CA Final SCMPE Question Paper May 2022 – CA Final SCMPE Study Material is designed strictly as per the latest syllabus and exam pattern.
SCMPE CA Final May 2022 Question Paper
AB Electronics Limited is a well-established manufacturing company manufactures household electronic gadgets like Air Conditioners, Refrigerators, Washing Machines etc. and almost all types of kitchen | appliances. Company’s main motto is to maintain the quality, for the said purpose company follows Total Quality Management (TQM). It is well known for its quality products. In terms of quality, goodwill of the company is very high. As company never compromises in quality, customers trust in company’s product. Company is also able to charge good prices from customers due to their quality and brand name.
The management of AB Electronics Limited has pointed out that since last two years company’s sales are decreasing continuously. Customers are not showing interest in their products and company is going on at par despite of good quality products and brand name, company is not able to create its products demand. Company investigated its internal departments to see whether there is an issue of quality. They spend an extra amount of 1% of its cost on testing the products for their quality check and also make a test check on inward and outward materials. As a result of all these, company found that everything is as per its standard.
To resolve this problem, company decided to decrease its selling price for various products so that demand can be increased. In view of this company has decreased its selling price by 5% but decrease in selling price does not affect much. As company has a good name in the market and well known in the market increase in marketing and advertisement expenses is also not justified. Human resources of company are also satisfied with company’s policies for them. Company has a good relationship with the workers and also pay a handsome remuneration to them. Internal working atmosphere of company is up to standard and workers work as team members and there are no issues with unions and company employs skilled workers.
Management of company is not able to find out the problem as to why their sales are decreasing despite of good quality and at best prices, so they decided to appoint a team of experts to point out the problem. The experts team investigate the internal procedures as well as make surveys of market and also take feedback from customers, then they observe that now a days in modern era there are products with new artificial intelligence which makes life easy. They are easy to use and more efficient and also energy savers and have all features to attract customers and provide more value for money to customer. In modern urban life fully automatic j electronic devices which requires fewer human efforts & time and operates on artificial intelligence are preferred. People are more interested in products which they can operate at remote locations using wireless fidelity.
Observations of the expert team are as follows:-
1. Products of AB Electronics Limited are not as per latest technology and company is repeatedly manufacturing the same product since its inception.
2. AB Electronics Limited’s products are not based on wireless fidelity technology and not much user friendly.
3. To maintain the quality and durability AB Electronics Limited uses heavy materials demanding large space and extra weight.
According to the expert’s team:
The company is doing well in internal processes and also working atmosphere is good and became a fame since last two decades and also follows TQM to some extent but as you know “Change is the law of world” but you j have not updated your products with technology and pushing the company with outdated technology without considering the long-term sustainability. Quality matter much but features also matters. To resume your position back in the market you need to spend on R&D not on advertisement or test check. If company manufactures goods with latest technology and according to modern era’s need, it may beat its competitors because of its goodwill and brand name. So, we suggest you-to update your processes and manufacture products with latest technology having easy to use and energy efficient features.
As management of AB Electronics Limited has to be spend a huge amount and efforts to get back its position in the market, company wants to seek your opinion.
You are required:
(a) As per strategic position analysis where does the company stand. (2 Marks)
(b) Demonstrate the applicability of Six C’s of TQM in AB Electronics Limited. (6 Marks)
(c) Give your recommendation for implementation of Six Sigma techniques in AB Electronics Limited. (6 Marks)
(d) Currently at which phase of life cycle in AB Electronics Limited product is going on and also list out the uses of product life cycle. (3 Marks)
(e) “Change is the law of world”. State these words in contrast of this situation. (3 Marks)
(1) The Six C’s for successful implementation of a Total Quality Management (TQM) process is depicted as follows:
Commitment: TQM culture is to be developed, so that quality improvement becomes a normal part of everyone’s job, a clear commitment, from the top mgt. of AB electronics has been provided. Without this all else fails. It is not sufficient to delegate ‘quality’ issues to a single person since this will not provide an environment for changing attitudes and breaking down the barriers to quality improvement. Such expectations must be made clear, together with the support and training necessary to their achievement.
Culture: Training lies at the centre of effecting a change in culture and attitudes. Management accountants, too often associate ‘creativity’ with ‘creative accounting’ and associated negative percep-tions. This must be changed to encourage individual contributions and to make ‘quality’ a normal part of everyone’s job. AB electronics has been able to maintain its quality throughout the period and has been able to keep their employees happy.
Continuous Improvement: Recognition that TQM is a ‘process’ not a ‘programme’ necessitates that we are committed in the long term to the never-ending search for ways to do the job better. There will always be room for improvement, however small. AB electronics has not been to improve in terms of change in technology over the period. They need to spend the amount on R&D in order to improve and compete in the market.
Co-operation: The application of Total Employee Involvement (TEI) principles is paramount. The on-the-job experience of all employees must be fully utilised and their involvement and co-operation sought in the development of improvement strategies and associated performance measures.
Customer Focus: The needs of the customer are the major driving thrust; not just the external customer (in receipt of the final product or service) but the internal customer’s (colleagues who receive and supply goods, services or information). Perfect service with zero defects in all that is acceptable at either internal or external levels. Too frequently, in practice, TQM implementations focus entirely on the external customer to the exclusion of internal relationships; they will not survive in the short term unless they foster the mutual respect necessary to preserve morale and employee participation.
AB Electronics is not able to meet the needs of their customer as the customer prefer modern technology as compared to the outdated one.
So the company needs to focus on the needs of their customer.
Control: Documentation, procedures and awareness of current best practice are essential if TQM implementation is to function appropriately. The need for control mechanisms is frequently over-looked, in practice, in the euphoria of customer service and employee empowerment. Unless procedures are in place improvements cannot be monitored and measured nor deficiencies corrected.
(2) DMAIC approach will be used as this method is very robust. It is used jg to improve existing business process:
Define: It means define the problems, projected goals & customer requirements. The problem decreasing sales despite of good quality and best prices. To identify the solution to overcome this problem by investing in technology and fulfill customer requirements.
Measure: AB electronics needs to measure the process to determine the current performance of the company. Performance needs to be measured in respect of quality and customer retention.
Analyse: AB electronics needs to analyse the process to determine the root cause of variation and poor performance. AB electronics identified that products are not as per latest technology and co. is continuously manufacturing same product since inception, products are not based on wireless fidelity technology and not user friendly, materials used in manufacturing demand large space and extra weight.
Improve: AB Electronics should improve the process by addressing and eliminating the above stated root cause. The company should spend heavily on R&D to improve its technology and come at par with that of the competitors. Company should employee trained staff and provide training to existing staff about the use of new technology.
Control: Control means maintaining the improved performance and future performance. AB Electronics would be required to monitor the performance ongoing basis. It should keep on pace with the change in technology and shall keep their products updated as per the needs of the market.
(3) AB Electronics limited is currently at Declining Stage of product life cycle as its sales are continuously declining.
Uses of Product Life Cycle (PLC) Costing
a. As a Planning tool, it characterizes the marketing challenges in each stage and poses major alternative strategies, i.e. application of Kaizen.
b. As a Control tool, the PLC concept allows the company to measure product performance against similar products launched in the past.
c. As a Forecasting tool, it is very important because sales histories exhibit diverse patterns and the stages vary in duration.
d. It leads to appropriate strategy formulation depending on the stages of the product lifecycle.
(4) Change is the law of world states that unless you change your business will not succeed. One must adapt changes as quickly as possible to stay in business.
In case of AB electronics since the company is focusing on its outdated technology the sales of company kept on decreasing despite of providing quality products. Therefore it needs to adapt to new technologies with time in order to maintain its position in the market.
A Limited is manufacturing a part, which is used in computer. Presently the company follows traditional system of the purchasing, quality check, storage and processing. CEO of the company has suggested that by implementing Just in time inventory system for. material purchases, the company will benefit a lot. As per present policy of inventory, raw material required for 2 months production and finished goods equivalent to the 2 weeks production are kept in stock. Other information are as under:
The Average inventory of raw material is held by the company throughout the year. Purchase cost of the raw material is ₹ 15 Crores for the year. Now on applying Just in time, the company decided to take its production requirement directly from the suppliers. This will result into an increase of the 10% in the cost of raw material purchased but will save the inventory holding cost by ₹ 70 Lakhs. Raw material inventory insurance will not be required now, which is ₹ 1.40 Crores per annum. Savings in other overheads will be ₹ 20 Lakhs per annum.
Projected production for the year is 2,00,000 Units. The company plans to maintain inventory of finished goods as per present policy only. There is a possibility of production stoppages due to unavailability of raw material from the suppliers. This could happen due to delay in delivery by the suppliers. The labour works in one 8-hour shift per day and will remain idle if there is no material to work on. Due to stoppage of production for this reason, it is possible to have stockout of 4,000 units in a year. Stockout represents lost sales opportunity due to unavailability of finished goods ie. the customer walks away without purchasing any product. However, if overtime is done by labour the stockout may reduced to 2,500 units. This overtime will cost ₹ 20 Lakhs.
Currently, sale price is ₹ 6,000 per unit. Raw material procurement cost is ₹ 1,000 per unit, that will increase by 10% under Just in time inventory system. Other variable overheads are ₹ 3,250 per unit.
A. Advise on:
(i) Acceptability of the company regarding implementation of the Just in time procurement system. (4 Marks)
(ii) Necessity of overtime cost be incurred to reduce Stockout. (2 Marks)
B. RECOMMEND factors that the management needs to consider before implementing the just in time procurement system. (4 Marks)
(i) Implementing Just in time procurement system will benefit the company by ₹ 18,75,000 per year as explained below:
|Particulars||Current Purchasing Policy (₹)||JIT Procurement System (₹)|
|Raw material procurement cost per year||15,00,00,000||16,50,00,000|
|OTHER Overheads (No longer required in JIT)||20,00,000||—–|
|Insurance Cost on raw material inventory (No longer required in JIT)||1,40,00,000||—–|
|Warehouse rental for storing raw material (No longer reqinred in JIT)||70,00,000||—–|
|Overtime Charges under JIT to reduce Stockouts (note 1)||——||20,00,000|
|Stockout Cost (note 2)||—–||41,25,000|
|Total Relevant Cost||17,30,00,000||171,125,000|
Therefore, moving to just in time procurement system results in savings 1 of ₹ 18,75,000 per year for the company.
(A) Note 1: Should overtime cost be incurred to reduce Stockouts?
Contribution per unit = Sale price – Variable production cost – Variable selling, distribution cost per unit; Variable production cost under the just I in time system = ₹ Contribution per unit = ₹ 6,000 – 1,100 – ₹ 3250 per unit = ₹ 1650 per unit.
Overtime cost can reduce stockouts from 4,000 units to 2,500 units that is I customers’ demand of 1,500 units more can be met.
Contribution earned from selling these 1,500 units = 1,500 × ₹ 1,650 per unit = ₹ 24,75,000.
Therefore, the contribution earned of ₹ 24,75,000 is more than the related overtime cost of ₹ 20,00,000. Therefore, it is profitable to incur the overtime cost.
Note 2: Stockout Costs
Out of the total shortfall of 4,000 units, by spending on overtime 1,500, units of demand can be met. Therefore, actual stockout units is only 2,500 units. As explained above, contribution per unit is ₹ 1650 per unit. Therefore, stockout cost = 2,500 units × ₹ 1,650 per unit = ₹ 41,25,000.
(B) The company plans to eliminate its raw material inventory altogether. Raw material will be delivered as per production schedule directly at the factory shop floor, from whence production will begin. The management should therefore carefully consider the following points:
(a) The entire production process has to be detailed and integrated sequentially. This is essential to know because it should be known in advance when in the sub-assembly process is each raw material is required and in what quantity.
(b) Since production is dependent on delivery and quality of raw material, heavy reliance is being placed on suppliers. They should be able to guarantee timely delivery of raw material of the appropriate quality. The company is paying a premium of 10% of original cost, that is ₹ 100 per unit (₹ 1,100 – 1000 per unit) in order to ensure the same. Each unit gives a contribution of 1650 per unit, which is 27.5% of the sale price per unit. Lost sales opportunities due to unavailability of raw material or non-conformance of the material can result in substantial losses to the company. While, portion of this has been factored while doing the cost benefit analysis of implementing Justin-time systems, it needs careful consideration and monitoring even after implementation. Therefore, to hedge its loss, the management and suppliers should agree on penalties or costs the supplier should incur should there be any delay or non-conformance in quality of materials beyond certain thresholds.
(c) Accurate prediction of sales trends is important to determine the production schedule and finished goods planning.
Continuous monitoring of the system even after implementation is essential to ensure smooth operations. Management commitment and leadership support is essential for its successful implementation & working.
ORAL Ltd. is engaged in marketing of wide range of electronic goods. The area is divided in four zones – North, South, East and West. Each zone has zonal sales head. The company fixes annual sales target for zonal heads. The cost of sales target fixed during 2021 is as under :
North = ₹ 25,00,000
South = ₹ 22,00,000
East = ₹ 26,50,000
South = ₹ 20,00,000
The Zonal sales managers are paid commission @ 10% on sales made by them. During 2021 the sales commission paid for each zone is as under:
North = ₹ 3,00,000
South = ₹ 2,90,000
East = ₹ 3,10,000
West = ₹ 2,40,000
The summary of the variances calculated for each zone are as under :
The Company wants to award an incentive to the best performer among all the zonal managers on the basis of:
1. Contribution earned to the company
2. Achievement of the sales target.
3. Sales margin achieved against target margin.
(A) Calculate the amount of sales target fixed and the actual amount of contribution earned in case of each of the zonal sales manager. (5 Marks)
(B) Analyze the overall performance of these zonal sales managers taking j three relevant base factors and recommend the best performer. (4 + 1 Marks)
(i) Sales price variance = (Actual sales qty. × actual qty.) minus (Actual sales qty. × std. price)
= Actual sales – AQ × SP
|NORTH||3000000 – AQ × SP = 40000|
|SOUTH||29000000 – AQ × SP = (60000)|
|EAST||3100000 – AQ × SP = (50000)|
|WEST||2400000 – AQ × SP = (20000)|
NORTH AQ × SP = 2960000
SOUTH AQ × SP = 2960000
EAST AQ × SP = 3150000
WEST AQ × SP = 2420000
SALES VOLUME VARIANCE = AQ × SP – BQ × SP
|NORTH||2960000 BQ × SP= (60000)|
|SOUTH||29600000 BQ × SP= 260000|
|EAST||3150000 BQ × SP= 150000|
|WEST||2420000 BQ × SP = 80000|
Budgeted Sales =
NORTH – 3020000
SOUTH – 2700000
EAST – 3000000
WEST – 2340000
(ii) Calculation of standard margin
NORTH 3020000 – 2500000 = 520000
SOUTH 2700000 – 2200000 = 500000
EAST 3000000 – 2650000 = 350000
WEST 2340000 – 2000000 = 340000
SALES MARGIN MIX VARIANCE = RAQ X SM – BQ X SM
|NORTH||RAQ × SM-520000 = (140000)|
|SOUTH||RAQ × SM-500000 = 80000|
|EAST||RAQ × SM-350000 = 170000|
|WEST||RAQ × SM-340000 = (30000)|
NORTH – 380000
SOUTH – 580000
EAST – 520000
WEST – 310000
ASSUMING qty. Variance as NIL
NORTH 380000 + 40000 = 420000
SOUTH 580000 + (60000) = 520000
EAST 520000 + (50000) = 470000
WEST 310000 + (20000) = 290000
SR Limited deals in readymade garments and its clients majorl’y include medium and large outlets. There are regular complaints from clients regarding delivery issues. As SR Limited understand the critical behaviour of clients and want to establish “Customer Profitability Analysis” (CPA) so that critical customers who are key factors can be recognized. SR Limited provide following information regarding its four major customers:
Order Processing Cost – 12,000 Per Order
Product Handling Cost – 0.90 per unit
Transport Cost – ₹ 18 per Kilometer
(a) Evaluate the Customer Profitability by calculating Total Profit as well as Profit Per Unit from each customer for SR Limited and interpret each customer. (4 + 4 Marks)
(b) Demonstrate three fundamental aspects of CRM to facilitate building relationship with profitable customer. (6 Marks)
(c) Enumerate two benefits of Customer Profitability Analysis (CPA). (2 Marks)
(d) Discuss the relevance of Customer Profitability Analysis in reference to Banking and Hotel sector. (4 Marks)
Customer’s Profitability Statement
If we first consider the sale volume of cases, customer D is the biggest customer alone accounting for 30.77% of total sales volume, followed by customer B (26.35%), customer C (23.08%) and customer A (19.80%). However, in terms of profit per customer, Customer D is the most profitable with the cumulative customer profits of ₹ 123 8100. Customer C contributes 160200. customer A Generates third highest profit amounting to 58200 whereas customer generates a loss of 286800.
Customer D is the most profitable accounting for 71 % of the total customer profits. In terms of sale volume also, the customer ranks first.
However, the customer B is not profitable because of the following reasons:
For a customer that provides 26.35% of volume, the number of orders placed in a year are 200. Customer D giving 30.77% of volume placed 100 orders in a year. This indicates that customer B, although a small customer, places orders more frequently than other larger customer. Therefore, order processing costs are higher for customer B. The company may revise ordering schedule for this customer or find out the reason for higher proportion of purchase orders, in order to pass on some of the cost to the customer. For example, let us say, customer B has an agreement with the company to provide cases “just in time” resulting in more frequent orders as compared to other customers. Therefore, the company is providing flexibility in procurement to customer B. For this convenience, it may pass on some of the ordering cost to customer B by way of a higher selling price.
Again, given the volume, the number of deliveries to customer B (4) is at a higher proportion compared to the other customers. The company may revise delivery schedule for this customer or find out the reason for higher proportion of deliveries, in order to pass on some of the cost to the customer. For example, let us say, customer B has an agreement with the company to provide cases “just in time” resulting in more frequent deliveries as compared to other customers. Therefore, the company is providing flexibility in procurement to customer D. For this convenience, it may pass on some of the delivery cost to customer B by way of a higher selling price or a lower discount.
Customer A is the smallest customer providing only 19% of total sale volume. However, with a contribution per case at ₹ 36 per unit and a profit per unit at ₹ 1.62 per unit, it is the most profitable of all customers. The primary reason for this is lower contribution per unit than other customers. Each unit sold to customer A yields a contribution of ₹ 36 as compared to a contribution of ₹ 45 to customer B, D, the biggest customer.
As regards product handling cost, each customer is currently charged 0.90 per unit sold. The company, if feasible, apply Activity Based Costing technique to find out if this can be allocated based on the cost driver for each customer. Let us say, packing cost before shipment is part of product handling cost. If customer B requires special packing to ship the goods, then customer D needs to be allocated a higher packaging cost as compared to the others. This cost can be recouped from customer D through a higher selling price.
(B) Supply chain management is the technique to integrate the supplier, manufacturing, store, and distribution function efficiently; in order to j procure, produce and distribute at/in right time, quantity and place 1 respectively. For effective distribution, CRM can be enabling tool. CRM is | an integrated approach to manage and coordinate customer interactions | to identifying, acquiring, and retaining customers. CRM enables businesses j to understand and retain customers (through better customer experience) j apart from attracting new customer, in order to increase profitably and j decrease customer management costs. CRM system, comprises following | three fundamental aspects to facilitate building relationship with profitable customers –
Operative CRM – takes care of individual transactions and is used by operational team. Interactions by customers are kept in the data base and are used later by the service, sales, and marketing team for operational decisions. In JSM, the staff who is responsible to deal with customer must be given access to customer’s details including all the information of activities performed earlier. This will enhance the JSMs’ staff’s efficiency to deal with customer-facing processes in a better way.
Analytical CRM – analyses the data created on the operational side of the CRM effort for evaluation and prediction of customer behaviour. In JSM, analytical CRM can highlight the patterns in customers’ behaviour which will help sale team while pitching the product at JSM.
Collaborative CRM – ensures that information about customer must flow seamlessly throughout the supply chain, majorJy distribution channel; in form of collaborative effort by all associated department of JSM to increase the quality of services provided to customers. Increase in utility at customer end will result in increased loyalty. Collaborative CRM comprises interactive technology like email, digital media to simplify the communications between customers and staff which would help in building relationships.
(C) Benefits of Customer Profitability Analysis:
It helps the supplier to identify which customers are eroding overall profitability and which customers are contributing to it.
It can help to provide a basis for constructive dialogue between buyer and seller to improve margins.
(D) Service organisations, such as a bank or a hotel, in particular need to cost customers. A bank’s activities for a customer will include the following types of activities:
- Withdrawal of cash
- Unauthorised overdraft
- Request for a statement
- Stopping a cheque
- Returning a cheque because of insufficient funds
Different customers or categories of customers will each use different amounts of these activities and so customer profitability profiles can be built up, and customers can be charged according to the cost to serve them. A hotel may have activities that are provided for specific types of customers, such as well laid-out gardens, a swimming pool and a bar. Older guests may appreciate and use the garden, families use the swimming pool and business guests use the bar. If the activities are charged to the relevant guests a correct cost per bed occupied can be calculated for this type of category. This will show the relative profitability and lead to strategies for encouraging the more profitable guests.
Vasco Limited manufactures 3 products UV, DV and XV. Due g- to scarcity of machine hours, management of Vasco Limited is planning > to adopt throughput accounting in the company. Information relating to products are as follows:
Total factory cost is ₹ 1,05,00,000 and available machine hours are 35,000 hours.
Vasco Limited has to supply 2,500 units of product DV to Alfa Limited as per a court judgment which cannot be denied.
(i) Rank the products using throughput accounting and prepare a statement showing optimal mix for maximization of profit. (5 Marks)
(ii) Whether court judgment has affected the optimum plan of profit of 1 the company, if yes, by which amount ? (2 Marks)
(iii) Briefly explain 3 operational measures of theory of constraints. (3 Marks)
(i) Calculation of Rank According to ‘Product Return per minute’
|Hours per unit||5||6||4|
|Contribution per hour||500||250||375|
(ii) ) Ranking Based on ‘TA Ratio’
|Contribution per Hour||500||250||375|
|Factory Cost per Hour (1,05,00,000/35,000)||300||300||300|
|TA Ratio (Cont. per minute / Cost per minute)||1.67||0.83||1.25|
|Ranking Based on TA Ratio||I||III||II|
Statement Showing Optimal Mix
|Contribution per unit||2500||1500||1500|
Statement Showing Optimal Mix (without court case)
|Contribution per unit||2500||1500||1500|
Yes the court judgment has affected the optimum plan of profit of the company, it has resulted in loss of profit of ₹ 375000.
(iii) Operational Measures of Theory of Constraints
The theory of constraints focuses on revenue and cost management when faced with bottlenecks.
It advocates the use of three key measures. These are:
(A) Throughput (T)
Throughput as a TOC measure is the rate of generating money in an organization through Sales.
Throughput = (Sales Revenue – Unit Level Variable Expenses)/Time
Direct Labour Cost is viewed as a fixed unit level expenses and is not usually included.
(B) Investment (I)
This is money associated with turning materials into Throughput and do not have to be immediately expensed.
Includes assets such as facilities, equipment, fixtures and computers.
(C) Operating Expense (OE)
Money spent in turning Investment into Throughput and therefore, represent all other money that an organisation spends.
Includes direct labour and all operating and maintenance expenses
Discuss the effect of Budget difficulty on Performance Evaluation.
Kingstorm & Co. manufactures industrial tools. Management is having emphasize on quality and well-known name among customers. The following details are provided by the Kingstorm:
Process time – 2 days for batch
Move time – 0.5 days per batch
Wait time – 3 days per batch
Inspection time – 1.5 days per batch
Queue time – 4.5 days per batch
Units per batch – 40 Units
You are required to:
(i) Calculate Manufacturing Cycle Efficiency (MCE) and interpret it. (2 Marks)
(ii) Manufacturing Cycle Time. (1 Mark)
(iii) Delivery Cycle Time. (1 Mark)
(iv) Calculate the New Manufacturing Cycle Time and Manufacturing Cycle Efficiency (MCE) if queue time is eliminated to 3 days using lean production. (1 Mark)
Once budgets have been set as performance targets, surely performance will be evaluated. This can be simply a comparison of actual with budgeted performance or alternatively can be a more detailed comparison of actual performance with flexed budget performance, as is found in variance analysis and operating statements. The evaluation step is often one of the j most argumentative as it is here that performance is likely to be criticised and employees will be sensitive. There are many potential difficulties:
Budgets have no motivational effect unless they are accepted by the managers involved as their own personal targets.
Up to the point where the budget is no longer accepted, the more demanding the target the better the results achieved.
Demanding budgets are seen as more relevant than less difficult targets, but negative attitudes result if they are seen as too difficult.
Acceptance of budgets is facilitated when good upward communication exists. The use of departmental meeting was found helpful in encouraging managers to accept budget targets.
Managers’ reactions to budget targets were found affected both by their own personality and by more general cultural and organizational norms.
(i) Manufacturing Cycle Efficiency _ Processing Time
= 2/11.5 = 17.4096
(ii) Manufacturing Cycle time = 2.0 hrs. + 1.5 hr.+ 0.5 hrs+ 4.5 hrs/40 Uts = 8.5 Days.
(iii) Delivery time = 2.0 hrs.+ 1.5 hr.+ 3.0 hrs.+ 0.5 hrs+ 4.5 hrs = 11.5 days
(iv) Manufacturing Cycle Efficiency
What is Oligopoly market structure ? Discuss the various pricing strategies and non-pricing strategies in oligopoly market structure. (5 Marks)
4(c) A market structure where there are few firms producing or selling homogeneous or identical product. In this type of market structure the firms are aware of the mutual interdependence of investment, production process, advertising and sales plan of its rival firm. Hence, any change in any variable by a firm is likely to have an equal reaction on the part of other competing firms. It is therefore, clear that the oligopolistic firm, while determining the price for its product, consider not only the demand for the product but also the reactions of the other firms in the industry to any action or decision it may take. If a firm does not follow or adapt its pricing policy in consonance with its competitor, the shift in the sales will be sensitive. That means demand will shift towards the lower price. Thus, each firm will study the potential reaction before increasing or decreasing the selling price. The firms in oligopolistic market maintain the price of the J product either by close analysis of each other’s behaviour or by means of cooperation and collusion.
Pricing Strategies of Oligopolies
- Predatory Pricing: Keeping price artificially low, and often below the full cost of production.
- They may also operate a Limit-Pricing Strategy to discourage entrants, which is also called entry forestalling price.
- Oligopolists may collude with rivals and raise price together, but this may attract new entrants.
- Cost-Plus Pricing: A straightforward pricing method, where a firm sets a price by calculating average production costs and then adding a fixed mark-up to achieve a desired profit level. There are different versions of cost-plus pricing, including full cost pricing, where all costs – that is, fixed and variable costs – are calculated, plus a mark- up for profits, and contribution pricing, where only variable costs are calculated with precision and the mark-up is a contribution to both fixed costs and profits.
Non-price competition is the favoured strategy for oligopolists because price competition can lead to destructive price wars – examples include:
- Trying to improve Quality & After Sales Servicing, such as offering extended guarantees.
- Spending on Advertising, Sponsorship, and Product Placement.
- Sales Promotion, such as buy-one-get-one-free, is associated with the large supermarkets, which is a highly oligopolistic market, dominated by three or four large chains.
- Loyalty Schemes, which are common in the supermarket sector, such as Reliance’s One Card.
XYZ Company is a manufacturer of an instrument which have monopoly in the market. The company is manufacturing this instrument since 2000. Two parts, Part ‘A’ and Part ‘B’ are required to manufacture this instrument. Part ‘A’ is manufactured at plant situated in Gujarat. Part B is manufactured at plant situated in Rajasthan. The instrument is being made by assembling the parts in assembling plant situated in ‘Gurgaon’. The Part ‘A’ and Part ‘B’ cannot be sold individually in the market.
Recently, the company has decided to benchmark the performance of the each plant individually by setting the cost targets. For this a new CEO has been appointed. The newly appointed CEO suggested that to assess the performance of each plant, a divisional transfer pricing policy is required to be implemented in each plant. For this Managing Director of the company is opined that the transfer price should be decided by Negotiating or bargaining price between each divisional manager. CEO is not in agreement with the opinion of the Managing Director.
You have been appointed to analyze and give advice :
(i) Whether opinion of the Managing Director is correct. Give reasons. (2 Marks)
(it) Options available for deciding the method of transfer pricing. While giving your advice discuss the advantages, disadvantages and behavioural consequences of each method. (8 Marks)
(i) No, the decision of Managing Director is not correct as both the division does not have any external market and therefore does not enjoy any bargaining power. This method will lead to conflict between the division and both the division won’t be able to reach at consensus.
(ii) Market Based Transfer Price:
Transfer price is based on market price of goods or services similar to the ones transferred internally within divisions. The transfer can be recorded at the external market price, adjusted for any costs that can be saved by internal transfer e.g. selling and distribution expenses, packaging cost.
- Since demand and supply determine market price, it is likely to be unbiased.
- Market prices are less ambiguous compared to cost-based pricing. They cannot be manipulated.
- Since the pricing is competitive, divisional performance can be linked more objectively to its contribution to the company’s overall profits.
- Market price may not be completely unbiased, if a competitive environment does not exist. Examples could be a distress sale market or manipulative pricing strategies (like price discrimination) that could distort the market price.
- May not be suitable when market prices can fluctuate widely or quickly.
- Goods that are transferred may be at an intermediate stage in the production process. At times market price may not be available for such intermediate goods.
The existence of an external market promotes competitiveness within the entity. Both managers will be motivated to improve performance. The supplying division will have to compete with the outside vendor that may lead to cost competitive operations. The purchasing division has more alternatives to choose from. However, the purchasing division must ensure that quality of the goods is also comparative. Generally, goods produced in-house may be as per specifications unique to the company’s products. Goods purchased externally may require additional work that involves additional cost.
Cost Based Transfer Price:
Cost based pricing models are based on the internal cost records of the company. They may be used when the management wants to benchmark performance with the cost targets set within the company or may be an alternative when market prices for the goods cannot be determined due to lack of comparable market. Cost based transfer price may consider variable cost, standard cost, full cost and full cost plus mark-up. Therefore, the basis for cost price may be subjective and has to adapted based on its suitability to the entity.
- Performance can be benchmarked to internal cost targets (budgets).
- Information is more easily available as compared to market price. While evaluating performance, cost components can be broken down further for internal analysis. Hence, the basis for transfer pricing is more clearly defined as compared to market price, which may be subject to the vagaries of demand and supply.
- The cost basis on which transfer pricing is used can be subjective since there can be multiple ways of interpreting costs. Variable cost, standard cost, full cost are some of those methods. Managers may not always agree on the basis to be followed, since each will try to use the one most beneficial to their division.
- Since cost is passed on to another division, there may be instances when managers of the supplying division may find little incentive to lower the cost of production by adopting cost efficient methods.
Marginal Cost Based Transfer Price:
Transfer price is recorded marginal cost required to produce one additional unit.
Useful when the supplying division has excess capacity. The method ensures that the supplying division recoups the cost of internal transfer, while the purchasing division enjoys the benefit of a lower price compared to the market.
No fixed cost or mark-up is allowed to be charged to the purchasing division. Each unit of internal sale will hence result in a loss at approximately fixed cost per unit.
In such a setup, profit evaluation is centralized at the entity level. There-fore, the supplying division may have little incentive to find measures for making cost efficient. Non-recovery of fixed costs would demotivate the supplying division. It may oppose certain decisions like capacity expansion or further infusion of investment, that lead to higher fixed costs.
Standard Cost Based Transfer Price
Transfer price is recorded at a predetermined cost, which is based on budgets and certain assumptions regarding factors of productions like capacity utilization, labour hours etc. Any variance between the cost absorbed using standard cost and the actuals, is either absorbed by the supplying unit or in some cases could be passed to the purchasing unit as well.
Performance evaluation can be done against budgeted cost targets. Facilitates better understanding of costs through variances. This enables the manager to take measures to improve performance.
Profit performance measurement is centralized and cannot be measured for individual divisions.
Budgeted costs are generally based on historic records. Therefore, little incentive exists to make costs more efficient to improve profitability.
Cost plus a Mark-up Based Transfer Price:
Transfer price is based on full product cost plus a mark-up. Mark-up could f be a percentage of cost or of capital employed.
Since the supplying division makes a profit, this method addresses the disincentive problem discussed above in the full cost method.
Since the transfer price under this method could closely approximates its market price, the purchasing division may bear a share of the selling expenses although none was incurred for such internal sales. Again, this could distort the performance of purchasing division. Therefore, it is essential to adjust the transfer price for such cost savings.
The problem with using full cost as a basis for transfer pricing is that it distorts the company’s cost structure while making decisions. The purchasing department would view the cost as a variable one, since it varies in proportion to the units purchased internally. In reality, this price includes a portion of fixed costs of the supplying division that is anyway a sunk cost, Consequently, the market price that the purchasing division may calculate based on the transfer price for the input supplied, may be slightly inflated. Special orders from purchasing division may typically be placed to meet short term demands. If transfer price is quoted at below full cost may be rejected because they could result in a loss for the supplying division. This could lead to sub-optimization of resources. Fixed costs remain constant in the short run, while the contribution margin from such special orders may have benefited the company as a whole. In such cases, management intervention has to happen for goal congruence.
Negotiation Based Transfer Price:
This is a go-between between market and cost methods. Managers of the purchasing and supplying divisions independently negotiate and arrive at a mutually agreeable transfer price.
Managers are given autonomy to decide whether to purchase (or sell) from its sister unit or source then from (or to) external market.
This method requires sufficient external information to be available regarding the external market price, terms of trade etc. Internal cost information must also be shared in order to negotiate a reasonable price.
These negotiations act as an integrating tool among the departments, it provides for autonomy in decision making at the same time promotes goal congruence through efficient performance of the concerned divisions. While autonomy is given to the managers, top management intervention may be required if decisions lead to sub-optimal utilization of resources. For example, when the purchasing division decides to procure from an external vendor quoting a lower price, at the same time supplying division has excess capacity, the management may have to intervene to ensure that resources are used optimally and that the decision benefits the company as a whole. Negotiated prices depend on the ability of the manager to bargain on behalf of the division. This could affect the division’s performance. The process may be time consuming that could even lead to conflict among the units.
Question 5 (b)
What is EMA ? Categories the under mentioned costs under following dimensions:
Environmental Prevention Costs
Environmental Appraisal Costs
Environmental Internal Failure Costs
Environmental External Failure Costs
Different costs: (4 Marks)
(i) Evaluating and picking pollution control equipment
(ii) Performing contamination tests
(iii) Creating environmental policies
(iv) Audit of environmental activities
(v) Improved systems and checks in order to prevent fines/penalties
(vi) Environmentally driven R&D
(vii) Failure in disposing toxic material
(viii) Cost of restoring land to its natural state
Environmental Management Accounting (EMA) is the process of collection and analysis of the information relating to environmental cost for internal decision making. EMA identifies and estimates the cost of environment S related activities and seek to control these cost.
(i) Implementation of the Target Costing technique requires intensive market research. Give your comments. (3 Marks)
(ii) State the impact of Target Costing on profitability. (3 Marks)
(i) Target cost is the difference between estimated selling price of a pro-posed product with specified functionality and quality and the target margin. This is a cost management technique that aims to produce and sell products that will ensure the target margin. It is an integral part of the product design.
While designing the product, the company needs to understand what value target customers will assign to different attributes and different aspects of quality. This requires use of techniques like value engineering and value analysis. Intensive marketing research is required to understand customer preferences and the value they assign to each attribute and quality parameter. This insight is required to be developed must before the product is introduced.
(ii) Target costing can have a startlingly large positive impact on profit-ability, depending on the commitment of management to its use, the constant involvement of management accountants in all stages of a product’s life cycle, and the type of strategy a company follows. Target costing improves profitability in two ways:
It places continuous emphasis on product costs throughout the life cycle of every product, and the management is completely aware of costing issues since it receives regular reports from the management accounting members of all design teams.
It improves profitability through precise targeting of the correct prices at which the company feels it can field a profitable product in the marketplace that will sell in a robust manner. This is opposed to the more common cost-plus approach under which a company builds a product, determines its cost, tacks on a profit and then does not understand why its .resoundingly high price does not attract buyers. Thus, target costing results not only in better cost control but also in better price control.
Note: If any organisation constantly issues a stream of new products, or if its existing product lines is subject to severe pricing pressure, it must make target costing a central part of its strategy.
If the shortcoming (highlighted in the previous heading) of target costing are dealt with by a management team, it will find that target costing is one of the best management accounting methods available for improving profitability.
SMS Hospital operates a 60-bed capacity Healthcare Unit and charges ₹ 4250 per bed per day from the patients. Following data have been provided for the year ended March 2022.
Fees Collected during the year – 5,10,00,000
Variable Cost – 2,10,00,000
Fixed Cost – 1,80,00,000
The requirement of nursing staff is in the ratio of 500: 1 mean for every 500-patient bed day 1 nurse requires. The remuneration of the nurse is ₹ 2,40,000 per annum.
Management of the hospital have following projections for the upcoming year:
(i) Variable cost will go up by 10%
(ii) Fixed cost will increase by ₹ 68,00,000 per annum.
(iii) Salary of the nursing staff and charges from patients will remain same. The number of patients is also not likely to increase in the next year.
The management is considering to open an ICU instead of above-mentioned Healthcare Unit which will be at par in initial 2 years but earn profits after that. ICU will also increase goodwill and social reputation of the Hospital.
You are required to:
(i) Prepare statement to show profitability of existing Healthcare Unit for 2022 and upcoming year. (3 Marks)
(ii) Break Even Bed Capacity on the basis of projections for upcoming year. (4 Marks)
(iii) Your advice on the basis of Financial as well as Non-Financial Factors to switch off from Healthcare Unit to ICU. (3 Marks)
(Note : – Nursing staff salary will be taken as Fixed Cost.)
(i) 1. Calculation of total bed days = total fees collected/charges per bed per day = 51000000/4250 = 12000 Bed Days
2. No. of Nurses required = 12000/500 = 24 Nurses
Total payment made to Nurses = 24 × 240000 = 5760000
3. Variable cost per bed day = 21000000/12000 = 1750
4. Variable cost for Upcoming year = 1750 + 10% = 1925
Particulars Current year Upcoming Year
|Particulars||Current year||Upcoming Year|
|Cost of nurses||5760000||5760000|
|Other Fixed Cost (other than Nurses)||12240000||19040000|
(ii) Break even capacity = Fixed Cost/Contribution per Unit.
Contribution per unit = 4250 – 1925 = 2325
BEP = (19040000 + 5760000)/2325 = 10666 Bed Days
(iii) On the Basis of financial consideration it should switch its operation from healthcare unit to ICU as we can see that profits in the healthcare unit has dropped drastically and ICU unit is going to give more profit in as compared to healthcare unit in the long run.
However on the basis of non-financial consideration healthcare unit is more important to people as more people require healthcare facilities as compared to that of ICU and if company shut down its healthcare facilities people of nearby areas might have to go too far of places to get these facilities which may be detrimental to them in terms of finances and health facilities.
A Consultancy firm having its branches across India is facing the problem of non-timely completion of services. Client are not satisfied with their services just because of delay. However, firm has a qualified team of professionals in different fields and the team members are highly qualified and experts in their field.
On investigation it was found that the main reason of delay is mobile phones of staff. Staff spent their valuable time on mobile phones however staff uses his or her mobile phones for 2 to 3 minutes at a time but frequency is high. As a result, on an average daily every staff member, spends b hour to 1 hour on receiving personal calls and on social media. It looks just a small issue but its effect is large as it also diverts their minds from their ongoing work also.
As it is a consultancy firm, it is not possible for staff members to work without phones because they have to converse with client’s officials time to time and clients also calls them to tell their additional requirements and feedbacks.
To resolve this problem, management has decided to provide landline phones. Now staff members have to submit their mobile phones at
reception and they are not allowed to take them at their workplace. Staff members are advised to use landline phones and firm mail-id to contact the clients. As per management opinion it will improve their efficiency up to 25% but there are some issues in which management wants your opinion.
(i) Whether clients will be compatible with such type of arrangements ? (2 Marks)
(ii) Will it affect the morale of staff members and will it affect long-term sustainability of firm ? Give reasons. (3 Marks)
(i) Yes, clients will be compatible with such arrangements as it doesn’t matter to them whether they talk on mobile phones or landlines they just want to get the best services. They will have a single number to contact. There would be no impact on the clients of such arrangement.
(ii) Yes, it will have an impact on the morale of the staff members initially. However, eventually the staff members will get used to such change. At first it may cause a feeling of being dejected, it might create a constrained work culture but they might get used to such changes with the passage of time and which might help them to increase their productivity.
However if the staff member does not accept such changes in the long term also then they might starting leaving the firm and their may be internal conflicts within the organization which may act detrimental to overall success of the organization.
And will cause an impact on long-term sustainability of the firm.
KRK Limited deals in spare parts of motorbike. Since last 2 years, it has shown loss even though it has negotiated with the suppliers very well and was able to purchase the goods at very competitive rates. The newly appointed CEO believed that there is a need of Implementation of Balanced Scorecard. CEO met the Managing Director and stated that “The Balanced Scorecard is a collection of critical performance measures that have some special properties. The performance measures are derived from a company’s vision, strategy and objectives. Performance measures should be chosen so that they are balanced between outcome and lead measures.”
Managing Director of the KRK limited was very happy with the CEO and it was decided that from the beginning of the next financial year the Balanced, Scorecard will be implemented. For implementing, the Balanced Scorecard, following strategic objective were decided to begin with:
(i) Expansion of eco-friendly product line.
(ii) Improve ROI.
(iii) Customer retention
(iv) Reduction in time spent in non-value added activities.
(v) Improve on time delivery to customers.
You are required to classify the above strategic objectives by perspective and suggest a measure for each objective. (5 Marks)
Classification of strategic objectives by perspectives and measure for each objective: