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S.No Issues under consideration Desired Information Available information Gap Possible sources of information
Loss of Rs. 30 million in 3rd quarter - Net P&L of the quarter - CA educational background. Calculation of projected profit Projection & Estimates made begining of
1 of 2008 to MGPM (owned by Mr. - Calculation of projected profit - Owner(Joginder) extremely surprised with the result, Expectation was profit year
Joginder Singh Marwah)
Study of reasons for loss & Procedure for studying Procedure No scientific method to ovecome Expert advice/CA
challenges in studying Accumulate, classify & group all the cost for challenges
1) ascertain all total & unit cost
2) observe trend
3) control them
2 4) analyze them for planning , control& decision making purpose
Challenges
-Not sure about difference between cost, expense,prices & losses
- Identification of cost object, cost center & cost unit
- accumulation, alloation, apportionment & absorption of cost
Analysis of expenses & assets Total expenses, total assets s Analysis of expenses Nil Not applicable
' - Utilities : 70% - for production & assembly shops.
- Premium : 80% -for prodcution & assembly shops.
Remaining premium & utlities cost - for office, adminstrative & selling activities
- Rent : 85% - for factory operations
- Labour : 15% - for activities in fatory & assembly lines.
85% - for common services
3 - Depreciation: 60%- for factory machines , equipments, fixtures.
40% - for selling department's assets & resources belonging to office.
Inventory at beginning of quarter
- Raw material: 60%
- Work in progress : 70%
- Finished goods: 85%
Whether Cost of Ordering(dock Analysis of product cost break -Raw material: 50% cost of total cost of high demand items. Absorbtion of Import Duties, Invoice, BOM, Expert advice
charges & import duty), transporation up - Raw cotton, wool & clay - direct cost(conveniently traced to spefic items) Transportation charges be considered
charges, storage , insurance cost of Process:Price of raw material - Synthetic gum ,minor regional jewellery & decoration pieces : form insignificant portion of total cost in Invoice price
4 raw material should be added to & semi finished products
invoice price. (purchase from suppliers) - Craftsman & other employees salary= 30% of cost of these above items(i.e. = 15 % of total cost)
- Hiring specific machines, special moulds , designs & patterns for export market : 5% of total cost
Pasting material: Whether to buy from Consumption of gum. If made in house Quantity of gum Trend of consumption of gum quantity
TM chemicals or make in house Price in making & buying - Rs. 10,000 - cost of machine during past few quarters
- Rs. 200/kg - cost of raw material
- Rs. 5000 - Juggu's salary
If more than 100kg , Rs. 5000 + 30/kg
- Rs. 25/kg - Mukku's salary
5 if more than 160kg, total salary expense = Rs. 4000
Electronic components from Monika a) Should Joginder buy Delta cost (increase) = Rs. 17.43 Customer preferenceto imporved Information about sales price & customer
Electronic electronic components from Instrument(to fix electronic component in puppet) = Rs. 5000 quality, rework cost preference to quality, market survey
Monika Elctronics?
6 B) Whether to sell current Effect : quality improvement, defect free product, saving in rework cost Rework cost past data
fixing machine to Mahavir
handicraft.
a) Increased electricity bill during this Calculation of inventory cost Increased electricity bill during this quarter Method to decide cost center & Expert advice/CA
quarter (as all additional units will not Reason: budget head for supervisor salary
b) Hiring of Production Supervisior be sold in current quarter) 1) Increased production
2) Hired new unsilled workers for increased production Which item consume supervisor's how
Allocation of supervisor salary 3) Purchase of addional Cotton, clay , clothes, stone & other material much time.
7 to which cost center/budget
head Supervisor salary related information
a) Supervisior Salary Rs 9000
b) 50 Different products being manufactured.
Storage cost for increased volume in How to show owner's capital Sales forecast Opportunity cost of buying ground Expert advice - for showning owner's
Q3 & Q4 in accounting books Forecast in quarter 3 & 4: 38% compound increase floor capital in accounting books.
Forecasted in 1st & 2nd quarter: 8%
Opportunity cost for current Export sales : 85% during Christmas & New year time. Selling cost of products stored as inventory
8
storage cost (Rs.7,50,000)
Funds may be required to be arrange funds if sales(particularly cash collection) is less than projected capital & other
expenditure.
Reduction in range of product by Total loss in jewellery boxes & Pros: Reduction in cost of precise material used in making of jewellery boxes Loss in jewellery boxes, Increase in Market surveys on sales due to availability
discotinuing unprofitable products opportunity cost (Increase in Cons:1) If discontinue making jewellery boxes , have to pay watchman's salary , property tax & rent related to room sales of other product due to visibility of range
9 sales of other product due to where these boxes are manufactured of variety
visibility of variety) 2) Less customer preference to other products as well because of reduction in range of products
a) Change in processing of Jute Saving percentage a) Saving of 20% through Jute processing. Nil
b) Change in handicrafts assembly b) Saving of waste by 15% by change in assembly process
10 proces c) Every craftsman to specialize in one or some activities rather than each craftsman doing all activities. Salary of
craftsman to be according to time spent on each product & degree of specialization required.
Opportunity to supply of premium 1) Minimum quantity firm expects 55% profit margin on specially ordered items) Increase in sales quanity projection if Sales increase projection from Marketting
items to Cottage Emporium 2) Competetive price - At the time of bargain, government may ask cost break up credibility increases. Study of
Current practice: Include out of pocket cost + labour breakeven price(competetive price Vs
Planning to include: increase in sales due to increase in
11
1) Interest @12% on internally generated funds invested in manufacturing credibility)
2) Rent on firm owned property
3) Notional periodic reward for efforts made by him
Income Statement as given in exibit 1 Balance sheet as given in exibit 2
Sales 1125000 Inventory
Closing stock percentage
change
80
Conclusion: While preparing income statement, CA overlooked expenses due to 50% 60% 70% 80% 90% 100% 110% 120% 130% 1
opening & closing stock of raw material , work in progress & finished goods. persentage change in closing inventory
i.e. It is not imporant that how much has been bought , rather how much raw
material, work in progress inventory & finished goods inventory has been changed
is really the expense because ending material inventory(Raw material+WIP+finished
goods) , we have already considered as Asset.
CA only considered raw material purchased as expense.
Arpan Khare WMP10059 MANAC Case Stud
Sensitivity analysis
Change in profit with respect to change in closing stock of r
Closing stock
Closing stock Profit change Ending Work In
of raw Profit
change percentage Progress Inventory
materials
Profit change percentage with change in raw material, WIP, FInished goo
125
120
115
105
Profit cha
WIP clos
100
Profit per
95 in finishe
inventory
90
85
80
50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% 160%
osing stock of raw material, WIP & finished goods inventory (at every 10% int
Ending
Profit change Profit change
Profit Inventory of Profit
percentage percentage
Finished Goods
160%
160%
WMP TERM 2