SCM PE Case Studies

CA.
DINESH JAIN STRATEGIC COST MANAGEMENT
STRATEGIC COST
MANAGEMENT – CASE
STUDIES
BHARADWAJ INSTITUTE (CHENNAI) 1

CA. DINESH JAIN STRATEGIC COST MANAGEMENT
Important Links to connect with faculty:
About the faculty:

❖ Dinesh Jain is a Chartered Accountant and is currently working in India’s premier
credit rating agency
❖ Rank holder in all three levels of Chartered Accountancy – CA Final (Rank 3), CA
IPCC (Rank 9) and CA CPT (Rank 24)
❖ He takes classes for both CA Inter and CA Final. Enriches student’s knowledge on
Cost Accounting and Str. Has an experience of eight years in teaching.
❖ Focuses extensively on conceptual clarity which has enabled multiple students
securing exemption in his subjects

Topic 63: Case Studies
Guidelines for answering case studies:

❖ Case Study is not about the quantity, but the quality.
❖ Prepare a plan for each issue.
❖ Decide what models to use and prioritize the issues.
❖ Identify the impact and alternative actions that could be taken, as well as the
relevant concepts and calculations required.
❖ Answer should have a logical flow.
❖ Offer a detailed analysis of the issues and conclude with sound, well justified
recommendations.
❖ Not to spend too much time on calculations.
❖ Do not place too much attention and time on the presentation.
❖ Quality of discussion on each issue which is most important, not the ranking
order.
❖ Discuss each of the issues in depth, explaining their impact.
❖ Do not leave any of the issue undecided.
❖ Recommendations should include ‘what to do', 'why to do it' and 'how to do
it’.
❖ Identify ethical issues and then briefly justify.
❖ Recommendation should appear at the end of the report.
❖ Practice makes perfect.
Areas where case study can be asked:

Level I Level II Level III Level IV
classification classification Classification classification
Environment
Management
Accounting
Ethics and non-
financial
considerations
Value chain
Value recognition analysis/ Value
shop model
Total quality
management
Quality
Cost of quality
management tools
Business excellence EFQM
model Balridge Criteria
Strategic cost
Target costing
management
Cost management Life-cycle costing
techniques Throughput
accounting
JIT, Kaizen, 5S, TPM,
Lean system Cellular Mfg, Six
Product service and
sigma
delivery
Supply chain Upstream and
management downstream flow
Decision making
Decision making Internal Transfer pricing
Pricing decision
External
Linking of CSF to
KPIs and strategy
ROI, RI, EVA and
Financial
Performance Divisional SVA
management performance BSC, TBL,
measures Non-financial Performance Prism,
Pyramid etc.
Benchmarking
Standard costing
Cost control and
Beyond budgeting
analysis Budgetary control
Behavioural aspects
Strategic analysis
Profitability analysis
through ABC
Planning and
ABB and ABM
forecasting tools
Important terms:
Traditional cost Traditional cost management involved allocation of costs and
management overhead and focused largely on cost control and cost reduction
Strategic cost Strategic cost management (SCM) is the application of cost
management management techniques to improve the strategic position of
business as well as control costs. SCM involves integrating cost
information with decision –making framework to support the
overall organizational strategy
Strategic Positional SPA analysis the company’s relative position within an industry
Analysis for its performanceIt reflects choices a company makes about the
kind of value it will create and how the value be created
differently than rivals
Structural cost Structural cost drivers facilitate strategic decision making because
drivers they involve plans and decisions that have long term effects. It
involves choices by the firm that drive product cost.
Executional cost Executional cost drivers facilitate operational decision making by
drivers focussing on short-term effects. These are the determinants of a
firm’s cost position that hinge on its ability to execute successfully.
Value Chain Analysis VCA is a process by which firm identifies & analyses various
activities that add value to the final product. VCA focuses on
identifying those activities that do not add value to the final
products/services and eliminate such non-value added activities
Primary Activities Inbound Logistics (Raw Materials, Handling and Warehousing),
Operations (Machining, Assembling, Testing Products),
Outbound Logistics (Warehousing and Distribution of Finished
Products), Marketing & Sales (Advertising, Promotion, Pricing,
Channel Relations), Service (Installation, Repair Parts)
Support Activities Firm Infrastructure (General Management, Accounting, Finance,
Strategic Planning), Human Resource Management (Recruiting,
Training, Development), Technology Development (R&D,
Product and Process Improvement), Procurement (Purchasing of
Raw Materials, Machines & Supplies)
Industry structure Bargaining power of Buyers, Bargaining Power of Suppliers, Threat
analysis or Porter’s of substitute products or services, Threat of new entrants and
five forces analysis Intensity of competition / rivalry amongst firms
Core competence Core competency is a distinctive or unique skill that creates
distinctive customer value. Core competence is the primary source

of an organization’s competitive advantage. The competitive
advantage could result from cost leadership or product
differentiation
Segmentation Segmentation analysis involve analysis of structural characteristics
analysis of different industry segments
Differentiation Differentiation advantage occurs when customers perceive that a
advantage business unit’s product offering is of higher quality, involves
fewer risks and/or outperforms products offered by competitors
Low cost advantage A firm enjoys relative cost advantage if its total costs are lower
(Cost leadership) than those of its competitors. Cost leadership can help the
company in charging the same price as competitor to maintain its
market share while improving profitability. It can also help the
firm to charge a lower price than its competitors to increase its
market share
Vertical linkage A company can earn competitive advantage not only through
analysis linkage between various internal activities but also through
linkages between a firm’s value chain and that of suppliers or
users. Vertical linkage analysis includes all upstream and
downstream activities throughout the industry
Value shop model or Value shop model is designed to solve customer problems rather
service value chain than creating value by producing output from an input of raw
materials. Value shop model has the same support activities as
Porter model but the primary activities are described differently
Primary activities – Problem finding and acquisition, Problem
solving, Choosing among solutions, execution and
control/evaluation
Cost of quality ❖ Quality is concerned with conformance to
specifications and ability to satisfy customer
expectations and value for money
❖ COQ = Cost of control/conformance + Cost of failure
to control/non-conformance
Types of quality costs Prevention costs, Appraisal costs, Internal failure costs and external
failure costs
Total quality CIMA defines ‘Total Quality Management’ as “Integrated and
management comprehensive system of planning and controlling all business
functions so that products or services are produced which meet
or exceed customer expectations. TQM is a philosophy of
business behaviour, embracing principles such as employee
involvement, continuous improvement at all levels and
customer focus, as well as being a collection of related techniques
aimed at improving quality such as full documentation of
activities, clear goal-setting and performance measurement from
the customer perspective.”
Six C’s of TQM Commitment, Culture, Continuous improvement, Co-operation,
Customer focus and Control
Deming Wheel (Plan- ❖ Plan – Establish objectives and develop action plans
Do-Check-Act Cycle) ❖ Do – Implement the process planned
❖ Check – Measure the effectiveness of new process
❖ Act – Take corrective action
Business excellence Business Excellence (BE) is a philosophy for developing and
models strengthening the management systems and processes of an
organization to improve performance and create value for
stakeholders
Three integrated ❖ The Fundamental, concept of excellence
components of EFQM ❖ The Criteria, conceptual framework
Model ❖ The RADAR, logic assessment framework
Balridge criteria for ❖ Leadership
performance ❖ Strategic Planning
excellence – seven ❖ Customer and market focus
categories ❖ Measurement, analysis and knowledge management
❖ Workforce
❖ Process management and
❖ Business results
Theory of constraints ❖ TOC focuses on revenue and cost management when
faced with bottlenecks. It advocates the use of three
measures
❖ The objective of management can be expressed as
increasing throughput, minimizing investment and
decreasing operating expenses
Three measures of Throughput contribution, Investment and Operating expense
TOC
Throughput Factor = Demand of factor/Supply of factor
accounting ratio Product = Return per bottleneck minute / cost per bottleneck
minute
Supply chain The Global Supply Chain Forum (GSCF) defines Supply chain
management management as the “integration of key business processes from
end user through original suppliers that provides products,
services, and information that add value for customers and
other stakeholders”.
Push model Under Push Model stocks are produced on the basis of anticipated
demand. Demand forecasting can be done via a variety of
sophisticated techniques such as operations research or data
mining
Pull model Under Pull Model stocks are produced on the basis of actual
demand. This new business model is less product centric and more
directly focused on the individual consumer – a more marketing
oriented approach
Upstream supply When the flow relates to supplier it is termed as upstream supply
chain chain
Downstream supply When the flow is with customers it is named as downstream
chain supply chain
Supplier relationship Supplier Relationship Management (SRM) is undergoing a major
management transition. There are lot of factors in choosing a supplier such as
innovation, quality, reliability, and costs/price reductions and
agility to reduce risk. SRM can create greater value for both
businesses, something that would be difficult to achieve if
operating independently
Use of information E-sourcing, E-Purchasing and E-Payment

technology in
upstream supply
chain
Six markets model Internal markets, referral markets, Influence markets,
Recruitment’s markets, Supplier’s markets and Customer’s
markets

Customer CRM focuses on knowing the needs of the customers and
relationship providing them with the best solution. Customers under different
management channels are compiled through CRM. The staff dealing with
customers get a detailed information about customer’s personal
information, purchase history, buying preferences and concerns
Customer’s account CAP involves calculation of the profitability at customer level.
profitability (CAP) Customer profitability analysis is best conducted with a technique
called as Activity Based Costing
Customers Lifetime Customers lifetime value is the present value of net profit that we
value (CLV) derive from a customer over the entire lifetime of relationship with
a particular customer. This is an essential tool in marketing to
focus on more profitable customers and stop servicing non-
profitable customers
Service Level An agreement between the customer and service provider is
Agreements termed as a service-level agreement. This can be a legally
binding formal or an informal "contract". The agreement may
be between separate organisation or within different teams of
the organisation.
Gain-sharing Gain sharing is an approach to the review and adjustment of
arrangements an existing contract, or series of contracts, where the
adjustment provides benefits to both parties. A fundamental
form of gain-sharing is where a supplier agrees to perform its
side of the contract with no guarantee of receiving a payment.
Outsourcing Outsourcing (also sometimes referred to as "contracting out")
is a business practice used by companies to reduce costs or
improve efficiency by shifting tasks, operations, jobs or
processes to another party for a span of time. Outsourcing is a
cost- saving measure, and practising this can have a significant
impact on manufacturing.
Lean system Lean system is an organized method for waste minimization
without sacrificing productivity within a manufacturing system
Types of waste ❖ Over-production
❖ Inventory – Having more inventory than what is
required
❖ Waiting – Waiting includes products waiting on the
next production step
❖ Motion – Movement of people or equipment more than
what is required
❖ Transportation – Moving products that is not actually
required to perform process
❖ Rework from defects
❖ Over-processing
Just-in-time “Just-in-time (JIT): System whose objective is to produce or to
procure products or components as they are required by a
customer or for use, rather than for stock. It is a Pull system,
which responds to demand, in contrast to a push system, in
which stocks act as buffers between the different elements of the
system such as purchasing, production and sales”.
Impact of JIT System Reduction in waste costs, Reduction in overhead costs and ability
to charge premium prices
Performance ❖ Machine utilization, Piece rate and labour efficiency
measures in JIT are inappropriate measures

system ❖ Inventory turnover, Setup time reduction, Customer
complaints, scrap, Cost of quality, Customer service
and ideas generated are some of the appropriate
performance measures
Back-flushing Backflushing requires no data entry of any kind until a finished
product is completed. At that time the total amount finished is
entered into the computer system, which multiplies it by all the
components listed in the bill of materials for each item produced.
Kaizen costing Lean manufacturing is founded on the idea of kaizen, or
continual improvement. Continuous improvement is the
continual examination and improvement of existing
processes and is very different from approaches such as
business process re-engineering (BPR), which seeks to make
radical one-off changes to improve an organization's operations
and processes.
5S 5S is the name of a workplace organization method that uses a
list of five Japanese words: seiri, seiton, seiso, seiketsu , and
shitsuke. They can be translated from the Japanese as “sort”, “set
in order”, “shine”, “standardize”, and “sustain” It explains how
a work space should be organized for efficiency and
effectiveness by identifying and storing the items used,
maintaining the area and items, and sustaining the new order.
Total productive Total Productive Maintenance (TPM) is a system of
maintenance (TPM) maintaining and improving the integrity of production and
quality systems. TPM helps in keeping all equipment in top
working condition so as to avoid breakdowns and delays in
manufacturing processes.
TPM goals Zero defect, zero breakdown and zero accident
Foundation and Foundation – 5S
pillars of TPM Pillars – Autonomous maintenance, Focussed improvement
(Kaizen), Planned maintenance, Early management, Quality
maintenance, Education and training, Office TPM, Safety, Health
and Environment
Performance measure ❖ OEE = Performance * Availability * Quality
in TPM ❖ OEE cannot be at 100% and the ideal values for
various parameters are: Performance (>95%),
Availability (>90%), Quality (>99%)
Cellular Cellular manufacturing is a system where multiple cells are used.
Manufacturing Each cell comprise of one or more machines which accomplish a
certain task. The product moves from one cell to the next with
each cell completing part of the manufacturing process. U-shaped
design is given to these cells because this allows the supervisor to
move less and have the ability to watch over the entire process
Six Sigma Six Sigma is quality improvement technique whose objective
to eliminate defects in any aspect that affects customer
satisfaction. The premise of Six Sigma is that by measuring
defects in a process, a company can develop ways to eliminate
them and practically achieve “zero defects”
Implementation of six DMAIC – Define, Measure, Analyze, Improve and control
sigma DMADV – Define, Measure, Analyze, Design and verify
Lean six sigma Lean Six Sigma is the combination of Lean and Six Sigma which
help to achieve greater results that had not been achieved if Lean
or Six Sigma would have been used individually.

Process innovation Process Innovation means the implementation of a new or
significantly improved production or delivery method
Business process Re- BPR is defined as fundamental rethinking and radical redesign
engineering of business processes to achieve dramatic improvements in
critical contemporary measures of performance such as cost,
quality, service and speed
Cost control Cost Control implies regulation of cost by executive action. For
this purpose, the executives are provided with some yard stick
such as standards or budgets with which the actual costs
and performances are compared to ascertain the degree of
achievement made.
Cost Reduction Cost Reduction is the achievement of real and permanent
reduction in unit cost of products manufactured. It, therefore,
continuously attempts to achieve genuine savings in cost of
production distributing, selling and administration.
Focus areas of cost Product Design, Organisation, Factory layout equipment,
reduction Production plan programme and method
Target costing Target costing can be defined as “a structured approach to
determining the cost at which a proposed product with
specified functionality and quality must be produced, to generate
a desired level of profitability at its anticipated selling price”
Steps in Target Setting of target selling price, Determination of target costs,
Costing Estimation of actual cost of the product and Comparison of
estimated cost with actual cost
Life-cycle costing Life Cycle Costing involves identifying the costs and revenue
over a product’s life i.e. from inception to decline. Life cycle
costing aims to maximize the profit generated from a product
over its total life cycle
Stages of product life- Introduction stage, Growth stage, Maturity stage and Decline stage
cycle
Pareto Analysis Pareto Analysis is a rule that recommends focus on the most
important aspects of the decision making in order to simplify
the process of decision making. It is based on the 80:20 rule or
70:30 rule.
Environmental EMA is the process of collection and analysis of the information
Management relating to environmental cost for internal decision making. EMA
Accounting (EMA) is an attempt to integrate best management accounting thinking
with best environmental management practice
Types of ❖ Classification one: Conventional costs, Hidden costs,
Environmental costs Contingent costs and relationship costs
❖ Classification two: Costs incurred to protect
environment and Costs of wasted material, capital and
labour
❖ Classification three: Internal costs and external costs
❖ Classification four: Prevention costs, Appraisal costs,
Internal failure costs and external failure costs
Techniques for ❖ Input-output analysis
identification of ❖ Flow cost accounting
environmental costs
❖ Life cycle costing
❖ Activity based costing

Controlling ❖ Waste
environmental costs ❖ Water
❖ Energy
❖ Transport and travel
❖ Consumables and raw materials
Non-financial ❖ Non- financial information is long term focused
considerations and ensures profitability and sustainability in long
term for an organization thereby evaluating the
internal performance of the company.
❖ Information of an organization like number of
employees, employee morale, customer satisfaction
that cannot be expressed in monetary terms is
termed non -financial in nature.
Ethics Ethics are moral principles that guide the conduct of individuals.
Theory of price One of the basic assumption of pricing theory is that firm’s main
objective is to maximize profits. Optimum price is the one which
yields the maximum profits. Firm should also take into account the
position of demand and cost functions while fixing on the price
Profit maximization Profit is said to be maximum at a level of output where Marginal
model revenue (MR) is equal to Marginal cost (MC)
Types of markets Perfect competition, Monopoly, Monopolistic competition and
Oligopoly
Pricing methods ❖ Competition based – Going rate pricing and sealed bid
pricing
❖ Cost-based
❖ Value -based – True economic value and Perceived
value
Market entry ❖ Skimming pricing
strategies ❖ Penetration pricing
Responsibility Responsibility accounting is the collection, summarization, and
accounting reporting of financial information where individual manager is
held accountable for certain costs, revenue, or assets of the firm
Cost or expense Cost or Expense Centres are responsibility centres where the
centres manager of such a centre or division is responsible for the costs
associated with that centre and hence the main focus is
cost minimisation. This level of decentralisation occurs normally
in functional organisation types.
Revenue Centres Revenue centres are responsibility centres where the manager is
totally concerned with raising revenue with no responsibility for
costs. The key measures used in appraising performance would be
monitoring sales variances from budget
Profit centres Manager of the division is responsible for both revenues and costs.
Performance is measured through profits generated by the division
Investment centres Investment centres are those divisions where manager is
responsible not only for revenues and costs, but also the assets that
generate these costs and revenues and the investment decisions
relating to disposal and acquisition of assets
Financial measures ❖ Return on Investment (ROI)
❖ Residual Income (RI)

❖ Economic value added (EVA)
❖ Shareholder value added (SVA)
Non-financial ❖ Balanced scorecard
measures ❖ The Performance Pyramid
❖ Building Block Model
❖ The Performance Prism
❖ Triple Bottom Line (TBL)
ROI ROI expresses divisional profit as a percentage of the assets
employed in the division
Residual income Residual income is defined as controllable contribution less a cost
of capital charge on the investment controllable by the divisional
manager
EVA Economic Value Added is a measure of economic profit.
Economic Value Added is calculated as the difference between
the Net Operating Profit After Tax (NOPAT) and the Opportunity
Cost of Invested Capital
SVA SVA measures the value the unit has created by analyzing
cash flows over time. At the corporate level, SVA provides
framework for evaluating options for improving shareholder
value by determining the tradeoffs between reinvesting in
existing businesses, investing in new businesses and returning
cash to stockholders
Triple Bottom Line TBL expands traditional accountancy reporting systems, looking at
social and environmental performance, rather than simple financial
performance
Balanced scorecard The balanced scorecard is a method which displays organisation’s
performance into four dimensions namely financial, customer,
internal and innovation
Performance ❖ Performance pyramid model viewed businesses as
Pyramid performance pyramids. Attractiveness of this
framework is that it links the business strategy with
day-to-day operations
❖ Objectives of the organizations are shown from top to
bottom whereas the measures are from bottom to top
❖ At the top is the organization’s corporate vision
through which long term success and competitive
advantages are described
Building Block Model Building Block Model suggests the solution of performance
measurement problems in service industries. It has the following
components:
• Standards – Equity, Achievable and ownership
• Dimensions
o Results – Financial performance and
Competitive performance
o Determinants – Quality, flexibility, innovation
and resource utilization
• Rewards – Motivation, clear and controllability
Performance prism Performance Prism is an approach to performance management
which aims to effectively meet the needs and requirements
of all stakeholders . This is in contrast with the performance

pyramid which tends to concentrate on customers and
shareholders and is also in contrast with value based
management, which prioritizes the needs of shareholders
Benchmarking Benchmarking is a technique for continuous improvement in
performance. It involves comparing a firm’s products, services
or activities against other best performing organisations, either
internal or external to the firm
Types of Competitive, Process, Strategic, Global, Functional, Internal and
benchmarking external
Performance Not-for-profit organisation does not exist for earning profits but
measures in not for for achievingcertain social or charitable cause. The activities
profit organizations carried out by such organisations must be measure to give a
confidence to the donors/ members that the resources
contributed are being utilized efficiently and effectively
Value for Money Effectiveness, efficiency and economy
framework (VFM)
Transfer pricing ❖ Market based
methods ❖ Cost based – Marginal cost based, Standard cost based,
Full cost based and cost plus markup based
❖ Negotiation based
Proposal for ❖ Dual rate transfer pricing system
resolving TP conflict ❖ Two part transfer pricing system
Direct Product Direct Product Profitability is one among the various analytical
Profitability (DPP) methods which analyse the profitability for each product or
segment of products separately.
Customer Customers use some activities but not all, and different groups
profitability analysis of customers have different ‘activity profiles’. Service
organisations, such as a bank or a hotel, in particular need to
cost customers. Analytical method to arrive at the profitability of
each customer is called as customer profitability analysis
Activity based cost Consortium for Advanced Management International (CAM)
management (ABM) defines ABM as “adds a dynamic, continuous improvement
dimension to the more static ABC model”. CAM-1 defines ABM
as: “A discipline that focuses on the management of activities as
the route to improving the value received by the customer and
the profit achieved by providing this value. This discipline
includes cost driver analysis, activity analysis, and performance
measurement. Activity-Based Management draws on Activity-
Based Costing as its major source of information.”
Value added and ❖ Value-Added Activities: The VA activities are those
non-value added activities which are indispensable in order to
activities complete the process. The customers are usually
willing to pay (in some way) for these services.
❖ Non-Value-Added Activities: The NVA activity
represents work that is not valued by the external
or internal customer. NVA activities do not improve
the quality or function of a product or service, but
they can adversely affect costs and prices. Non-Value
Added activities create waste, result in delay of some
sort, add costs to the products or services and for
which the customer is not willing to pay.
Activity based ABB analyse the resource input or cost for each activity. It
budgeting (ABB) provides a framework for estimating the amount of resources
required in accordance with the budgeted level of activity.
Activity Based Budgeting is a process of planning and
controlling the expected activities for the organisation to
derive a cost-effective budget that meets forecast workload and
agreed strategic goals.
Budgetary control Budgetary Control is “Systematic control of an organization's
operations through establishment of standards and targets
regarding income and expenditure, and a continuous
monitoring and adjustment of performance against them.”
Feedback control CIMA’s official terminology defines feedback control as :
‘Measurement of differences between planned outputs and actual
outputs achieved, and the modification of subsequent action
and/or plans to achieve future required results. Feedback control
is an integral part of budgetary control and standard costing
systems.’
Feed-forward control According to the CIMA’s Official Terminology, feed-forward
control is defined as the ‘forecasting of differences between
actual and planned outcomes and the implementation of actions
before the event, to avoid such differences.’
Approaches for Top-down approach and bottom-up approach
preparing budget
Beyond budgeting Beyond Budgeting is ‘An idea that companies need to move
beyond budgeting because of the inherent flaws in budgeting
especially when used to set contracts. It is argued that a range
of techniques, such as rolling forecasts and market related
targets, can take the place of traditional budgeting
Meaning of different words:

VERBS
DEFINITION
USED
List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of
Describe Communicate the key features
Distinguish Highlight the differences between
Make clear or intelligible/State the meaning or purpose
Explain
of
Identify Recognise, establish or select after consideration
Illustrate Use an example to describe or explain something
Apply Put to practical use
Calculate Ascertain or reckon mathematically
Demonstrate Prove with certainty or to exhibit by practical means
Prepare Make or get ready for use
Reconcile Make or prove consistent/compatible
Solve Find an answer to
Tabulate Arrange in a table
Analyse Examine in detail the structure of

Categorise Place into a defined class or division
Compare and
Show the similarities and/or differences between
contrast
Construct Build up or compile
Discuss Examine in detail by argument
Interpret Translate into intelligible or familiar terms
Prioritise Place in order of priority or sequence for action
Produce Create or bring into existence
Advise Counsel, inform or notify
Evaluate Appraise or assess the value of
Recommend Advise on a course of action

1. Case study on TQM, Product Life Cycle and Kaizen Costing
HT manufactures and sells consumer goods. The market in which it operates is highly
competitive and HT is constantly designing new products in order to maintain its market
share. The life cycle of products in the market is extremely short with all of the manufacturers
constantly introducing new products or variations on existing products.
Consumers consider two main factors when buying these products: price and quality. HT uses
a penetration pricing policy when launching its products and is always striving to improve
its quality from product design stage through to customer care. As a result it has a 15% market
share, and its largest competitor has a 6% market share with around 30 other companies
sharing the remainder of the market.
Required:
• Compare and contrast: Costs of quality conformance; and Costs of quality non-
conformance.
• Discuss the relationship between quality conformance costs and product
selling prices in HT.
• Explain how Kaizen principles could be used by HT to extend the life of its
products
2. Case study on Kaizen Costing and TQM:

HRS is a food producer that makes low cost processed food that it sells to supermarkets. HRS
produces only one type of processed food product and production techniques have remained
largely unchanged for a number of years. Over recent months, sales have been falling steadily.
Consumer tastes are changing to favour natural ingredients and supermarkets have reflected
this in the products that they offer for sale. HRS is keen to address the decline in sales and
recently held a meeting to discuss the performance of the organisation. The Management
Accountant suggested to the Managing Director that the performance of HRS could be
improved by implementing Total Quality Management (TQM) principles and adopting
Kaizen costing concepts. Currently the control systems of HRS focus on material price and
usage. The Managing Director is sceptical of the Management Accountant’s suggestions and
is unclear as to whether they are suitable for the company.
Required:
(a) Explain TWO concepts of Kaizen costing.
(b) Explain THREE conditions that must exist for TQM to be successfully implemented at
HRS.
3. TQM and Kaizen Costing:

PB is a car production company. PB uses a system of standard costing to set its budgets.
Budgets are set annually by the Finance department and approved by the Board of Directors
of PB. The Finance department prepares variance reports each month for review at the Board
of Directors meeting, where actual performance is monitored by comparison to budgeted
figures. A new Finance Director has recently joined PB from a competitor organisation where
there was a Total Quality Management culture. The new Finance Director of PB is keen to
discuss the implementation of Kaizen costing at the next meeting of the Board of Directors.
The new Finance Director would like to review the current planning and control system at PB
with a view to making changes so that it could support Kaizen costing concepts.
Required:
(a) Explain TWO basic principles of Total Quality Management.
(b) Explain THREE changes required to PB’s planning and control system to support the
adoption of Kaizen costing concepts.
4. Value chain analysis and TQM
ZZ manufactures and sells electronic personal grooming and beauty products. The products
are sold throughout the world and 90% of ZZ’s total revenue comes from export sales. The
production takes place in one factory. Materials are sourced from a variety of suppliers. The

company is keen to build a reputation for quality and gives a five year guarantee with all of
its products. The Managing Director of ZZ recently issued a memo to all of the company’s
managers which stated “My objective for the forthcoming year is to reduce our quality costs
in each of the primary activities in our value chain”.
Required:
(a) State the primary activities in the value chain of a manufacturing company.
(b) Explain, by giving examples, how each of the FOUR types of quality cost could be
reduced. You should identify in which primary activity each one of your examples would
occur in ZZ’s value chain.
5. Budgetary Control and performance assessment :

A firm of solicitors is using budgetary control during 2010. The senior partner estimated the
demand for the year for each of the firm’s four divisions: Civil, Criminal, Corporate, and
Property. A separate partner is responsible for each division.
Each divisional partner then prepared a cost budget based on the senior partner’s demand
estimate for the division. These budgets were then submitted to the senior partner for his
approval. He then amended them as he thought appropriate before issuing each divisional
partner with the final budget for the division. He did not discuss these amendments with the
respective divisional partners. Actual performance is then measured against the final budgets
for each month and each divisional partner’s performance is appraised by asking the
divisional partner to explain the reasons for any variances that occur.
The Corporate partner has been asked to explain why her staff costs exceeded the budgeted
costs for last month while the chargeable time was less than budgeted. Her reply is below:
“My own original estimate of staff costs was higher than the final budgeted costs shown on
my divisional performance report. In my own cost budget I allowed for time to be spent
developing new services for the firm’s corporate clients and improving the clients’ access to
their own case files. This would improve the quality of our services to clients and therefore
increase client satisfaction. The trouble with our present system is that it focuses on financial
performance and ignores the other performance indicators found in modern performance
management systems.”
Required:
(a) Discuss the present budgeting system and its likely effect on divisional partner motivation.
(b) Explain two non-financial performance indicators (other than client satisfaction and service
quality) that could be used by the firm.
6. Balanced scorecard of Grocery Store:

AST is a grocery and general merchandise retail group. AST has supermarkets located in most
towns and cities in its home country. Over the last few years, profits have fallen and AST has
recognised that it has paid insufficient attention to customer care.
AST has now realised the importance of the customer experience at its supermarkets. In an
attempt to earn the loyalty of its customers, AST has introduced a loyalty card scheme that
rewards customers with discount vouchers based on their spend and buying patterns at
supermarkets.
The management of AST is considering the introduction of a balanced scorecard approach to
manage the performance of its stores.
Required:
Recommend an objective and a suitable performance measure for each of three non-financial
perspectives of a balanced scorecard that AST could use to support its new strategy of
improving the customer experience.
Note: in your answer you should state three perspectives and then recommend with reasons
an objective and a performance measure for each one of your three perspectives.
7. Budgetary Control:
DW, a transport company, operates three depots. Each depot has a manager who reports
directly to the Operations Director.
For many years the depot managers have been asked by the Operations Director to prepare a
budget for their depot as part of the company’s annual budgeting process. A new depot
manager has been appointed to the Southern region and he has concerns about the validity of
these annual budgets. He argues that they soon become out of date as operational
circumstances change. At a recent manager’s meeting he said, “They are restrictive. They do
not permit the depot managers to make decisions in response to operational changes, or
change working practices for next year until that year’s budget has been approved.”
Required:
(a) Explain the differences between the above annual budgeting system and a rolling budget
system.
(b) Discuss how the Southern region depot manager could use a rolling budget system to
address his concerns.
8. Product Life Cycle:

CD manufactures and sells a number of products. All of its products have a life cycle of less
than one year. CD uses a four stage life cycle model (Introduction, Growth, Maturity and
Decline). CD has recently developed an innovative product. It was decided that it would be
appropriate to adopt a market skimming pricing policy for the launch of the product.
However CD expects that other companies will try to join the market very soon. This product
is currently in the Introduction stage of its life cycle and is generating significant unit profits.
However, there are concerns that these current unit profits will not continue during the other
stages of the product’s life cycle.
Required:
Explain, with reasons, the changes, if any, to the unit selling price AND the unit production
cost that could occur when the product moves from the previous stage into each of the
following stages of its life cycle:
(i) Growth
(ii) Maturity
9. Balanced Scorecard
YY is a large banking organisation. It has a branch in most of the towns in the country in which
it operates. The bank’s business is mainly concerned with private individuals. It is a very
‘traditional’ bank that offers only ‘over the counter’ services during limited opening hours. At
a recent board meeting, the directors of the bank stated that they were worried that the bank
was losing customers to the new style banks that offer a much more friendly service, longer
opening hours, internet banking and a diverse range of banking services. It has now been
decided that the bank will pursue strategies to achieve the goal of being “The bank that people
choose” and will use a balanced scorecard to monitor progress towards that goal.
Required:
Produce, for each of the three non-financial perspectives of a balanced scorecard, an objective
and a performance measure that the bank could use. (In your answer you must state each
perspective, and the objective and performance measure for that perspective and explain why
they support the goal of YY becoming “The bank that people choose”.)
10. Customer life cycle costing:

DTG is a management accounting consultancy that specialises in providing services to small
businesses that do not have in-house expertise in management accounting techniques. Its
clients vary in size and operate in many different sectors including manufacturing, retail and
service industries. Although they are different, all clients require similar services most of
which are provided by DTG’s team of employed accountants and support staff. Occasionally
DTG will engage the services of specialists on a one-off contract basis to help to solve the
problem faced by a particular client.
Before accepting clients, DTG will meet with them to discuss their requirements and to agree
the basis of their fees.
DTG has an ongoing relationship with many of its clients. This level of involvement within
the client’s business enables DTG to foresee potential problems for the client and offer further
services. This works well for the clients and particularly well for DTG who gain a considerable
number of new assignments in this way.
New clients tend to be initially for “one-off” assignments. Working with new clients requires
time and effort to be invested to become familiar with the client’s business and procedures.
DTG hopes to form a relationship and attract more assignments and referrals from each client
it works with.
Required:
Explain how Customer Life Cycle costing could be used by DTG.
11. Balanced Score-card – airline company

ZJET is an airline company that operates both domestically and internationally using a fleet
of 20 aircraft. Passengers book flights using the internet or by telephone and pay for their
flights at the time of booking using a debit or credit card.
The airline has also entered into profit sharing arrangements with hotels and local car hire
companies that allow rooms and cars to be booked by the airline’s passengers through the
airline’s web site.
ZJET currently measures its performance using financial ratios. The new Managing Director
has suggested that other measures are equally important as financial measures and has
suggested using the Balanced Scorecard.
Required:
(a) Discuss how the Balanced Scorecard differs from traditional financial performance
measurement.
(b) Explain THREE non-financial performance measures (ONE from EACH of THREE
different perspectives of the Balanced Scorecard) that ZJET could use as part of its
performance measurement process.
12. Value analysis and functional analysis:

LCG was established in 1998 and manufactures a range of garden tables and chairs which it
makes from timber purchased from a number of suppliers.
The recently appointed Managing Director has expressed increasing concern about the trends
in falling sales volumes, rising costs and hence declining profits over the last two years. There
is general agreement amongst the managers of LCG that these trends are the result of the
increased intense competition that has emerged over the last two years. LCG continues to
have a reputation for high quality but this quality is now being matched by the competition.
The competitors are taking LCG’s share of the market by selling equivalent products at lower
prices. It is thought that in order to offer such low prices the production costs of the
competitors must be lower than LCG’s.
Required:
Discuss how LCG could improve its sales volumes, costs and profits by using (i) value
analysis and (ii) functional cost analysis.
13. Balanced Scorecard

An airline company has operated short haul passenger and cargo flights to various
destinations from a busy airport for several years. Its competitive advantage has been the fact
that it offers low ticket prices to passengers. It now faces increased competition on a number
of its routes.
The company currently monitors its performance using financial measures. These financial
measures have served it well in the past, but a new director has suggested that non-financial
measures may also be used to provide a better indication of overall performance. She has
suggested that the company should consider using the Balanced Scorecard.
Required:
(a) Explain the concepts of the Balanced Scorecard and how it could be used by the airline
company.
(b) Explain TWO non-financial measures that the airline company could use to monitor its
performance.
14. Business Process Re-engineering:

MLC, which was established in 1998, manufactures a range of garden sheds and
summerhouses using timber purchased from a number of suppliers.
The recently appointed managing director has expressed increasing concern about the falling
sales volumes, rising costs and hence declining profits over the last two years.
Required:
Discuss how business process re-engineering could help to improve the profits of MLC.
15. Kaizen costing and standard costing:

SD manufactures and sells a small range of timber products. The main differences between
the products are their size and the type of timber used. SD prepares annual budgets and sets
a standard cost for each different product at the start of each year. Variance reports are
produced every month.
Recently, there have been significant differences between the actual costs and standard costs
of the products manufactured.
SD recently introduced a system of Kaizen Costing which has resulted in changes to the
methods used to manufacture the timber products.
Some of the directors have suggested that the use of standard costs as a means of monitoring
performance is no longer appropriate and that the monthly variance report is meaningless.
Required:
(a) Explain the principles of Kaizen Costing.
(b) Discuss how SD can use standard costing and variance analysis to prepare meaningful
reports when using Kaizen Costing.
16. Feed forward and feedback control:

A transport company is preparing its cost budgets for the coming year. It has been set both
social objectives and cost targets by the government which it must achieve in order to receive
a subsidy. Part of the subsidy is paid when acceptable budgets have been submitted to the
government’s transport office and the balance is payable at the end of the year provided the
company has achieved its social objectives and cost targets.
The first draft of the cost budgets has been completed and submitted to the budget committee.
Required:
Explain to the Board of Directors how (i) feedforward control and (ii) feedback control should
be used in the transport company. (You should use examples from the company’s budgeting
system in your answer.)
17. Balanced scorecard

A college currently measures its performance by comparing its actual costs against its
budgeted costs for the year. Now that the college is facing increased competition from other
colleges and private education providers, one of its professors has suggested that it needs to
consider additional performance measures such as those indicated by the Balanced Scorecard.
Required:
(a) Explain the concepts of the Balanced Scorecard and how this approach to performance
measurement could be used by the college.
(b) Explain TWO non-financial measures (chosen from different perspectives of the balanced
scorecard) that the college could use to measure its performance.

CX is a passenger transport company which is seeking to improve its profits. It operates a
number of bus routes within a 10 mile radius of a city centre. It operates a fleet of 100 buses,
each of which has a capacity of 50 persons, throughout the day, seven days per week. The
frequency of buses on each of its routes varies from a minimum of one to a maximum of four
per hour during the day and evening.
The passengers who use the buses are a mix of adults and children. Some routes are busier
than others and, at certain times, some passengers have to stand on the bus as there are
insufficient seats available.
The directors of CX are considering how best to measure the performance of each of the routes
that they operate and it has been suggested that they should use a Balanced Scorecard
approach.
Required:
(a) Explain how the Balanced Scorecard could be used by CX to improve its profits.
(b) Explain TWO performance measures, each from a different perspective of the Balanced
Scorecard, that CX could use to measure the performance of its routes. (You must state the
perspective to which each of your measures relates.)
19. Product Lifecycle

A company has carried out extensive product research and as a result has just launched a new
innovative product unlike anything else that is currently available on the market. The
company has launched this product using a market skimming pricing policy.
The market in which it operates is highly competitive and historically success has been
achieved by being the first to market with new products. Only a small number of companies
have survived in the market and those that remain are constantly aiming to develop new
products either by improving those already in the market or by extensive product research.
Required:
Explain, with reasons, the changes that the company may need to make to the unit selling
price of the product as it moves through each of the four stages of its product life cycle.

The Pathology Laboratory service of the County Hospital provides diagnostic services to
support the care provided by the County Hospital, local General Practitioners, other hospitals
and healthcare providers. The importance of the work done by the Pathology Laboratory was
summarised by the Head of the laboratory:
"Over 70% of diagnostic and treatment decisions made by doctors are based on medical
laboratory test results. Without our work, doctors would not be able to confirm their
diagnosis. Laboratory results give us the ability to identify diseases in their earliest stages so
that we have a better chance of treating people effectively. The types of tests performed by
our highly-trained staff encompass the entire spectrum of human disease, from routine
diagnostic services to clinical laboratories that specialise in bone marrow transplants. The
laboratories provide over four million tests each year, providing doctors with the information
needed for diagnosis and treatment of all kinds of condition. Our vision is to continually
improve the efficiency of the laboratory to ensure the best economic approach to patient care.”
The management team of the County Hospital has decided that the use of the balanced
scorecard should be cascaded down to departmental level. Consequently, departmental
managers have been given the task of designing a balanced scorecard for their departments.
Required:
Recommend an objective and a suitable performance measure for each of three non-financial
perspectives of a balanced scorecard that the Pathology Laboratory could use.
Note: in your answer you should state three perspectives and then recommend an objective
and a performance measure for each one of your three perspectives.
21. Product Life cycle

PT manufactures and sells a number of products. All of its products have a life cycle of six
months or less. PT uses a four stage life cycle model (Introduction; Growth; Maturity; and
Decline) and measures the profits from its products at each stage of their life cycle.
PT has recently developed an innovative product. Since the product is unique it was decided
that it would be launched with a market skimming pricing policy. However PT expects that
other companies will try to enter the market very soon.
This product is generating significant unit profits during the Introduction stage of its life cycle.
However there are concerns that the unit profits will reduce during the other stages of the
product’s life cycle.
Required:
For each of the
(i) Growth; and
(ii) Maturity stages of the new product’s life cycle
explain the likely changes that will occur in the unit selling prices AND in the unit
production costs, compared to the preceding stage.
22. Target costing and kaizen costing

JYT manufactures and sells a range of products. It is not dominant in the market in which it
operates and, as a result, it has to accept the market price for each of its products. The company
is keen to ensure that it continues to compete and earn satisfactory profit at each stage
throughout a product’s life cycle.
Required:
Explain how JYT could use Target Costing AND Kaizen Costing to improve its future
performance.
Your answer should include an explanation of the differences between Target Costing and
Kaizen Costing.
23. Balanced Score-card

Example 1
MacWendys is an Indian restaurant that wishes to implement a balanced scorecard approach
and has established the following goals for each of the balances scorecard perspectives:
Perspective Goals
❖ Customer perspective
o To increase the number of new and returning customers
❖ Process efficiency perspective
o To reduce the customer waiting time
o To reduce staff turnover
❖ Learning and growth perspective
o To increase the proportion of revenue from new meals
o To increase the % of training time for staff
❖ Financial perspective
o To increase the spend per customer
o To increase the gross profit margin
The following information is also available for the year just ended and for the previous year:
2016 2017
Total customers 27,800 29,000
- of which are new customers 6,500 8,200
- of which are returning customers 21,300 20,800
Customer complaints 820 1,050
Waiting time for order to arrive 15 minutes 25 minutes
% staff turnover 15% 30%
% of time that staff spend training 4% 2%
Revenue $252,000 $302,000
- revenue from new meals $26,000 $64,000
- revenue from existing meals $226,000 $238,000
Gross profit $51,000 $64,000
Calculate appropriate measures, and comment on whether or not MacWendys have
achieved their goals.
24. Balanced scorecard and Participative Budgeting

KL is a transport company that has recently won a five-year government contract to provide
rail transport services. The company appointed a new Director to take responsibility for the
government contract. She has worked in various positions in other rail transport companies
for a number of years. She has put together a team of managers by recruiting some of her
former colleagues and some of KL’s current managers.
The contract stipulates that the company should prepare detailed budgets for its first year of
operations to show how it intends to meet the various operating targets that are stated in the
contract. The new Director is undecided about whether she should prepare the budgets herself
or whether she should involve her management team, including the newly recruited
managers, in the process.
Required:
Produce a report, addressed to the new Director, that discusses participative budgeting.
Note: your report must
• explain TWO potential benefits and TWO potential disadvantages of involving the new and
existing managers in the budget setting process.
• provide a recommendation to the new Director.
25. TQM and standard costing:

It has been argued that some of the standard costing performance measures are irrelevant in
a TQM environment. Explain why each variance below may not be relevant in a TQM
environment.
❖ Labour efficiency variance
❖ Labour price variances…
❖ Material price variance
❖ Idle time variances
26. Life-cycle costing and Pricing Strategy:

Cam Co manufactures webcams, devices which can provide live video and audio streams via
personal computers. It has recently been suffering from liquidity problems and hopes that
these will be eased by the launch of its new webcam, which has revolutionary audio sound
and visual quality. The webcam is expected to have a product life cycle of two years. Market
research has already been carried out to establish a target selling price and projected lifetime
sales volumes for the product. Cost estimates have also been prepared, based on the current
proposed product specification. Cam Co uses life cycle costing to work out the target costs for
its products, believing it to be more accurate to use an average cost across the whole lifetime
of a product, rather than potentially different costs for different years. You are provided with
the following relevant information for the webcam:
Projected lifetime sales volume 50,000 units

Target selling price per unit $200
Target profit margin (35% selling price) $70
Target cost per unit $130
Estimated lifetime cost per unit (see note below for detailed breakdown) $160
Note: Estimated lifetime cost per unit:
$ $
Manufacturing costs

Direct material (bought in parts) 40
Direct labour 26
Machine costs 21
Quality control costs 10
Rework costs 3
–––
100
Non-manufacturing costs
Product development costs 25
Marketing costs 35
–––
60
––––
Estimated lifetime cost per unit 160
––––
The average market price for a webcam is currently $150. The company needs to close the cost
gap of $30 between the target cost and the estimated lifetime cost. The following information
has been identified as relevant:
1. Direct material cost: all of the parts currently proposed for the webcam are bespoke parts.
However, most of these can actually be replaced with standard parts costing 55% less.
However, three of the bespoke parts, which currently account for 20% of the estimated direct
material cost, cannot be replaced, although an alternative supplier charging 10% less has been
sourced for these parts.
2. Direct labour cost: the webcam uses 45 minutes of direct labour, which costs $34·67 per
hour. The use of more standard parts, however, will mean that whilst the first unit would still
be expected to take 45 minutes, there will now be an expected rate of learning of 90% (where
‘b’ = –0·152). This will end after the first 100 units have been completed.
3. Rework cost: this is the average rework cost per webcam and is based on an estimate of 15%
of webcams requiring rework at a cost of $20 per rework. With the use of more standard parts,
the rate of reworks will fall to 10% and the cost of each rework will fall to $18.
Required:
(a) Recalculate the estimated lifetime cost per unit for the webcam after taking into account
points 1 to 3 above.
(b) Explain the ‘market skimming’ (also known as ‘price skimming’) pricing strategy and
discuss, as far as the information allows, whether this strategy may be more appropriate for
Cam Co than charging one price throughout the webcam’s entire life.
27. Transfer Pricing

Rest Easy Company is a rapidly growing start-up in the technology sector. It develops
customized ERP packages for clients across various business sectors. The business comprises
primarily of two departments (1) consultant and (2) customer support. Consultant department
has highly qualified professionals from management, accounting and technology
background, who approach clients as a team and work out solutions that meet their needs.
Customer support personnel are in charge of IT implementation and provide support through
telephone, e-mail or on-site. Currently, the strength of the consultants department is 200 while
that of customer support is 150.
Yash, the founder and CEO of the company, is very passionate about this business model. To
deliver high-quality product solutions, he believes that his staff should be well-trained and
up-to date with developments in their professional fields. Therefore, Rest Easy provides
periodic training to its staff in-house. All employees are expected to undergo 2 weeks of
training annually. A training department has been set up with qualified trainers in various
fields, who provide periodic training sessions to both Consultant and Customer Service
departments. The training department has 5 trainers. Training sessions are aimed at providing
skills that the executives need to provide better service to their clients. This in-house focus of
high-quality delivery, is the key factor that Yash believes would set apart Rest Easy from its
competitors.
In addition to delivering training sessions, trainers are responsible for developing training
material for routine, on-going as well as specialized training sessions. They attend
conferences, train the trainer sessions and subscribe to journals to keep themselves up-to-date
with various developments that consultants and customer support executives need to be
aware of.
At the beginning of each year, heads of consultant and customer service departments advise
the training department on the expected number of training sessions that their staff would
undertake. In special situations, where developments need to be communicated rapidly, extra
sessions can also be conducted. Training department budgets are prepared based on these
needs.
Transfer Pricing - Training Cost Allocation

Cost incurred by the training department is allocated to the consultant and customer service
department based on the training sessions availed by both departments. A standard quote
(transfer price) based on budgets is provided at the beginning of the year. At the end of the
year, actual cost is allocated based on actual training sessions of each department.
Each of the user departments use the transfer price to prepare their individual budgets, that
further gets built into their pricing models used for billing clients. One of the metric for
manager appraisal is also the financial performance of their individual departments. Hence,
managers of both consultant and customer service departments are very cost conscious.
Figures for budget and actual costs for 2017 of the training department are as follows:
Figures in Rs.
Cost Particulars Budget Actual
Salaries 25,00,000 30,00,000
Depreciation on Office Equipment 2,00,000 5,00,000
Software Licenses for Training Packages 80,000 1,05,000
Conference Travel for Train the Trainer Sessions 10,000 15,000
Telephone 20,000 25,000
Training Supplies 50,000 60,000
Trainee Lunch 100,000 120,000
Total Expenses 29,60,000 38,25,000
Consultant and Customer service departments are charged based on the number of training
sessions actually availed. Details of training sessions for each department are:
Department Budget Actual
Consultant 100 100
Customer Service 100 80
Total 200 180
Problem of Goal Congruence

In accordance with the above explanation, the training department quoted a rate of Rs.14,800
per session based on the budgeted cost and budgeted training sessions. (Budgeted cost
Rs.29,60,000 for 200 training sessions). Actual cost per session is Rs.21,250 (Actual cost
Rs.38,25,000 for 180 training sessions). Cost overrun of Rs.6,450 per session, a jump of 44%
from the original quote.
Consequently, a meeting was called that was attended by the managers of consultant,
customer service and training departments, along with the CEO Yash.
The user departments were unhappy with the higher charge. Manager of the consultant
department raised the following concerns:
(a) The market rate for similar trainings provided by external vendors was only Rs.12,000
per session. He has accepted a higher transfer price of Rs.14,800 per session only because
the in-house training program was more customized towards Rest Easy’s end-user-
clients. However, if the department is actually going to be charged Rs. 21,250 per session,
he would rather source the training to the outside vendor.
(b) Further, he pointed out that while his department had adhered to its commitment of 100
training sessions, the customer service department has availed of 20 lesser sessions than
its commitment. Reviewing the cost structure of the training department, most of the
expenses are fixed in nature. Therefore, when the transfer price is based on the actual
cost and actual training sessions, the per session cost has increased because the customer
service department did not undergo the entire 100 sessions. He questions, why he should
bear a higher allocation of cost due to variance in actual and budgeted usage of training
resources of the customer service department?
Manager of the customer service department explained that the variance of 20 training session
is on account of the executives handling high-priority work pressure that did not allow them
enough time to complete some of the training sessions. At the same time she contended that
she should not be charged for those 20 sessions for which no training was availed.
Manager of the training department explained that the Rs.500,000 cost overrun on salary due
to new hire of a trainer. The trainer’s experience is very valuable to the company and hence
to get her on board, the company had to offer a higher pay scale. Depreciation on office
equipment was higher by Rs.300,000 due to higher replacement cost of ageing equipment. A
specialized software license resulted in an excess spend of Rs.25,000. The manager argued
that the rest of the expenses were normal increases which were not controllable.
Yash, the CEO, was understandably not happy with the cost over-run. Higher internal transfer
price to the end user departments would affect employee morale. However, even though a
cheaper option was available from an outside vendor, he could still foresee the value of
investing in in-house training programs. Intangible benefits from these customized sessions,
would definitely help the company’s growth.
To conclude, he was not willing to shut down the training department. At the same time, he
had to resolve the dispute resulting from internal transfer pricing in an amicable way. Like
profits, teamwork is critical to success.
Required
i. IDENTIFY the threats to goal congruence due to internal transfer pricing.
ii. During the meeting, an alternate transfer pricing methodology based on two-part
pricing system was formulated. Costs would be segregated into fixed and variable
categories. A transfer price for each category would be arrived based on budgeted
costs and budgeted usage. The standard rate for fixed cost will be applied to the
budgeted training sessions and charged to the user departments. The standard rate for
variable cost will be applied to the actual training sessions and charged to the user
departments. Fixed cost would be defined as those that are not directly impacted by

the number of training sessions. CALCULATE the transfer price to be charged to each
department under this method.
iii. EVALUATE how the two-part pricing price method of transfer pricing address
the threats to goal congruence as identified in question 1?
28. Kaizen Costing:

Zen Limited is a leading mobile manufacturing company and sells its mobile phone across the
world. In a fast-changing technological environment, Zen has been able to maintain its
leadership in smartphones segment for third year in a row now. Though the revenues have
grown year on year, the costs have increased at a higher rate in the mobile phone industry as
a whole.
“We have been leaders in revenue. We must lead in cost reduction front as well. I believe we
can achieve this with improvements overtime, however minor they might be!”
– This is what the CEO of Zen has told its directors in a recently concluded board meeting.
The net profit margins of the company has fallen from 10% in 2016 to 8% in 2017 owing to rise
in raw material & repair cost. Another significant rise in the cost was on account of repairs of
mobiles which are under warranty. There was an increase in these repair costs by 1.5 crores
which represents 1% of the total turnover of the company.
The process of repairs/ replacement of under warranty product is outlined below:

❖ The company own 200 repair centres in various cities in India.
❖ A customer whose phone is under warranty and requires replacement/ repair
visits any of the 200 centres to deposit the faulty mobile phone.
❖ The technician at service centres examines the phone and the service centre
sends the phone to a centralised repair centre at Mumbai. The phones are sent
to Mumbai even for minor repairs which can be done locally if requisite
infrastructure is provided to the service centres.
❖ The phones are sent in batches. Each service centre creates 3-4 batches of mobile
phones in a day. (A recent study showed that the batches could be combined
into a single batch per day)
❖ The phones are repaired in Mumbai’s centralised centres and sent back to the
respective service centres for handing them back to the customer. The phones
which are repaired are sent in separate batches and those which are replaced
are sent in separate batches.
Required
You are working as a Finance Manager in Zen. The finance director has approached you to
understand whether the minor improvement would be useful given the size of the company.
The Finance Director has asked you to examine the process of warranty repairs and
replacement and submit a report covering the following aspects:
i. What is the CEO referring to when he says “minor improvements”?
ii. What are the benefits of such minor improvements?
iii. Apply the above process to the warranty claim process and explain how the
process can be improved.
iv. Any other matter which you consider relevant.
29. Performance Prism:

Galaxy Limited is in the business of logistics and distribution. In 2002, Galaxy limited had
implemented Balance Scorecard as a performance measurement & management system. The
balanced scorecard measures performance across Financial, Customer, Business and
Innovation perspective. The implementation of Balanced Scorecard had the following impact
❖ The company’s financial performance improved substantially.
❖ The complaints from customers regarding poor service reduced.
❖ The company has pioneered in innovation in the field of door to door delivery
of goods.
All these led to improvement in profitability of the company. The share prices are trading at
life time highs. Since the ultimate objective of a commercial organisation is to maximise
shareholder’s wealth, the CEO of the company is extremely pleased with the affairs at the
company.
Of late, the company has witnessed high employee turnover ratio. Though the company has
a formal exit interview process for the resigning employees, the inputs received from these
interview is rarely considered in improving the HR practices. One of the common feedback
from employees who left the company was that there is too much pressure to perform and
improve customer service without adequate support of systems and processes.
Also, the truck drivers who move consignment from one city to another have been on strike
thrice in the last one year demanding better pay and working conditions. These drivers are
generally hired on contractual basis. They are not entitled to any retirement benefits. The
drivers have been insisting that they be taken as permanent employee and are given benefits
applicable to employees of the company.
The above two issues were discussed in one of the board meetings. The directors wondered if
they had the right performance measurement mechanism to address the issues. The company
is doing great financially but must also ensure that the employees and other stakeholders are
taken care of apart from shareholders. The board is also concerned that they have too much
of data and reports to look at on performance management as the current measurement is
done on a monthly basis. However, the alignment of such reports to the overall strategy of the
company is missing.
Required
RECOMMEND an alternative performance measurement mechanism which considers all
stakeholders instead of just shareholders and employees.
30. Value Chain:

You are the Finance Manager of DP Limited which is in the business of manufacturing wire
rods. A division in the company manufactures copper wire rods from a single manufacturing
plant in Central India. The division purchases raw material (copper cathodes) from various
suppliers across the country. The cathodes are melted and wire rods of various dimensions
are produced. Each batch of wire rods produced are tested for quality and strength.
The wire rods are stored in rolls in the warehouse and dispatched in company owned trucks
as per the requirement of the customers. The customers are required to pay 50% of invoice
value as advance and balance 50% within 30 days of delivery of goods. The company prices
its copper wire rods based on the price prevailing on London Metal Exchange after adjusting
it with a factor to cover conversion costs and profits.
The company explores newer markets by advertising in national dailies and participating in
various industrial events in India as well as abroad. An annual conference of customers is

conducted by the company to improve customer relationships and attract newer customers.
The customers have right to return the material if quality specifications are not met. There is
a separate team to handle such complaints.
The following email was sent by the Chief Financial Officer of the company to you.
---------------------------------------------------------------------------------------------------------------------
From: Chief Financial Officer
To: Finance Manager
Subject – Commodity Price Fluctuation
The board is quite aware of foreign exchange fluctuation related risks. However, they are not
much aware of risks related to fluctuation in commodity prices. The prices of copper which
are used to manufacture copper wire rods have fallen down by over 20% in the last six months
owing to global factors.
The procurement team of Copper Wire Division has been waiting for the right time to buy
these metals as they expect the prices to fall down further. However, we are at a verge of
stock-out of these metals as no purchase was made in the last one month.
The bonus of procurement team largely depends on the annual savings as compared to the
budgeted cost of purchase. I am not happy with the approach of speculation and making
profits out of price fluctuation in raw materials. Could you highlight the issues related with
our performance measurement mechanism and suggest how it could be improved?
Regards
Chief Financial Officer
Attachment:
Copper Prices Quoted on LME
---------------------------------------------------------------------------------------------------------------------
Required
(i) EXPLAIN and IDENTIFY the various primary activities of Copper Division.
(ii) DISCUSS the issues with performance measure in force in the company.
(iii) ADVISE an alternate performance measure and Identify Key Performance Indicators
(KPI).
31. Six sigma and cost of quality:

Absolute Singapore Pte Ltd. (ASPL) manufactures electronic components for washing
machines in an assembly line. Recent market survey reports indicate erosion of its clientele.
Feedback taken from customers suggest that the company’s products were not of good
quality. ASPL is concerned because its competitors have been able to achieve zero defect
performance in terms of nil sale returns on account of quality and nil subsequent warranty
cost. Therefore, the competitors enjoy huge customer loyalty.

To satisfy its customers, the company ASPL wants to improve its product quality.
Consequently, it has decided to undertake Six Sigma study of its operations.
Below is the additional information given about ASPL’s operations:

❖ Yearly sales of electronic components are 25,000 units at Rs.20,000 each. Of
these, 1% sales are returned due to quality issues. These are scrapped and a
replacement is made by the company. In addition, each product is under
warranty for one year after sale. If a claim is accepted under warranty, service
and replacement of parts is done free of cost. Current yearly warranty claims
(these are separate from sales returns), which is also representative of the
average yearly warranty claims, amount to Rs.30,00,000 per annum.
❖ Quality control check and inspection is carried out directly at the assembly line.
There is no quality check done at any other point in the entire work flow. Total
time spent on inspection is 2,000 hours in a year which costs the company
Rs.10,00,000 per annum. Inspection leads to 10% rejection i.e. 2,525 units. These
units require only one cycle of rework, after which they are ready for sale. Rate
of rework in the units rejected on inspection at the assembly line is 5 units in 1
hour. Cost of rework is Rs.6,250 per hour.
❖ The variable cost of electronic component is Rs.12,500.
The Six Sigma team as part of its study found that rework on products was mainly due to the
following reasons:
❖ Assembly line workers, including new hires, learnt on the job as to how to
assemble the input material to produce the final electronic component. This
lead to many errors due to lack of proper standardized training. Therefore, on
account of these errors, the entire electronic component has to assembled again.
❖ Sub-standard quality of raw material is detected on inspection only at the
assembly line. By this time, the defective material is already fitted into the final
electronic component. Therefore, entire component has to be reworked upon
to replace the defective raw material input.
❖ Machines are outdated and are not entirely suitable for the current production
methodology.
Proposed solutions to tackle these issues are as follows:

❖ Provide training to assembly line workers to train them on the production
methodology. This training is expected to standardize work flow, thereby
reducing errors. Such training programs will be held regularly to update the
workers on new methodologies. These programs can also serve as employee
feedback sessions about the actual working conditions at the assembly line.
This two-way communication can improve and streamline the production
process. Brainstorming can help detect or give heads up about potential
problems in the production process. Total training hours in a year are expected
to be 5,000 hours, costing Rs.1,000 each hour.
❖ Currently poor quality of raw material input is detected only on inspection at
the assembly line. This results in wastage of resources in terms of material, time
and capacity. In addition to the existing inspection at the assembly line, a new

functional area for quality planning and improvement is proposed to be set up.
At the time of procurement, the department will determine the appropriate
quality of raw material input, ensure that suppliers supply material as per these
requirements as well as suggest alternatives that can help improve product
quality. By ensuring quality of raw materials at the beginning of the production
process, wastage of resources is reduced, if not can be eliminated. Cost of
setting up such a facility will be Rs.1,50,00,000. In addition to this facility,
inspection will continue at the assembly line. This ensures complete quality
check during the entire production cycle. At the same time, due to the
introduction of this new functionality for quality control, the pressure on
resources for inspection at the assembly line would reduce.
❖ Current machines should be replaced entirely with new machines. Old
machines can be sold for negligible amount as scrap. New machines would cost
Rs.3,60,00,000 having a life of three years.
Implementation of the above three solutions can have the following impact:
❖ Rework of products can be entirely eliminated.
❖ Sale returns will reduce from 1% to 0% due to better quality of products.
❖ Yearly warranty claims will reduce from Rs.30,00,000 to nil per annum.
❖ With the introduction of the new facility, time required for inspection at the
assembly line would reduce from 2,000 hours to 1,200 hours. Cost of inspection
to do quality check at the assembly line would reduce from Rs.10,00,000 per
annum to Rs.600,000 per annum.
❖ Due to better quality, ASPL can build better reputation with the customers
which can further yield additional sales of 5,000 units per year.
Required
You are the management accountant at ASPL. As part of the Six Sigma project implementation
team, you are requested to EVALUATE proposals suggested by the Six Sigma team. The team
has used the DMAIC technique to assess quality improvements.
32. Value analysis and functional analysis:

Queenstown Wood Co. (QWC) began 20 years ago, as a small family-run business supplying
custom-made school furniture. Now QWC has grown into a thriving hub of experts
specializing in either custom-made, locally sourced or quality imported commercial grade
furniture. The newly appointed CFO is concerned about the trends in dropping sales
volumes, increasing costs, and hence falling profits over the last three years. He observed
that the reason of these trends is increased cut-throat competition that has emerged over the
last three years. For many years, QWC has been known for high quality but now this quality
is being matched by the competitors. QWC’s share of the market is declining due to
equivalent products being sold by competitors at lower prices. It is considered that, to offer
such low prices, the furniture’s production costs of the competitors must be lower than
QWC’s.
Required
ADVISE how QWC can improve its sales volumes, costs and profits using Value Analysis
and Functional Analysis.
33. Relevant costing, Transfer Pricing and Cost of Quality:

About Aditya Group
Aditya Group was established in 1975, manufactures and sells electronic personal grooming
and beauty products. The group has two 100% subsidiaries AUS Ltd. and ANZ Ltd. AUS Ltd.
manufactures luxury products that cater to niche customers who prefer specialized personal
grooming and beauty care. ANZ Ltd. caters to regular daily beauty and grooming
requirements that has a wide reach within the market. Factories of both companies are located
within India. The products are sold to wholesalers, who supply these products to the retail
market.
Aditya Group purchases its raw material requirements from both domestic and overseas
markets. Additionally, certain products manufactured by AUS Ltd. can be enhanced based on
the products manufactured by ANZ Ltd. Therefore, as per production requirements, AUS Ltd.
sources some product components from ANZ Ltd.
Aditya Group has a centralized decision making set-up. Basic policy decisions for functions
such as production planning, sales and client relationship, finance and human resources are
handled at the group level. Individual units AUS Ltd. and ANZ Ltd. concentrate on the
manufacturing alone.
About You
You are an Assistant Manager in Finance and Accounts department of Aditya Group, headed
by Director- Finance Ms. Elsea. You assist and report to Ms. Fiona, Manager of your
department. Sometime you also assist Director Finance in analysing financial and non-
financial information, drafting reports for board meetings, preparation of presentation and
staff trainings.
Business Situation- 1 Yesterday, 5.15 P.M.

You got an email from Ms. Elsea, with Cc to Ms. Fiona. Ms. Elsea, asked you to prepare a cost
statement for making a quotation to a new customer. She has also informed you that the
customer can also maintain a long- term business relation with us. You have been requested
to gather information related to the specification from Sales Manager.
Yesterday, 5.25 P.M.

You have been called by Ms. Fiona, and provided the product specification received from
Sales- Manager for which quotation has to be quoted. Ms. Fiona has also requested you to
gather relevant information to prepare cost statement. Due to the expected long term business
relationship that AUS Ltd. wants to have with the customer, the sales manager wants to quote
the lowest possible price. AUS Ltd. currently has some spare capacity that can be utilized to
cater to this entire order. Therefore, only the relevant cost to AUS Ltd. has to be considered to
arrive at the quote.
After meeting with your reporting officer, you mailed to various concerned department and
requested for data.
The following information has been obtained in relation to the contract:

Today, 10.05 A.M.
You got an e-mail from Production Manager, it has been informed that 40 tonnes of material
Dx would be required. This material is in regular use by AUS and has a current purchase price
of Rs.380 per tonne. Currently, there are 5 tonnes in inventory which cost Rs.350 per tonne.
The resale value of the material in inventory is Rs.240 per tonne.
Further, with regards to components, it has been informed that 4,000 components would be
required. These could be bought externally for Rs.15 each or alternatively they could be
supplied by ANZ Ltd. The variable cost of the component if it were manufactured by ANZ
Ltd. would be Rs.8 per unit. ANZ Ltd. has sufficient capacity to produce 2,500 components

without affecting its ability to satisfy its own external customers. However, in order to make
the extra 1,500 components required by AUS Ltd., ANZ Ltd. would have to forgo other
external sales of Rs.50,000 which have a contribution to sales ratio of 40%. To have uniformity
in the quality of the component, it is assumed that AUS Ltd. would procure its entire
requirement of 4,000 components either externally or from ANZ Ltd. The transfer pricing
policy of Aditya Group for sales between units aims at goal congruence. The unit selling the
goods would be allowed to charge any opportunity cost on account of catering to internal
demand, while the purchasing unit should ensure that the company is not at a loss.
Today, 10.45 A.M.

You got an e-mail from Personnel Manager, it has been informed that 2,000 high skilled labour
hours would be required. The grade of labour required is currently paid Rs.5 per hour. Highly
skilled labour is in short supply and cannot be increased significantly in the short-term. This
labour is presently engaged in meeting the, demand for product ‘G’, which requires 4 hours
of highly skilled labour. The contribution from the sale of one unit of product L is Rs.24.
It has also been informed that the contract would require a specialist machine. The machine
could be hired for Rs.15,000 or it could be bought for Rs.50,000. At the end of the contract if
the machine were bought, it could be sold for Rs.30,000. Alternatively, it could be modified
at a cost of Rs.5,000 and then used on other contracts instead of buying another essential
machine that would cost Rs.45,000. The operating costs of the machine are payable by AUS
whether it hires or buys the machine. These costs would total Rs.12,000 in respect of the new
contract.
Supervisor
The contract would be supervised by an existing manager who is paid an annual salary of
Rs.50,000 and has sufficient capacity to carry out this supervision. The manager would receive
a bonus of Rs.5,000 for the additional work.
Development Time
15 hours of development time at a cost of Rs.30,000 have already been worked in determining
the resource requirements of the contract.
Fixed Overhead Absorption Rate

AUS uses an absorption rate of Rs.20 per direct labour hour to recover its general fixed
overhead costs. This includes Rs.5 per hour for depreciation.
Today, 11.15 A.M: Ms. Fiona called you in her place as asked you the following:
Required
(i) CALCULATE the relevant cost of the contract to AUS. You must present your answer
in a schedule that clearly shows the relevant cost value for each of the items identified above.
You should also EXPLAIN each relevant cost value you have included in your schedule and
why any values you have excluded are not relevant. Ignore taxation and the time value of
money.
(ii) DISCUSS two problems that can arise as a result of setting prices using relevant
costing.
Business Situation- 2
Today, 5.26 P.M: A memo from Managing Director of the group has been circulated to all
officers of the group which stated “My objective for the forthcoming year is to reduce our
quality costs in each of the primary activities in our value chain”. The company is keen to
build a reputation for quality and gives a five-year guarantee with all of its products.
Today, 5.37 P.M: Ms. Fiona, called you in her place and asked the following:
Required

(iii) EXPLAIN, by giving examples, how each of the four types of quality cost could be
reduced. You should also IDENTIFY in which primary activity each one of your examples
would occur in Aditya Group’s value chain.
34. Budgetary system and performance measurement:
TES operates a chain of health clubs in its home country. Managers at health clubs receive a
quarterly bonus if their health club achieves or exceeds ALL of the following financial targets:
ROCE 8% (based on net assets)
Asset turnover 40%
Operating profit margin 20%
Summary actual performance for Quarter 3 of the current year for Health Club E is detailed
below:
Quarter 3
Revenue $36,000
Staff costs $12,000
Other fixed costs $22,000
Net assets $110,000
Number of customers 600
The quarterly financial targets are set by the head office finance team and all health clubs are
given the same target. TES is currently forecasting the performance of its health clubs in
Quarter 4.
TES will use the following information to forecast the performance of each of its health clubs
in Quarter 4:
• The average revenue per customer will increase by 10% on Quarter 3.
• Customer numbers will increase by 5% on Quarter 3.
• Staff costs and net assets are expected to remain at the same level as Quarter 3.
• Other fixed costs are expected to decrease by 5% on Quarter 3.
• Staff and other costs are fixed (they are not related to the number of customers).
Required:
Prepare calculations to show whether the manager of Health Club E is expected to
receive the bonus in Quarter 4 based on the forecast performance.
Note : you should calculate operating profit margin, ROCE and asset turnover for Quarter
4.
The manager of Health Club E is dissatisfied with the quarterly bonus system and does not
perceive it to be fair. The manager argues that the financial targets are based on a national
view of all TES health clubs and do not take account of specific local circumstances. For
example, Health Club E is located in a less affluent area of the country. The manager of Health
Club E would like to see participation from health club managers in the development of
quarterly financial targets.
Discuss the potential impact for TES of involving the health club managers in the
production of their quarterly financial targets.?
35. Building Block Model:



Question No.1
(a)
Costs of quality conformance are the costs incurred by an organisation in attempting to ensure
that their quality standards are met before the product or service is completed.
In contrast, costs of quality non-conformance are costs that occur as a result of quality failure,
either because they require the product / service to be re-worked (Internal failure cost) or
because of the damage they cause to the business as a result of supplying a poor quality item
to a customer (external failure cost).
(b)
HT is operating in a market where consumers consider price and quality as the main factors
when making the buying decision. This is not unusual but highlights the need for HT to
understand the profile of its customers – to what extent are they prepared to pay for high
quality, in other words, there is a trade-off between price and quality. The more that HT
spends on developing a quality product, the greater will be its costs and hence its product
selling price will need to reflect this additional cost in order for HT to be profitable. HT will
need to decide whether to follow a low price, low quality strategy or a high price, high quality
strategy, or to follow a strategy that lies somewhere between these two extremes.
(c)
Kaizen principles encourage gradual and continuous improvement by making small changes
in the product or the method of operations. HT operates in a market where products have an
extremely short life cycle. If this life cycle could be extended then this would result in greater
profitability for HT. Kaizen principles could achieve this by gradually improving product
quality without any increase in price for example by making small changes to the components
being used in its products.
Question No.2
Concepts of Kaizen Costing:
❖ Kaizen costing is a system of cost reduction based upon attaining incremental cost
reductions by making small changes in the product or the method of operations.
❖ Kaizen costing is a system of cost reduction rather than cost control. Kaizen goals are
often updated monthly and targets set based on achievement of a cost reduction.
❖ Kaizen costing is based on the assumption that the manufacturing process is always
able to improve. Perfection is never achieved and the organisation should continually
seek to improve its processes and production conditions
Conditions of TQM:
❖ In order for Total Quality Management to be successfully implemented at HRS, the
whole organisation must adopt a quality culture. This includes the managing director
of HRS. It is imperative that the managing director adopts and espouses the principles
of Total Quality Management as the company’s ethos will dictate to what extent the
philosophy is committed to by the employees of HRS.
❖ HRS must get much closer to its customers. HRS’s supermarket customers have
reduced their purchases as consumer tastes have changed. HRS must foster and
deepen its relationship with supermarkets to understand the customer requirements.
❖ HRS should seek continuous improvement in its production, processes and
employees. Production techniques have remained largely unchanged at HRS and
production is limited to one type of product. HRS must aim to meet the quality
requirements of its customers and not be satisfied with current production techniques.
Question No.3
Principles of TQM:
❖ Total Quality Management has two basic principles: ‘get it right first time’ and
‘continuous improvement’.
❖ Get it right first time essentially equates to aiming for a zero-defect target. This
principle is based on the premise that prevention costs are less than the cost of
correction.
❖ The principle of continuous improvement is based on the idea that, although the ideal
state may never be achieved, it is the aim. A target of zero defects may not be
achievable. However, the principle of never being satisfied until this is achieved will
engender the correct behaviour of continually seeking to improve.
Suggested changes for adoption of Kaizen Costing:

❖ Kaizen costing is a system of cost reduction rather than cost control and is based upon
attaining incremental cost reductions by making continuous small changes in the
product or the method of operations.
❖ As Kaizen costing is a system of cost reduction, PB would require different target
information than at present. Rather than setting a budget based on standard costs, the
target would be the Kaizen cost.
❖ Cost analysis in Kaizen costing requires the comparison of target Kaizen costs to actual
cost reductions. The performance reporting in PB would need to change from the
current system of comparing actual costs to budget costs to accommodate this.
❖ Kaizen costing sets and applies cost reduction targets monthly. The current system of
setting targets (currently the annual budget at PB) once per year needs to change to
accommodate more frequent target setting.
Question No.4
Primary activities of value chain:
❖ Inbound logistics
❖ Operations
❖ Outbound logistics
❖ Marketing and sales
❖ Service
Quality costs and value chain:

❖ Prevention – operations: preventative maintenance and checking of the calibration of
machinery. This would reduce the number of potentially faulty products being
produced and therefore reduce guarantee claims.
❖ Appraisal – inbound logistics: reduce costs of incoming inspections by building close
links with suppliers and getting them to adopt TQM. If suppliers can guarantee their
quality then inbound inspections could be eliminated.
❖ Internal failure - operations: reduce costs of re-works by training employees on a
continual basis e.g. quality circles. This would reduce failure costs and also improve
quality.
❖ External failure - service: design quality into the product to try to prevent guarantee
claims and therefore the cost of servicing/repairing the product.
Question No.5
Present budgeting system and its likely effect:
The senior partner seems to want to involve the divisional partners in the budgeting process
by inviting them to prepare cost budgets for their respective divisions. However, since they
are then amended without any consultation it is clear that the divisional partners do not have
any real involvement as they are not able to influence their final cost budgets. From a

motivational point of view this approach is probably worse than not involving the divisional
partners at all. They will feel that they have wasted their time in preparing a budget which is
then effectively ignored. The benefit of involvement leading to ownership of the budget and
thus feeling personally responsible for achieving the target costs is therefore lost. Divisional
partners will not be motivated to achieve the budgeted cost. Indeed they may be motivated to
deliberately fail to achieve the budgeted costs in order to prove that their own budget was
correct and that the changes imposed by the senior partner were wrong.
Non-financial performance indicators:

A number of non-financial performance indicators could be used by the firm. These include:
❖ Number of training days for staff and partners – which is used to measure the
investment by the firm in its people and the firm’s commitment to providing up to
date and current information to its clients.
❖ Response time between the enquiry and the first meeting with a client – which is used
to measure the efficiency and flexibility of the firm to meet client demand.
Question No.6
Customer perspective
Objective: increase customer loyalty.
Performance measure: percentage of customers using loyalty card offers.
Customer loyalty is important to AST in terms of deepening the relationship AST has with its
customers to drive revenues. A high percentage would indicate that AST has returning
customers and that the offers they are targeting them with are of value to them. If AST can
provide customers with the products that they value, customers will return and potentially
purchase additional items from stores. Deepening the customer relationship to drive revenue
may be cheaper than acquiring new customers.
Internal business process perspective

Objective: for customers to pay for goods in a reasonable time.
Performance measure: time spent by customers queuing to pay for products at a check out.
The customer experience at their supermarkets is extremely important to AST. A key
indicator of the experience of a customer is the time queuing to pay for products at a check
out. AST could measure average queue time to focus resources on managing queuing time to
acceptable levels.
Learning and growth perspective

Objective: to have qualified staff able to meet the needs of the customer.
Performance measure: number of staff training days.
The number of staff training days is an indicator of staff having the required skills to serve
customers and that they are continuing to develop professionally.
Question No.7
Difference between annual budgeting and rolling budget system:
❖ An annual budgeting system is a system of preparing a set of budgets for a 12 month
period, usually coinciding with the financial year of the company.
❖ A rolling budget system is a system of budgeting that is continuous. Once the budget
has been prepared it is added to each month, or perhaps quarterly, thus ensuring that
a budget always exists for the next 12 months and possibly for longer depending on
the company’s budgeting policy.
❖ One of the key differences between these two systems is that, when a rolling budget
system is being used, managers see budgeting as part of their ongoing planning and
decision making processes, rather than as a separate exercise which is used to measure
their performance.

❖ In some organisations, where rolling budgets are used, the unexpired portion of the
budget is also updated monthly or quarterly to reflect any changes in operational
circumstances since the budget was originally prepared. There is much debate as to
whether this amounts to changing the original budget or preparing a latest annual
forecast.
Benefits of rolling system to southern depot:

❖ The manager of the Southern depot has raised two specific issues with the current
annual budgeting system.
❖ One of these is his argument that the budgets become out of date due to changing
operational circumstances. Whether or not rolling budgets provide a solution to this
issue depends on the organisation’s philosophy of the use of rolling budgets. If the
view is that they should be used to plan for future budget years so as to ensure that
managers can make better decisions for those years, but not change the current year’s
budget, then a rolling budget will not be the solution to this problem. However, the
manager can now effect changes to future budget periods, as yet unapproved, in the
light of those circumstances.
❖ If the rolling budget system allows revision of the remaining part of the plan for the
current budget year then their use will solve the argument that the original budget has
become out of date.
❖ It is important to consider the use of the budget. There are two main uses: operational
control and strategic decision making. From an operational control perspective care
must be taken to ensure that a rolling budget does not become a vehicle for eliminating
variances caused by actual performance. Once a budget has been set and approved,
then any unexpected changes to circumstances should be reported via the budgetary
control system using variance analysis including planning variances as appropriate.
❖ From a strategic decision making perspective, it is important to use the rolling budget
process to determine whether strategies need to be revised in the light of the current
operational circumstances.
❖ The second of the manager’s arguments relates to the lack of authority for actions in
respect of future periods. The rolling budget method does have a role here because as
it is continuously being updated then if each update is approved by the Board of
Directors, managers will always have authority to carry out decisions in line with the
approved budget for the next 12 months or more. This is a weakness of the annual
budgeting system, especially towards the end of the current year when next year’s
budget is still to be approved. Managers can often find that they do not have authority
for decisions which will impact on the early part of the next budget year until that year
has almost started.
❖ If DW were to introduce a system of rolling budgets then this would enable the depot
manager to plan and improve their decisions, for example with regard to recruiting
and training employees, and to evaluate alternative operating methods and possible
capital investments based on the budgets that have been agreed for the next 12 months
or more.
Question No.8
Growth Stage
Compared to the introduction stage the likely changes are as follows:
Unit selling prices

These are likely to be reducing for a number of reasons:

• The product will become less unique as competitors use reverse engineering to
introduce their versions of the product.
• CD may wish to discourage competitors from entering the market by lowering the
price and thereby lowering the unit profitability.
• The price needs to be lowered so that the product becomes attractive to different
market segments thus increasing demand to achieve the growth in sales volume.
Unit production costs

These are likely to reduce for a number of reasons:
• Direct materials are being bought in larger quantities and therefore CD may be able to
negotiate better prices from its suppliers thus causing unit material costs to reduce
• Direct labour costs may be reducing if the product is labour intensive due to the effects
of the learning and experience curves.
• Other variable overhead costs may be reducing as larger batch sizes reduce the cost of
each unit.
• Fixed production costs are being shared by a greater number of units.
Maturity Stage
Compared to the growth stage the likely changes are as follows:
Unit selling prices
These are unlikely to be reducing any longer as the product has become established in the
market place. This is a time for consolidation and whilst there may be occasional offers to
tempt customers to buy the product the selling price is likely to be fairly constant during this
period.

• Direct material costs are likely to be fairly constant in this phase and may even rise as
the quantities required diminish compared to those required in the growth stage with
the consequential loss of negotiating power.
• Direct labour costs are unlikely to be reducing any longer as the effects of the learning
and experience curves have ended. Indeed the workers may have started working on
the next product so that their attention towards this product has diminished with the
result that these costs may increase.
• Overhead costs are likely to be similar to those of the end of the growth phase as
optimum batch sizes have been established and are more likely to be used in this
maturity stage of the product life cycle where demand is more easily predicted.
Question No.9
Internal Business Process Perspective
❖ Objective: Cross-sell products
❖ Measure: Products purchased per customer
❖ Why: this provides a measure of customer satisfaction. If customers are happy with
how the bank operates they will be more likely to use the bank for differing kinds of
services e.g. loans, insurance, savings etc rather than using other banks.
Learning and Growth Perspective

❖ Objective: Increase the number of new products and services sold.
❖ Measure: number of customers buying the new products/using the new services.
❖ Why: The bank needs to offer a range of products and services in order to be
competitive. The uptake of the new products /services offered (e.g. internet banking)
will provide a measure of their acceptability and relevance.
Customer Perspective
❖ Objective: Increase customer loyalty
❖ Measure: Number of accounts closed
❖ Why: if customers close their accounts it is a sign that they are not happy with the
services provided by the bank. The reasons for customers closing their accounts should
be investigated and action taken where appropriate to improve the service offered
with a view to retaining existing customers and attracting new ones.
Question No.10
Life cycle costing collects the costs of the cost object (each client in DTG’s case) over their
lifetime, irrespective of accounting years. This allows the total profit of each client to be
measured.
DTG would need to set up a system to record the time spent, its cost, the cost of disbursements
and the fee income derived from its client so that these values could be accumulated over the
client’s lifetime.
This would start with the initial meeting with the potential client because although this cost
could not be charged to the client it is still a cost that has been incurred. If they become a client
then other costs will be incurred in setting them up on the system as a client. At this stage no
fee income has been earned because no services have yet been provided so the client is loss
making. DTG would hope to gradually recover these initial costs by providing services until
the client becomes profitable to them.
For those clients where DTG is being engaged on a one-off basis for each assignment there
will be non-chargeable set up costs before each assignment is agreed. These costs need to be
reflected in the fees charged for the services that are to be provided. Where a continuous role
is agreed then discounted fee rates may be applied to recognise the reduced amount of setup
costs.
DTG will also need to record the cost of time spent on non-chargeable activities after the
service has been provided such as chasing the client for payment. They will also need to record
the value of referrals that the client has made to them. This is often difficult to measure but
may perhaps be identified by the smaller amount of time required to convert a lead from an
existing client into a new client compared with the time required to convert other prospects
into clients.
DTG can then measure the profits of each of its clients since their initial appointment and
consequently determine which of them are most and least profitable.
Question No.11
Difference between Balanced Scorecard and traditional financial performance
measurement:
❖ A typical Balanced Scorecard measures the performance of an organisation from four
perspectives: customer perspective; internal business perspective; innovation and
learning perspective; and financial perspective.
❖ The Balanced Scorecard demonstrates that the achievement of financial objectives is
often the result of achieving other non-financial targets which lead to the financial
targets being achieved. For example, if customers are happy with the products and
services being provided then this will often result in increased sales which improve
profits and therefore financial objectives are achieved.
❖ Thus by measuring non-financial performance and taking action when targets are not
achieved, the result will be improved financial performance. This is because the cause
of the financial performance has been reviewed, whereas financial performance
indicators alone do not identify the causes of performance, simply the effect of it.

Suggested non-financial performance measures:

A number of non-financial indicators could be identified:
❖ The number of take-offs that are on time is a measure of the efficiency of the airline in
preparing the aircraft for a flight. Aircraft do not earn revenue while they are standing
on the tarmac. This is a measure of the efficiency of internal processes and is part of
the internal business perspective.
❖ The number of new routes operated by the airline is a measure of the innovation of the
airline to develop new services for its customers. The greater the number of routes the
more customer choice, which also increases the number of customers that would
consider ZJET for their flights. This measure is part of the innovation and learning
perspective.
❖ Within the customer perspective, ZJET could use the number of missed calls due to all
of the telephone operators being busy. Customers will expect a speedy answer when
they telephone and undue delays may result in the customer ringing off before the call
is answered. The negative impression gained by the customer may result in current
and future business being lost.
Question No.12
❖ Value Analysis is a systematic interdisciplinary examination of the factors which affect
the cost of a product in order to determine the means of achieving the specified
purpose in the most economical manner while meeting the required level of quality
and reliability.
❖ Functional Cost Analysis is a method that can be applied to examine the component
costs of a product or service in relation to the value as perceived by the customer.
Functional Cost Analysis can be applied to new products and breaks the product
down into its component parts. For example a garden table may have the function to
fold completely flat and therefore require much less storage space. The outcome of the
analysis is to improve the value of the product while maintaining costs and or reduce
the costs of the product without reducing value.
❖ Value Analysis may therefore be viewed as a cost reduction and problem solving
technique that analyses an existing product in order to identify and reduce or
eliminate any costs which do not contribute to value or performance.
❖ In contrast, Functional Cost Analysis focuses on the value to the customer of each
function of the product and consequently allocates resources to those functions from
which the customer gains the most value.
❖ It is clear from the scenario that LCG needs to be able to reduce its selling prices in
order to compete in the market. This selling price reduction can only be sustained by
a reduction in LCG’s unit costs; however such a reduction must not be achieved by
compromising on quality.
❖ Both value analysis and functional cost analysis have potential to help LCG but value
analysis is likely to be a more useful technique because garden tables and chairs are
products that are sold more on the basis of their use value rather than their esteem
value.
Question No.13
Concept of Balanced Scorecard:
❖ The main principle of the Balanced Scorecard is that an organisation’s performance
should not be measured on the basis of its financial results alone. Other key
performance indicators are relevant to an organisation’s success.
❖ The balanced scorecard typically identifies four groups (or perspectives) of
performance indicator that would be suitable for most organisations, though each
organisation is free to determine the performance indicators that are most relevant to
its own needs. The typical perspectives are: customer perspective; internal business
perspective; innovation and learning perspective; and financial perspective.
❖ Many people believe that success in the non-financial performance measures will
lead to success in the financial performance measures so that these other measures
are leading measures whereas the financial measures are lagging measures.
❖ The airline company could use the balanced scorecard to monitor its performance in
other areas of its business. It is important for service businesses such as airlines to
understand the needs of its customers and thus measures connected with the
customer perspective are important. The airline may discover that particular
destinations and flight times are demanded by their customers and this may lead the
airline company to develop new routes which can be measured using the innovation
and learning perspective.
❖ The airline can also look at how it operates its processes both in relation to its staff
and its customers. These could be used to improve the financial results because costs
savings can be made.
Non-financial measures:
❖ The airline could measure the number of new destinations that it has provided to its
customers during the year. This measure relates to the innovation and learning
perspective. The greater the number of destinations, the more choice it has provided
to its customers and thus increased its potential customer base.
❖ The airline company could measure the amount of time it takes for its staff to prepare
the aircraft between flights, thus measuring the turnaround time. This is monitoring
its internal business processes. The longer it takes to prepare the aircraft, the more
expensive it is for the airline company because its asset is not earning revenue at that
time.
Question No.14
❖ Business process re-engineering involves examining business processes and making
substantial changes to the way in which an organisation operates. It requires the
redesign of how work is done through activities. A business process is a series of
activities that are linked together in order to achieve the desired objective. For example
material procurement might be viewed as a business process which could impact on
the separate activities of production scheduling, storing materials, processing
purchase orders, inspecting materials and paying suppliers.
❖ The aim of business process re-engineering is to enhance organisational performance
by achieving improvements in business processes by focusing on simplification,
improved quality, enhanced customer satisfaction and cost reduction.
❖ It may be that MLC needs to be able to reduce its selling prices in order to compete in
the market. This selling price reduction can only be sustained by a reduction in MLC’s
unit costs, however such a reduction must not be achieved by compromising on
quality.
❖ Business Process re-engineering can be applied not only to manufacturing processes
but also to an extensive range of administrative activities. In the case of material
handling MLC might re-engineer the activity of processing purchase orders by
collaboration with suppliers of timber and other components for their products by
integration of their production planning system with that of their suppliers. This
would enable purchase orders to be sent directly to their suppliers thereby obviating
the need for any intermediate administrative activity.
❖ Additionally scheduled orders might be agreed with suppliers which would reduce
the need to hold inventories of timber and other components. In circumstances where

suppliers are working in close collaboration with MLC, it may be possible to roll the
quality back down the supply chain and agree quality control procedures with
suppliers which would reduce the need to inspect incoming deliveries of timber and
components. Thus savings in material handling costs could be achieved via reduced
storage, processing and inspection costs. It must be recognised that such costs do not
add value to the final product and thus are of no benefit to the customer.
❖ In conclusion business process re-engineering may be useful to MLC because it may
enable them to identify cost savings that do not directly affect their products and so
would not have any effect on their customers’ perception of the quality or value of the
products.
Question No.15
Principles of Kaizen Costing:
❖ Kaizen Costing is a system of cost reduction based upon the concept of continuous
review of systems and procedures to identify and implement small incremental cost
savings. It is used in the production phase of a product and employees are both
encouraged and empowered to recommend changes that they believe will reduce
costs without affecting the quality of products or otherwise affect the customer’s
perception of products
Standard costing and variance analysis:

❖ With regard to the use of standard costing and variance analysis, since Kaizen Costing
is based on the concept of continuous small improvements to reduce costs then the
original standard cost would no longer reflect the target that is achievable.
Consequently the measurement of performance against this target would be of limited
usefulness.
❖ In order to prepare meaningful reports SD would need to determine the extent of the
variances that have been caused by changes in the method of operations as a result of
using Kaizen Costing. These variances would be reported as planning variances and
the remaining cost differences would be reported as operational variances.
❖ Although the managers of SD will have been involved in the Kaizen process it is
important that the variances between the target that the managers believed would
now be achievable and the actual results are reported separately. Then the managers
can consider whether these variances have arisen due to operational factors or due to
over ambitious revised targets. The variance between the original target and the new
Kaizen target (the planning variance) measures the extent to which it is believed that
Kaizen techniques have reduced SD’s costs.
Question No.16
Feedforward control systems are the comparison of draft plans with the objectives of the
company.
In the scenario the company has to produce budgets showing acceptable cost targets in order
to receive the first payment of its subsidy.
The first draft of the budget will need to be compared to the target costs that are acceptable to
the government office to ensure that the company qualifies for the subsidy. This comparison
process is the operation of a feedforward control system since the transport company will
have this cost target as one of its objectives. It may be that the first draft of the budget does
not achieve the required cost target. If this is the case then there will need to be revisions to
the budget perhaps by changing the method of providing the transport service so that the cost
target is achieved. Care must be taken however to ensure that the proposed budget changes
do not cause the company to fail to meet its social objectives.
Feedback control systems are the comparison of actual results against the budget that has been
approved. Thus in the context of the transport company a comparison of the actual monthly
costs can be made against the budgeted costs for that month.
As with any budget and actual comparison there may be an adverse or favourable variance.
If this is significant then further analysis may be required to determine its cause. This is
particularly important in the context of the transport company because failure to achieve the
cost target will result in not receiving the balance of the subsidy payment. If action is required
to reverse an adverse variance this will need to be done as soon as possible before the size of
the variance is too great to reverse before the end of the year. This comparison process is
feedback control.
Thus the difference between feedforward and feedback control systems is that feedforward
occurs in the budget setting stage whereas feedback control occurs during the year.
Question No.17
Concept of Balanced Scorecard:
❖ The main concepts of the Balanced Scorecard are that an organisation’s performance
should not be measured on the basis of its financial results alone. Other key
performance indicators are relevant to an organisation’s success.
❖ The balanced scorecard typically identifies four groups (or quadrants) of performance
indicator that would be suitable for most organisations, though each organisation is
free to determine the performance indicators that are most relevant to its own needs.
The typical quadrants are: customer perspective; internal business perspective;
innovation and learning perspective; and financial perspective.
❖ Many people believe that success in the non-financial performance measures will lead
to success in the financial performance measures so that these other measures are
leading measures whereas the financial measures are lagging measures.
❖ The college could use the balanced scorecard to measure its success in other areas of
its business. It is important for service businesses such as colleges to understand the
wants of its customers and thus measures connected with the customer perspective
are important. The college may discover that particular types of courses are demanded
by their customers and this may lead the college to develop new courses which can be
measured using the innovation and learning perspective.
❖ The college can also look at how it operates its processes both in relation to its staff
and its customers. Improvements in these processes could be used to improve the
financial results, perhaps, because costs savings can be made.
Non-financial measures:
❖ The college could measure the number of new courses that it has provided to its
customers during the year. This measure relates to the innovation and learning
perspective. The greater the number of courses, the more choice it has provided to its
customers and thus increased its potential customer base.
❖ The college could measure the time it takes for its staff to answer the telephone at the
administration office. This is a measure of the effectiveness of its internal business
processes. The longer it takes to answer the call the more likely is it that potential
customers will be lost because they do not want to wait. If waiting time is significant,
the customer may also deter others from making such calls thus losing the college even
more business.
Question No.18

Use of Balanced Scorecard:
❖ The Balanced Scorecard can be used to measure the performance of an organisation.
Traditionally, performance was only measured in financial terms, but it is now
recognised that financial measures alone are not enough; hence the development of
the Balanced Scorecard.
❖ There are different variations of the Balanced Scorecard that may be used since it
facilitates internal performance measurement and thus is designed by each
organisation to meet their requirements. However, most Balanced Scorecards contain
four perspectives. These are: Customer perspective; Internal Business perspective;
Innovation & Learning perspective and Financial perspective. Each of these
perspectives represents a different but equally important viewpoint on the operation
of the organisation. Each of these contribute to the success of the organisation, in fact
many argue that success in the first three of these perspectives leads to financial
success that can be measured by an increase in profits. By measuring its performance
from all of these different perspectives CX can identify the things that it does well and
the things that it needs to improve if it is to improve its performance and hence its
profits. For example CX may discover that it needs to change the frequency of its bus
services at certain times of the day; or on some of its routes. This understanding of
cause and effect can lead CX towards improved profits and long term success.
Performance measures:
❖ CX could use the Balanced Scorecard to measure the performance of each of its routes
by recognising that there are a number of different measures that can be used to
measure performance.
❖ For example CX could measure the capacity utilisation of each of its buses at different
times of the day and on different days of the week. This could be a measure of both
customer satisfaction (customer perspective) (because if the buses are too full
passengers may have to stand or wait for the next service) or of the company’s
efficiency (internal business perspective) in operating the appropriate frequency of
buses to match customer demand.
❖ Another measure that CX could use would be the number of breakdowns of buses.
This would be a measure of CX’s internal business processes to ensure that
preventative maintenance avoids unnecessary breakdowns.
Question No.19
❖ The company has just launched an innovative new product using a market skimming
pricing policy. This means that the selling price of the product is high and thus the
product is only available to a small segment of the market that can afford to pay the
high price for something that is unique and innovative.
❖ There are four stages to the product life cycle: Introduction, Growth, Maturity and
Decline.
❖ In the Introduction stage the product is unique and hence the company can charge a
high price. However the company’s competitors will buy the product and carry out
reverse engineering to see how it works and how they can develop their own similar,
but different product. The competitors will be particularly attracted by the high unit
selling price which should result in high unit profit. However, the company will seek
to avoid this competition by lowering its selling price towards the end of the
Introduction stage to deter competitors from entering the market and also to make its
product more affordable to the wider market.
❖ In the Growth stage the company will maintain its lower selling price to continue to
attract new purchasers of the product. If competitors have entered the market there

may need to be further reductions in selling price to maintain the growth unless the
original product can be differentiated in other ways.
❖ In the Maturity stage the selling price of the product is likely to be stable but may be
reduced still further, possibly by short term one-off offers or discounts for multiple
purchases so that the product continues to be financially viable for as long as possible.
❖ In the Decline stage the product may continue to be sold provided its margin is
positive. If it is not then the product may be bundled with other products or sold for
less than its unit cost in order to clear the company’s inventory of what has become an
obsolete product.
Question No.20
Internal processes
Objective: to provide accurate results
Performance measure: percentage of spoiled tests. Reason: need to ensure accuracy and lack
of contamination (and achieve external quality benchmark figures)
Learning and growth

Objective: to have highly qualified staff trained in the latest techniques
Performance measure: number of staff training days. Reason: provides a measure of continual
professional development
Customer
Objective: to provide results that allow our customers to meet the stated minimum period for
treatment
Performance measure: reporting time for each type of test. Reason: specific tests have specific
treatment windows and therefore ‘turn around’ time is important for the doctors.
Question No.21
Growth Stage
Compared to the introduction stage the likely changes are as follows:
Unit selling prices

These are likely to be reducing for a number of reasons:
❖ The product will become less unique as competitors use reverse engineering to
introduce their versions of the product
❖ PT may wish to discourage competitors from entering the market by lowering the
price and thereby lowering the unit profitability
❖ The price needs to be lowered so that the product becomes attractive to customers in
different market segments thus increasing demand to achieve growth in sales volume.

These are likely to reduce for a number of reasons:
❖ Direct materials are being bought in larger quantities and therefore PT may be able to
negotiate better prices from its suppliers thus causing unit material costs to reduce
❖ Direct labour costs may be reducing if the product is labour intensive due to the effects
of the learning and experience curves
❖ Other variable overhead costs may be reducing as larger batch sizes reduce the cost of
each unit
❖ Fixed production costs are being shared by a greater number of units.
Maturity Stage
Compared to the growth stage the likely changes are as follows:

Unit selling prices
These are unlikely to be reducing any longer as the product has become established in the
market place. This is a time for consolidation and while there may be occasional offers to
tempt customers to buy the product the selling price is likely to be fairly constant during this
period.

❖ Direct material costs are likely to be fairly constant in this stage. They may even
increase as the quantities required diminish compared to those required in the growth
stage, with the consequential loss of negotiating power.
❖ Direct labour costs are unlikely to be reducing any longer as the effect of the learning
and experience curves has ended. Indeed the workers may have started working on
the next product so that their attention towards this product has diminished with the
result that direct labour costs may increase.
❖ Overhead costs are likely to be similar to those of the end of the growth stage as
optimum batch sizes have been established and are more likely to be used in this
maturity stage of the product life cycle where demand is more easily predicted.
Question No.22
Target Costing is a system that is used when the company is unable to dictate the selling price
of its products and (like JYT) is forced to accept the market price of the item it is planning to
market. Once the specification of the product has been completed, then the company
determines the price that the market is prepared to pay for its product. This may be discovered
by market research or by considering the prices of similar items that are already available. The
company then subtracts its profit target from this price to determine its cost target. If the
expected product costs already meet the target cost over the lifecycle of the product, taking
account of any cost reductions that may occur, for example due to the benefits of the learning
and experience curves, then production commences. However, it is more likely that at this
initial stage the expected product costs exceed the target costs and as a result major product
/ process changes are made in order to achieve the target cost. If it is not possible to achieve
the target cost by making these changes then the product is abandoned.
Kaizen Costing is a system that is used once production has commenced. Kaizen means
improvement and it is applied by continually striving to improve. However, Kaizen does not
look for large significant improvements; instead it is based around making small
improvements continuously. It is a group effort in which everyone is involved. It should
become part of every employee’s daily routine to constantly look for ways to improve the
workflow within the organisation. Kaizen is based around a continuous circle of Plan, Do,
Check, Act. Plan refers to the need to set a target for improvement as without a benchmark
success cannot be measured. Do refers to the implementation of the plan. Check is the
determination of whether the plan improved the process. Act means standardise the
improved procedure so that it can be repeated.
One of differences is that Target Costing applies before production commences whereas
Kaizen Costing applies once production has commenced. Another difference is that although
both Target Costing and Kaizen Costing involve making changes to improve results, Target
Costing looks at making significant changes in order to reduce the expected cost until it
reaches the Target Cost necessary to achieve the Target Profit from the given selling price.
Kaizen Costing deals with making a number of further small improvements as a result of
involving everyone in the process.
Question No.23
Customer perspective:

❖ Overall customer of 2017 stood at 29,000 as compared to 27,800 in 2016. The company
has been able to increase the number of customer in 2017 by 4.32 percent
❖ However the company has seen a drop in the number of returning customer and has
seen only an increase in the new customers. Hence the company has not been able to
meet the objective in this perspective.
Process efficiency perspective:
❖ Customer waiting time: The company has seen a deterioration in performance in this
segment and the overall waiting time has increase from 15 minutes to 25 minutes
❖ Staff turnover: The overall staff turnover has also increase from 15 percent to 30
percent reflecting the unhappiness of the employees with the company. The company
should look at new ways of retaining its employees
Learning and growth perspective:
❖ The company had derived 10.32% of its revenues from new meals in 2016 and the same
has improved to 21.19% in 2017. The company has been able to attract customers for
its new product and has done well in this performance metric
❖ The company had plans to reduce the training time for its staff and it has been able to
do the same in 2017
Financial perspective:
❖ The company has managed to increase the spend per customer. This would have been
supported by the new product offering. The average spend per customer has increased
from $9.06 to $10.41
❖ The company has also managed to increase the GP margins. The margins increased
from 20.23% to 21.19% and the margin improvement would have been supported by
higher profitability on newer products
Question No.24
REPORT
To: Managing Director
From: XX
Subject: Participative budgeting.
Date: November 2012
Introduction
The following report identifies two advantages and two disadvantages of involving
managers in the setting of budgets.
Advantages
1) If managers are involved in setting budgets then the budgets may be more relevant to
the business because the manager will have specialist knowledge of their area of the
business and they can incorporate this into their budgets. As a result the budgets will
provide a more realistic target and are a better indicator of likely results which can then
be used in strategic planning and decision making with a view to meeting the terms of
the contract.
2) If managers are involved in the budget setting process then they are likely to take
ownership of the budget and feel that failing to achieve it is a personal failure. This means
that managers will be motivated to achieve the targets they have set and agreed, and
consequently the target is more likely to be achieved than one that is simply handed to
them without their involvement.

3) The new managers may gain valuable knowledge of the business by working closely
with the existing managers when preparing the budgets. The existing managers may
have detailed knowledge of current operations and the availability of resources that are
of benefit for the new contract.
Disadvantages
1) The managers may deliberately set themselves targets that are easier to achieve by the
inclusion of budgetary slack. This may result in the company’s performance being lower
than it would have been had more difficult targets been imposed on the managers.
However targets are set in the contract.
2) Some of the managers may have less experience than others in managing passenger
transport operations. Consequently they may not understand the relationships that exist
between different budgets and the impact that one has on the other and they may take
decisions in their own area that are detrimental to another area of the business and to the
company as a whole.
Question No.25
It has been argued that some of the standard costing performance measures are irrelevant in
a TQM environment.
❖ Labour efficiency variance – (TQM aim to have motivated staff and empowered to
work best they can at all times)
❖ Labour Price variances – to get positive variances here –management could be
encouraged to use lower cost labour –that's against the TQM principles.
❖ Material price variance – less relevant due to good relationships with suppliers so
materials less variable or susceptible to shortages.
❖ Idle time variances – waste built into the system – not compatible with TQM
Question No.26
Revised target cost
$ $
Manufacturing cost
Direct material (working 1) 21.60
Direct labour (working 2) 10.96
Machine costs 21
Quality control costs 10
Rework costs (working 3) 1.80
–––––
65.36
Product development cost 25
Marketing cost 35
–––––
Non-manufacturing costs 60
–––––––
Total cost 125·36
–––––––
Working 1: Direct material cost

❖ Parts to be replaced by standard parts = $40 x 0·8 = $32.
❖ New cost of those at 45% (100% – 55%) = $14·40.
❖ Unique irreplaceable parts: original cost = $40 x 20% = $8.
❖ New cost $7·20
❖ Revised direct material cost = $14·40 + $7·20 = $21·60
Working 2: Direct labour

❖ Direct labour – cost per unit for first one hundred units: Y = axb
❖ 45 x 100–0·152 = 22·346654 minutes
❖ Total time for 100 units = 2,234·6654 minutes.
❖ Time for the 100th unit:
❖ Time for 99 units = 45 x 99–0·152 = 22·380818 minutes.
❖ For 99 units = 2,215·701 minutes.
❖ Therefore, time for 100th unit = 2,234·6654 – 2,215·701 = 18·9644 minutes.
❖ Time for remaining 49,900 units = 946,323·56 minutes.
❖ Total labour time for 50,000 units = 948,558·23 minutes.
❖ Therefore total labour cost = 948,558·23/60 x $34·67 = $548,108·56.
❖ Therefore average labour cost per unit = $548,108·56/50,000 = $10·96.
Working 3: Rework cost
❖ Total cost = 50,000 x 10% x $18 = $90,000.
❖ Cost per average unit = $90,000/50,000 = $1·80.
(b) Market skimming
Market skimming is a strategy that attempts to exploit those areas of the market which are
relatively insensitive to price changes. Initially, high prices for the webcam would be charged
in order to take advantage of those buyers who want to buy it as soon as possible, and are
prepared to pay high prices in order to do so.
The existence of certain conditions is likely to make the strategy a suitable one for Cam Co.
These are as follows:
❖ Where a product is new and different, so that customers are prepared to pay high
prices in order to gain the perceived status of owning the product early. The webcam
has superior audio sound and visual quality, which does make it different from other
webcams on the market.
❖ Where products have a short life cycle this strategy is more likely to be used, because
of the need to recover development costs and make a profit quickly. The webcam does
only have a two year life cycle, which does make it rather short.
❖ Where high prices in the early stages of a product’s life cycle are expected to generate
high initial cash inflows. If this were to be the case for the webcam, it would be
particularly useful for Cam Co because of the current liquidity problems the company
is suffering. Similarly, skimming is useful to cover high initial development costs,
which have been incurred by Cam Co.
❖ Where barriers to entry exist, which deter other competitors from entering the market;
as otherwise, they will be enticed by the high prices being charged. These might
include prohibitively high investment costs, patent protection or unusually strong
brand loyalty. It is not clear from the information whether this is the case for Cam Co.
❖ Where demand and sensitivity of demand to price are unknown. In Cam Co’s case,
market research has been carried out to establish a price based on the customers’
perceived value of the product. The suggestion therefore is that some information is
available about price and demand, although it is not clear how much information is
available.
It is not possible to say for definite whether this pricing strategy would be suitable for
Cam Co, because of the limited information available. However, it does seem unusual that
a high-tech, cutting edge product like this should be sold at the same price over its entire,
short life cycle. Therefore, price skimming should be investigated further, presuming that
this has not already been done by Cam Co.
Question No.27
(i) Threats to goals congruence due to internal transfer pricing are:
❖ User groups, consulting and customer service department are concerned that training
department is not controlling its costs. Since the entire actual costs gets allocated to the
users, training department may not be managing its costs efficiently. Since the
financials of user departments are affected, it may lead to conflict between the
departments.
❖ Yash, the CEO is a firm believer of in-house training and its benefits. However, there
are outside vendors that provide similar service at substantially reduced costs.
Performance assessment of managers of consulting and customer service are based on
their department’s financial metrics. Higher internal transfer price for training would
affect employee morale since they have no control over these allocated costs. However,
their performance is being evaluated based on uncontrollable factors. This could lead
to discontent among the managers. Alternatively, Yash may want to reconsider his
strategy of in-house training. When suitable, training can be sourced to cheaper
options available in the market, without compromising on quality.
❖ Most costs of the training department are fixed in nature, as they need to be incurred
irrespective of the number of training sessions. These costs are being allocated to the
users based on actual training sessions. The budgeted target price is used by the user
departments, to determine their billing model to Rest Easy’s end user clients. Hence it
is important that the budget transfer price is not very different from the actual transfer
price charged at the end of the year.
❖ In the given problem, internal transfer price has been based on a budget of 200
sessions. Here the customer service department does not adhere to its commitment of
100 training sessions, training sessions actually availed are only 80. Since costs are
mostly fixed in nature, the actual cost per training session increases. This is then
charged out to the consultant and customer service departments. Consequently,
despite meeting its commitment, the consultant department bears a higher cost
allocation due to variance in the usage of training resources. This can lead to friction
between the user departments.
(ii) By segregating the costs into fixed and variable components, Rest Easy is working out two-
part pricing system for transfer price.
Two-Part Pricing System = Lump-Sum Charge + Marginal Cost
To segregate the costs into fixed and variable categories, the criteria is whether the costs
change per additional training session. Accordingly, the classification of costs will be as below:
Cost Particulars Budget Classification
(Rs.)
Salaries 25,00,000 Fixed
Depreciation on Office Equipment 2,00,000 Fixed
Software Licenses for Training Packages 80,000 Fixed
Conference Travel for Train the Trainer 10,000 Fixed
Sessions
Telephone 20,000 Fixed
Training Supplies 50,000 Variable
Trainee Lunch 100,000 Variable
Total Expenses 29,60,000
The lump-sum charge would be based on the fixed cost budget. Marginal cost would be based
on the variable cost budget.
Total budget fixed expenses = Rs.28,10,000 and total budget variable expenses = Rs.150,000.
Number of training sessions is 200, that is 100 each for consultant and customer service

departments. Hence the fixed cost allocation rate would be Rs.14,050 per session and variable
cost allocation rate is Rs.750 per session.
Transfer price to the consulting department = lump-sum charge + marginal cost
= (Standard Fixed Cost per session × Budgeted Training Sessions) + (Standard
Variable Cost per Session × Actual Training Sessions)
= (Rs.14,050×100) + (Rs.750×100)
= Rs.14,05,000 + 75,000 =
Rs.14,80,000.
Transfer price to the customer service department = lump-sum charge + marginal cost
= (Standard Fixed Cost per session × Budgeted Training Sessions) + (Standard
Variable Cost per session × Actual Training Sessions)
= (Rs.14,050 × 100) + (Rs.750 × 80)
= Rs.14,05,000 + Rs.60,000 =
Rs.14,65,000.
Total transfer price allocation is Rs.29,45,000 versus actual expenses of Rs.38,25,000.

Unallocated expenses are Rs.880,000.
(iii) Evaluate how the two-part transfer pricing model would address the goal congruence
issues listed in question 1?
❖ Since transfer prices are based on budgets, the training department would become
more cost-conscious. As explained above, as per this transfer pricing method,
unallocated expenses of Rs.880,000 would have to be borne by the training
department. As given in the problem, this variance is mainly on account of extra cost
for the newly hired trainer and the higher depreciation expense. The department will
be more cautious while taking future decisions. However, Yash the CEO must ensure
that the quality of training is not compromised and remains in line with the
company’s strategic policy.
❖ Internal transfer price of Rs.14,800 per session is still higher than the outside rate of
Rs.12,000 per session. Further decisions would be based on the company’s strategic
objective. At the same time, if the number of training sessions are expected to increase
beyond the budget, this transfer pricing method charges the user department only a
marginal cost of Rs.750 per session. This is definitely lower that the external rate.
❖ Under this method, fixed expenses that form majority of the cost are allocated based
on budgeted cost and budgeted usage. Variable expense are allocated based on actual
training sessions. Hence, any variance in the utilization of training resources, does not
impact the other user department.
Therefore, most of the goal congruence issues can be addressed through this methodology.
Question No.28
Issue
Zen limited is a leader in manufacturing of mobiles and is concerned about increasing costs.
The increase in warranty related costs has been significant in the current year as compared to
previous year. This has reduced the net profit of the company by 1% of sales.
Applicability of Kaizen Costing

“Kaizen” is a Japanese word which means “Change for Better”. In business parlance, Kaizen
is used to refer to small and continuous improvement across all functions, processes and
employees. Kaizen costing is a cost reduction system. Yashihuro Moden defines Kaizen
Costing as "the maintenance of present cost levels for products currently being manufactured
via systematic efforts to achieve the desired cost level.

Toyota Production System is considered as a pioneer in Kaizen Costing. Though the model
was used for eliminating wastage from production at factory initially, the concept can be
applied in any of the processes in a business. Since Kaizen is a continuous improvement
process, a radical change or disruptive innovation is not expected in Kaizen costing.
The following are the key features of Kaizen -

❖ Kaizen processes focus on eliminating waste in the systems and processes of an
organisation, improving productivity and achieving sustained continual
improvement.
❖ Application of small, incremental changes routinely applied and sustained over a long
period can lead to significant improvements.
❖ It aims to involve workers from multiple functions and levels in the organisation.
❖ A value chain analysis helps to quickly identify opportunities to eliminate wastage
❖ Although incremental changes can often be too small to be seen, Kaizen can be very
effective in the long run. An airline which identified that 75% of its flyers would leave
the olive from salad, the airline decided to remove it from its servings. This saved the
airline $ 40,000 per year. Another example is where an airline stopped printing its logo
in the rubbish bags as it did not add value saved over $ 300,000 per year.
The CEO is referring to Kaizen costing when he mentions minor improvements to save costs
over time. Kaizen costing takes into consideration various costs such as costs of supply chain,
manufacturing costs, marketing, sales, distribution costs etc.
Benefits of Kaizen Costing

❖ Kaizen reduces waste in areas such as employees waiting time, transportation, excess
inventory etc., which leads to improved efficiency in overall business processes and
systems.
❖ A company applying Kaizen philosophy can achieve cost reduction through small
incremental improvements and cost savings.
❖ Kaizen looks at functions and processes at all levels of organisation and requires
participation of all employees and massive as well as open communication system.
This participative approach improves teamwork across the organisation.
❖ Product improvement using Kaizen is likely to result in less number of defective
products leading to customer satisfaction and reduction in warranty related costs.
❖ The reduction in wastage, improved efficiency and cost reduction improves the overall
profitability of the company.
Implementation of Kaizen in the Current Case

The implementation of Kaizen as a cost reduction techniques can take several forms. The key
question to ask for implementation is - “Can we eliminate waste?”. The waste can take several
forms like -
❖ Unnecessary movement of material and men - Travelling for meeting in cases where a
video conferencing could help.
❖ Unwanted part in a product which if removed is not likely to impact the performance
of the product. (Nano sim card has reduced a significant portion of use fibre boards as
compared to the traditional sim cards.)
❖ Defects which involve extra cost in terms of reworks.
❖ Waiting time - A simple example could be locating for files in your computer which
has not be arranged properly. This leads to waste of time.
The above is just an indicative list where improvements can be made. However, an important
point to note is that reduction of waste should not be done by compromising the quality of
product. Apple launched iPhone 5c as a budget phone by using plastic material instead of

Aluminium. The market did not like the product as it was considered to be an inferior product
as compared to iPhone 5s.
Another way of looking at Kaizen is asking following questions -

❖ Can we eliminate functions from the production process without compromising the
quality and utility of end products? - Removing unnecessary movements of material
and men.
❖ Can we eliminate some durability? - Use of unbreakable plastic for producing
disposable glasses would be waste of resources
❖ Can we minimise design? - e.g. use of Nano Sims.
❖ Can we substitute parts of the product being manufactured?
❖ Can we take supplier’s assistance to get better quality parts?
❖ Is there a better way? - This is a question which must be asked continuously to ensure
that the improvement is not a one-time exercise.
(The above questions also form a part of the Value Engineering Process)
Application of Kaizen at Zen Limited

The current warranty claim process at Zen involves movement of mobile phones from various
service centres across the country to a centralised centre in Mumbai. The possible
improvements in the claim process is explained below -
❖ The company needs to analyse whether it requires to own 200 centres by itself across
the country. The company can evaluate closing down centres with less customer
footfalls or outsource the ones which are not located at the strategic location. This
would save some cost to the company.
❖ The current process requires each service centre to send the faulty mobile phones back
to Mumbai for repair or replacement. This is done even in case of minor repairs which
can be handled locally. The company can provide necessary infrastructure to the
service centres to carry out minor repairs locally. This would save logistics cost of
sending the phones to Mumbai and back to service centre. The company should
analyse the past data to understand the proportion of phones which require minor
repair. Repairing the phones locally would also reduce the turnaround time and the
customer will get back the phone faster.
❖ The current process is to send phones in 3-4 batches in a day. This effectively means
creating 3-4 consignments, documents for dispatches and incurring extra costs for
transportation. Combining the phones in a single batch would reduce the cost of
transportation and administrative cost as well.
❖ The phones can be sent back from Mumbai in single batch instead of creating multiple
batches to save transportation costs.
The above improvements must be revisited continuously to derive required benefit from
Kaizen process.
Apart from eliminating waste in the warranty claim process, the company must also identify
root causes of increase in warranty claims in the current year as compared to previous year.
Every phone being sent back for repair/replacement involves avoidable cost. The company
must also revisit the manufacturing process and quality control processes to eliminate
wastage in production process and improve quality.
❖ Zen can consider producing better quality mobiles at the manufacturing process to
reduce the warranty claims.
❖ The pattern of warranty claim must be analysed to understand whether there is certain
common problem related to repair claims. If the issue has some relation with parts
used in mobile, the issue can be taken up with supplier of such parts.

Question No.29
Issue
Galaxy limited use Balance Scorecard to measure performance. Balance scorecard focusses on
the financial, customer, business and innovation perspectives. The company has been doing
great on financial parameters and customer satisfaction parameters. However, of late the
company has been facing issues related to high employee turnover and dissatisfaction of the
truck drivers.
The board of directors is also concerned about the volume of performance measurement data
and alignment of performance measurement with the strategy of the company. An alternate
performance measurement mechanism is Performance Prism.
Performance Prism
Performance Prism is considered to be a second-generation performance management
framework conceptualized by Andy Neely and Chris Adams. The following are the factors
which make Performance prism should replace the models like Balanced Scorecard -
❖ Organisations cannot afford to focus on just two stakeholder group - Investors and
Customers. Other stakeholders group like employees, suppliers, government etc.
should not be forgotten. This is important for sustainable growth of companies both
profit oriented and non-profit oriented.
❖ Most of the performance measurement models do not focus on changes that could be
made to the strategies and processes. The underlying assumption is that if right things
are measured, the rest will fall into place automatically.
❖ Stakeholders expect somethings from the organisation. The organisation also must
expect contribution from the stakeholders. There is a ‘Quid Pro Quo’ relationship
between the stakeholders and organisation.
Another problem highlighted by Andy Neely and Chris Adams was that management are
measuring too many things. They believe that in doing so they are controlling the
organisations well. The problem with increased measurement is that the management starts
micro-managing things and lose sight of the strategic direction. This negatively impacts the
organisation in the longer run.
The performance Prism aims to measure performance of an organisation from five different
facets listed below:
❖ Stakeholder Satisfaction
❖ Stakeholder’s Contribution
❖ Strategies
❖ Processes
❖ Capabilities
Stakeholder Satisfaction
The first facet of prism focusses on stakeholder’s satisfaction. Though balanced scorecard also
focusses on stakeholder’s satisfaction, it is primarily concerned with the shareholders and
customers and ignores other stakeholders. This is precisely the issue at Galaxy limited where
the shareholders and customers are happy with the company, other stakeholders are not.
The company must identify all stakeholders and determine relative importance of each of the
stakeholders. The company can use Mendelow’s matrix to identify key shareholders in terms
of power and interest of stakeholders. A stakeholder group which has high power and high
interest (say a trade union) must be kept satisfied. The key stakeholders for a company are:
❖ Investors - They want return on investment.
❖ Customers - They want good quality products at cheap prices.
❖ Suppliers - They want better price for products.
❖ Government - They want revenues and development.
❖ Society at large - They want employment opportunities.
Each of the stakeholders group exercise different level of power/influence on the company.
The interest of each stakeholder group in the company also differs. Based on the power and
interest of the stakeholders, the company must appropriately perform activities for
stakeholder’s satisfaction.
After identification of the stakeholders, the company must identify the requirements of each
of the stakeholders group. What must the company do to ensure stakeholder satisfaction?
Galaxy limited must ensure satisfaction of the two stakeholders highlighted above. The
company must take steps to improve employee satisfaction and reduce the employee
turnover. The company must also address the issues related to truck drivers and involve them
in a dialogue. The impact of not keeping these stakeholders group satisfied is that the
company might suffer financially in the longer run.
Performance measure - Employee Turnover Ratio, Average employment duration of

employees, Number of strikes by truck drivers etc.
Stakeholders Contribution
In the second facet of Performance Prism, the organisations identify the contribution required
from the stakeholders. The organisations must then define ways to measure the contribution
of stakeholders. This aspect is different from traditional measures where the organisations
were just concerned with what they could contribute to the stakeholders.
The company would take steps to provide better service to its customers. In return the
customers must contribute in terms of profits and revenues to the company. There is a ‘Quid
Pro Quo’ relationship as described earlier.
In case of Galaxy limited, the company could improve the employee satisfaction with better
pay, training and growth opportunities. In turn, the employees must perform better to
contribute to the company as a whole. Similarly, the drivers must be given better working
conditions and in turn, they should contribute towards improving efficiency and on-time
deliveries.
Performance Measure - Efficiency of Employees, Productivity, On Time deliveries by Truck

drivers.
Strategies
In the strategies facet of the Prism, the organisation should identify those strategies which the
organisation would adopt to ensure that -
❖ The wants and needs of the stakeholders are satisfied
❖ The organisation own requirements are satisfied by the stakeholders.
After the company identifies strategies, the performance measures must be put in place to
confirm that the strategies are working. The various aspects to be considered appropriate
communication of strategies, implementation of strategies by managers and continuous
evaluation of appropriateness of strategies.
Galaxy limited might come out with a strategy of to retain employees by means of better pay
and growth opportunities within the company. This strategy can be called successful if the
higher pay ensures that employees turnover is reduced. As a strategy, the company can start
to hire drivers on the payrolls of the company.

Performance Measure - Number of employees leaving the organisation after getting pay hike,
Efficiency of deliveries after Truck drivers are put on employment of company.
Processes
After identifying the strategies, organisations need to find out if they have the correct business
processes to support the strategy. The various business processes can have sub-processes.
Each process will have a process owner who is responsible for functioning of the process.
The organisations must develop measures to evaluate the how well the processes are working.
The management must be careful to evaluate most important processes instead of evaluating
all the processes. Porter’s Value Chain analysis can be used to identify and evaluate various
processes in the organisation.
Galaxy limited could devise a recruitment process which results in transparency in hiring and
pay of employees. The process could be owned by the Human Resources Manager. The
working condition of drivers can be improved by providing structured training and working
conditions.
Capabilities
Capabilities refers to the resources, practices, technology and infrastructure required for a
particular process to work. The company must have right capabilities in order to support the
processes. The company must identify performance measures to set how well the capabilities
are being performed.
While Galaxy limited might choose to increase the salaries of employees, an important
question to answer is whether the company has financial capability to do so.
Conclusion
The facets of Performance Prism are interlinked and must support each other. The company
must first identify the stakeholder wants and what the company wants from those
stakeholders. The required strategies for these are identified and the processes to achieve the
strategy followed by identifying the capabilities to perform these processes.
Question No.30
Value chain is defined as “a chain of value added activities; products pass through the
activities in a chain, gaining value at each stage”. Value chain focuses on systems, and how
business inputs are changed into business outputs purchased by customers. The entire set of
activities that a business undertakes to covert inputs to outputs are interlinked to each other.
Porter’s value chain classifies activities into primary activity and secondary activity.
Primary Activities
Primary activities are those activities that are directly related with creating and delivering a
product to the end customers. The following activities are considered as primary activities:
Inbound Logistics
Inbound logistics involves arranging inbound movement of materials from suppliers to the
manufacturing plants. The activities related to inbound logistics in the case of copper division
of DP limited would involve transporting copper cathodes from multiple suppliers across the
country and storing them in the warehouse. The cathodes stored in warehouse would be
issued to the production facilities depending on the requirement of the production plants.
Operations
Operations involve those activities which are concerned with conversion of input into outputs
in case of manufacturing companies. The activities under operations would include those

related to melting of copper cathode and converting the copper cathodes into wire rods. The
quality tests carried out for wire rods would also be included as a part of operations.
Outbound Logistics
These include planning and despatch, distribution management, transportation,
warehousing, and order fulfilment. This includes warehousing of finished goods (copper wire
rods) and distribution of copper wire rods to its customers. The company uses its own trucks
to distribute finished goods to its customers. The scheduling of trucks and dispatch of material
would also be a part of outbound logistics.
Marketing & Sales

Marketing and sales are the means whereby consumers and customers are made aware of the
product which is ultimately sold to them. The activities include selling products to the end
customers covering activities like product management, price management, promotion and
marketing management. DP limited uses advertisement in national dailies and holds
conferences as a part of its marketing and sales efforts. The company also holds annual
customer conference to improve customer relations and attract new customers.
Service
In case of manufacturing industry, service generally refers to the after sales service which are
required to maintain the value of product and includes activities like installation, repair etc.
The service team is also expected to handle customer returns on account of poor quality of
copper wire rods.
Issues:
❖ A procurement team is generally a cost centre and the most appropriate way to
evaluate performance of cost centre is the comparison between actual cost and
budgeted cost (also called variance). A large portion of bonus (performance
measurement) is dependent on the savings in actual purchases.
❖ The company has adopted variance analysis as a measure of performance. If the team
is able to reduce the actual cost of purchase as compared to the budgeted cost, a higher
bonus is paid. The procurement team has stopped purchase of copper cathodes to save
on the purchase budget which ultimately would translate into higher payout of bonus.
❖ The commodity prices of copper have fallen by about 20% in the last six months. The
speculation of fall in price has resulted in halting of procurement process. It is very
difficult to time the market and such speculation could lead to losses to the company.
There could be a stock-out situation if the procurement is not resumed and the
situation could hamper the production and overall delivery schedules.
❖ The procurement team appears to have taken a short- term view of price movement.
The team is focused on earning higher bonus and hence is waiting to buy at lower
prices. There is a larger impact of not being able to deliver product on time which
could damage the reputation of the company. This has been ignored by the
procurement team. Managers must be encouraged to consider the impact on the
company as a whole and not on just the own department.
❖ The company is using just a financial measure to measure performance. This can result
in lopsided view of the goals and objectives of the company. Managers tend to look at
short term profits and ignore the long- term growth.
Optimum Performance Measurement

❖ A performance measurement is most effective when the goals of the respective
departments are aligned with that of the company. This ensures that each employee
within the company works towards the overall objective of the company. The
company manufactures wire rods and the objective of the copper division is to
manufacture copper wire rods as per the requirement of the customers.

❖ The profit flows from the main business of the company. If a department focusses on
an objective which is not aligned with the main goal, the company as a whole suffers.
A stock-out like situation would hamper the image of a company, if wire rods are not
delivered as per schedule to the customers.
❖ Another aspect to be considered is that managers and employees are evaluated only
on those parameters which are controlled by them. If for example, the procurement
team is able to purchase copper at a discount to market price because of their efforts,
it could be considered as saving.
❖ The prices of copper are determined by the prices on commodity exchanges and are
not in the control of procurement managers. The performance of managers and
employees should not be impacted by global change in prices of commodities as they
are not controlled by the concerned employees.
Alternate Performance Measure

❖ The issue with financial performance measures alone is that managers tend to have a
short- term view as can be seen in our case. In order overcome possible shorttermism
of financial measures Kaplan and Norton developed the Balanced Scorecard which
outlined four key areas in which company and divisional performance should be
measured to focus on both the short and long term needs of the organisation.
❖ The key idea is that managers are to be appraised on a variety of measures which
include non-financial measures so that their focus is both long and short term. The
four perspectives used to measure performance measure in a Balanced Scorecard is
given below:
❖ Financial Perspective: This measures the financial performance which is linked to the
overall objective of maximising shareholder’s wealth. We already use financial
measures to measure performance. The weightage could be reduced to include other
measures. Also, factors beyond the control of managers like commodity prices should
be excluded.
❖ Customer Perspective: This includes focussing on customers and meeting their needs.
Measures could include quality of material produced, optimum levels of inventory
maintained, number of stock-out instances, etc.
❖ Internal Business Perspective: This includes measures to evaluate the performance of
business processes with particular emphasis on productivity and efficiency. Measures
could include procurement lead time, number of defective purchases etc. The
company could use measures like JIT to reduce the procurement lead time.
❖ Training and Growth: This includes focusing on innovating in processes and
developing and learning for the future. Trainings could be given to procurement
managers to identify best quality of copper cathodes, aspects related to purity etc.
Question No.31
DMAIC technique analyses operational problems by assessing them in the following phases
(1) Define; (2) Measure; (3) Analyze; (4) Improve and (6) Control.
(1) Define the problem, project goals and customer requirements: Poor quality leading
to erosion of clientele.
❖ Customers feedback indicates that product quality requires improvement.
Dissatisfaction is reflected in the form of sale returns and warranty claims.
Competitors have no sale returns on account of poor quality as well as no warranty
claims on its products. Hence, in an environment where 100% quality can be achieved,
ASPL is facing quality issues. This is the problem to be addressed. Failure to do so
would result in loss of clientele, leading to a possibility of going out of business. The
goal of the project is to identify what is the sigma level at which the company is
operating and to suggest improvements to the production process it achieve 6σ level
of operations.

(2) Measure current performance: Indicators of poor quality to find out what is the
sigma level of the current operations?
Current performance focusing on quality can be determined based on the cost incurred in the
following phases:
❖ Sale returns: Sale returns are 1% of total sales. Gross sales are 25,000 units per annum
at selling price of Rs.20,000 each, therefore having a value of Rs.50,00,00,000. Sales
returns @1% amount to Rs.50,00,000 that represent the return of 250 units per annum.
The cost of poor quality on account of these sale returns is the variable cost of the
product Rs. 12,500 per unit. This is an avoidable cost amounting to Rs.31,25,000 per
annum that is 0.63% of sales (Rs.31,25,000/Rs. 50,00,00,000).
❖ Warranty claims: Warranty is an undertaking given by the company to repair the
electronic component free of cost if defect occurs within a specific period of time.
Hence, when the customer files a claim that is accepted by the company, it means that
there has been an issue with the quality of the product. This is a liability / cost that
should ideally be kept minimum, if not nil like ASPL’s competitors.
❖ Warranty for the product is for one year from the date of sale. Warranty claims this
year is Rs.30,00,000, which is given to be representative of the average yearly warranty
cost. Therefore, currently this cost amount to 0.60% of sales (Rs.30,00,000/
Rs.50,00,00,000).
❖ Summarizing sale returns and warranty claims alone represent 1.23% of current sales.
Considering the current percentage of deficiency, the company is operating between
3σ and 4σ level. The rest of the industry is able to achieve 6 σ level of operations. At
zero defective production, there are no sale returns on account of quality and no
warranty claim costs. Therefore, is tremendous scope for improvement in ASPL’s
operations.
(3) Analyze: What is the cause of poor quality? What is the cost of resources focused on
quality?
Six sigma team studied the production process in detail. Replicating the issues detailed in the
given problem:
❖ Problem 1: Assembly line workers, including new hires, learnt on the job as to how to
assemble the input material to produce the final electronic component. This lead to
many errors due to lack of proper standardized training. Therefore, on account of these
errors, the entire electronic component has to assembled again.
❖ Problem 2: Sub-standard quality of raw material is detected on inspection only at the
assembly line. Inspection leads to 10% rejection of units. By this time, the defective
material is already fitted into the final electronic component. Therefore, to entire
component has to be reworked upon to replace the defective raw material input.
❖ Problem 3: Machines are outdated and are not entirely suitable for the current
production methodology.
The above factors result in rework on products, an internal failure cost, that lead to wastage
of material, resources and capacity.
❖ Two costs incurred to focus on quality are cost of inspection and cost of rework, 2,525
units are reworked upon. Time required to rework 2,525 units per year = 2,525 units /
5 units per hour = 505 hours per year. Cost of rework is given to be Rs.6,250 per hour.
Therefore, total cost of rework per year = Rs.31,56,250.
❖ Inspection cost for 2,000 hours at the assembly line is given to be Rs.10,00,000 per
annum.
❖ Therefore, total cost of resources currently incurred for quality = Rs.41,56,250 per
annum.

(4) Improve: Reduce errors and improve quality of the product
While cost of resources currently incurred for quality is only 0.83% of sales
(Rs.41,56,250/Rs.50,00,00,000), a detailed analysis brings forth many qualitative aspects that
ASPL needs to be address. If its competitors are able to achieve excellence in quality, so must
ASPL, in order to remain in business. Therefore, following are the proposals that can provide
solutions to the problems referred to above:
❖ Solution to Problem 1: Periodic training sessions to educate new hires and update
workers in the assembly line on the latest techniques in production. Standardized and
informed working will lead to lower errors and thereby improving product quality.
Cost per year = 5,000 hours yearly training × Rs.1,000 per hour = Rs.50,00,000.
❖ Solution to Problem 2: Delay in detection of poor quality input can be resolved by
streamlining the work flow. New function for quality planning and improvement, at
the beginning of the process helps in early detection, without wastage of resources.
Cost per year for introducing this functionality = Rs.1,50,00,000.
❖ Solution to Problem 3: Replace old machines with newer ones. Machine upgrade will
align the resource with the production requirements. This reduce chances of errors in
the production process. Cost of procurement: Rs.3,60,00,000 has a life of 3 years.
Therefore, annual depreciation is Rs.1,20,00,000.
❖ Consequences of implementing these proposals, as given in the problem, can result in
the following improvements:
o Rework of products can be entirely eliminated.
o Sale returns will reduce from 1% to 0% due to better quality of products.
o Yearly Warranty claims will reduce from Rs.30,00,000 to nil per annum.
o With the introduction of the new facility, time required for inspection at the
assembly line would reduce from 2,000 hours to 1,200 hours. Cost of inspection
at the assembly line would reduce from Rs.10,00,000 per annum to Rs.6,00,000
per annum.
o Due to better quality, ASPL can build better reputation with the customers
which can further yield additional sales of 5,000 units per year.
When the company is capable to achieve points (i), (ii) and (iii) milestones, it would have
achieved 6 σ operational level. The cost of quality report summarizes the above discussion:
Cost of Quality Report
Before Improvements After Improvements
Cost of Quality Component
Current Cost % of Projected Cost % of
Rs. Sales Rs. Sales
Preventive Cost
Training ××× ××× 50,00,000 0.83%
(5,000 hrs. × Rs.1,000 per hour)
××× ××× 1,50,00,000 2.50%
Quality Planning and Improvement
Appraisal Cost
Inspection Cost 10,00,000 0.20% 6,00,000 0.10%

Internal Failure Cost
Rework 31,56,250 0.63% ××× 0.00%
External Failure Cost
Sale Returns 31,25,000 0.63% ××× 0.00%
Warranty Claims 30,00,000 0.60% ××× 0.00%
Total Cost of Quality 1,02,81,250 2.06% 2,06,00,000 3.43%
Yearly Sales 50,00,00,000 60,00,00,000
Total Cost of Quality / Sales (%) 2.06% 3.43%
(e) Cost of quality is 2.06% of sales of which 1.23% alone is external failure cost. This has an
impact on the customer experience and can erode customer base. By implementing the six
sigma team’s proposal, this external failure cost on account of sale returns and warranty costs,
can completely eliminated. Internal failure cost can also be eliminated. The increase in cost of
quality proposed to be made would be a preventive cost to avoid failure of quality. The
company should focus on preventing the error such that it ensures that product is of good
quality when it reaches the customer at the very first instance. This enhances the customer
experience and therefore eliminating the scope for external failures like sales returns and
warranty claims. Better quality can yield further sales of 5,000 units per year. Therefore, an
increase in spending on quality measures is justified since it not only yields significant
improvements to quality but also brings in more sales orders.
Improvement to the financial position of the firm is summarized below:
Particulars Amount Rs.
Improved Contribution Margin (Ref. note 1) 3,75,00,000
Elimination of Goods Replacement 31,25,000
Elimination of Warranty Claims 30,00,000
Elimination of Rework 31,56,250
Savings in Inspection Cost 4,00,000
Total Benefit…(A) 4,71,81,250
Additional Costs Incurred
Training 50,00,000
Quality Planning and Improvement 1,50,00,000
Increase in Fixed Cost 1,20,00,000

(Yearly Depreciation of Upgraded Machines)
Total Additional Cost …(B) 3,20,00,000
Net Benefit …(A) - 1,51,81,250
(B)
❖ Sales have increased by 5,000 units. Selling Price is Rs.20,000 per unit while variable
cost is Rs.12,500 per unit. Contribution is Rs.7,500 per unit.
❖ Conclusion: Six Sigma team’s proposals are focused on preventing the error from
occurring. Consequently, quality improves, sale improves and thereby can yield a net
benefit of Rs.1,51,81,250 per year to the company.
(5) Control: Maintain quality at 6σ level and keep the production facilities updated.

❖ Training sessions with workers can serve as two way communication platform to
detect other problems that can be resolved in more timely manner. Inputs received can
also be used to improve the production work flow as well.
❖ New function of quality planning and improvement can help the company be better
informed about the latest production methodologies.
❖ Updated machines are better equipped to handled changes in the production process
since they are built with the latest technology. ASPL should do a continuous
assessment of the state of its machines and upgrade them when necessary.
Question No.32
❖ Value Analysis is viewed as a reduction in cost and problem solving technique. Such
technique analyses an existing product to identify and cutback or eliminate any cost
which do not give any contribution to performance or value. It is a planned, scientific
approach to cost reduction which reviews the material composition of a product and
production design so that modifications and improvements can be made which do not
reduce the value of the product to the customer or to the user. (i.e. quality for purpose
should not be compromised.)
❖ Functional analysis is applied to the design of new products and breaks the product
down into functional parts. For example, a new chair may have the moveable feature.
The value that the customer places on each feature is considered and added to give a
target cost. Thus, functional analysis aims to increase profits by reducing costs through
elimination of unnecessary features and/or by adding cost-effective new features that
are so attractive to customers that the product becomes more lucrative.
❖ The result of the above analysis is to improve the value of the furniture while
maintaining costs and/or cutback the costs of the furniture without compromising
with value. It is clear from the scenario that QWC needs to cut back its selling prices
to compete in the market. This selling price reduction can only be possible by a
reduction in QWC’s unit costs; however, such reduction must not be accomplished by
compromising with quality. Both value analysis and functional cost analysis may be
used for QWC; however, value analysis is likely to be a more useful technique because
office tables and chairs are such items which are demanded more on the basis of their
use value rather than their esteem value.
Question No.33
(i) Statement Showing Relevant Cost
Type of Cost Explanation Amount
(Rs.)
Material Dx (40 tonnes × 1 15,200
Rs.380)
Components 2 52,000
Direct labour (2,000 hrs. × 3 22,000
Rs.11)
Specialist machine 4 10,000
Machine operating cost 5 12,000
Supervision 6 5,000
Development time 7 Nil

General fixed overhead 8 Nil
Total relevant cost 1,16,200
Explanation
1. Material Dx is in regular use by AUS Ltd. and must be replaced. Consequently, its relevant
value is its replacement cost. The historical cost is not relevant because it is a past cost and the
resale value is not relevant because AUS Ltd. is not going to sell it because the material is in
regular use.
2. AUS Ltd. would like to procure 4,000 components either from ANZ Ltd. or externally
from the market. At the current production level, ANZ Ltd. (seller) has available capacity to
accommodate part of AUS Ltd’s request to the extent of 2,500 components. At this point, ANZ
Ltd. would be operating at its maximum capacity. To cater to the remaining demand of 1,500
units from AUS Ltd., ANZ Ltd. has to forego external sales of Rs.50,000 to its own customers.
Given that the contribution to sales ratio is 40%. Therefore, ANZ Ltd. has to forego
contribution of Rs.20,000 (40% of external sales foregone ₹50,000) in order to cater to AUS
Ltd.’s request. Fixed cost at ANZ Ltd. is irrelevant, since it would be incurred irrespective of
whether AUS Ltd.’s order to catered to or not.
Therefore, in spirit of goal congruence, the transfer price that ANZ Ltd. would charge AUS
Ltd. would be the variable cost of Rs.8 per unit and Rs.20,000 towards lost contribution as
explained above. Therefore, the transfer price
= (Rs.8 per unit × 4,000 components) + Rs.20,000
= Rs.32,000 + Rs.20,000
= Rs.52,000 for 4,000 components
Therefore, per component, the price charged would be Rs.52,000 / 4,000 = Rs.13 per
component. This is lower than the external market price of Rs.15 per unit. Therefore, in the
interest of goal congruence the cheaper option is preferred. AUS Ltd. should source its
components from ANZ Ltd, for a total procurement cost of Rs.52,000.
3. Skilled labour is in short supply and can only be obtained by reducing the production
of product ‘G’, resulting in a loss of contribution of Rs.24 (given) or Rs.6 per hour of skilled
labour. Hence the relevant labour cost will be Rs.6 (contribution lost per hour) + Rs.5 (hourly
rate of skilled labour) i.e. Rs.11 per hour.
4. AUS Ltd. has a number of options: (a) If the machine were to be hired it would have a
cost of Rs.15,000; (b) if the machine were bought and then sold at the end of the work it would
have a net cost of Rs.20,000; or (c) if the machine were bought and then modified to avoid the
need to buy the other machine it would have a net cost of Rs.10,000 (Rs.50,000 plus Rs.5,000
modifications less Rs.45,000 cost of another machine). Thus, the most economic approach is
buy the machine and then modify it so the relevant cost is Rs.10,000.
5. The machine operating costs are future costs of doing the work and therefore are
relevant.
6. The supervisor’s salary is irrelevant, but the bonus needs to be included because it is
dependent on this work and therefore is relevant.
7. The development time has already been incurred. Therefore, it is a past cost and not
relevant.
8. General fixed overhead costs and their absorption are not relevant because they will
be incurred whether the work goes ahead or not. Depreciation is also not relevant because it

is an accounting entry based on the historical purchase of assets. It is not affected by the work
being considered.
(ii) Two main issues arise when pricing work based on relevant costs:
• Profit reporting; and
• Pricing of future work.
With regard to profit reporting, the decision as to whether to proceed with the work will have
been based on the use of relevant costs, but the routine reporting of the profit from the work
will be based on the company’s normal accounting system. Since this system will be based on
total cost, it is probable that the costs of the work reported will be greater than its relevant
cost. Consequently, the amount of profit reported to have been made on this order will be
lower than expected and may even be a loss. This may cause difficulties for the manager who
accepted the work as an explanation will be required of the reasons why there is such a
difference in profit.
With regard to the pricing of future work the difficulty lies in increasing the price for similar
items for the same customer in future. Once a price is set, customers tend to expect that any
future items will be priced similarly. However, where a special price has been offered based
on relevant cost because of the existence of spare capacity the supplier would not be able to
continue to price on that basis as it does not recover its long term total costs. There may also
be difficulties created by this method of pricing as other customers are being charged on a full
cost basis and if they were to discover that a lower price was offered to a new customer they
would feel that their loyalty was being penalised.
(iii) Prevention
Operations: Preventative maintenance and checking of the calibration of machinery. This
would reduce the number of potentially faulty products being produced and therefore reduce
guarantee claims.
Appraisal
Inbound Logistics: Reduce costs of incoming inspections by building close links with
suppliers and getting them to adopt TQM. If suppliers can guarantee their quality, then
inbound inspections could be eliminated.
Internal Failure
Operations: Reduce costs of re-works by training employees on a continual basis e.g. quality
circles. This would reduce failure costs and also improve quality.
External Failure
Service: Design quality into the product to try to prevent guarantee claims and therefore the
cost of servicing/repairing the product.
Question No.34
Q4 Working
$000
Revenue 41.58 1
Less: Costs
Staff costs 12.00
Other costs 20.90 2
Profit 8.68
Net assets 110
Number of customers 630
Profit margin 20.9%
Quarterly ROCE 7.9%
Asset turnover 37.8%
1 Q3 average revenue per customer = $36,000 / 600 = $60

Increase of 10%: $60 * 1.1 = $66
Customer numbers: 600 * 1.05 = 630
Revenue = 630 * $66 = $ 41,580
2 Q3 other costs $22,000 * 0.95 = $20,900
Based on the forecast performance in quarter 4, only one of the three financial targets will be
achieved. Therefore a bonus will not be awarded to the manager of health club E.
Manager’s involvement in budget setting:
The managers’ involvement with setting the quarterly financial target could mean that the
target will be more accurate and realistic. This is because the managers will be close to the
operations of the health clubs and will be able to use their specialist knowledge to advise on
regional variations to targets. For example, a national assumption of an increase of 10% in
average revenue per customer may not be appropriate for health club E and should not
automatically be factored in to target setting. This involvement of managers could result in
more accurate forecast information that can be used by the finance team in devising the
financial targets.
However, it is possible that the input of the managers may result in unrealistic financial
targets. The managers may attempt to influence the targets in order to attain a bonus more
easily. The health club managers may also not have an overall picture of the health club
market or TES’s strategic outlook.
Question No.35
Performance management using the Building Block Model poses three questions based on
which the performance measurement system is developed:
What dimensions of performance should the company measure?
Dimensions are the goals that the company wants to achieve based on its overall strategy,
those goals that define its success.
How to set the standards (benchmarks) for those measures?
What are the rewards needed to motivate employees to achieve these standards?
Dimensions
Dimensions (goals) include financial and non-financial goals. Dimensions are further
categorized as into results and determinants. Results are tracked as (a) financial performance
and (b) competitive performance. Determinants are tracked as (a) quality, (b) flexibility, (c)
innovation, and (d) resource utilization. Determinants influence results.
Results
(a) Financial Performance: KTR is a closely held partnership with 5 partners. Partners
are interested in earning profits that have been benchmarked at an overall return on
equity of 25% each year. This can be derived from periodic financial statements that
get prepared as part of the accounting function. Partners want to retain the current
capital structure. This implies that they do not have any plans to go public or have
other external funding with ownership stake. They may take loans from banks for
funding their expansion.
Consequently, if they want to expand, the firm has to make sufficient profits that will
yield ample cash reserves. Therefore, KTR’s financial performance dimensions
should also include profitability ratios like gross profit ratio, net profit ratio,
operating margin, return of capital employed (if bank loans are taken) etc. Cash
profit and changes in cash reserves may also be included as dimensions of
performance. These measures should be tracked at the firm’s overall level as well at
the individual branch/franchisee level.
(b) Competitive Performance: KTR was to be a niche joint in a highly competitive
segment. However, to measure how it compares with its peers there is a limitation
in terms of availability of information due to the unorganized nature of the fast food
industry. All the same, one of the measures that can be helpful are the number of
branches / franchisees the firm is able to open.
KTR is also likely to have a competitive edge because it is foraying into providing
healthier food choices along with its regular menu. Since this is unique among its
segment, it will retain a competitive edge until its peers start replicating the same.
Therefore, one other measure for competitive performance could be the spread and
uniqueness of KTR’s menu as compared to its peers. Information for this could be
gathered from published / researched sources like trade magazines as well as
informal sources like customer feedback / word of mouth.
Determinants
(a) Quality: Quality drove past performance and it will continue to drive performance
even after expansion. For product quality, the management should track if internal
quality checks and external certifications are met periodically. Quality control should
cover all branches and franchisees. Non-compliance may require immediate
attention of the management. For service quality, periodic training programs can be
initiated to educate the staff with people management skills. Therefore, KTR should
determine parameters that the management would be interested in ensuring that
quality standards are met and how non-compliance should be reviewed.
(b) Innovation: Innovation involves experimenting with the appropriate inputs which
make them healthy. At the same time, the healthier option should satisfy the taste
and presentation preference of customers. This requires innovative efforts from
qualified and skilled chefs. This will give the competitive edge to KTR. Innovation
has to be constant and not a onetime exercise. Therefore, management may review
the number of new variants that have been introduced in the menu, regularity of
these introductions and customer feedback of the same.
(c) Flexibility: Growth in scale of operations combined with a competitive business
environment implies that KTR should have some flexibility in its operations. This
could mean ability to hire staff quickly, cater to seasonal surges in customer’s
demand etc.
(d) Resource utilization: Better utilization of resources help business function
efficiently. Revamping the order, delivery and payment system would improve the
way resources (kitchen, ordering and delivery staff) operate. Lesser errors and delays
would increase capacity utilization, freeing up time to cater to more customers.
Consequently, pressure on resources decreases. Therefore, some indicators to be
tracked can be overtime / idle time of kitchen, ordering and delivery staff,
turnaround time in these functions, table occupancy rate, breakage, or wastage of
material etc. Again here, the management should chart out the appropriate
dimensions that will help them track resource utilization.
Standards
Standards are the benchmarks or targets related to the performance metric that is being
tracked under each dimension. To be useful, standards should have the following
characteristics:
(a) Ownership: It is important to establish who in the organization structure is
responsible for achievement which performance metric. KTR has to consider this
very carefully. As explained in the problem, many key management functions like
decisions about the menu and its preparation are determined by a core team.
Similarly, the centralized core team is handling finance and marketing. However, at
the branch level, managers of various operational functions can be held accountable
for performance of that specific process. For example, the chief at a particular branch
can be held accountable for the quality of food prepared in that branch (Dimension:
Quality). Similarly, the head of the order taking staff at a particular branch can be
held accountable for the overtime that the staff at putting in at that branch
(Dimension: Resource utilization).
(b) Achievability: Benchmarks and targets will be useful only if they are achievable. The
managers who have ownership for the achievement of performance metric have to
be involved in setting benchmarks or targets. They should be clearly defined,
preferably quantifiable. At the same time, they should be in line with the firm’s
overall strategy. If the target is set very high staff can get demotivated. If set too low,
will not raise the bar for performance. If not in line with the firm’s overall strategy,
there will be discord or gap between the firm’s performance and what it wants to
achieve.
(c) Equity: Benchmarks should be equally challenging for all parts of the business. KTR
should customize its performance measure for each function like kitchen staff, order
and delivery staff, finance staff, advertising staff etc. For example, while turnaround
time to meet a customer’s order would be relevant metric to the kitchen, ordering
and delivery staff, popularity of the advertisement jingle for KTR would be the
relevant metric for the advertisement department. The rigor of the target should be
uniform across departments. Otherwise the staff would view the benchmark system
as being biased towards select functions within the firm.
Rewards
This relates to the reward structure within the firm that includes compensation package,
bonus, rewards, awards, facilities provided to employees etc. Proper reward system is
required for achievement of standards while maintaining costs at optimum levels. KTR
should have a well-defined HR policy for compensation, bonus, promotion and reward. A
good system should have the following characteristics:
(a) Motivation: Does the reward system drive the people to achieve targets and
standards? A low reward system would not induce staff to work towards the goal.
Goal clarity and participation in target/benchmark setting can motivate staff to
achieve standards.
While some part of compensation may be fixed, other parts can be made variable.
For example, bonus of the advertising staff can be aligned to the sales generated,
Chefs can be rewarded bonus based on sales as well quality measures etc. Better job
prospects in a growing environment would also be a good motivator. KTR’s
management should track various metric in this regard. Some of them could be
percentage of bonus paid to the overall compensation package categorized staff
cadre, attrition rate, internal promotions, cross training programs etc.
(b) Clarity: The reward package should be clearly communicated to the staff. It should
be understood by the staff concerned. They should be told what kind of performance
will be rewarded and how their performance will be measured. KTR may consider
having a dedicated HR team for this purpose.

(c) Controllability: Unlike the traditional understanding, rewards need not be based
only on the financial element that the staff can control. There may be other non-
financial elements for which rewards can be given. Both aspects however need to be
controllable by the staff concerned. For example, the chef can come up with a popular
menu. If the pricing of the product, managed by the central core team, is such that it
results in a loss to KTR, the chef may not get the much deserved bonus. This is not a
good reward system and might lead to attrition.
KTR can design its performance measurement system along the above lines.

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CA.

DINESH JAIN STRATEGIC COST MANAGEMENT

BHARADWAJ INSTITUTE (CHENNAI) 1

About the faculty:

BHARADWAJ INSTITUTE (CHENNAI) 2

Guidelines for answering case studies:

Areas where case study can be asked:

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Use of information E-sourcing, E-Purchasing and E-Payment

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Meaning of different words:

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2. Case study on Kaizen Costing and TQM:

3. TQM and Kaizen Costing:

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5. Budgetary Control and performance assessment :

6. Balanced scorecard of Grocery Store:

8. Product Life Cycle:

10. Customer life cycle costing:

11. Balanced Score-card – airline company

12. Value analysis and functional analysis:

13. Balanced Scorecard

14. Business Process Re-engineering:

15. Kaizen costing and standard costing:

16. Feed forward and feedback control:

17. Balanced scorecard

18. Balanced scorecard

19. Product Lifecycle

20. Balanced scorecard

21. Product Life cycle

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22. Target costing and kaizen costing

23. Balanced Score-card

24. Balanced scorecard and Participative Budgeting

25. TQM and standard costing:

26. Life-cycle costing and Pricing Strategy:

Projected lifetime sales volume 50,000 units

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27. Transfer Pricing

Transfer Pricing - Training Cost Allocation

Problem of Goal Congruence

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28. Kaizen Costing:

The process of repairs/ replacement of under warranty product is outlined below:

29. Performance Prism:

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30. Value Chain:

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Copper Prices Quoted on LME

31. Six sigma and cost of quality:

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Below is the additional information given about ASPL’s operations:

Proposed solutions to tackle these issues are as follows:

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32. Value analysis and functional analysis:

33. Relevant costing, Transfer Pricing and Cost of Quality:

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