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S.

No Issues under consideration Desired Information Available information Gap Possible sources of information
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Loss of Rs. 30 million in 3rd quarter of
2008 to MGPM (owned by Mr.
Joginder Singh Marwah)
- Net P&L of the quarter
- Calculation of projected profit
- CA educational background.
- Owner(Joginder) extremely surprised with the result, Expectation was profit
Calculation of projected profit Projection & Estimates made begining of
year
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Study of reasons for loss & challenges
in studying
Procedure for studying Procedure
Accumulate, classify & group all the cost for
1) ascertain all total & unit cost
2) observe trend
3) control them
4) analyze them for planning , control& decision making purpose
Challenges
-Not sure about difference between cost, expense,prices & losses
- Identification of cost object, cost center & cost unit
- accumulation, alloation, apportionment & absorption of cost
No scientific method to ovecome
challenges
Expert advice/CA
3
Analysis of expenses & assets Total expenses, total assets s Analysis of expenses
' - Utilities : 70% - for production & assembly shops.
- Premium : 80% -for prodcution & assembly shops.
Remaining premium & utlities cost - for office, adminstrative & selling activities
- Rent : 85% - for factory operations
- Labour : 15% - for activities in fatory & assembly lines.
85% - for common services
- Depreciation: 60%- for factory machines , equipments, fixtures.
40% - for selling department's assets & resources belonging to office.
Inventory at beginning of quarter
- Raw material: 60%
- Work in progress : 70%
- Finished goods: 85%
Nil Not applicable
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Whether Cost of Ordering(dock
charges & import duty), transporation
charges, storage , insurance cost of
raw material should be added to
invoice price.
Analysis of product cost break
up
Process:Price of raw material
& semi finished products
(purchase from suppliers)
-Raw material: 50% cost of total cost of high demand items.
- Raw cotton, wool & clay - direct cost(conveniently traced to spefic items)
- Synthetic gum ,minor regional jewellery & decoration pieces : form insignificant portion of total cost
- Craftsman & other employees salary= 30% of cost of these above items(i.e. = 15 % of total cost)
- Hiring specific machines, special moulds , designs & patterns for export market : 5% of total cost
Absorbtion of Import Duties,
Transportation charges be considered
in Invoice price
Invoice, BOM, Expert advice
5
Pasting material: Whether to buy from
TM chemicals or make in house
Consumption of gum.
Price in making & buying
If made in house
- Rs. 10,000 - cost of machine
- Rs. 200/kg - cost of raw material
- Rs. 5000 - Juggu's salary
If more than 100kg , Rs. 5000 + 30/kg
- Rs. 25/kg - Mukku's salary
if more than 160kg, total salary expense = Rs. 4000
If purchased from TMC : Rs. 425/kg
Quantity of gum Trend of consumption of gum quantity
during past few quarters
6
Electronic components from Monika
Electronic
a) Should Joginder buy
electronic components from
Monika Elctronics?
B) Whether to sell current
fixing machine to Mahavir
handicraft.
Delta cost (increase) = Rs. 17.43
Instrument(to fix electronic component in puppet) = Rs. 5000
Effect : quality improvement, defect free product, saving in rework cost
Customer preferenceto imporved
quality, rework cost
Information about sales price & customer
preference to quality, market survey
Rework cost past data
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a) Increased electricity bill during this
quarter
b) Hiring of Production Supervisior
Calculation of inventory cost
(as all additional units will not
be sold in current quarter)
Allocation of supervisor salary
to which cost center/budget
head
Increased electricity bill during this quarter
Reason:
1) Increased production
2) Hired new unsilled workers for increased production
3) Purchase of addional Cotton, clay , clothes, stone & other material
Supervisor salary related information
a) Supervisior Salary Rs 9000
b) 50 Different products being manufactured.
Method to decide cost center &
budget head for supervisor salary
Which item consume supervisor's how
much time.
Expert advice/CA
8
Storage cost for increased volume in
Q3 & Q4
How to show owner's capital in
accounting books
Opportunity cost for current
storage cost (Rs.7,50,000)
Sales forecast
Forecast in quarter 3 & 4: 38% compound increase
Forecasted in 1st & 2nd quarter: 8%
Export sales : 85% during Christmas & New year time.
Funds may be required to be arrange funds if sales(particularly cash collection) is less than projected capital & other
expenditure.
Opportunity cost of buying ground
floor
Expert advice - for showning owner's capital
in accounting books.
Selling cost of products stored as inventory
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Reduction in range of product by
discotinuing unprofitable products
Total loss in jewellery boxes &
opportunity cost (Increase in
sales of other product due to
visibility of variety)
Pros: Reduction in cost of precise material used in making of jewellery boxes
Cons:1) If discontinue making jewellery boxes , have to pay watchman's salary , property tax & rent related to room
where these boxes are manufactured
2) Less customer preference to other products as well because of reduction in range of products
Loss in jewellery boxes, Increase in
sales of other product due to visibility of
variety
Market surveys on sales due to availability
of range
Arpan Khare WMP10059 MANAC Case Study -Inexperience WMP TERM 2
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a) Change in processing of Jute
b) Change in handicrafts assembly
proces
Saving percentage a) Saving of 20% through Jute processing.
b) Saving of waste by 15% by change in assembly process
c) Every craftsman to specialize in one or some activities rather than each craftsman doing all activities. Salary of
craftsman to be according to time spent on each product & degree of specialization required.
Nil
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Opportunity to supply of premium
items to Cottage Emporium
1) Minimum quantity
2) Competetive price
firm expects 55% profit margin on specially ordered items)
- At the time of bargain, government may ask cost break up
Current practice: Include out of pocket cost + labour
Planning to include:
1) Interest @12% on internally generated funds invested in manufacturing
2) Rent on firm owned property
3) Notional periodic reward for efforts made by him
Increase in sales quanity projection if
credibility increases. Study of
breakeven price(competetive price Vs
increase in sales due to increase in
credibility)
Sales increase projection from Marketting
Income Statement as given in exibit 1
Sales 1125000 Inventory
Wages 205000 Raw Material 362500
Closing stock percentage
change
Utilities 37500 Work In Progress 387500 60%
Depreciation 97500 Finished Goods 862500 70%
Raw Material purchased 412500 Machine and Equipment 1575000 80%
Insurance 10000 Debtors 402000 90%
Rent 125000 Cash in Hand 375000 100%
Salesforce salary 40000 Cash in Bank 582500 110%
Admin Staff Salary 40000 Accumulated Loss 4612500 120%
Advertising 187500 130%
Net Operating Loss -30000 140%
150%
Corrected Income statement
Expenses (COGS)
Revenues 1125000 Raw materials Cost
Cost of Goods Manufactured 555250 Opening stock of raw materials 217500
Beginning Inventory of Finished Goods (85%) 733125 Purchases of raw materials (60%) 412500
Ending Inventory of Finished Goods -862500 Closing stock of raw materials 362500
Cost of Goods Sold 425875 Raw material 267500
Gross Margin 699125
Operating Expenses Labor Cost (15%) 30750
Utilities (30%) 11250
Depreciation (40%) 39000 Manufacturing Overhead Costs
Insurance (20%) 2000 Inraw Labor 174250
Rent (15%) 18750 Utilities cost (70%) 26250
Sales staff Salary 40000 Insurance Premium (80%) 8000
Office staff Salary 40000 Rent (85%) 106250
Advertisements 187500 Depreciation (60%) 58500
Total Operating Costs 338500 Total Manufacturing Overhead Costs 373250
Operating Income (Profit) 360625 Manufacturing costs incurred 671500
Beginning Work in Progress Inventory (70%) 271250
Ending Work In Progress Inventory -387500
Cost of Goods Manufactured 555250
Income Statement
Balance sheet as given in exibit 2
Conclusion: While preparing income statement, CA overlooked expenses due to
opening & closing stock of raw material , work in progress & finished goods.
i.e. It is not imporant that how much has been bought , rather how much raw
material, work in progress inventory & finished goods inventory has been changed is
really the expense because ending material inventory(Raw material+WIP+finished
goods) , we have already considered as Asset.
CA only considered raw material purchased as expense.
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120
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Sensitivity analysis
Change in profit with respect to change in closing stock of raw material, WIP & finished goods inventory (at every 10% interval)
Closing stock
change
Closing stock
of raw
materials
Profit
Profit change
percentage
0.6 217500 302625 84
0.7 253750 317125 88
0.8 290000 331625 92
0.9 326250 346125 96
BASE VALUE 1 362500 360625 100
1.1 398750 375125 104
1.2 435000 389625 108
1.3 471250 404125 112
1.4 507500 418625 116
1.5 543750 433125 120
CONCLUSION:
Arpan Khare WMP10059 MANAC Case Study -Inexperience WMP TERM 2
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110
115
120
125
50% 60% 70% 80% 90% 100% 110% 120% 130% 140%
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Percentage change in closing inventory
Profit change percentage with change in raw material, WIP, FInished
goods closing inventory
Every 10%
decrease
Every
10%
increase
Change in profit with respect to change in closing stock of raw material, WIP & finished goods inventory (at every 10% interval)
Ending Work In
Progress Inventory
Profit
Profit change
percentage
Ending
Inventory of
Finished Goods
Profit
Profit change
percentage
232500 314125 87 517500 308875 86
271250 325750 90 603750 321813 89
310000 337375 94 690000 334750 93
348750 349000 97 776250 347688 96
387500 360625 100 862500 360625 100
426250 372250 103 948750 373563 104
465000 383875 106 1035000 386500 107
503750 395500 110 1121250 399438 111
542500 407125 113 1207500 412375 114
581250 418750 116 1293750 425313 118
CONCLUSION:
Profit is most sensitive with respect to closing inventory of raw
material followed by closing inventory of WIP inventory followed by
closing inventory of finished goods
Arpan Khare WMP10059 MANAC Case Study -Inexperience WMP TERM 2
140% 150% 160%
Profit change percentage with change in raw material, WIP, FInished
goods closing inventory
Profit change with change in raw
material closing inventory
Profit change with change in WIP
closing inventory
Profit percentage with change in
finished goods closing inventory
Change in profit with respect to change in closing stock of raw material, WIP & finished goods inventory (at every 10% interval)
CONCLUSION:
Profit is most sensitive with respect to closing inventory of raw
material followed by closing inventory of WIP inventory followed by
closing inventory of finished goods
Arpan Khare WMP10059 MANAC Case Study -Inexperience WMP TERM 2