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Strategic Cost Management

June 2021 Examination

 

 

1. A motor manufacturing company is planning to switch from traditional costing method to Activity based costing system in order to make their business run more efficiently, a meeting has been called with the management to discuss the application of Activity based costing. You being the Project manager of the company guide the management by explaining the following: -

a) Difference between Traditional costing and ABC system.

b) Steps in implementation of ABC system.

c) Advantages and Limitations of an ABC system. (10 Marks)

Answer:

 

INTRODUCTION:

 

Traditional costing: The costing system in which an organization allocates the factory overheads based on consumed production resource's volume. The factory overhead used here is based on machine hours used or direct labor hours consumed. It is pretty economical to use the traditional costing system

 

2. Ms Shweta is the CEO of an organization manufacturing Butter. There are two primary divisions: One unit processing the milk from cattle and the other manufacturing butter. The Milk unit supplies the milk as Raw material to the other unit manufacturing Butter.

Ms Shweta is confused about the profitability of the two divisions and appoints you as the Management accountant.

Please assist her in understanding the importance of implementing the importance of Transfer pricing mechanism to determine the appropriate cost.

She would also like to know the objectives of Transfer pricing and any two methods of Transfer pricing adopted by organizations.  (10 Marks)

Answer:

 

INTRODUCTION:

 

Transfer pricing: The price at which the related parties of a firm transact is known as transfer pricing. Transfer pricing is used for the individual entities of an organization. The company treats these entities as separate from the firm. Large entity firms use this concept of pricing most of the time. These companies can also report the entities separately for the purpose of tax. The transfer price is different from the market price. It gives an advantage to the entity buying it but

 

3.a. Exotica Ltd produces 10,000 masks every month. The company’s expenses to 1 unit of the product are listed below:

Prepare budget for 70%, 80% and 100% utilization of the capacity if details listed above is for 100% capacity utilization (5 Marks)

Answer:

INTRODUCTION:

Budget: Budget means estimating the expenses and revenue of an organization during a specified time in the future. An organization revalues the budget periodically. Besides organizations, an individual, group of individuals, government, or anyone else who earns and spends money can prepare the budget.

 

3.b. Following data have been extracted from the books of M Ltd. and N Ltd.

You are required to calculate for both companies:

(i) P/V Ratio

(ii) Fixed Cost

(iii) Break Even Point

(iv) Contribution (5 Marks)

Answer:

INTRODUCTION:

Strategic Cost Management: It means improving the strategic position of an organization by reducing the total costs. The firm can reduce the total costs by finding out which cost positively affects the firm's strategic position and which cost negatively impact the company's strategic position. Strategic cost management is a continuous process as the strategy is uncertain over time.

 

 

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