Mohammed.Akbar@al-ghurair.com <Mohammed.Akbar@alghurair.

com>; Industrial Concerns: Saleh Steel is a pioneer and acknowledged market leader in Steel Business in Bangladesh and also a largest integrated Steel Company in the private sector.

Saleh STEEL
Product specification: Cold Rolled Steel Coils and Sheets Full Hard Quality, as per JIS G3141 SPCC1B and equivalent International Standards. The product is also available as per customers specification. Thickness Range : 0.11-0.50 mm Width Coil Weight Coil I.D. Length of the Sheet : 750-1000 mm : 2.0-9.0 MT : 508 mm
:

3048 mm max.

Hot Dip Galvanized Steel Coils & Sheets (plain & corrugated) as per JIS G3302 & equivalent International Standards. The product is also available as per

customers specifications. Zinc Coating Base Metal Thickness GP Sheet Width Length of GP or GC Sheet Quality : Hard Quality : 750-1000 mm : 3048 mm max. : 100 to 275 gms/sqm : 0.11-0.50 mm

Production Process: Mine Iron Slab H.R. Coil C.R. Coil

GPI

GCI

In the factory AKS uses two methods of production: 1) Sheet to sheet 2) Continuous galvanizing line.
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Production procedure or AKS

1.3 Founding Philosophy:

Every business organization is established for some intended purpose. The fundamental purpose is usually expressed in the mission statement. The mission is a general statement for the markets that the firm plans to serve which includes some indication of how the firm intends to position itself.

Vision: Our customers never are less than fully satisfied- that is our continuing commitment and we will be the quality leader in the industry.
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Mission statement: Saleh Steel always cares and sincerely serves the needs of its customers and seeks to accomplish this in a manner that contributes to the development and growth of its stakeholders and to the goals of countries and communities in which it operates.

1.4 Company Objectives:

The companys mission needs to be turned into detailed supporting objectives for each level of management. Each manager should have objectives and be responsible for reaching them.

Financial objectives:

1. To achieve 15% return on equity. 2. To achieve a return on asset (ROA) of 10% per year.

3. Earn an annual rate of return on investment (ROI) over the next five years of 12% after taxes. 4. Produce net profits 320 million Tk. in 2004-05. 5. Increase the inventory turnover rate by 15% within next 2005.

Marketing Objectives: 1. Generate sales by 15% or by 900 metric tonnes in the North Bengal within June 2005. 2. Increase awareness at Rajshahi by 20% within June 2005. 3. Generate sales revenue of 320 million Tk. in 2004-2005 fiscal years. 4. Modify the market by targeting the contractors and real estate businessman for encouraging the use of GCI in the construction and fencing thus the sales can be generated by 15% within 2005. 5. Generate sales in the Middle East market by 10% in 2005.

1.5 Competitive advantages:

The key to wining and keeping customers is to understand their needs and buying process better competitors do and to deliver more value. To the extent, that a company can position itself as providing superior value to selected target markets its gains competitive advantage. Saleh Steel is the leading company is GCI market with having the highest market share (35%) and gaining the highest net profit of 280million tk. in the last fiscal year (2003-04), which is 80 million, more than its nearer competitors (PHP). This

highest net profit indicates the highest sales and ROA& ROI of the Saleh Steel in the GCI industry.

Saleh Steel has some competitive advantages over its competitors, which helps it to become the leading company in the industry. The competitive advantages are described below-

1) Distribution channel: The most important and sustainable competitive for SS is its distribution channel. SS has separate distribution channel and the excellent sales force of SS operates it. The competitors of SS follow indirect distribution, which incurred much cost, but SS follow almost direct distribution system.

The distribution system of SS is---

SS

Retail shop

Customer

The sales force of Saleh Steel goes to every retail shop of its coverage directly and takes the order of GCI from them. The important thing is, through this direct selling, the sales force can estimate the demand clearly and understand the market so closely. Only for this, SS has not to arrange any survey over the retailer to understand their behaviors towards the product.

2) Brand Name: The brand name of the SS is another sustainable competitive advantage..

Highest production capability:

SS has four CR COIL factories in

Bangladesh where the nearer competitors (PHP) have only two. Thats why SS is capable to meet the demand of the target customers. The production capacity of the GCI industries are-

NameCapacitySaleh Steel300,000 M.TonsPHP Steel150,000 M.TonsKY Steel100,000 M.TonsR.M Steel50,000 M.TonsAbul Khair Steel120,000 M.TonsS. Alam Steel140,000 M.Tons So from the above the table it can be seen that, the production capacity of SS is the highest in GCI industry and it is considered as the sustainable competitive advantages in the market over competitors.

4) Acid regenerate plant: In the production of GCI, hydro-chloric acid is used which is very much harmful for the environment and the wastage which comes out after production process is so much poisonous. Thats why AKS has installed a acid-generate plant 2002 for reusing the acid in the production and to keep the environment polluted free. This machine has reduced the cost of production

so much because it regenerates the hydro-chloric acid again and again, where the competitors cant use it.

2.0 Situation Analysis

2.2 Target market:

All companies first must define their target markets and then decide how they will position in these markets. Too many companies fail to define their target markets and positions clearly. They try to have something for everybody and end up satisfying no market value. In contrast, successful companies define their target markets well and position themselves strongly. So to become a successful company, everyone has to target their customers very precisely; otherwise all attempts will go in vain. Thats why marketers always segment the market and then select the best segment which match with their resources and capabilities and then target that segment to achieve the goals. 9

In case SS, it has also a separate target market and that is described below on the basis some characteristics-

1) Demographic segmentation. 2) Psychographic segmentation. 3) Behavioral segmentation.

1) Demographical Segmentation: In demographic segmentation, the market is divided into groups on the basis of variable such as gender, age, income, occupation, education, religion, social class. Demographic variables are the most popular bases for distinguishing customer groups. One reason is that consumers wants, preferences, usage rate are often associated with demographic variables. Another is that, demographic variables are easier to measure. Even the when the target market is described in non-demographic terms the link back to demographic characteristic is needed to estimate the size of the target market and the Age: 35-60 media that should be used to reach it efficiently. Gender: Male

Income:

40,000- 1, 50,000 (Per Year)

The demographic segmentation of SS is like that-

Occupation: Any occupation in village. Education: Uneducated and low educated (primary level)

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Social Class: Lower class (upper and middle)

2) Psychographic segmentation: In psychographic segmentation, buyers are divided into two different groups on the basis of lifestyle or personality and values. People within the same demographic group can exhibit very different psychographic profiles.

The psychographic segmentation of SS is like that-

Lifestyle:

Ordinary, General

Personality: Prestigious Value: Who wants roof solution

3) Behavioral segmentation: In behavioral segmentation, buyer are divided into groups on the basis of their knowledge of, attitude toward, use of, or

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response to a product. Many marketers believe that behavioral variablesoccasions, benefits, user status, usage rate, loyalty status, buyer readiness stage and attitude- are the best starting points for constructing market segments.

The behavioral segmentation of SS is based on benefits, user status, loyalty status.

Base for benefits- a) Price b) Size c) Quality d) Durability.

Base for user status- a) Non-user b) Ex-user c) Potential user d) First time user

Occasion: In case of the target market of SS, the occasion segmentation is different from other products. The occasion of target customers are- marriage, change of solvency, family expansion, repairing.

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2.3 Size of the market:

The industry is a high capital-intensive business. Here both entry and exit barriers are high. Thats why the risk and return are also high. For this reason, only few want to enter this business who have the bulk amount of capital. There are so many steel companies in Bangladesh. But as our product only GCI, thats why we have considered only GCI manufacturers. From this point of view, there are six companies in Bangladesh who produce GCI (Galvanized Corrugated Ironsheet). And those are1) 2) 3) 4) 5) Saleh STEEL PHP STEEL KY STEEL S.ALAM STEEL APOLLO STEEL.

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6) R.M. STEEL. The total market demand of GCI is 200,000 tones (per annum) and price per ton is 40,000(tk.).
Name of the companyMarket share Sales( Units)Sales revenue(Tk)Saleh

Steel35%70,000

M.

Tonnes2,800,000,000

TK.PHP

Steel25%50,000

M.

Tonnes2,000,000,000 TK.KY Steel 10%20,000 M. Tonnes Alam Steel10%20,000 M. Tonnes Tonnes

800,000,000 TK.S.

800,000,000 TK.R. M Steel5%10,000 M.

400,000,000 TK.Apollo Steel 15%30,000 M. Tonnes 1,200,000,00 TK.

Total100%200,000M. Tonnes 8,000,000,00 TK

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2.4 Why do customers need the product:

GCI (Galvanizing corrugated iron-sheet) is basically used in the purpose of roof solution. But now-a-days the use of GCI has increased and it is now used in the purpose of fencing, construction, covering, doors etc. But still the main use of GCI is in the roof of housing. Thats why the target customers are also the people who want the roof solution. It is true that the new use of GCI is a part of the sales, but the core product of GCI is roofing.

Advantages:
1. GCI is better than the bamboo or wood made roof. 2. It is a long lasting but not more than brick roof. 3. It is easily repairable and the cost is relatively low than the cost of brick and wood.

Disadvantages: 1. It produces so much heat in the daytime, which is so intolerable and uncomfortable. 2. The Hydro choric acid, which is used in production, is harmful for the environment.

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2.5.1 where do they buy the product:

The most of GCI customers reside in the village area and they are both uneducated and low educated. These people use this product as their roof and it is the most special product for them. The decision making process are very much longer in their case. They dont buy the product frequently and they always attracted or motivated by the reference groups. Thats why the marketers of GCI always use a opinion leader as a member of reference group.

The customers of this product from the retail shop of GCI and this retail shop are generally located in the Hat, market of village area. SS distributes their product throughout the retail shops of Bangladesh to make the product available to the target customers. Moreover, the retailers also influence the customers also by telling his/her preferable brands benefits. Thats why the purchase decision of this product is really complex. In fact, in Bangladesh most of the products successes depend on the retailers attitude towards it. If the retailers dont want to take the product, the manufacturer has no way to survive. Thats why the AKS also dependent to the retailers for their sale.

Distribution system of SS (GCI):

Sales force distributes GCI to Sell the GCI to

SS

Retail Shop

Customers

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2.5.2 When do the customers buy the product:

The target customers GCI are mostly lower class (upper and middle) people who have not enough money. The occupations of those people are- farmer, fishermen, milkman, daily laborer, etc. Bangladesh is agro-based country and more than 80% people live in the village. And still most of the village occupations are centered with the agriculture.

There are two seasons for producing crops in our country and the times are March-July and Aug- Nov. At this time, the village people especially farmers have not enough money in hand, because they invest all their money in the production. At this time, the other people have not enough money to buy GCI because of rainy season. Except the fishermen, no other occupation can generate enough money in this season. After getting the crops, farmers sell it and get the cash of their crops. At this time, the people of other occupation also earn cash. So in total all people have money at that time and they also want to spend also. For the above reason, the target customers of GCI also buy the product at the dry season (Nov- March) and the sales also rise in this season. Thats why this time can be called as peak season for GCI market. In these five months, the village people use to build houses and they buy as much as need.

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Accounts cycle The accounting cycle of Saleh Steel are as follows

The accounting cycle, also commonly referred to as accounting process, is a series of procedures in the collection, processing, and communication of financial information. As defined in a lesson earlier, accounting involves recording, classifying, summarizing, and interpreting phases. Financial information is communicated through the financial statements the end products of an accounting system. Before the financial statements can be prepared, accountants need to gather information about accountable transactions, record and collate them to come up with the values to be reported in the reports. The cycle does not end with the presentation of financial statements. Several steps are needed to be done to prepare the accounting system for the next cycle. The following diagram presents the nine steps in the accounting cycle.

Accounting Cycle Steps

1. Identifying and Analyzing Business Transactions The accounting process starts with identifying and analyzing business transactions and events. Not all transactions and events are entered into the accounting system. Only those that pertain to the business entity are included in the process. For example, a loan made by the owner in his name that does not have anything to do with the entity is not accounted for. The transactions identified are then analyzed to determine the accounts affected and the amounts to be recorded. The first step includes the preparation of business documents, or source documents. A business document serves as basis for recording a transaction. 2. Recording in the Journals A journal is a book paper or electronic in which transactions are recorded. Business transactions are recorded using the double-entry bookkeeping system. They are recorded in journal entries containing at least two accounts (one debited and one credited). To simplify the recording process, special journals are often used for transactions that recur frequently such as sales, purchases, cash receipts, and cash disbursements. A general journal is used to record those that cannot be entered in the special books.

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Transactions are recorded in chronological order and as they occur. Hence, journals are also known as Books of Original Entry. 3. Posting to the Ledger Also known as Books of Final Entry, a ledger is a collection of accounts that shows the changes made to each account as a result of past transactions, and their current balances. This is the core of the classifying phase. After the posting process, the balances of each account can now be determined. For example, all journal entries made to Cash would be transferred into the Cash account in the ledger. Increases and decreases in cash will be entered into one ledger account. Thus, the ending balance of Cash can be determined. 4. Unadjusted Trial Balance A trial balance is prepared to test the equality of the debits and credits. All account balances are extracted from the ledger and arranged in one report. Afterwards, all debit balances are added. All credit balances are also added. Total debits should be equal to total credits. When errors are discovered, correcting entries are made to rectify them or reverse their effect. Take note however that the purpose of a trial balance is only test the equality of total debits and total credits and not to determine the correctness of accounting records. Some errors could exist even if debits are equal to credits, such as double posting or failure to record a transaction. 5. Adjusting Entries Adjusting entries are prepared as an application of the accrual basis of accounting. At the end of the accounting period, some expenses may have been incurred but not yet recorded in the journals. Some income may have been earned but not entered in the books. Adjusting entries are prepared to have the accounts updated before they are summarized into the financial statements. Adjusting entries are made for accrual of income, accrual of expenses, deferrals (income method or liability method), prepayments (asset method or expense method), depreciation, and allowances. 6. Adjusted Trial Balance An adjusted trial balance may be prepared after adjusting entries are made and before the financial statements are prepared. This is to test if the debits are equal to credits after adjusting entries are made. 7. Financial Statements When the accounts are already up-to-date and equality between the debits and credits have been tested, the financial statements can now be prepared. The financial statements are the endproducts of an accounting system. A complete set of financial statements is made up of a Statement of Comprehensive Income or Income Statement and Other Comprehensive Income , Statement of Changes in Equity, Statement of Financial Position or Balance Sheet, Statement of Cash Flows, and Notes to Financial Statements. 8. Closing Entries

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Temporary or nominal accounts, i.e. income statement accounts, are closed to prepare the system for the next accounting period. Temporary accounts include income, expense, and withdrawal accounts. These items are measured periodically. The accounts are closed to a summary account (often, Income Summary) and then closed further to the appropriate capital account. Take note that closing entries are made only for temporary accounts. Real or permanent accounts, i.e. balance sheet accounts, are not closed. 9. Post-Closing Trial Balance In the accounting cycle, the last step is to prepare a post-closing trial balance. It is prepared to test the equality of debits and credits after closing entries are made. Since temporary accounts are already closed at this point, the post-closing trial balance contains real accounts only. *Reversing Entries: An optional step at the beginning of the new accounting period Reversing entries are optional. They are prepared at the beginning of the new accounting period to facilitate a smoother and more consistent recording process. In this step, the adjusting entries made for accrual of income, accrual of expenses, deferrals under the income method, and prepayments under the expense method are reversed.
Manufacturing costs: Most manufacturing companies divide manufacturing cost into three broad categories. Direct material, Direct labor and Manufacturing overhead. Direct material: Direct materials are those materials that become an integral part of the finished product and that can be physically and conveniently traced to it. For example: Panasonic use electric motor in its CD Players to make the CD spin. Direct labor: The term direct labor is reserved for those labor costs that can be easily traced to individual product. Direct labor is sometime called touch labor, since direct labor workers typically touch the product while it is being made. For example the labor cost of machine operator. Manufacturing overhead: Manufacturing overhead the third element of manufacturing cost, includes all cost of manufacturing except direct material and direct labor. So, we can say that all costs associated with operating the factory are included in the manufacturing overhead category. Such as indirect material, indirect labor, maintenance and repairs on production equipment etc. Role in decision-making Manufacturing cost is used to determine the inventory valuation on the balance sheet and cost of goods sold on the income statement of external financial reports. Assume that Tongi national company produce fan. The total manufacturing cost of one unit is 850 taka, where Direct material: Direct labor: MOH: Total 400 tk 150 tk 300 tk 850 tk

Now from this manufacturing cost the company can decide that how much they want to make profit and set a selling price based on that. Suppose they want to make 20% profit on manufacturing cost then their selling price will be 1020 tk.

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But after setting selling price they see that one of their competitor sales their product at 950 tk. In this situation the company can justify the manufacturing cost that where the wrong is going on. If their material price is high then they can buy the raw material from other supplier at low cost to reduce the access cost. If their labor cost is high, then they can hire labor from other at low cost or can cut the number of employee to reduce the cost. By taking this corrective action the company can maintain the manufacturing cost to stay in the market. Non-manufacturing costs: Generally non-manufacturing costs are sub-classified into two categories, (1) Selling costs, (2) Administrative costs Selling costs: Selling cost include all costs necessary to secure customer orders and get the finished product on service into the hand of the customer. This cost is also known as marketing cost. Example: Advertising, Shipping, Sales travel etc. Administrative costs: It includes all executive, organizational and clerical costs associated with the general management of an organization rather than with manufacturing and selling. Example: Secretarial, compensation, public relation and other this types of costs Role in decision-making Non-manufacturing cost is playing a great role in decision-making. In income statement we deduct non-manufacturing cost or operating cost from gross margin to get net profit. Suppose we expect X amount of money as net profit. But if the net income falls below than our expectation, then we must reduce operating cost to gain more profit. We can give one example to clear this idea. Suppose our net income is less than our expectation. Now we have to reduce price. We can take advertising cost as a sample. In case of advertising our first motive is to identify our target consumer then we have to select the advertising media. Suppose we make one types of product and our target consumers are fishermen. In this case we must use radio as an advertising media rather than television and it will cost less. By this way we can save non-manufacturing cost. In this purpose we can also reduce the cost of shipping, sales travel, compensation, public relation cost, sales salary etc. to increase net profit. Fixed costs: A fixed cost is a cost that remains constant in total, regardless of changes in the level of activity. As the activity level rises and falls, the fixed cost remains constant in total amount unless influenced by some outside force, Such as price changes. There are two types of fixed cost. (1) Committed fixed cost: Committed fixed costs relate to the investment in facilities, equipment and the basic organizational structure of a firm. Example: Rent. (2) Discretionary fixed cost: Discretionary fixed cost usually arise from annual decisions by management to spend in certain fixed cost areas. Example: Advertising. Role in decision-making Cm per unit.Usually fixed cost is used to determine break-even point. The formula for break-even point is = fixed cost Suppose our fixed cost = $ 20,000 Selling price = $ 250 Variable cost = $ 150 (250 150)}Then break-even unit = {20,000

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= 200 unit In the break-even point there is no profit as well as no loss at all. We have calculated break-even point to determine the sales level and using this method we can also calculate the number of unit to gain our expected profit. Reduction of fixed cost is also very important to increase net income. If we reduce fixed cost per unit then it will contribute to net income. Suppose our production is not running in our full capacity level then we can increase production in order to reduce our fixed cost per unit. For example: Capacity: 400 Units Production: 300 Units Fixed cost: $20,000 Variable cost: $150 Selling price: $250 Current income statement Sales = $75,000 250)(300 (-) V. cost = $45,000 150) (300 Cm $30,000 (-) F. cost = $20,000 Net income $10,000 Here we see that in the current situation we have a net income of $10,000. Now we get an offer from outside to deliver 100 extra units at $200. In this case our proposed net income as follows: Proposed income statement Sales = $95,000 200)250) + (100(300 (-) V. cost = $60,000 150) (400 Cm $35,000 (-) F. cost = $20,000 Net income $15,000 400) = $50.00, So here we see that how fixed cost plays effective role in decision-making. 300) = $66.67 to (20,000 In this case we will accept the proposal because our proposed net income is greater than the current net income. Though the proposed selling price is less than current one but we can generate more income because in this case fixed cost goes down from (20,000

Variable cost: A variable cost is a cost that varies in total, in direct proportion to changes in the level of activity. The activity can be expressed in many ways, such as units produced, units sold, miles driven, lines of print and so forth. A good example of variable cost is direct material. It is important to note that when we speak of a cost as being variable, we mean the total cost rises and falls as the activity level rises and falls. There are two types of variable cost. (1) True variable cost: Direct material is a true variable cost because the amount used during a period will vary in direct proportion to the level of production activity. (2) Step-variable cost: A cost that is obtained only in large chunks and that increases or decreases only in response to fairly wide changes in the activity level is known as step-variable cost. Maintenance cost is an example of step-variable cost.

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Role in decision-making Variable cost plays a great role in decision-making we know that if we increase our production then our variable cost will also increase. So we have to concentrate on reduction of total cost and in this case we must consider fixed cost also. If we increase our production within our capacity, our unit cost of production will decrease. Because as production increase variable cost will also increase but fixed cost per unit will decrease. Suppose, Variable cost = $1

Fixed cost Capacity Production unit 5 10 15

= $10 = 20 unit Variable cost per unit 1 1 1 Fixed cost per unit 2 1 .56 Total cost per unit 3 2 1.56

Here we see that as production increases total cost per unit decrease because fixed cost per unit continuously decreases. So, in case of reducing total cost we must increase the production level. And as we know variable cost is constant so we must try to reduce the total cost from other sector to generate more profit. Thus variable cost has a significant impact on selling price. Variable cost is also used to calculate cm per unit, cm ratio, margin of safety, degree of operating leverage and other this types of important things. Absorption costing: A costing method that includes all manufacturing costs, direct materials, direct labor and both variable and fixed overhead as part of the cost of a finished unit of production. For example in this method the unit cost is as follows: Unit cost Direct material: Direct labor: Variable MOH: Fixed MOH: 02

03 02 03

Total $ 10 per unit Here fixed and variable MOH both are considered. Role in decision-making Absorption costing is the generally accepted method for preparing mandatory external financial reports and income tax returns. Absorption costing treats fixed manufacturing overhead as a product cost. If fixed costs are treated as period costs and there is a low level of sales activity in a

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period then a low profit or a loss will be recorded. If there is a high level of sales activity there will be relatively high profit. Absorption costing creates a smoothing of these fluctuations by carrying the fixed costs forward until the goods are sold. Many firms use the Absorption approach exclusively because of its focus on full costing of units of product. Variable costing: In variable costing, only variable costs of production are allocated to products and the unsold stock is valued at variable cost of production. Fixed production costs are treated as a cost of the period in which they are incurred. For example in this method the unit cost is as follows: Unit cost Direct material: Direct labor: Variable MOH: Total

03 02 03 $ 08 per unit

Here fixed MOH is not considered. Role in decision-making Variable costing is used internally for planning purposes. Under Variable costing, only those production costs that vary with output are treated as product cost. This includes direct material, direct labor and variable overhead. Fixed manufacture overhead is treated as a period cost and charged off against revenue as it is incurred, the same as selling and administrative expenses. Under Variable costing, the profit for a period is not affected by changes in inventory. This cost is particularly important for company having cash flow problems. One thing is very important that when Variable costing is in use profits move in the same direction as sales. We can also take the data for CVP analysis directly from a contribution margin format income statement that are not available on a conventional income statement based on absorption costing. The Variable costing approaches are often indispensable in profit planning and decision-making. Opportunity costs: Opportunity cost is the potential benefit that is given up when one alternative is selected over another. For example: Suppose I worked in a company and it gives me 20,000 taka per month. But suddenly I leave that job and get admitted in North-South University for M.B.A. Then my salary 20,000 taka is my opportunity cost which I sacrificed for further education. Role in decision-making Opportunity cost is a very important item, which is playing an effective role in decision-making. By considering opportunity cost we can determine the real cost of production. We can give an example to clear this idea. Let, Direct material Direct Labor Supervisor salary Factory rent Depreciation Allocated general

: $3 (Avoidable) : $2 (Avoidable) : $1 (Avoidable) : $1 (Unavoidable) : $2 (Unavoidable)

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Expense Total cost per unit Avoidable cost Unavoidable cost

: $3 (Unavoidable) : $12 : (3+2+1) = $6 : (1+2+3) = $6

Here we see that if we make the material the cost of per unit will be $12. Now we get an offer from outside at $8 per unit. If we want to buy we have to consider some other things because there are some unavoidable cost that we cant ignore. It will add to the buying cost. Now we see that if we buy it will costs (8+6) = $14 per unit. So we can easily determine that we will go for making not buying. In this case we have to consider opportunity cost. Suppose the room, where we will make our production, the rent of that room is $20,000 and we get an offer for 5,000 unit. Make $12 $60,000 $20,000 $80,000 Buy $14 $70,000 -----$70,000

Unit cost For 5,000 unit (+) Opportunity cost Total cost

Here we see that if we go for making it will cost more and if we buy raw material from outside we can generate $10,000 as a profit. So, in this case we will definitely go for buy not make. Sunk costs: A sunk cost is a cost that has already been incurred and that cannot be changed by any decision made now or in the future. So, they should be ignored when making decision. Example: Suppose we buy a machine costs 50,000 taka to produce one kind of goods. But now there is no longer demand of that product. So we buy another new machine costs 70,000 taka. Now there is no use of old machine and we have already incurred that cost. So, here 50,000 taka is sunk cost, which was paid for purchasing of old machine. Role in decision-making Sunk cost does not play any role in decision-making. On the other hand it plays a great role in decision -making. Usually we deduct the sunk cost from both keep old machine & purchase of new machine. By this way we can show the proper fixed cost. Suppose our sunk cost is $50,000 but the salvage value of that machine is $20,000. Now if we dont consider the sunk cost then it will show us $20,000 income and if we consider sunk cost, ultimately it will show us 30,000 losses. Thus sunk cost plays an effective role to show proper income. Sunk cost is also playing a great role in another criteria. If we dont deduct the sunk cost from fixed cost then our fixed cost will be greater and our unit cost will increase also. In this case we cannot compete with our competitors. So we must deduct sunk cost from our account. Product costs: Product costs include all the costs that are involved in acquiring or making a product. In the case of manufacturing goods these costs consist of direct material, direct labor and manufacturing overhead. Product costs are initially assigned to inventories. So, they are known as inventoriable costs. Role in decision-making

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If an organization want to minimize their inventory cost they can fallow just in time process. In this process the cost of inventory is less than the normal process. So, the product cost is minimized and it will help to generate more profit. If an organization follows normal process for manufacturing goods, then they must reserve material for future and it will cost a lot. Such as rent for place, guard salary, maintenance cost. And it will reduce net income. So, they must follow just in time process to increase the net income. Period costs: Period costs are all the costs that are not incurred in product costs. These costs are expensed on the income statement in the period in which they are incurred, using the usual rules of accrual accounting. Period costs are not included as part of the cost of either purchase or manufactured goods. Example: Sales commission, Office rent. Role in decision-making Depending on period cost we can also take some corrective action. Normally sales commission, office rent and other these types of cost are included in period cost. Suppose our net income is lower than our expectation then we can increase our net income by reducing period cost. Lets take office rent. If our office rent is high then we can reduce the rent by shifting office place. However for many decision-making purposes the period costs are seen as being non-controllable in the shortterm, so that attention may focus on product cost. Differential costs: A difference in costs between any two alternatives is known as differential cost. A differential cost is also known as incremental cost. Technically an incremental cost should refer only to an increase in cost from one alternative to another. Decreases in cost should be referred to as decremental costs. So here we see that differential cost is broader term consist of both incremental cost & decremental cost. Role in decision-making Differential cost can be either fixed or variable. To illustrate assume that Keya cosmetics ltd. is thinking about changing its marketing method from distribution through retailer to distribution by door-to-door direct sale. Present cost and revenues are compared to projected costs and revenues in the following table:

Retailer Direct sale Differential cost Distribution Distribution and revenue Revenue $500,000 $600,000 $100,000 Deduct ======================================= Cost of good sold $150,000 $200,000 $50,000 Advertising $50,000 $25,000 $(25,000) Commission -0$20,000 $20,000 Depreciation $25,000 $50,000 $25,000 Other expenses $20,000 $20,000 -- 0 -Total $245,000 $315,000 $70,000 Net income $255,000 $285,000 $30,000 ====================================== According to the analysis the differential revenue is $100,000 and the differential cost is $70,000 leaving a positive differential net income $30,000 under the proposed marketing plan. From the given table the company can easily decide that which marketing plan they should follow.

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As we see in the above analysis the net income under door-to-door is $30,000 higher than the previous one. And they can get it simply focusing on differential cost, revenue and net income. By this way differential cost helps in decision-making. Standard costs: Standard costs are target costs, which should be attained under specified operating conditions. They are expressed as a cost per unit. For example: Hospitals have standard cost (for food, laundry and other items) for each occupied bed per day, as well as standard time allowance for certain routine activities, such as laboratory test. Role in decision-making Standard cost is used to integrate costs in the planning and pricing and pricing structure of a business. Once the Standard cost has been decided, the actual cost may be compared with the standard. If it equals the standard then the actual outcome has matched expectations. If the actual cost is different from the standard cost allowed, then there will be variance to be investigated, whether it is favourable or unfavourable. When the actual cost is less than the standard cost then it is called favourable and when the actual cost is greater than the standard cost then it is called unfavourable. In case of favourable term management will accept the proposal and in case of unfavourable term, they will reject it. Direct cost & Indirect cost Direct cost: A direct cost is a cost that cannot be easily and conveniently traced to the particular cost object under consideration. The concept of direct cost extends beyond just direct material and direct labor. Example: Suppose woodland company is assigning costs to its various regional and national sales offices. Then the salary of the sales manager in its Bombay office would be a direct cost of that office. Indirect cost: An indirect cost is a cost that cannot be easily and conveniently traced to the particular cost object under consideration. For example: Igloo company makes varieties ice-cream. The factory managers salary would be an indirect cost of a particular variety such as igloo chocbar. Role in decision-making Direct cost includes direct material, direct labor; on the other hand indirect cost includes indirect material and indirect labor. They are playing a great role in decision-making, but not individually. They have a significant impact on manufacturing cost, because these costs are included in manufacturing cost. So ultimately they are playing role in setting selling price. Mixed cost: A mixed cost is one that contains both variable and fixed cost elements. Mixed costs are also known as semi-variable cost. Mixed cost is calculated by following equation. bx+Y = a Here Y = Total cost a = fixed cost b = Variable cost x = Total unit.

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The fixed portion of a mixed cost represents the basic, minimum cost of just having a service ready and available for use. The variable portion represents the cost incurred for actual consumption of the service. The account analysis and the engineering approach is used to estimate the fixed and variable portion of a mixed cost. For example: The cost of providing X-ray services to the to patients at the P>G hospital is a mixed cost. There are substantial fixed costs for equipment depreciation and for salaries for radiologists and technicians but there are also variable costs for X-ray film, power and supplies. Role in decision-making Mixed costs also have some role in decision-making because this cost is a combined form of fixed and variable cost. As we know fixed costs are constant but variable cost differs with the production level. So, by reducing the variable cost we can decrease total unit cost and it will help to increase net income.

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