Question 1

Drawbacks of Traditional Cost- Management.

Solution:
6 Reasons
 Ignores Competition Market Growth and Customer Requirement
 Reactive Approach
 Short-Term Outlook
 Limited Focus on Revision and Improvisation
 Ignore Dynamics of Marketing and Economics
 Excessive Focus on Cost Reduction
1. The focus is on cost control and reduction. However, a broad cost reduction
program doesn't work effectively in today's business environment. If a company
targets to reduce the marketing spend by, say, 20% across all the product
categories, it is likely that the sales of profitable products is also impacted.
2. Traditional cost management system has internal focus and does not look at the
external factors of competition, market growth, customer requirement, etc.
3. A broad-based cost reduction could lead to inferior quality of products & services
which might drive away customers resulting in lower sales and profitability.
4. The expectations of modern customer are quite different. An excessive focus on
cost reduction could impact the quality of product and services and alienate the
customers.
5. There is a limited focus on review and improvisation of existing processes and
activities.

Question 2
Explain Concept of Strategic Cost Management?
Solution:
1. Strategic Cost Management is the process of reducing total cost while
improving strategic position of a business.
For eg. the strategy of a manufacturing firm is to be able to offer rapid turnaround
of customer orders by maintaining tight control over its bottleneck production
operation. (Bottleneck production operation means resources which restrict
production.)
2. SCM is focused on Sustainable Competitive Advantage (One plus Phones),
Product Differentiation (Apple Macbook Air) and Cost Leadership (Reliance jio).
3. Example in Indian scenario: Tata (Ratan Tata), Infosys (Narayan Murthi), Wipro
(Azim Premji), Reliance (Dhirubhai Ambani)

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4. It should be an integral part of value chain in all aspects of Production Purchase,
Design, Manufacturing, Delivery and Services.

Question 3
What is Value Chain Analysis & its Activities? (Use this Theory in Case Studies, Ref:
Smart.)
Solution
Value-chain analysis is a process by which a firm identifies & analyses various
activities that add value to the final product. The idea is to identify those
activities which do not add value to the final product/service and eliminate such
non-value adding activities . The analysis of value chain helps a firm obtain cost
leadership or improve product differentiation. Resources must be deployed in
those activities that are capable of producing products valued by customers.

Primary Activities
1. Inbound Logistics
These are activities concerned with receiving, storing, and
distributing the inputs (raw materials) to the production process. The relationship
with suppliers is a key component in this process.
2. Operations
These activities involve transforming inputs into final product. Activities such as
machining, packaging, testing and equipment maintenance form part of
Operations.
3. Outbound Logistics
These activities involve collecting, storing and distributing the products from the
factory line to end consumers. This may include finished goods warehousing,
delivery vehicle operation, order processing and scheduling.
4. Marketing and Sales
Marketing and Sales provide the means by which the customers are made aware
of the product. The activities include advertising , promotion, distribution channel
selection, sales force management and pricing policy.
5. Service
This includes activities related to after sales service like Installation, repair and
parts replacement.

Support Activities

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1. Procurement involves purchasing of raw material, supplies and other
consumables required as inputs for the primary activities.
2. Technological Development includes technical knowledge, equipment ,
hardware, software and any other knowledge which is used in the transformation
of inputs to outputs .
3. Human Resource Management includes activities around selection, recruitment,
placement, training, appraisal, rewards and promotion; management development;
and labour/ employee relations.
4. Firm Infrastructure consists of activities such as planning, finance, accounting,
legal, government affairs and quality management.

Question 4
Explain Michael Porter’s 5 Forces Analysis (Use the Solution in Case Studies,
Ref: WDG Ltd.).
Solution
1. Bargaining power of buyers
The bargaining power of buyers generally determines the ability of buyer to push
the price down. This happens when the buyers are concentrated or when the
volume purchased by buyers is very high. The degree of buyer power generally
depends on:
a) customer concentration (the higher the concentration of customers, the greater
is their negotiation leverage);
b) the propensity for customers to integrate backward (the higher the propensity
for backward integration, the greater the bargaining leverage);
c) costs of switching suppliers (the lower the switching costs, the greater the
buyer's leverage); and
d) the number of alternative suppliers (the greater the number, the greater the
customer's leverage)
Eg: Top CDMA players i.e. Reliance and Tata Teleservices had put a
combined pressure on Qualcomm to reduce the royalties payable on CDMA
based handsets.
2. Bargaining power of suppliers
The bargaining power of supplier is relatively higher when the input is
important to the buying firm or when there are very few suppliers of the input.
The suppliers could also dictate terms if the input supplied is not replaceable or
when an alternate input is not available.

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 Microsoft dominates the operating system business of computers and laptops and
can dictate terms to its buyers as buyers do not have multiple options to choose
from. The profitability of companies can shrink if the suppliers have a higher
bargaining power.
3. Threat of substitute products or services
When multiple and close substitutes are available in the market for a particular
product, customers are likely to switch suppliers easily. A firm in such a case
must resort to competitive pricing to retain its customers. When few substitutes
exist for a product, consumers are willing to pay a potentially high price.
If close substitutes for a product exist, then there is a limit to what price customers
are willing to pay. The problem becomes severe if substitutes are available at
much cheaper price (case of launch of Reliance Jio).
A company should strive to build its brand and customer loyalty to stop the threat
of substitutes. Substitutes could be from within the industry or from a different
industry. The paper industry faces threats from e-book market. When more people
switch to public transport as trains, the demand for vehicles comes down.
4. Threat of new entrants
The threat of new entrants largely depends on the barrier to entry and perceived
profitability in an industry.
If an industry is profitable and the barriers to entry are low, new firms could enter
the industry leading to excess supplies and reduced prices. Some examples of
barriers to entry are intensive capital requirement, sophisticated technology, legal
factors, limited access to raw material & labour etc.
Industries which require huge amount of capital or sophisticated technical
knowhow might not have a high threat of new firms entering into the industry.
Airline industry is a case where very few new firms enter the business because of
the capital requirements.
Another barrier to entry could be legislation which restricts newer firms to start
the business, like in the case of defence industry. Certain industries (for example
medicines) are largely driven by patents and new firms might find it difficult to
enter the industry. An industry where threat of new entrants is low is more
profitable than an industry where new entrants can easily enter the industry.
Eg: Ola and Uber, Flipkart and Amazon, Apple and Samsung, Coke vs Pepsi,
India Airline vs Indigo
5. Intensity of competition/ rivalry amongst firms
Some markets are more competitive than others. In highly competitive industries,
firms resort to cut-throat competition to win more customers. The competitive

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rivalry is higher when an industry has high number of firms and is lower when
there are few large players dominating the market. The intensity of competition is
higher:
 When firms are of more or less equal size.
 Extra capacity exists in the industry.

Question 5
Give brief explanation of “Differentiation Advantage” & Low-cost Advantage”.
Differentiation Advantage (Product Differentiation)
 Customers perceive that a product will offer High Quality, Involves Fewer
Risks and outperforms competitors product.
 Techniques include Superior Quality, Superior Innovation and Superior
Customer Responsiveness.

Low-Cost Advantage (Cost Leadership)

 Company must lower its cost to gain competitive advantage or match with the
price of competiting products or services and increase its productivity.
 Sources include access to low cost raw materials, innovative process
technology, superior operating management etc.

Question 6
Explain how Total Quality Management would enable a company to gain
competitive advantage?
Solution
TQM is a management philosophy. It concerns itself with managing the
processes and people to make sure that the customer is satisfied at each and every
stage.
This means making the needs of the customer the priority, expanding the
relationship beyond traditional services and incorporating the customer's needs in
the company's business plan and corporate strategy.
In TQM, the concept of “quality” is perceived exclusively from the frame of
reference of the customer. These customers can be
 internal, such as, those working in another department and
 external customers who are the end recipients of the product or services.
The organisation should attempt for continuous improvement in the quality that it
delivers with the ultimate aim of achieving zero defects in this quality.

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 TQM should be view as an investment rather than as a cost that should be
minimised. There are many ways in which investment can be made in TQM.
 fine-tuning the product mix
 fine-tuning of the processes of ensuring quality,
 introducing employee development programmes with the nature of an
academic course
 empowering the employees professionally and personally,
 improving the top management commitment to quality,
 monitoring of the performances and proper rewarding based on achievements
 ensuring the customer satisfaction etc
Companies could provide its employees with training in the technical aspects of
banking practice as well as in customer care. Customers would thus get a better
service not only technically but also from a customer care perspective. This
should lead to smaller customer complaints and greater customer satisfaction. It
could also motivate customers to recommend others to use this bank.
TQM also requires Companies to respond to its customer's requirements
immediately for example by providing more staff to reduce the lengths of queues
in festive/ seasonal/ busy time. An example for Bank could be that it can be
opened for longer hours to allow customers to complete their bank related
requirements and have meetings with bank employees at a time that is more
convenient for the customer, this would lead to more satisfaction to customers.
In long run, if bank continue to follow TQM, the bank would have higher profits
and competitive advantage in banking sector despite incurring additional
expenditure to improve quality.

Question 7
Theory question related to Goldratt 5 Step model: Theory of Constraints.
1. Identifying the System Bottlenecks
This step involves identification of constraints which restrict output from being
expanded.
2. Describe How to Exploit the Bottlenecks
Having identified the bottlenecks, it becomes the focus of attention since only the
bottleneck can restrict or enhance the flow of products. It is therefore essential to
ensure that the bottleneck activity is fully utilised. Decision regarding the
optimum-mix of products to be produced by the bottleneck activity must be made.
3. Subordinate Everything Else to the Decision in Step-2

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 This step requires that the optimum production of bottleneck activity should
determine the production schedule of the non-bottleneck activities.
Let us consider an organisation dealing with a product which requires multiple
parts and processed on different machines. With multiple parts in a product,
dependencies arise among operations; some operations cannot be started until
parts from previous operations are available. Waiting time appear for two reasons:
Parts that require processing at a bottleneck machine must wait in line until the
bottleneck machine is free, and Parts made on non-bottleneck machines must wait
until parts coming off the bottleneck machines arrive.
Therefore, the workers of non-bottleneck machines should not be motivated to
improve their productivity if the additional output cannot be processed by
bottleneck machine. Producing more non-bottleneck output results in increase in
WIP inventories and no increase in sales volume. Therefore, the preferred course
of action is that bottleneck machine should setup pace for non-bottleneck
machine.
4. Elevate the System Bottlenecks or Increase Bottleneck Efficiency and
Capacity
This step involves taking action to remove (that is elevate) the constraint. This
might involve
 replacing a bottleneck machine with a faster one or
 providing additional training for a slow worker or
 changing of the design of the product to reduce the processing time required
by a bottleneck activity.
5. Repeat the Process as a New Constraint Emerges
If the bottleneck activity has been elevated and replaced by a new bottleneck
activity it is necessary to return to step 1 and repeat the process

Question 8
Explain GSCF Framework for SCM
Solution
GSCF Framework For Supply Chain Management
The Global Supply Chain Forum (GSCF) defines Supply chain 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”
The following 8 supply chain management processes are included in the GSCF
framework:

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1. Customer Relationship Management, to manage and analyse customer’s
interaction and data throughout the life cycle with the main motive of
improving business relations.
2. Supplier Relationship Management, provides the structure for how
relationships with suppliers are developed and maintained.
3. Customer Service Management, provides the key points of contact for
administering product and service agreements.
4. Demand Management, provides the structure for optimising the customer's
requirements with supply chain capabilities.
5. Order Fulfilment, includes all activities necessary to define customer
requirements, design the logistics network, and fill customer orders.
6. Manufacturing Flow Management, includes all activities necessary to move
products through the plants and to obtain, implement and manage
manufacturing flexibility in the supply chain.
7. Product Development and Commercialization, provides the structure for
developing and bringing to market new products jointly with customers and
suppliers.
8. Returns Management, includes all activities related to returns, reverse
logistics, gatekeeping, and avoidance.

Question 9
Concept of Relationship Marketing and its Six market Models?
Solution
Relationship marketing helps the organization to keep existing customer and to
attract new customer through helpful staff, quality service/ product, appropriate
price and proper customer care.
RM is facet of Customer Relationship Management that focuses on customer
loyalty and long-term customer engagement.

Six Market Models Are

1. Customer Market
 Represent existing and prospective customers.
 Creating Brand Loyalty for Customer is our main goal.
2. Referral Market
 Buying product after being reffered by friends and relatives;
 Referral market further be divided into 2 categories:
- Customer recommendation of supplier.

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 - Consultancy firm referral.
3. Recruitment Market
Includes commercial recruitment agencies & Universities for potential
employees.
4. Influence Market
 Keep existing customer & attract new customers.
 Ability to influence marketing environment like financial analysts,
shareholders, government, consumers.
5. Supplier Market
 Suppliers who supply crucial raw material and parts.
 Need to develop strategic alliance & maintain good relation with them for
quality and speed of material.
6. Internal Market
 Includes internal department and staff.
 Determine customer oriented corporate culture.

Question 10
Explain the concept of Gain Sharing Arrangement with an example.

Solution
1. Gain sharing is an approach to the review and adjustment of an existing
contract, or series of contracts, where the adjustment provides benefits to both
parties.
2. 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.
3. Instead, any payment received is based upon the benefits that emerge to the
customer as a result of the successful completion of the supplier’s side of the
bargain.
4. This is clearly a risky stance for the supplier, because it could spend a fortune
and walk away with nothing.
5. Alternatively, if the benefits to the customer are substantial, the supplier could
find itself rewarded with a large return.
6. In this situation, the supplier could almost be described as taking an equity
stake in the customer rather than entering into a contract with it.
7. There must be no rewards for the suppliers to achieve a higher return through
adversarial behaviour or by hiding behind the contract.

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 8. Gain-sharing deals are, on the face of it, a win-win situation for suppliers and
their customers.
Example:
 Cost Savings initiatives and Gain Sharing arrangements at Chiang
International
 Supplier will deliver 3% minimum cost savings on controllable portion of
costs.
 Cost savings generated in first year as a result of Supplier idea will be
retained by Supplier
 Cost savings generated in year second will be shared between Chiang
International and Supplier at a ratio of 40%:60%.
 Cost savings generated in year three will be passed along to Chiang
International.
 Any cost savings generated by an idea proposed exc l us i ve l y by Ch i
ang International that does not require capital investment by Supplier will
be immediately passed along to Chiang International.

Question 11
Explain in detail concept of Just In Time, JIT purchasing, JIT production and
Prerequisite of JIT.

Solution
1. Concept
A just in time approach is a collection of ideas that streamline a company's
production process activities to such an extent that wastage of all kinds viz., of
time, material, and labour is systematically driven out of the process. JIT has a
decisive, positive impact on product costs.
Zero Failure  Zero Inventory  Zero Lead Time  Zero Delay
A complete JIT system begins with production, includes deliveries to a company's
production facilities, continues through the manufacturing plant, and even
includes the types of transactions processed by the accounting system.
As per CIMA, JIT is a system whose objective is to produce or to procure
products or components as they are required by the customers. It is a pull system
which responds to demand.
Just-in-time (JIT) is the management philosophy based upon demand pull
system (rather than supply-push) throughout the plant in order to reduce cost, with
a single piece flow after considering Takt time.

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JIT process is different for purchase and production department, due inherent
nature of the function they render; despite the purpose of both is to de-clutter
store/assembly line at the production floor and reduce the cost.
JIT if applied in purchases by purchase department then known as JIT purchasing,
which meant materials should only be purchased, when required for production.
Whereas if JIT applied by the production department, it will be termed as JIT
production and meant that finished products should only be produced, as needed
to meet actual customer demand.
The areas, where JIT purchasing expected to reduce cost significantly are:
1. Interest cost of working capital
JIT purchasing will reduce the level of raw materials, which cause a reduction
in the amount blocked as working capital; hence interest cost (either actual or
opportunity) will reduce too.
2. Reduction in storage cost
As we know JIT purchasing reduce the level of raw material stored, hence
storage cost is expected to reduce.
3. Since JIT purchasing reduced the inventory level of raw material, hence
sorting (first S out of 5S) become easy and motions (as per motion study)
also reduced, which reduce labour and overhead cost as well.
4. Material is purchase as and when required hence wastage and scarp will be
less due to a relative reduction in evaporation and tendency to obsolete.
Prerequisite of JIT purchasing or production
1. Integration with vendor, if vendor is not integrated properly or less reliable,
then situation of stock out can arise and which can result into loss of
contribution.
2. Multitasking by employee is another key feature of JIT, group of employees
should be made based upon product instead based upon function. Hence,
functional allocations of cost become less appropriate.
Overall, JIT enhance the quality into the product by eliminating the waste and
continuous improvement of productivity.

Question 12
Explain concept of Kanban Card, Kanban Size, Number of Kanban and
factors to be considered as a pre-requisite to Kanban System?
Solution

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KANBAN system is a visual signal-based workflow management technique.
Taiichi Ohno an industrial engineer, developed the first Kanban system for
Toyota automotive in Japan.

Kanban in inventory management

Kanban can be used in pull system of inventory, where supplier supplies the
material based upon consumption. Kanban (a yellow line, originally used in
Toyota) is visual clue to worker (may be unskilled or even illiterate) to understand
that further material is required. Kanban reduce the cycle time and enhance the
predictability, in order to promote value to customer. Kanban system hold specific
amount of material (divided in Kanban Size). Kanban system also maintain
information regarding quantity, storage location, vendor and details on
product/part.
While calculating Kanban size and number of Kanban required following
assumption need to be taken–
a) Consumption is constant throughout the period; else smoothing factor need to
be used in calculation of Kanban size.
b) The supplier will deliver material directly to the point of use area (assembly
line)
c) Requirement in term of space to store number of Kanban is met.

Kanban in non-manufacturing facilities

Kanban originally designed for manufacturing entities but can be applied to
nonmanufacturing concern as well, for smoothening of workflow rather inventory
management. In Kanban, signal based dashboard is used to manage and improve
the flow of work to be followed and also categories the work into to do, on-going
and done (in some of cases backlog category also be added).

Kanban Size and Number of Kanban

Formula
KANBAN ¿ (C)x (¿) x (L) x (SF )
Where,
C  stands for consumption,
LT stands for Lead Time
(Note – Lead Time should be in terms of consumption pattern means if consumption is
considered for week/s time then lead time shall also be considered in term of week/s)
L stands for Location of Kanban

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(Note - When so even any entity implement the Kanban then keep one container of
material at both the location (entity it-self and supplier), hence L is 2 unless otherwise
provided)
SF stands for Smoothing Factor
(which is used to set-off seasonal variations in consumption; obviously if consumption and
level of stock throughout the period remain same then smoothing factor can be one.)
Note – EOQ can also be practice as Kanban size

Number of Kanban depends upon the maximum quantity of inventory which

comprises of demand/consumption during lead period and quantity of safety
stock. It can be determined using following formula–

Quantity of safety stock+ consumptionduring lead period

¿
Kanban¿ ¿ ¿

Factors to be considered and specific precautions/pre-requisite to Kanban

system
Kanban try to smoothen the workflow process by 'visualise the flow of the work,
reducing WIP, managing process, making process policies explicit, incorporate
feedback and using scientific techniques'.
In order to do so, while applying Kanban system SCC need to consider following
factors–
1. Will supplier ready to supply material in the lot size equal to Kanban Size?
2. Will supplier participate in pull system of inventory and agree upon Kanban
Stocking program? – reliability on supplier.
3. Will supplier agree to supply material directly at point of use i.e., assembly
line?
4. Is the consumption pattern comprising significant variations or constant
throughout?
5. What is requirement regarding handling and storage of material?
6. Contribution margin on sale of product in which raw material is used.

Note – these factors have major impact on calculation of Kanban size as well.

Question 13
Concept of Takt-Time with an Example.
Solution

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Takt time is the rate at which you need to complete a product to meet customer
demand. For eg: If you received a new product order every 4 hours, your team
needs to finish a product in 4 hours or less to meet the demand.
Takt Time is the maximum available time to meet the demands of the customer;
this
will help to decide the speed of/ at manufacturing facility. Takt time is the average
time between the start of production of one unit and the start of production of the
next unit, when these production starts are set to match the rate of customer
demand.
Available Production Time
Takt Time=
Total Quantity Required

Example,
Available Production Time is 'total available time for production' - 'planned
downtime i.e. spent in shutdown and cleaning' i.e. 450 minutes = 480 minutes - 30
minutes. Total Quantity Required is 10 units.
450 Minutes
Takt Time= =45 Minutes
10 Units

Note - Heijunka can be applied in order to reduce variation between 'Takt times'
over the production.

Interpretation
Customer's demand is 10 units, to calculate the takt time, divide the available
production time (in minutes) by the total quantity required. The takt time would
be 45 minutes. This means that process must be set up to produce one unit for
every 45 minutes throughout the time available. As order volume increases or
decreases, takt time may be adjusted so that production and demand are
synchronized.

Question 14
All points of case study of Kaizen costing & Detailed explanation of Kaizen
costing (Case Study Reference: Zen Limited)

Solution:

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“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 –
1. Kaizen processes focus on eliminating waste in the systems and processes of
an organisation, improving productivity and achieving sustained continual
improvement.
2. Application of small, incremental changes routinely applied and sustained
over a long period can lead to significant improvements.
3. It aims to involve workers from multiple functions and levels in the
organisation
4. A value chain analysis helps to quickly identify opportunities to eliminate
wastage
5. 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.

Benefits of Kaizen Costing

1. 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.
2. A company applying Kaizen philosophy can achieve cost reduction through
small incremental improvements and cost savings.
3. Kaizen looks at functions and processes at all levels of organisation and
requires participation of all employees and massive as well as open

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 communication system. This participative approach improves teamwork
across the organisation.
4. Product improvement using Kaizen is likely to result in less number of
defective products leading to customer satisfaction and reduction in warranty
related costs.
5. The reduction in wastage, improved efficiency and cost reduction improves
the overall profitability of the company.

Implementation of Kaizen
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 leads to be arranged properly. This 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.

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Question 15
All points of case study of 5-S and detailed explanation of 5-S
(Case Study Reference: Gold Star Limited)

Solution
5S represent scientific way of workplace management so that work can be
performed Effectively, Efficiently, and Safely.
5S was come into practice as part of Toyota Production System in early of mid-
20th century. 5S is usually considered as essential component of lean
manufacturing, and foundation of eight pillars of TPM.
The 5S refer to five Japanese words-
1. seiri  sort
means to separate needed and unneeded materials and to remove latter.
2. seiton  Set in Order
means to arrange materials and equipment so that they are easy to find and
use.
3. seiso  Shine
means to conduct a clean-up campaign.
4. seiketsu  Standardize

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 means to formalize procedures and practices to ensure that all steps are
performed correctly
5. shitsuke  Sustain
means to form habit of always following first four Ss through training,
communication etc.
They define a system for workplace organization and standardization.

S1 – Sorting
In order to over-come the problem of 'idle laying over material' all across
production floor area, sorting of material is need to be done in following
categories:
 Not needed at all - to be moved to red tag area.
 Needed but not now - need to be moved to store with yellow tag.
 Needed but not here - to be moved to red tag area.
 Needed but not so much quantity.
Sorted material depending upon category can be separated and made ready for
movement shift, in order to segregate the sorted material; visual aid technique
can be used by attaching coloured tags to each category of material (called
visual sorting). Following two categories of tag can be used:
Red tag - A card containing detailed information of 'unwanted things' with a
given time limit for further action to be taken.
Yellow tag - A card containing detailed information of 'needed things', but
not now with a given time limit for further action to be taken - usually kept in
store.

Sorting can help to identify:

a) Obsolete material : parts jigs /tooling) not required as the design has
become obsolete.
b) Defective material: part can't be used as it is.
c) Scrap material.
d) Material which is not in place : kept at wrong place.
e) Unnecessary/extra/not useful material.
Sorting can also help in reduction of material lying vacant on production
floor , by segregating them into different categories and ensure that rarely
used material either removed or tagged in red tape area. If material were
sorted than 'loss of material' which was lying vacant near to assembly line
during fire incident could be saved.

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 S2 - Set in order
Systemic arrangement by ensuring 'place for everything and everything in its
place'. Purpose is to save search time and eliminate motion waste, through
visual management; with search-free and count free arrangement.
Colour can be best visual aid – RYGB
 R- Red- Critical
 Y- Yellow – Reorder
 G- Green- Design
 B Blue - Excess
Note - Mapping of RYGB to feature is purely illustrative.
In order to implement systematic arrangement, we need to consider and
answer;
 Analyse status.
 Decide - Which things will belong where?
 Decide - How they should be put away?
 Get everybody to follow rules through indexing, labelling etc.
Expected Benefits of set in order
a) Faster retrieval of things results in elimination of search time.
b) Opportunity to correct the abnormalities faster as visibility improve by system
itself.
c) Space saving by systematic arrangement.
d) Efficiency of work improves as things are available when they are actually
needed.
Thus, S can solve the specifically problem of non-accessibility of tools.

S3 – Shine
Ensure there must be cleanliness 'in and of' everything. Obviously, if there are less
number of items, then there is less to clean.
 Cleaning should be with meaning.
 Cleaning is inspection (from all aspects - front, rear, left right, top and
bottom).
Shine will help to keep things in order with regular cleaning and upkeep, so that
maintenance become 'preventive function' rather corrective and any incident,
likewise fire occurrence on assembly-line ; must be avoided. This will ensure
larger utility out of Machine and Plants which will increase replacement cycle and
save investment by lowering down maintenance and replacement cost.

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 S4 – Standardization
Establishing the 'standards' and make 'operating procedure' to create consistency
and ensure that all steps are performed correctly. There are;
 Fix responsibilities for implementing & evaluating system.
 Integrate these responsibilities into routine work.
 Check how well the system is working and sustaining itself
In order to ensure TPM all 5S are essential, but standardisation is key is facing
large set of problem in assembly of electronic cycles and reason being absence of
SOPs. Hence, by establishing the standardised process can identify Critical
Success Factors (CSFs) and benchmark the Key Performance Indicator (KPls)
against each CSFs.

S5 – Sustain
In order to sustain with the established standard, it is required to do;
 Daily monitoring
 Improving ownership by allocating areas
 Using 'red tag campaign'
 Communicating visually through fixed point photography
 Structured communication
 Continuous training of all employees
 Periodic audits at all level
 Motivating staff through recognition

Since 5S is not a onetime exercise, it is continuous process , hence, it is essential

to sustain the practices followed during earlier 5Ss.
Sixth S is 'safety' which was added later on, in order to ensure safety while
performing all the remaining 5S.
Question 16
(1) What are the reasons for introducing TPM? (i.e. Losses arising due to Breakdown)
(2) Explain concept of TPM and its Pillars (All Points of Case study also covered.
Reference: Super Refinary Ltd.

Solution
Losses Arising Due to Breakdown
The following are the losses which can be associated with the breakdown of
machinery at Super Refineries Limited –

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 1. Equipment failure leading to unexpected loss of time-The production at plants
is interrupted and the supplies to customers are delayed.
2. Idle waits and stoppages due to ad hoc maintenance requirements. Since the
interruption is unplanned, the productive labour time is wasted.
3. Production of inferior quality products causes financial losses. The company
would also incur additional costs to remake the product without any
additional revenues.
4. The company would also incur losses in terms of additional set up costs.
Every time a machine breaks down, a significant amount of time would be
wasted in setting up the production processes again.

Concept
TPM (Total Productive Maintenance) is a holistic approach to equipment
maintenance that strives to achieve perfect production
 No Breakdowns
 No Small Stops or Slow Running
 No Defects
In addition it values a safe working environment:
 No Accidents

TPM emphasizes proactive and preventative maintenance to maximize the

operational efficiency of equipment.
The implementation of a TPM program creates a shared responsibility for
equipment that encourages greater involvement by plant floor workers. In the right
environment this can be very effective in improving productivity (increasing up
time, reducing cycle times, and eliminating defects).
Question 18
Concept of Cellular Manufacturing and explanation of Machine Cell design?
Solution
(1) Cellular manufacturing is a lean way to enhance productivity by improving
(reducing) the performance in the context of time and motion involved in the
production.
Cellular manufacturing is an application of group technology in the manufacturing
in which all or a portion of a firm's manufacturing system has been converted into
manufacturing cells.
Here is important to note that a manufacturing cell is a cluster of machines or
processes located in close proximity and dedicated to the manufacturing of a

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family of parts. Cellular Manufacturing results in following benefits to improve
productivity–
a) Reduce
 setup times by using part family tooling and sequencing.
 flow times by reducing material handling and transit time and using
smaller batch sizes (even single piece flow – this also results in the
requirement of less floor space).
 lead time
 work-in-process inventory
b) Better
 use of human resources. Hence, reduced direct labour but heightened
sense of employee participation.
 scheduling, easier to control, and automate.
c) Increased use of equipment & machinery, hence reduced investment on
machinery & equipment.

The Machine Cell Design can be classified based on the number of machines and
the degree to which the material flow is mechanized between the machines. The
most common designs are–
a) Single Machine Cell consists of a machine plus supporting fixtures and
tooling to make one or more-part families. This can be applied (useful) to
work parts that are made by one type of process such as turning or milling.
b) Group Machine Cell with manual handling consists of more than one
machine used collectively to one or more-part families and no provision for
mechanical part movement between machines. In this, human operators run
the cell and perform material handling.

Note– If the size of the part is huge or there is a large number of machines in
the cell, then regular handling crew may be required.
Preferable cell shape is U-shaped (single/few workers). U shape is useful in
the movement of multi-functional workers.
Since the design simply includes certain machines in the group and restrict
their use for specified part family hence often achieved without rearranging
the process type layout; So, bring the cost-saving (on rearranging) but lock-in
material handling benefits of group technology.

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c) Group Machine Cell with semi-integrated handling consists of more than
one machine used collectively to one or more-part families and uses a
mechanical handling system, such as conveyor, to move parts between
machines in the cell. Note– There may be in-line layout (identical or similar
routing - machines are laid along a conveyor to match the processing
sequence) and loop layout (allows parts to circulate in the handling system
and permits different processing steps in the different parts in the system).

d) Flexible Manufacturing System is a highly automated machine cell in group

technology that combines automated processing stations with a fully
integrated material handling system.

Question 19
Tools to Implement Six Sigma: (DMAIC & DMADV).

Solution
1. DMAIC (Improve Existing Business)
This method is very robust. It is used to improve existing business process. To
produce dramatic improvement in business process, many entities have used it
successfully. It has five phases:
D - Define the problem, the project goals and customer requirements.
M -Measure the process to determine current performance.
A -Analyze the process to determine root causes of variation and poor
performance (Defects).
I - Improve the process by addressing and eliminating the root causes.
C -Control means maintaining the improved process and future process
performance.

2. DMADV (Improve New Business)

D - Define the project goals and customer deliverables.
M - Measure and determine customer needs specifications.
A - Analyse the process options to meet the customer needs.
D - Design (detailed) the process to meet customer needs.
V - Verify the design performance and ability to meet customers needs.

Question 20
Scope of Cost Reduction.

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Solution
PRODUCT DESIGN
Efficient designing for a new product or improving the design for an existing
product reduces cost in the following manner:
1. Cheaper substitute, higher yield and less quantity and varieties of materials,
cause reduction in cost.
2. Reduced time of operation and increased productivity reduce cost.
3. Standardization and simplification in variety increases productivity and
reduces costs.

ORGANISATION
It is not possible to measure the extent of cost reduction resulting from an
improvement in organisation. Nevertheless, economies are bound to be achieved if
the following considerations are looked into:
1. Definition of each function and responsibility.
2. Proper assignment of task and delegation of responsibility to avoid
overlapping.
3. A suitable channel of communication between various management levels.
4. Co-operation and closed relationship between the various executives.
5. Removal of doubts and fiction. 6.Encouragement to employees for cost
reduction suggestion.

PRODUCTION PLAN PROGRAMME & METHOD

Production control ensures proper planning of work by installing an efficient
procedure and programme ordering correct machine and proper utilisation of
materials, manpower and resources so that there is no waste of time and money
due to wait for components, men, material etc. An efficient cost reduction
programme should examine the following points relating to production control.
1. Whether wastage of manpower and material is kept to the minimum.
2. Whether there is any scope for reducing idle capacity.
3. Whether the procedures for the control of stores and maintenance services are
efficient.
4. Whether labour wastage may be reduced and productivity increased by
eliminating faulty production method, plant layout and designs or introducing
incentive schemes.
5. Whether there is scope for reduction of overhead, whether a budgetary control
system is in operation to ensure the control over overhead costs.

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 FACTORY LAY OUT EQUIPMENT
1. A cost reduction programme should study the factory layout and the
utilisation of the existing equipment to determine whether there is any scope
of cost reduction by elimination of wastage of men, materials and maximum
utilisation of the facilities available.
2. The necessity for replacement of plants, introduction of new techniques or
expansion of facilities should be considered and various alternatives explored
with a view to reducing costs.

Question 21
State what standardization of the components and the manners in which it will
work out to reduce the cost?

Solution
Standardisation of component means using the same type of component for more
than one product or all the product which any manufacturer is producing.
For example, if an automobile company manufacture cars of different models, it is
possible to use only one type of door handle and wiper in all the models.
Standardisation of the component can be benefits which may lead to cost
reduction, major among them are-
 Economies of scale.
 Ease in inventory control.
 Ease for an operator who use this component for various purposes.
Example: Maruti has so many cars. Basic (Alto) & Luxury (Nexa). It can have
some standardized components for all Maruti Cars and achieve Economies of
scale.

Question 22
Explain in detail components of Target Costing.

Solution
1) Value Engineering
Opportunities to modify Design which results in Reduction in cost without
reducing quality of product.
 Eliminate unnecessary functions from production process.
 Better product design.

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  Substitution of Parts.
 Better way of doing things.

2) Value Alalysis
Detect, Eliminate & Minimize Non-Value Added Activities

Value Engineering
a) Can we eliminate functions from the production process?
b) Can we design the product better for the manufacturing process?
c) Can we substitute parts?
d) Is there a better way?
e) Can we minimize the design?
f) Can we eliminate some durability or reliability?
g) Can we combine steps?
h) Can we take supplier’s assistance?

Can we eliminate functions from the production process?

This involves a detailed review of the entire manufacturing process and determine
the non- value added activities. By eliminating them, one can take their associated
direct or overhead costs out of the product cost.

Can we eliminate some durability or reliability?

It is possible to design an excessive degree of sturdiness into a product. For
example, a vacuum cleaner can be designed to withstand a 1-ton impact, although
there is only the most vanishing chance that such an impact will ever occur;
designing it to withstand an impact of 100 pounds may account for 99.999% of all
probable impacts, while also eliminating a great deal of structural material from
the design. However, this concept can be taken too far, resulting in a visible
reduction in durability or reliability, so any designs that have had their structural
integrity reduced must be thoroughly tested to ensure that they meet all design
standards.

Can we minimize the design?

This involves the creation of a design that uses fewer parts or has fewer features.
This approach is based on the assumption that a minimal design is easier to
manufacture and assemble.

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Can we design the product better for the manufacturing process?
Also, known as design for manufacture and assembly, this involves the creation of
a product design that can be created in only a specific manner. For example, a
toner cartridge for a laser printer is designed so that it can be successfully inserted
into the printer only when the sides of the cartridge are correctly aligned with the
printer opening; all other attempts to insert the cartridge will fail.

Can we substitute parts?

This approach encourages the search for less expensive components or materials
that can replace more expensive parts currently used in a product design. It is
becoming an increasingly valid approach since new materials are being developed
every year.

Can we combine steps?

A detailed review of all the processes associated with a product sometimes reveals
that some steps can be consolidated, which may mean that one can be eliminated
(as noted earlier) or that several can be accomplished by one person, rather than
having people in widely disparate parts of the production process perform them.
This is also known as process centering. By combining steps in this manner, we
can eliminate some of the transfer and queue time from the production process,
which in turn reduces the chance that parts will be damaged during these transfers.

Can we take supplier's assistance?

Another approach to value engineering is to call on the services of a company's
suppliers to assist in the cost reduction effort. These organizations are particularly
suited to contribute information concerning enhanced types of technology of
materials, since they may specialize in areas that a company has no information
about.

Is there a better way?

This one is a more general attempt to start from scratch and build a new product or
process that is not based in any way on pre-existing ideas. Improvements resulting
from this step lend to have the largest favourable impact on cost reductions but
can also be the most difficult for the organization to adopt, especially if it has used
other designs or systems for the production of earlier models.

Question 23

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 5 Practical application of Pareto Analysis

1. Pricing of a Product
In the case of a firm dealing with multi products, it would not be possible for it to
analyse cost- profit- price -volume relationships for all of them. In practice, in
case of such firm approximately 20% of products may account for about 80% of
total sales revenue. Pareto Analysis is used for analysing the firm estimated sales
revenues from various products and it might indicate that approximately 80% of
its total sales revenue is earned from about 20% of its products.

2. Customer Profitability Analysis

 Instead of analysing products, customers can be analysed for their relative
profitability to the organisation.
 Again, it is often found that approximately 20% of customers generate 80% of the
profit. There will always be some customers who are less profitable than others,
just as some products are less profitable than others.
 Such an analysis is useful tool for evaluation of the portfolio of customer profile
and decision making such as whether to continue serving a same customer group,
what is the extent of promotion expenses to be incurred.

3. ABC Analysis- Stock Control

Another application of Pareto analysis is in stock control where it may be found
that only a few of the goods in stock make up most of the value. In practice,
approximately 20% of the total quantity of stock may account for about 80% of its
value. The outcome of such analysis is that by concentrating on small proportion
of stock items that jointly accounts for 80% of the total value, a firm may well be
able to control most of monetary investment in stocks.

4. Application in Activity Based Costing

In Activity Based Costing it is often said that 20% of an organisation cost drivers
are responsible for 80% of the total cost. By analysing, monitoring and controlling
those cost drivers that cause most cost, a better control and understanding of
overheads will be obtained.

5. Quality Control

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 Pareto analysis seeks to discover from an analysis of defect report or customer
complaints which “vital few” causes are responsible for most of the reported
problems.
 Often, 80% of reported problems can usually be traced to 20% of the various
underlying causes. By concentrating once efforts on rectifying the vital 20%,
one can have the greatest immediate impact on product quality.
 The Pareto Analysis indicates how frequently each type of failure (defect)
occurs. The purpose of the analysis is to direct management attention to the
area where the best returns can be achieved by solving most of quality
problems, perhaps just with a single action.

For example, when we gather the facts, we might find that:

 In a 25-step manufacturing process, five of the operations account for 65
percent of the total scrap generated.
 Of the 12 unique services that our company offers, three of the services
account for 82 percent of the customer complaints.
 Of the 18 items of information that must be filled in on an order form, four of
the items generate 86 percent of the errors found on these forms.
In these typical cases, the few (steps, services, items) account for the majority of
the negative impact on quality. If attention is focused on these vital few, the
greatest potential gain from our efforts can be had.

Question 24
Explain EMA and types of Environmental Costs.

EMA is the process of collection and analysis of the information relating

to environmental cost for internal decision making.
EMA identifies and estimates the costs of environment-related activities
and seeks to control these costs. The focus of EMA is not on financial costs but it
also considers the environmental cost or benefit of any decisions made. EMA is an
attempt to integrate best management accounting thinking with best
environmental management practice.
EMA can be viewed as a part of the environmental accounting framework
and is defined as using monetary and physical information for internal
management use. Though EMA information can be used in any management
decision making process, it is particularly useful for environmental decision
making. EMA aims to make a better use of or to modify sources of information

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and management accounting techniques and to evaluate sustainability and/or
environmental efficiency of a company.

Areas for Application of EMA

Savings of Environmental Projects or Setting Quantified Performance Targets
 Product Pricing
 Budgeting
 Investment Appraisal
 Calculating Costs

TYPES OF ENVIRONMENTAL COSTS

Hansen and Mendoza (1999) point out that environmental costs are incurred
because of poor quality controls. They advocate the use of a periodical
environmental cost report, based on the principles of cost of quality report, with
each category of cost being expressed as a percentage of sales revenues or
operating costs so that comparisons can be made between different periods and/ or
organisations. The categories of costs would be as follows:

Environmental Prevention Costs–

Those costs associated with preventing adverse environmental impacts. Examples
include:
- Evaluating and picking pollution control equipment
- Creating environmental policies
- Environmentally driven R & D
- Site and feasibility studies
- Investment in protective equipment

Environmental Appraisal Costs -

The cost of activities executed to determine whether products, process and
activities are in compliance with environmental standards, policies and laws.
Examples include
- Monitoring, testing, inspection and reporting
- Improved systems and checks in order to prevent fines/ penalties
- Regulatory compliances
- Performing contamination tests
- Audit of environmental activities

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Environmental Internal Failure Costs –
Costs incurred from activities that have been produced but not discharged into the
environment. Examples include
- Recycling scrap
- Disposing toxic material
- Back end costs such as decommissioning costs on project completion

Environmental External Failure Costs –

Costs incurred on activities performed after discharging waste into the
environment. These costs have adverse impact on the organisation's reputation and
natural resources. Examples include
- Cleaning up contaminated soil.
- Restoring land to its natural state

The environmental cost report should be similar in format to the cost of quality
report. Some companies have started linking their environmental strategy to
concrete performance measures via balanced scorecard framework.

Question 25
When Should a Company Outsource?

A firm generally decides to outsource:

1. If it costs less rather than to manufacture it internally;
2. is not attractive enough; be made to manufacture necessary investment to If
the return on the
3. If the company does not have the requisite skilled manpower to make;
4. If the component shows much seasonal demand resulting in a considerable
risk of maintaining inventories;
5. If adequate managerial manpower is not available to take charge of the
extrawork of manufacturing;
6. If the concern feels that manufacturing internally will mean additional labour
problem;
7. If transport and other infrastructure facilities are adequately available
8. If the process of making is confidential or patented;
9. If there is risk of technological obsolescence for the component such that it
does not encourage capital investment in the component.

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Question 26
What are Non-Financial & Ethical consideration in Decision making?

With increase in competition, dynamic market changes and changing needs of

customers, non-financial information have gained relevance in the decision-
making process. Information to which monetary value can be attached is in the
nature of financial information. 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. Non- financial information is
long term focused and ensures profitability and sustainability in long term for an
organization thereby evaluating the internal performance of the company. Non-
Financial information which a company should focus that would turn out to be
advantageous while making decisions for a company are:
 Quality  Employee Satisfaction
 Customer Satisfaction  Corporate Social Responsibility
 Environmental Factors  Intellectual Property
 Intangible Assets  Competitor’s Movements
 Brand Name

Decisions made in a business rest on the balance between the perceived effects of
financial and non-financial information. Following are Limitations of Non-
Financial Information-
 Time and Cost of the company involved.
 Subjective measurement – No proper of common denominator to measure
performance.
 Improper measures will lead the companies to draw attention on wrong
objectives. Lack of Statistical Reliability – Possible chances of error.
 Management Disintegration when excess of measures and indications used by
the company.

ETHICS
Ethics are moral principles that guide the conduct of individuals. By their
behaviour
and attitude, managers set the company culture. Guideline for Ethical Conduct:
 Identify an ethical decision by using personal ethical standards of honesty and
fairness.
 Identify the consequences of the decision and its effect on others.

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 Consider obligations and responsibilities to those that will be affected by
decision. Make a decision that is ethical and fair to those affected by it.
Some ethical problems can be can be avoided simply by using common sense and
not focusing solely on the short term at the expense of long term. Firms with a
strong code of ethics can create strong customer and employee loyalty.
Furthermore, a firm that values people more than profit and is viewed as operating
with integrity and honour is more likely to be a commercially successful business.

Question 27
What are General points in relation to Non-financial viability?

Environmental Factors
Environmental factors like pollution, deforestation, impact on climate and
weather, greenhouse effects etc. must be considered by companies while selecting
a project for implementation. Any project which adversely affects the
environment is not taken positively by common public and environmentalists. A
lot of projects have been stalled or delayed due to the protests by pro-environment
groups leading to cost and time overrun. The government through ministry of
environment could impose penalties on projects which are violating
environmental norms or green norms.

Staff Motivation
Staff motivation and satisfaction is another important factor which companies
might consider while choosing projects. If, for example, a company decides to
implement automation in its plants for operations which would result in
redundancy in labour, the overall staff motivation would come down. Staff and
workers would resort to strikes and lockouts to protest against such decisions. The
company should adopt a participative approach while taking such decisions
considering the impact it would have on the labours

Government Regulations
The companies must comply with relevant government regulations while
implementing projects. Some projects might be profitable and yield excellent
returns. However, if the profits and cashflowsare generated by violating
government regulations, it could be harmful in the longer run for the company and
its brand. The companies must ensure that all relevant laws and regulations are
complied with.

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Availability of Resources
The evaluation of any project must also consider availability of key resources like
raw material, manpower, logistics infrastructure, electricity etc. If there is any
constraint on any of the key resources at a future date, a financially viable and
excellent project could well turn into a failed project. It is thus important that the
requirements and availability of key resources are analysed in advance

Availability of Project Site

Site selection involves measuring the needs of a new project against the merits of
potential locations. This indicates the practice of new facility location, keeping in
mind project requirements. A wrong or unsuitable project location may mar the
very benefits of a financially lucrative investment proposal

Ethics
Ethics are a set of guiding moral principles for individuals and corporates. Every
company has a duty of care to various stakeholders (shareholders, employees,
suppliers, customers etc.). A company is expected to act in a fair and transparent
manner and be honest in all its dealings with stakeholders.

Corporate Social Responsibility

Corporate social responsibility refers to "the ethical principle that an organisation
should be responsible for how its behaviour might affect society and the
environment”. The companies do not function in silos but are a part of the larger
society and environment. They have a responsibility towards the society and
environment to use the various resources judiciously and ensure a sustainable
development. Companies are expected to uplift the well being of the society at
large and to not harm the environment through operations. The aspects of
corporate social responsibility must also be considered while deciding the project
to be implemented.

Question 28
What are Pricing/ Non Pricing Strategies for Oligopolies?

PRICING STRATEGIES FOR OLIGOPOLIES

Oligopolies may pursue the following pricing strategies:
1. Predatory Pricing

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 Keeping price artificially low, and often below the full cost of production.
2. They may also operate a Limit-Pricing Strategy to discourage entrants, which
is also called entry forestalling price.
3. Oligopolists may collide with rivals and raise price together, but this may
attract new entrants.
4. Cost-Plus Pricing
A straightforward pricing method, where a firm sets a price by calculating
average production costs and then adding a fixed mark-up to achieve a desired
profit level. There are different versions of cost-plus pricing, including full
cost pricing, where all costs - that is, fixed and variable costs - are calculated,
plus a mark-up for profits, and contribution pricing, where only variable costs
are calculated with precision and the mark-up is a contribution to both fixed
costs and profits.

NON-PRICING STRATEGIES FOR OLIGOPOLIES

Non-price competition is the favoured strategy for oligopolists because price
competition can lead to destructive price wars – examples include:
1. Trying to improve Quality & After Sales Servicing, such as offering extended
guarantees.
2. Spending on Advertising, Sponsorship, and Product Placement.
3. Sales Promotion, such as buy-one-get-onefree, is associated with the large
supermarkets, which is highly oligopolistic market, dominated by three or
four large chains.
4. Loyalty Schemes, which are common in the supermarket sector, such as
Reliance’s One Card.

Question 29
Explain Factors of Price Sensitivity.

Measures customers behaviour to change in price of a product. Low price

senstivity means " pricing does not impact customer’s behaviour." and vice versa.

1. Unique Value Effect: More unique the product, Lower is the price sensitivity.
(Antique Products)
2. Shared Cost Effect If the cost of the product is shared by another party, the
buyer will have less prone to price sensitivity. (Sharing of space/ Rent)

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3. Sunk Investment Effect Price sensitivity is low in products which are used
along with assets previously bought.(New car bought; new seat cover is sunk
investment)
4. Substitute Awareness Effect If the buyers are aware of substitutes and these
perform the same function, then the buyer’s price sensitivity will be high.
(Coke vs Pepsi)
5. End-Benefit Effect Buyers are less price sensitive where the expenditure on
the product is low compared to the total cost of the end product. (TV stand
with high end TV)
6. Price Quality Effect Higher the perceived quality of the product, lower the
price sensitivity. (iphone)
7. Difficult Comparison Effect Price sensitivity will be low if the buyer has
difficulty comparing two alternatives. (Beach facing house)
8. Total Expenditure Effect If the expenditure on the product represents a low
proportion of the consumer income, the price sensitivity will be less visible
for such a product.(Packet of bread for a CA)
9. Inventory Effect If the product cannot be stored, the buyer will be less price
sensitive. (Perishable stock)

Question 30
How to ensure strategies pricing of new products?

Revolutionary Product
A product is said to be revolutionary when it is new for the market and has the
potential to create its own value. This type of product has revolutionary impact on
the market and consumer behaviour. It replaces the existing method or technology
and the approach to doing a work is quite different and unique. These products
enjoy the benefit of product differentials and have the potential of being market
leader.
Revolutionary product may enjoy the premium price as a reward for its innovation
and taking first initiative.
On the contrary, there are the businesses that are referred to as revolutionary.
These businesses forever change what we do. They take an industry that once
operated one way and have us look at it in a totally different manner. These
companies tend to be the most destructive, gain the biggest market share and
achieve the highest valuations. The founders of these companies are put on
pedestals for being so innovative and forward-thinking. What is interesting is that

36
early on, most of these entrepreneurs were questioned and their ideas were often
shut down because they were so revolutionary in nature that no one really
understood them. Whether Steve Jobs and Apple, or Elon Musk and space
exploration, or Travis Kalanick and Uber, these ideas forever transformed the way
we do things in our daily lives.

Evolutionary Product
A product introduces upgraded version with few additional characteristics of the
product is known as evolutionary product.The evolutionary products may be
priced taking cost-benefit, competitor, and demand for the product into account.
Evolutionary products take something that already exists and makes it bigger,
better or faster. Typically automation or technology improves a process or system
and often new materials make it possible to do something faster. Many times,
someone will take an old business model and tweak it, bend it and pivot it in such
a way that the industry is evolved in a new direction. When you look at the newest
home goods company, or health supply company, or a mobile app for completing
a daily task, or the next “smart” thermostat, you are looking at the modern
evolution of a product.

Me-too Product
A product is said to be me-too product when its emergence is a result of the
success of a revolutionary product. These types of products are very similar (in
ordinary language imitation) to revolutionary and/ or evolutionary products of
other firms. The firm while producing me-too products, generally follows the
similar production process and technology that is used by the other firms. These
are known as market followers. The me-too products are price takers as the price
is determined by the market mainly by the competitive forces.

Question 31
What is the Impact on unit SP and Average cost of production per unit at each
stage of product life cycle?

Introduction Stage
At the Introduction Stage of Lifecycle, due to high cost of production and initial
promotion expenditure , the unit cost of production will be high. Using Skimming
Price Policy, the unit selling price will also be high.

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Growth Stage
This is the second phase of the Life-Cycle, product awareness among customers
would result in increased demand. Therefore , scale of production likely to
increase. The new market segment would attract competitors , who are like to
reverse engineer and offer similar products in the market. Promotional activities
and marketing activities need to continue to maintain and gain market share.
Accordingly , the unit selling price would reduce from the introduction stage on
account of the following reasons:
 Competitors offering similar product would take away the uniqueness.
 Again , to gain market share, the unit selling price may have to be lowered to
make it attractive to a larger segment of customers.

The unit cost of production is also likely to reduce due to the following reasons:
1. Increased production would result in increased material procurement from
2. suppliers. Bulk purchasing discounts can be negotiated with them to lower
cost of production.
3. Learning curve and experience would enable the labor force to become more
efficient. This leads to higher production with the same level of resources
leading to cost savings.
4. Larger production batches due to increase in scale of operations will reduce
the unit variable overhead cost.
5. Economies of scale would result due to fixed overhead cost being spread over
larger number of units.

Maturity Stage
The third phase of Product Life-Cycle that is characterized by an established
market. After rapid growth in sale volume in the previous stages, growth of sales
for the product will saturate. Competition would be high due to large number of
rivals in the market, this may lead to decreasing market share. It is likely that the
price of the product will be lowered further at the maturity stage in a bid to
preserve sales volumes. The company may attempt to preserve sales volumes by
employing an extension strategy rather than reducing the selling price.
Unit production cost will remain constant:
1. Direct material cost will remain constant. If procurement is lower than the
growth
2. phase, it might even lead to slightly higher prices since supplier may not
extend bulk discounts.

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3. The benefits of efficient production due to the effect of learning and
experience may also have waned . Therefore , unit labour cost is also likely to
remain constant.
4. Since scale of production is no longer increasing, the unit variable overhead
costs are also likely to remain constant.

Decline Stage
This last stage in the product cycle is characterized by saturated market, declining
sales, change in customer's tastes etc. Profitability may slowly start decreasing
with fall in sales.
Sales volumes at the decline stage are likely to be low as the product is surpassed
by new exciting products that have been introduced to the market. Furthermore,
the workforce may be less interested in manufacturing a declining product and
may be looking to learn new skills. For both of these reasons, unit production
costs are likely to increase at the decline stage.

Question 32
Explain Matrix Organisational Structure

The matrix organizational structure is an answer to the problem of managing large

and complex projects. When working on a large project, a highly hierarchical
structure can be an obstacle in the path of moving that process forward
successfully.

In a matrix structure, cross - functional teams are formed to reap the benefits of
decentralization, speedy decisions and early resolution of prospective disputes or
issues, because representatives of different functions are part of team. Cross
functional team contain staff from different functions and who are responsible to
achieve a specific target unitedly.

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1. A MATRIX ORGANISATION has a complicated structure in which the
reporting relationships are set up as a MATRIX - a grid - instead of the
traditional vertical hierarchy.
2. A matrix organization is defined as one in which there is dual or multiple
managerial accountability and responsibility. There are usually two chains of
command, one along functional lines and the other along project, product, or
client lines.
3. In a matrix structure, individuals work across teams and projects as well as
within their own department or function. For example, a project or task team
established to develop a new product might include engineers and design
specialists as well as those with marketing, financial, personnel and
production skills.
4. The shaded staff required to report twice, once to their functional lead and
another to project lead/manager. Conflict of interest is expected, but
availability of cross functional skills is a key advantage.

Question 33
Explain how to find ways to increase EVA?

EVA will increase if any of the following initiative either individually or in any
combination applied by the organisation-
 Operating profit can be made to grow without employing more capital, i.e.
greater efficiency.
 Additional capital invested in projects that return more than the cost of
obtaining new capital, i.e. profitable growth.
 Churn out capital from those investment/ projects which yield at a rate less
than cost of capital, i.e. liquidate unproductive capital.

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Question 34
Explain in Brief SMART Objectives.

Concept Insight SMART Objective

Even objectives of organisation also need to be SMART. George T. Doran first
use this term in the November 1981 issue of Management Review , but the
attribute of MBO (management by objective by Peter F Drucker) inspire the
origin of SMART.
Specific  should be clearly defined;
Measurable  have means to quantify;
Achievable  can be achieved i.e. should be realistic;
Relevant  relevant to the organization 's strategic goals;
Time  Constrained have a designated start and end dates

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 Question 35
Advantages and Disadvantages of Financial and Non-Financial Measures, 4
Perspective of BALANCE SCORECARD.

Financial Measures - Focus on profits made by a business and financial results

Advantages Disadvantages
1) Objective of wealth creation 1) Ignores long term growth
2) Easy to compare with other companies 2) Distorted by inflation
3) Measurable financial performance 3) Easy to manipulate

Non-Financial Measures
Advantages Disadvantages
1) Takes long term view 1) Highly subjective
2) Qualitative aspect considered 2) Difficult to compare
3) Measures every area 3) Not measurable

4 Perspectives of BSC
1) Financial Perspective
 “How Do We Look To Shareholders?
 Revenue & earnings (ROI, Growth, Cost Management, Profit Margin)
 Link business objectives to corporate strategy.
 Value for Shareholder (EVA)
 Cash flow (survival & sustain)
Strategies Objectives  Profitability & ROCE

2) Customer Perspective
 “How Do Customer View Us?”
 Identify customers and market segments in which they compete
 Quality: Customer satisfaction
 Delivery time:On time, on site, after sales support.
 Return on complaint, repeat buyer, customer loyalty/ retention.
 Focus on quality, delivery time, performance, service, exceed customer
expectation.
 Brand retention
Strategies Objectives  Zero Recall & Stock-out
3) Internal Business Perspective
 “At What Must We Excel?”

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 Improve operational, efficiency and minimize problems.
 Customer relationship manager
 Fast business decision and approvals
 Work culture and employee confidence
 Cross selling
 Reduce time on NVA
Strategic Objectives  TQM/ TPM  Zero Idle Time / Critical Success Factor.

Learning and Growth Perspective

 How Do We Improve and Create Value
- People (Employee capacity)
- System (Information system)
- Organisation procedure (R & D Setup)
 Long term growth & sustainability
 Eco-friendly product line
 New customer centric products.
Strategic Objectives
Expansion of Eco-friendly product line
Introduction of limited edition items.

CSF / KPI

Question 36
Explain in detail concept of Building Block Model.

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Fitzgerald and Moon proposed a Building Block Model which suggests the
solution of performance measurement problems in service industries. But it can be
applied to other manufacturing and retail businesses to evaluate business
performance.
Variants of the building block model are currently used in Australia in the
regulation of electricity transmission and distribution, gas transmission and
distribution, railways, postal services, urban water and sewerage services,
irrigation infrastructure, and port access.

Fitzgeraid & Moon: Building Block Model

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THE BUILDING BLOCK MODEL
STANDARD
These are the measures used, i.e. the
KPIs , should have the following
characteristics:
A1 – Equity
Performance measures should be
equity challenging for all parts of
business. Relaxation given to one part
of the business leads to perception of
unfair treatment which hinders
productivity.
A2 – Ownership
Performance measure should be
acceptable to everyone. Employees
should be involved in the
identification of measures rather than
being imposed on them. Ownership
means here is responsibility for the
results.
A3 – Achievable
Performance measure should be
realistic. Eg: using actual results for
the competitors to set as target,
Employee will not be motivated to
achieve targets if consider them
impossible.
DETERMINANTS
These are performance areas which
influence the results. These are.
B2(a) – Quality
It is the ability to deliver goods and
service with consistency. Quality
should be judged from eyes of the
customers. Quality is the level of
benefits customers expects from the
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REWARDS
To ensure that employee are
motivated to meet standards, the
standards need to be clear and linked
to controllable factors. Reward
schemes should possess following
characteristics:
C1 – Motivation
Rewards scheme should be set in
manner which motivates employees to
achieve the business goals. If sales
growth is desired than bonus can be
linked to performance measures, like
increase in number of unit sold than
previous year.
C2 – Clear
Rewards scheme should be clearly
communicated to employees in
advance. What kind to performance
will be rewarded and how their
performance will measured?
C3 – Controllability
Employees should only be rewarded
or penalized of the result over which
they have some control or influence.
RESULTS
It reflects the success or failure of
determinants identified above.
 product. Quality should be enough for
a product price paid.
B2(b) – Flexibility
It is the responsiveness to change in
the factor i nfluenc i ng the bus i ness
performance. Eg: ability to cope with
sudden increase in sales demand.
B2( c ) – Innovation
Ability of the business to devise new
products and new ways of doing
things. Like packaging of products
with environment friendly
(recyclable) material.
B2(d) – Resource
Utilization It is the ability to use
resources to achieve business
objectives. Business assets should be
used for the proper purpose and in
most efficient way. Eg: using delivery
vans to its maximum capacity only by
carrying authorized goods.
B1(a) - Financial Performance
Financial performance gives an
indication of overall business at a
glance in monetary terms. These can
be used to identify areas of strengths
and weaknesses. It may also highlight
other areas previous identified which
may be critical to business success.
B1(b) - Competitive Performance
How they stand in comparison to its
competitors? How are the different
from their competitors? Eg: offering
of products of higher qual i ty than
competitors and products having
distinct features than rival products.

Question 37
5 Factors of Performance Prism.

1. Stakeholder satisfaction
“Who are the stakeholders and what do they want and need?
Identify & give importance to “All Stakeholder”
a) Investors: Return on Investment
b) Suppliers: Better price for products.
c) Customer: Quality products at cheaper price
d) Government: Timely taxes revenues.
e) Employees: Work life balance, Safe & Secure Environment
( Employee T/o ratio, Employee duration)
2. Strategies

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  'What strategies we require to ensure that the wants & needs of our
stakeholders are satisfied?'
 Identify those strategies which organisation would adopt to ensure
 Wants and needs of stakeholders are satisfied
 Organisation’s own requirement are satisfied
 Appropriate communication
 Implementation
 Eg: For employees; better pay/ working condition / growth opportunity
Continuous evaluation

3. Process
 “What are the processes we have to put in place in order to allow our
strategies to be delivered?”
 These are: Develop new products, generate demand, fulfil demand, plan and
manage the enterprise.
 For each processes, it should be possible to identify specific measures. Sub-
Process: Assign and give responsibility to process owners
 Focus on most important processes.
 Continuous evaluation

4. Capabilities
 “What are the capabilities we require to operate our processes?
 Resource, practices, technology, infrastructure: for all processes
 Company must have right capability and keep on developing throughout
organisation

5. Stakeholder’s Contribution
 It recognises the fact that not only do organisations have to deliver value to
their stakeholders, but also that organisations enter into a relationship with
their stakeholders which should involve the stakeholders contributing to the
organisation.
 “What the organisation expect from stakeholders to contribute and deliver?
 Quid Pro Quo: ‘Something in return’
a) Suppliers: Provide quality raw material
b) Government: Provide best infrastructure, hospitals and economy.
c) Investors: Remain invested

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 d) Customers: Purchase our product and contribute to revenue and profit.
e) Employee: employees offer ideas & suggestion, remain loyal, develop
expertise.

Question 38
Case Study on Triple Bottom line with Explanation & Concept.

ISSUE  Vidyut Dam Project

CONCEPT
As part of policy initiative, if VHDCL is willing to implement the Triple Bottom
Line
(TBL) reporting initiative; then ADVISE the management regarding dimensions
of TBL, and what are perspectives composed by different dimensions of TBL.
Also, enumerate the challenges, expected benefits, and initiatives under each
dimension in context of Vidyut Dam & Vidyut Hydroelectric Power Plant (1,000
MW).

EXPLANATION
TBL = Focus on People, Planet and Profit for sustainability (long term survival)
of business.
VHDCL =
Certification : CSR Commitment for quality, environment & safety.
Awards : for CSR & Training

A. People (Social Equity)

(Corporate Governance, Motivation, Incentives, Human Capital Development,
Human Rigths, Ethical Behaviour, Health and safety.)
Major - Concern
 Displacement of Town inhabitants.
 Reduction in flow of river
 People lost their lands but how allotted of poor quality.
Remedies
 Development of Hill station / lakes/ hotels.
 Better Road Network for ease of living & communication.
 Shifting of district head quarter.
 Improved Health facilities (80 bed hospital).
 Education facilities (900 students).

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 Other Points
 Water supply to neighbouring state.
 Distribution of power as well.

B. B. Planet (Environment)
 Environmental consequences of locating Dam in Work Ecosystem.
 Catastrophe region resulting in Dam-break.

Scope of Improvement
 Rainwater Harvesting: 9 lakh litres
 Green Energy Generation & Technology promotion: (LED based solar
lights)
 Environment Protection: (Lots of Plantations)

Conclusion
The project largely seems sustainable as running in profit since it was operational,
leaving minimal and positive environmental footprint, and also payback to society
(especially directly affected local population) with alternate better facilities and
compensation (may be with few minor exceptions or irregularity on case-to-case
basis).

Question 40
Considerations of Shifting to Foreign Manufacturer.

49
Question 39
Proposals for Resolving.

Conflict of interest between interests of individual divisions and the company can
also be addressed by following the following systems for transfer pricing:
Dual Rate Transfer Pricing System Two Part Transfer Pricing System
The supplying division records
transfer price by including a normal This pricing system is again aimed at
profit margin thereby showing resolving problems related to
reasonable revenue. The purchasing distortions caused by the full cost
division records transfer price at based transfer price.
marginal cost thereby recording
purchases at minimum cost. This Here, transfer price = marginal cost of
allows for better evaluation of each production + a lump - sum charge
division’s performance. It also (two part to pricing).
improves cooperation between
divisions, promoting goal congruence While marginal cost ensures recovery
and reduction of suboptimization of of additional cost of production
resources. related to the goods transferred, lump-
sum charge enables the recovery of
Drawbacks some portion of the fixed cost of the
1. It can complicate the records, supplying division. Therefore, while
thereby may result in errors in the the supplying division can show better
company’s overall records. profitability, the purchasing division
2. Profits shown by the divisions are can purchase the goods a lower rate
artificial and need to be used only compared to the market price.
for internal evaluations.

Question 41
Explain 5 Major activities as wastage & unnecessary in context of Non-Value-
Added Activities.

The Non-Value-Added activity

 Represents work that is not valued by the external or internal customer.
 Do not improve the quality or function of a product or service, but they can
adversely affect costs and prices.
 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.

50
Moving materials and machine set up for a production run are examples of NVA
activities. In the manufacturing operation, five major activities are often cited as
wasteful and unnecessary:

1. Storing  An activity that uses time and resources while a good or material
is held in inventory.
2. Waiting  An activity in which materials or work in process use time and
resources by waiting for the next process.
3. Inspecting  An activity in which time and resources and spent ensuring that
the product meets specifications.
4. Moving  An activity that uses time and resources to move materials, work
in process, and finished goods from one department to another.
5. Scheduling  An activity that uses time and resources to determine when
different products have access to processes (or when and how many setups
must be done) and how much will be produced.

Question 42
Explain ABM & its types.

The term Activity Based Management (ABM) is used to describe the cost
management application of ABC.
The use of ABC as a costing tool to manage costs at activity level is known as
Activity Based Cost Management (ABM). ABM is a discipline that focuses on the
efficient and effective management of activities as the route to continuously
improving the value received by customers and to improve strategic and
operational decisions in an organisation. Kaplan and Cooper divide ABM into
Operational and Strategic.

Operational ABM covers the actions that increase efficiency, lower cost (i.e.
reduce the cost driver rate of activities) and lead to higher revenue through better
resources utilisation- in short, the action required to do things right. In other
words, it is all about 'doing things right', using ABC information to improve
efficiency. It also helps in identifying and improving value added activities and
removing non -value added activities as to reduce cost without distorting product
value.

51
Strategic ABM is about 'doing the right things'. It uses ABC information to
determine which products is to be manufactured and which activities is to be used.
Companies can also use this for customer profitability analysis, identifying that
which customer are the most profitable and focusing on them more.

A risk with ABM is that some activities have an implicit value are not reflected in
a financial value added to any product. For example, a good and pleasant working
environment can attract and retain the best human resources, but might not be
identified as value-added activities in operational ABM.

ABM provides managers an understanding of costs and helps teams to make

certain decisions that benefit the whole organizations and not just their own
activities. Therefore, some companies may adopt ABM to improve their
operations and obtain useful activity information.

Question 43
Explain Feedback and Feed Forward Control

FEEDBACK
1) A control activity that takes place
after a process is complete, known as
post action control
2) If any problem is identified after a
process is complete, a corrective
action is taken to rectify the
problem.
3) Significant time is lost to take
corrective action.
4) Focus on Output.
5) Point out & correct improper
performance.
FEED-FORWARD
1) Foresee potential problems and
take action to ensure that final
output is as expected.
2) Designed to detect deviation to be
made before a particular sequence
of action is completed.
3) Allow management to prevent
problems rather than having to
cure them later.
4) Focus on Input.
5) Prevent problems before they arise

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Question 44
Write Advantages and Disadvantages of Participative Budgeting.

ADVANTAGES
1. Senior staff may agree to accept the targets because they would take
ownership of it as their budget.
2. Senior staff may have a better understanding of what results can be achieved
and at what costs. For example, they may have a better knowledge of
individual courses and how they may be delivered more efficiently and cost
effectively.
3. Senior staff cannot blame unrealistic goals as an excuse for not achieving
budget expectations.
4. Senior staff would feel that they are being appreciated for the value that their
experience brings to the running of the management school.
5. Senior staff may get the opportunity to discuss organisational issues, in which
an exchange of information and ideas can help to solve problems and agree
future actions.

DISADVANTAGES
1. Senior staff may be excel lent academically but could lack the practical
knowledge required to formulate their budget.
2. Senior staff may limit the benefits of participation due to personality traits of
participants.
3. Senior staff may consume a great deal of time arguing with each other (and
with the school director).
4. Senior staff may decide among themselves to artificially inflate the proposed
budget so that it is easier for them to attain the cost targets they have set.

Question 45
What are the Circumstances where top down budget setting is preferable?

Circumstances Where Top-Down Budget Setting is Preferable is as follows:

1. Where personality characteristics of the participation may limit the benefits of
participation.
2. Where participation by itself is not adequate in ensuring commitment to
standards and managers can significantly influence the results.
3. Where a process is highly Programmable and clear, stable input-output.

53
4. Where a firm has large number of homogenous units and operating in a
relationships stable environment

Question 46
Explain about Leadership principles & Management process of Beyond
Budgeting.

Leadership Principles (COVATP)

C. Customer - Connect everyone’s wok with customer needs; avoid conflicts of
interest.
O. Organisation - Cultivate a strong sense of belonging & organise around
accountable teams; avoid hierarchical control & bureaucracy.
V. Values - Govern through shared values & sound judgement; not through
detailed rules & regulations.
A. Autonomy - Trust people with freedom to act; don’t punish everyone if
someone should abuse it.
T. Transparency - Make information open for self-regulation, innovation,
learning & control; don’t restrict it.
P. Purpose - Engage & inspire people around bold & noble causes; not around
short term financial targets.

Management Processes (R3TP2)

R. Rhythm - Organise management processes dynamically around business
rhythms & event; not around the calender year only.
R. Resource Allocation - Foster a cost conscious mind-set & make resources
available as needed; not through detailed annual budget allocations.
R. Rewards - Reward shared success against competition; not against fixed
performance contracts.
T. Targets - Set directional, ambitious & relative goals; avoid fixed & cascaded
targets.
P. Plans & Forecasts - Make Planning & forecasting lean & unbiased
processes; not rigid & political exercises.
P. Performance Evaluation - Evaluate performance holistically & with peer
feedback for learning & development; not based on measurement only & not
for rewards only.
Question 47: Differentiate between Traditional & Beyond Budgeting.

54
Question 48: Explain Concept of McDonald

Question 49
Write Factors to be Consider when Investigation Variance.

Certain set of factors should be considered before undertaking the variance

investigation of the actual performance against the estimates set.

Size
A standard is seen as an average of the estimates and therefore small variations
seen from the standard should be ignored and not investigated further. In addition

55
organizations can establish limits and the variances seen beyond those limits
should be undertaken for further investigation.

Budgetary process
In case the budgetary process is uncontrollable and unrealistic then in that case the
investigation should be re-evaluating the budgetary process rather than
undertaking investigation of the variances.

Type of Variance
Adverse variance is given more importance by the organization over favorable
variances seen with regards to the estimates.

Cost
The costs associated with the undertaking of the investigation should be lower
than the benefits associated with the investigation of variances for the
organization to undertaken the said investigation.

Pattern in variance
The variances need to be monitored over a period of time and if the variance of a
particular cost is seen to be worsening over time then in that case the investigation
in relation to the variance needs to be undertaken.

Question 50
Describe Possible interdependence between variances.

It is a term used to express the way in which the cause of one variance may be
wholly or partially explained by the cause of another variance. For control
purposes, it might therefore be essential to look at several variances together and
not in isolation. Some examples of interdependence between variances are listed
below:
1. Use of cheaper material which is poorer quality, the material price variance
will be favourable, but this can cause more wastage of materials leading to
adverse usage variance.
2. Using more skilled labour to do the work will result in an adverse labour rate
variance, but productivity might be higher as a result due to experienced
labour.

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3. Changing the composition of a team might result in a cheaper labour mix
(favourable mix variance) but lower productivity (adverse yield variance).
4. Workers trying to improve productivity (favourable efficiency variance) in
order to get bonus (adverse rate variance) might use materials wastefully in
order to save time (adverse materials usage).
5. Cutting sales prices (adverse sales price variance) might result in higher sales
demand from customers (favourable sales volume variance
6. Similarly, favourable sales price variance may result in adverse sales volume
variance.

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