches.

The process of assigning fixed costs begins with the use of classic costing methodologies.

Calculate the time, energy, and materials required to create each object.

Labour, utilities, materials, and management pay should all be divided in line with production
in an industrial setting.

The unit price is computed using traditional cost accounting procedures in the second step.

The fixed cost per unit may be calculated by dividing the total fixed expenses by the total
production.

In order to calculate the unit price, conventional cost accounting practises demand that unit
variable costs be multiplied by unit fixed costs.

ABC's budgeted money have all been spent.

It is vital to estimate the amount of time, money, and effort needed to complete any task.

The cost of each move is calculated by multiplying the amount paid by the driver's
investment.

Before applying activity charges, the utilisation of cost components for each commodity must
be examined.

Examine ABC's pricing methods in depth.

The project's ultimate cost is determined by multiplying the projected utilisation of each cost
driver by the budgeted quantities.

The total amount is obtained by summing the costs associated with each letter of the alphabet.

ABC estimates unit costs by dividing total expenses by production.

Please keep the following figures in mind:

When allocating fixed expenses for the first time, standard costing processes should be
followed.

Total Labor Hours = (1300 * 250) + (2000 * 350) + (1500 * 200) + (1200 * 200) = 325,000 +
700,000 + 300,000 + 240,000 = 1,565,000 hours

Total Fixed Costs = Rs. 2,500,000 (Salaries and Wages) + Rs. 75,000 (Supervisor Cost) + Rs.
1,000,000 (Factory Overheads) + Rs. 600,000 (Packaging costs) = Rs. 4,175,000
Fixed Cost Allocation Rate (per labor hour) = Total Fixed Costs / Total Labor Hours

Fixed Cost Allocation Rate = Rs. 4,175,000 / 1,565,000 hours ≈ Rs. 2.67 per labor hour

Step 2: Using conventional costing, calculate the unit cost.

Now, using Traditional Costing, compute the unit cost of each product:

a) Product P1 (P1):

Fixed Cost Allocation for P1 = Rs. 2.67 per labor hour * 250 labor hours = Rs. 667.50

Variable Cost per Unit for P1 = Total Costs / Total Units Produced = Rs. 4,175,000 /
6,000 units = Rs. 695.83

Total Cost per Unit for P1 = Rs. 667.50 (Fixed) + Rs. 695.83 (Variable) = Rs. 1,363.33

b) Product P2 (P2):

Fixed Cost Allocation for P2 = Rs. 2.67 per labor hour * 350 labor hours = Rs. 934.50

Variable Cost per Unit for P2 = Rs. 4,175,000 / 6,000 units = Rs. 695.83

Total Cost per Unit for P2 = Rs. 934.50 (Fixed) + Rs. 695.83 (Variable) = Rs. 1,630.33

c) Product P3 (P3):

Fixed Cost Allocation for P3 = Rs. 2.67 per labor hour * 200 labor hours = Rs. 534

Variable Cost per Unit for P3 = Rs. 4,175,000 / 6,000 units = Rs. 695.83

Total Cost per Unit for P3 = Rs. 534 (Fixed) + Rs. 695.83 (Variable) = Rs. 1,229.83

d) Product P4 (P4):

Fixed Cost Allocation for P4 = Rs. 2.67 per labor hour * 200 labor hours = Rs. 534

Variable Cost per Unit for P4 = Rs. 4,175,000 / 6,000 units = Rs. 695.83

Total Cost per Unit for P4 = Rs. 534 (Fixed) + Rs. 695.83 (Variable) = Rs. 1,229.83

Once a cost per unit has been calculated, standard cost accounting procedures may be
applied.

Finally, ABC will be utilised to disburse the funds.

We'll look at unit price to figure out what's significant.

The following factors impact these costs:

Working hours (for budgeting purposes).

The total amount of time spent observing.

Time spent utilising equipment is sometimes referred to as "machine time."

The total number of packets used to calculate packing costs.

Fees and costs:

Labor Cost Rate = Salaries and Wages / Total Labor Hours

Supervisor Cost Rate = Supervisor Cost / Total Labor Hours

Machine Cost Rate = Factory Overheads / Total Machine Hours

Packaging Cost Rate = Packaging Costs / Total Number of Packets

Let’s calculate these cost rates:

Labor Cost Rate = Rs. 2,500,000 / 1,565,000 hours ≈ Rs. 1.60 per labor hour

Supervisor Cost Rate = Rs. 75,000 / 1,565,000 hours ≈ Rs. 0.048 per labor hour

Machine Cost Rate = Rs. 1,000,000 / 1,250 hours ≈ Rs. 800 per machine hour

Packaging Cost Rate = Rs. 600,000 / 1,000 packets ≈ Rs. 600 per packet

Step 4: Calculate the Cost per Unit under ABC

Now, let’s calculate the cost per unit for each product under ABC:

a) Product P1 (P1):

Labor Cost for P1 = Rs. 1.60 per labor hour * 250 labor hours = Rs. 400

Supervisor Cost for P1 = Rs. 0.048 per labor hour * 250 labor hours = Rs. 12

Machine Cost for P1 = Rs. 800 per machine hour * 260 machine hours = Rs. 208,000

Packaging Cost for P1 = Rs. 600 per packet * 2 packets = Rs. 1,200

Total Cost for P1 = Rs. 400 (Labor) + Rs. 12 (Supervisor) + Rs. 208,000 (Machine) + Rs.
1,200 (Packaging) = Rs. 209,612

Total Cost per Unit for P1 = Rs. 209,612 / 1,300 units ≈ Rs. 161.24

b) Product P2 (P2):

Labor Cost for P2 = Rs. 1.60 per labor hour * 350 labor hours = Rs. 560

Supervisor Cost for P2 = Rs. 0.048 per labor hour * 350 labor hours = Rs. 16.80
 Machine Cost for P2 = Rs. 800 per machine hour * 450 machine hours = Rs. 360,000

Packaging Cost for P2 = Rs. 600 per packet * 5 packets = Rs. 3,000

Total Cost for P2 = Rs. 560 (Labor) + Rs. 16.80 (Supervisor) + Rs. 360,000 (Machine) +
Rs. 3,000 (Packaging) = Rs. 379,576.80

Total Cost per Unit for P2 = Rs. 379,576.80 / 2,000 units ≈ Rs. 189.79

c) Product P3 (P3):

Labor Cost for P3 = Rs. 1.60 per labor hour * 200 labor hours = Rs. 320

Supervisor Cost for P3 = Rs. 0.048 per labor hour * 200 labor hours = Rs. 9.60

Machine Cost for P3 = Rs. 800 per machine hour * 360 machine hours = Rs. 288,000

Packaging Cost for P3 = Rs. 600 per packet * 3 packets = Rs. 1,800

Total Cost for P3 = Rs. 320 (Labor) + Rs. 9.60 (Supervisor) + Rs. 288,000 (Machine) +
Rs. 1,800 (Packaging) = Rs. 290,129.60

Total Cost per Unit for P3 = Rs. 290,129.60 / 1,500 units ≈ Rs. 193.42

d) Product P4 (P4):

Labor Cost for P4 = Rs. 1.60 per labor hour * 200 labor hours = Rs. 320

Supervisor Cost for P4 = Rs. 0.048 per labor hour * 200 labor hours = Rs. 9.60

Machine Cost for P4 = Rs. 800 per machine hour * 180 machine hours = Rs. 144,000

Packaging Cost for P4 = Rs. 600 per packet * 3 packets = Rs. 1,800

Total Cost for P4 = Rs. 320 (Labor) + Rs. 9.60 (Supervisor) + Rs. 144,000 (Machine) +
Rs. 1,800 (Packaging) = Rs. 145,129.60

Total Cost per Unit for P4 = Rs. 145,129.60 / 1,200 units ≈ Rs. 120.94

Conclusion:

Activity-Based Costing (ABC) was combined with standard cost accounting to establish unit
pricing. In the past, the major predictor of pricing was work effort. We then establish
individual pricing for each commodity.
Answer 3(a)

Introduction:

Goods from P, Q, R, and S represent XYZ Company goods. To properly anticipate yearly
profitability, a thorough examination of several business and economic aspects is required.
Each kilogramme of manpower costs Rs. 25, while goods cost Rs. All expenses must be
considered, not only the ones that can be changed. Despite paying a monthly lease of one
million rupees for its facilities, the company spends around twenty thousand dollars on
operations each month. manufacturing time, cost per unit, raw material cost, and total cost of
manufacturing are all broken down.

Concept and application:

1. Total sales revenue is calculated by multiplying the production by the price per unit.

For Product P: 50 units * Rs. 700 per unit = Rs. 35,000

For Product Q: 45 units * Rs. 700 per unit = Rs. 31,500

For Product R: 80 units * Rs. 900 per unit = Rs. 72,000

For Product S: 90 units * Rs. 950 per unit = Rs. 85,500

2. Variable Costs: Variable Costs for each product include labor and raw material costs.

Labor Cost per Unit:

For Product P: 10 hours * Rs. 10 per hour = Rs. 100

For Product Q: 12 hours * Rs. 10 per hour = Rs. 120

For Product R: 8 hours * Rs. 10 per hour = Rs. 80

For Product S: 4 hours * Rs. 10 per hour = Rs. 40

Raw Material Cost per Unit:

For Product P: 6 kgs * Rs. 25 per kg = Rs. 150

For Product Q: 5 kgs * Rs. 25 per kg = Rs. 125

For Product R: 10 kgs * Rs. 25 per kg = Rs. 250

For Product S: 12 kgs * Rs. 25 per kg = Rs. 300

3. Total Fixed Costs: Total Fixed Costs include factory rent and other overheads.

Factory Rent: Rs. 100,000

 Other Overheads: Rs. 20,000

Total Fixed Costs = Rs. 100,000 + Rs. 20,000 = Rs. 120,000

Total Profit is determined by subtracting total variable costs and total fixed costs from
total sales revenue.

Total Sales Revenue:

Rs. 35,000 (Product P)

Rs. 31,500 (Product Q)

Rs. 72,000 (Product R)

Rs. 85,500 (Product S)

Total Sales Revenue = Rs. 35,000 + Rs. 31,500 + Rs. 72,000 + Rs. 85,500 = Rs. 224,000

Total Variable Costs:

Rs. 100 (Product P)

Rs. 120 (Product Q)

Rs. 80 (Product R)

Rs. 40 (Product S)

Rs. 150 (Product P)

Rs. 125 (Product Q)

Rs. 250 (Product R)

Rs. 300 (Product S)

Total Variable Costs = Rs. 100 + Rs. 120 + Rs. 80 + Rs. 40 + Rs. 150 + Rs. 125 + Rs. 250
+ Rs. 300 = Rs. 1,165

Total Profit = Total Sales Revenue - Total Variable Costs - Total Fixed Costs

Total Profit = Rs. 224,000 - Rs. 1,165 - Rs. 120,000 = Rs. 102,835

So, Company XYZ’s budgeted profit for the year is Rs. 102,835.

Conclusion:

At this meeting, decisions will be taken about the long-term viability of the budget plan as
well as the yearly performance objectives. To ensure the company's long-term financial
stability, all future tactical and strategic actions must be based on this mission statement.
Answer 3(b)

Introduction:

Profit Volume Ratio and Contribution per Unit are two important financial measures that a
company may use to improve its pricing, production, and sales strategies. This study reveals
how increased sales translate into improved financial performance for businesses. After
deducting operational expenditures, a company's "Contribution per Unit," also known as its
"Contribution Margin per Unit," is used to calculate profitability. Forecasting a product's
future sales is critical. Profit volume (PV) as a proportion of revenue can be used to assess a
company's financial health. The figure depicts the link between profit and income. Divide
total revenue by the proportion of sales related to variable expenses to obtain the profit
margin on each unit sold. An increase in the PV Ratio directly correlates to an increase in the
unit gross margin.

Concept and application:

Yes, please enable us to properly investigate your question and our choices for action.

In light of what we now know,

Total Sales: Rs. 1,250,000

Number of units sold: 25,000

Variable Cost components:

Raw Material: Rs. 250,000

Labor: Rs. 345,000

Variable Overheads: Rs. 150,000

Fixed Costs: Rs. 400,000

Profit: Rs. 105,000

a) Contribution per unit:

The "contribution per unit" is the amount of money that each unit contributes to
supporting continuing expenditures and profit.

Contribution per unit = (Total Sales - Total Variable Costs) / Number of units sold

Total Variable Costs = Raw Material + Labor + Variable Overheads

Total Variable Costs = Rs. 250,000 + Rs. 345,000 + Rs. 150,000 = Rs. 745,000

Contribution per unit = (Rs. 1,250,000 - Rs. 745,000) / 25,000

 Contribution per unit = Rs. 505,000 / 25,000

Contribution per unit = Rs. 20

b) PV Ratio (Profit Volume Ratio):

Profit Volume (PV) Ratio demonstrates the contribution as a percentage of sales. It shows
the estimated return on investment for every rupee spent.

PV Ratio = (Contribution / Total Sales) * 100

PV Ratio = (Rs. 505,000 / Rs. 1,250,000) * 100

PV Ratio = 40.4%

c) Number of units required to generate a profit of Rs. 70,000:

Using contribution per unit, it is possible to calculate the number of units required to
create a certain amount of money.

Let X be the number of units to be sold for earning a profit of Rs. 70,000.

Contribution per unit * X = Desired Profit

Rs. 20 * X = Rs. 70,000

Now, solve for X:

X = Rs. 70,000 / Rs. 20

X = 3500 units

So, to earn a profit of Rs. 70,000, SRT & Co. needs to sell 3,500 units.

In summary:

a) Contribution per unit = Rs. 20

b) PV Ratio = 40.4%

c) Number of units to be sold for earning a profit of Rs. 70,000 = 3,500 units

Conclusion:

Two financial measures, the PV ratio and the contribution per unit, may have an influence on
pricing, profit objectives, and profitability evaluations. These assessments can help with
decision-making and provide useful information about a person's financial status.