Contents

● Company Profile

● Current cost sheet analysis

● suggestions/improvements on current costing

● Process based costing approach

● Analysis of opportunity cost

 Company Profile – LAVA International
Lava International Ltd., established in 2009, is one of the fastest growing mobile
handset companies in India and stood at No. 2 in Indian Mobile Handset brands in
2014-15 after Micromax. Lava realized revenues of more than 1 Billion $ in FY14 -15.
LAVA has a wide product portfolio that encompasses tablets, feature phones,
smartphones and data cards having various models in bar and touch form factor at
multiple price points to suit all categories of consumers.
Lava boasts of a unique & reliable sales and service distribution (SSD) network
comprising 1500 distributors, 75,000 retailers and 1100 service centers spread
throughout the country. Lava Mobiles has a single-layer distribution model, wherein over
1500 distributors pan-India are directly managed and controlled by the company itself
and company CFAs (carrier and forwarding agents) supplies goods to them. Company
also has 1100 service centers pan-India and are directly managed and controlled by the
company itself.

LAVA International History

Lava International Ltd., is credited with launching the world’s first Intel chip based
smartphone.
According to IDC Asia Pacific Quarterly Mobile Phone Tracker 2014, Lava Mobiles has
a 8% market share in the Indian mobile phone market.
 LAVA International – Products Portfolio
Lava's product portfolio includes
a. Feature phones
b. Smartphones
c. Tablets
d. Mobile accessories
e. Data Cards
Factory Cost Analysis
Current Costing Factory Cost -
Variable Costs:
(A) Material costs: • SKD cost is considered for products costing PER UNIT which are imported
from China based on the current exchange rate of USD. The incoterms for SKDs are Free on
Board (FOB), so the Freight cost, customs & CHA cost and Insurance cost in involved
transferring the goods from port of loading to assembly plants are born by LAVA international
and is included in product costing
• Packaging cost as procured separately from Indian vendors is considered and costed per unit
• Depreciation/ Machine hour Rate* - Annual burden of Capital expenditure incurred is
calculated based on the useful life of an asset. Monthly cost thereafter is allocated equally in a
twelve month period and per unit rate calculated based on the number of units produced in the
month.
Method of Depreciation is SLM
• Additional 2% excise - on clearance of goods from the factory under the excise law. Company
has opted for payment of excise duty method without obtaining the CENVAT credit for input.
• Electricity Consumption* – Actual consumption per unit

Critical Analysis of Costing

• As the assembly plant is a totally separate unit, the whole building rent is apportioned to
production even the support staff like IT, procurement, finance, HR etc and as well a small
medical team supporting the production plant.
• All the labor costs and other costs are apportioned based on total production and does not
consider per unit assembling time which means a low value & low assembling time handset will
also be apportioned the same labor and other cost vis a vis a high value & high assembling time
handset
• No head office cost personal and activity costs are considered in factory cost but considered in
selling and administrative expenses, like:
No product team and marketing overheads considered in factory cost
No Selling overheads are considered in factory cost
No Supply chain Executives cost are considered in factory cost
• No rejection cost at final stage is accounted in product cost
• Lots of product and production people travel to China related to the production but not
considered
• HR cost except Labor eg Staff Welfare cost is not considered
• IT costs in plant like SAP implementation, Internet charges, Hardware cost, consumables,
telephones cost etc are not considered in production cost
• No recruitment cost considered
• Factory also has Guest House, but its Expenses are not considered in cost
• Packing/Loading-unloading Expenses are not considered at gate
• Other factory Administrative Expenses are not considered
• Consumables were not considered

Process based Costing approach

Process costing is methodology used to allocate the total costs of
production to homogenous units produced via a continuous process
that usually involves multiple steps or departments.
A tabulation of costs is needed for process costing but with
emphasis on costs by department. The cost report that is prepared
for each department is termed a cost of production report. The cost
of production report provides comprehensive information on the
material, labor, and overhead incurred within each department
during a period. It is the primary source document for determining
how those costs are allocated to actual production.
When goods are produced in a continuous process, the costs are allocated between
work in process and finished goods by calculating equivalent units, a physical unit
expressed in terms of a finished unit.

Process based Costing

Lava Production process is divided into 4 major processes/departments

•Quality Inspection
•Phone Assembly
•Functional Testing
•Packaging

Entire Factory cost needs to be accumulated by the above departments. Process

costing under weighted-average method involves the following steps:

Step 1 - Preparing the quantity schedule: i.e. finding units in the beginning work in
process for the period, units started or units transferred-in from prior departments, units
transferred out to the next department or units of finished goods, and units in closing
work in process.
Step 2 - Bringing forward the cost of units in the beginning work in process from last
period. The cost should be broken up into all its components: direct materials and
conversion costs (=direct labor and manufacturing overheads).

For step 1 & 2 - all the SKDs and packaging material which passes through Quality
(process 1) are issued in batches to assembly and functional testing process (process 2
& 3), which work in sequence. All the assembled mobiles are issued for packaging
(process 4). So we can assume that the same no. of finished units are moving in
different departments and there is no WIP in any function. This can be assumed
because the processes cycle times are very small i.e. 2-3 minutes for every department
per unit

Step 3 - Finding the costs added in the current department under different heads: direct
materials, direct labor and manufacturing overheads. Finding total cost to be accounted
for under each head i.e. direct materials, direct labor and manufacturing overheads.

Step 4 - Allocating the cost between departments for the units produced.

Analysis of opportunity Cost

The opportunity cost of a choice is the value of the best alternative foregone, where a
choice needs to be made between several mutually exclusive alternatives given limited
resources. Assuming the best choice is made, it is the "cost" incurred by not enjoying
the benefit that would be had by taking the second best choice available. Opportunity
cost in economics has been described as expressing "the basic relationship between
scarcity and choice". The notion of opportunity cost plays a crucial part in ensuring that
scarce resources are used efficiently. Thus, opportunity costs are not restricted to
monetary or financial costs: the real cost of output forgone, lost time, pleasure or any
other benefit that provides utility should also be considered opportunity costs.

Explicit costs
Explicit costs are opportunity costs that involve direct monetary payment by producers.
The explicit opportunity cost of the factors of production not already owned by a
producer is the price that the producer has to pay for them. For instance, if LAVA
spends 5 lakhs on electrical power consumed, its explicit opportunity cost is 5 lakhs.
This cash expenditure represents a lost opportunity to purchase something else with
these 5 lakhs.

Implicit costs

Implicit costs (also called implied, imputed or notional costs) are the opportunity costs
not reflected in cash outflow but implied by the failure of the firm to allocate its existing
(owned) resources, or factors of production to the best alternative use. For example:
LAVA has previously bought SKDs to manufacture mobiles and other parts and the
machinery to produce a Mobile. The implicit part of the opportunity cost of producing the
mobile is the revenue lost by not selling the SKDs/other parts and not renting out the
machinery instead of using them for production.

Another opportunity cost is in the evaluation of "foreign" buyers and their allocation of
cash assets in real estate or other types of investment vehicles.

Suggestions/Improvements on current costing

Apportioned cost is based on total production instead of per unit assembling time which
changes with time and volume of production. The factory has recently started producing
multiple mobiles with different assembly operations and assembly cycle time, so the low
value handsets which have less operations & assembly cycle time will the current
costing will also be apportioned the same cost. Need to consider per unit assembly time
also.
•Rejection cost to be accounted in product cost
•Production personal Travel cost to China to be considered
•HR Staff Welfare cost to be considered
•IT costs to be considered for Assets, telephone, internet to be considered in production
cost. SAP cost to be considered in overheads
•Recruitment cost to be considered
•Factory Guest House Expenses to be considered in cost
•Packing/Loading-unloading Expenses to be considered
•Other factory Administrative Expenses to be considered
•Consumables cost to be considered

LAVA INTERNATIONAL – REVISED COSTING based on the above Suggestions

Sales and Admin Overhead Costing - revised
References