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Case Study-Cost Analysis Term- II Management Accounting

Prepared by Group 12: ANUJA (A04) SUDHA (A54) DOLLY (A56) SHUBHAM (A38)

INTRODUCTION Name: Description: Projects: for Soft Drink rers Products for Marine Market Conditions: a) b) 2) Site 2: Paint Coating 1) Site 1
Competitive Fewer Customers with Large Orders c) Number of Customer with Small Orders d) Can Producers are the suppliers

Company A Chemical Industry 1) Site 1: Painting Cans Manufactu

2) Site 2
a) Market b) Right time is the Need of Customers c) Competitive advantage due to unique Product Right Place at Fragmented

Product Costing: expense report overheads to Product

1)

Detailed overhead neglecting the 2) Controllable identified to departmental computed

overhead costs are cost centre but overheads are not

Management encouraged an Ownership of the system by all teams Creation of costing system design committee for improving the costing and management information.

Questions for Discussions

a) Is the product costing system in site 1 adequate for this Company? If not, can you suggest? Or Specific improvements? Answer: No, the product costing system is not adequate in site 1 because inventory level is being ignored by the company A. But as we know Cost management ownership should be driven down to lower levels in organizations and linked to the processes that deliver the outputs.

The purpose of process cost management is to support managements decisions and provide modeling tools to help evaluate process designs. Process designs refer to the color matching process, control on WIP and FINISHED goods inventory, Maintenance of the Orders. The Company A has not taken into account any of the process designs which reflect that companys product costing system is not adequate in site 1. Although, we can suggest one method under Process cost management to improve the management decisions that links to the processes. Just In Time (JIT) method will be the good option for the Company A which minimizes the difference in the net operating income calculated by variable and absorption costing. Under just in time (JIT) goods are produced to customers' orders and the goal is to eliminate finished goods inventory entirely and reduce work in process inventory to almost nothing where as Company had a very little concern on Inventory level. If there is very little inventory, the changes in inventories will be very small and both variable costing and absorption costing will show basically the same net operating income figure. a) What particular characteristics of management success should the system in site 1 emphasize? Suggest performance measures which will highlight these characteristics.

Answer: The following are particular characteristics of management success the system should emphasize in site1: 1. The batch cost minimization. 2. Carrying and handling cost minimization 3. Overhead costs reduction Performance measures that highlight the above characteristics: 1. Precision was maintained, under supervision due to ownership of the system, during the color matching process. 2. Inventory level was minimized with the application of process costing management. 3. Overhead costs were measured in per unit of the output which gives the information to control it. c) To what extent can the costing system and performance measures you suggest above for site 1 be applicable to site 2? As a similar product is being produced should the same issues receive prominence? Discuss your answer. Answer: As in site 1, the color matching process is carried out to produce a correct shade of the color for painting the can. Similarly, in site 2, company has to produce color for the painting ship. Thus, till the production of paint, the process costing technique is applicable because in site 2 the company doesnt have to paint the ship. Suggestions of performance measures in site 1 which are applicable for site 2: 1. Precision can be maintained, under supervision due to ownership of the system, during the color matching process. 2. Instead of batch production, company should opt for continuous production. 3. Just in time (JIT) method will not be applicable, as company has to maintain a proper inventory level in site 2.

As company A has an important competitive advantage with the new paint, which did not cause damage to sea-life, over market. Thus, it is a monopoly market for company A. With the introduction of similar product, Company A will loose market share and sale will go down. In order to maintain its sale company A can cut down its cost to maintain the targeted sale. Cutting down cost is not an easy task. As company has to shift the production process from continuous production to batch production, it has to incur a heavy cost in the shift.