Download this by clicking on – Download E-BOOK link.
Special Question – Altogether new for many of you!
Drum – Buffer –Rope – Theory of Constraints
When there is an internal constraint, there are very few resources (people, machines, equipment, materials) dictating the output of the system. The most limiting resource is referred to as the ‘Drum’ as it determines the pace or ‘beat’ of the entire system. Decide how to Exploit the System’s Constraint(s), the constraint resource cannot be allowed to waste one moment of its capacity. This means that it should never be stopped waiting for parts and should not use capacity producing anything other than the parts required to fulfill sales orders. To ensure this we finitely schedule the Drum creating a Drum Schedule. The Drum schedule should maximise the Throughput of the Constraint and provide a detailed plan for just this one area. The Drum Schedule must be derived from the Shipping Schedule.
Subordinate everything else to the above decisions, there are a number of actions that have to be met by the non-constraints in the system in order to meet the Drum Schedule and ultimately the shipping schedule. Understanding that we have to protect the constraint from lost capacity due to these breakdowns, a Buffer of time is used. The Constraint buffer is a pre-determined length of time; we must release the order into the system before the order is due on the Drum Schedule. As all other resources have more capacity than the constraint (by definition), the effect of introducing parts a buffer time before they are due at the constraint is that work builds up in front of the constraint and protects it from breakdowns on preceding operations.
To ensure that too much inventory is not introduced into the system, it is important to start a new order only as the constraint finishes one. To ensure this, a Rope is tied to the first (gating) operation of the system. This is calculated by the date the order appears on the Drum Schedule minus the Constraint Buffer time giving a schedule for material release into the system. We have now “choked” the release of work into the system.
To ensure the Shipping Schedule is met after meeting the Drum Schedule a rope is tied from the Drum to the Shipping Schedule. The rope length is a buffer of time to ensure the shipping schedule is always met; this is called the shipping buffer.
This “choking” of release results in excess capacity being revealed in the non-constraints in front of and behind the Drum. This can have negative ramifications and must be properly handled in implementation; otherwise non-constraint resources will slow down to protect themselves from perceived negative consequences of not being busy all the time. This will of course impact Throughput and delivery performance.
Watch Throughput Accounting Video on SJC Website for Practicals
Total Quality Management
Eight Dimensions of Quality
- Performance: Performance refers to a product’s primary operating characteristics. This dimension of quality involves measurable attributes; brands can usually be ranked objectively on individual aspects of performance.
- Features: Features are additional characteristics that enhance the appeal of the product or service to the user.
- Reliability: Reliability is the likelihood that a product will not fail within a specific time period. This is a key element for users who need the product to work without fail.
- Conformance: Conformance is the precision with which the product or service meets the specified standards.
- Durability: Durability measures the length of a product’s life. When the product can be repaired, estimating durability is more complicated. The item will be used until it is no longer economical to operate it. This happens when the repair rate and the associated costs increase significantly.
- Serviceability: Serviceability is the speed with which the product can be put into service when it breaks down, as well as the competence and the behavior of the serviceperson.
- Aesthetics: Aesthetics is the subjective dimension indicating the kind of response a user has to a product. It represents the individual’s personal preference.
- Perceived Quality: Perceived Quality is the quality attributed to a good or service based on indirect measures.
Quality products can be determined by using a few of the dimensions of quality. Identify the following under the appropriate dimension:
- Consistency of performance over
- Primary product characteristic
- Exterior finish of a product
- Useful life of a product
Quality of Products with Appropriate Dimension
|Sl. No||Quality of Products (Examples)||Dimension|
|(i)||Consistency of performance over time||Reliability|
|(ii)||Primary product characteristics||Performance|
|(iii)||Exterior finish of a product||Aesthetics|
|(iv)||Useful like of a product||Durability|
Classify the following items under appropriate categories of equality costs viz. Prevention
Costs, appraisal Cost, Internal Failure Costs and External Failure costs:
(iii) Warranty Repairs
(iv) Revenue loss
(v) Repair to manufacturing equipment
(vi) Discount on defective sale
(vii) Establishment of quality circles
(viii) Packaging inspection
|(i)||Rework||—– Internal Failure|
|(ii)||Scrap||—– Internal Failure|
|(iii)||Warranty Repairs||—– External Failure|
|(iv)||Revenue Loss||—– External Failure|
|(v)||Repairs to Manufacturing Equipment||—– Internal Failure|
|(vi)||Discount on Defective Sales||—– External Failure|
|(vii)||Establishment of Quality Circles||—– Prevention Cost|
|(viii)||Packaging Inspection||—– Appraisal Cost|
A Ltd. is going to introduce Total Quality Management (TQM) in its company. State whether and why the following are valid or not for the successful implementation of TQM.
- Some departments serve both the external and internal customers. These departments have been advised to focus on satisfying the needs of the external custom
- Hold a training program at the beginning of a production cycle to ensure the implementation of TQM.
- Implement Management by Objectives for faster achievement of
- Appoint the Head of each department as the person responsible to develop improvement strategies and performance measures.
- Eliminate wastage of time by avoiding documentation and procedures.
|(i)||Invalid||TQM advocates focus to be given on both external and internal customers. Hence, focus satisfying the needs of the external customers only will not be valid for the successful implementation of TQM.|
|(ii)||Valid||Training at the beginning would improve productivity by bringing standardization in work habits and eliminating variations in production.|
|(iii)||Invalid||For implementation of TQM, Management by Objectives should be eliminated as targets of production will encourage delivery of poor quality goods and thus will defeat the collective nature of TQM.|
|(iv)||Invalid||Appointing the head of each department as the responsible person is not valid for the successful implementation of TQM as Total Employee Involvement (TIE) principle is an important part of TQM.|
|(v)||Invalid||Documentation, procedures and awareness of current best practice are essential in TQM implementation. If documentation and procedures are in place then only improvement can be monitored & measured and consequently deficiency can be corrected.|
Activity Based Costing
State with a brief reason whether you would recommend an activity based system of costing in each of the following independent situations:
- Company K produces one product. The overhead costs mainly consist of depreciation.
- Company L produces 5 different products using different production facilities.
- A consultancy firm consisting of lawyers, accountants and computer engineers provides management consultancy services to
- Company S produces two different labour intensive products. The contribution per unit in both products is very high. The BEP is very low. All the work is carried on efficiently to meet the target costs.
ABC (Yes / No)
|(i)||K produces one product. Overhead is mainly depreciation.||No|| One product situation. For allocation of overhead, ABC is not required.
ABC for cost reduction not beneficial since most of the overhead is depreciation.
|(ii)||L produces 5 different products with
|Yes|| Multi product situation. ABC is required for allocation of overhead.
ABC is necessary for pricing.
Cost drivers are likely to be different.
Cost reduction may be possible.
Production facilities are different.
– lawyers /
/ accountants /
|Yes|| Variety of services. Hence ABC is required for cost allocation.
Services are very different.
ABC is necessary for pricing.
Cost reduction possible.
|(iv)||S produces 2 different labour intensive products. High unit contribution and efficient operations.||No|| Different products, but labour intensive. Hence, overhead allocation based on readily traceable direct labour cost will be accurate. Hence, ABC not required for cost allocation.
Low BEP level implies low level of fixed cost as a % of sale price or as a
% of total cost.
Many fixed cost activity drivers are likely to align with the direct labour costs. Hence not required for cost allocation.
Efficient operation. Hence ABC not required even for cost reduction or ABC management.
State whether each of the following independent activities is value-added or non-value-added:
- Polishing of furniture used by a systems engineer in a software
- Maintenance by a software company of receivables management software for a banking compan
- Painting of pencils manufactured by a pencil factor
- Cleaning of customers’ computer key boards by a computer repair
- Providing, brake adjustments in cars received for service by a car service
|Sl. No||Item||Value Added / Non Value Added|
|(i)||Polishing furniture used by a Systems Engineer in a software firm.||Non-Value
|(ii)||Maintenance by a software company of receivables management software for a banking company.||Value-Added|
|(iii)||Painting of pencils manufactured by a pencil factory.||Value-Added|
|(iv)||Customers’ computer key board cleaning by a computer repair centre.||Value-Added|
|(v)||Providing brake adjustments in cars for repairs by a care service station.||Value-Added|
Target Costing> Kaizen Costing
- M. India Ltd. (MIL) is an automobile manufacturer in India and a subsidiary of Japanese automobile and motorcycle manufacturer Leon. It manufactures and sells a complete range of cars from the entry level to the hatchback to sedans and has a present market share of 22% of the Indian passenger car markets. MIL uses a system of standard costing to set its budgets. Budgets are set semi-annually by the Finance department after the approval of the Board of Directors at MIL. The Finance department prepares variance reports each month for review in the Board of Directors meeting, where actual performance is compared with the budgeted figures. Mr. Suzuki, group CEO of the Leon is of the opinion that Kaizen costing method should be implemented as a system of planning and control in the MIL.
Recommend key changes vital to MIL’s planning and control system to support the adoption of ‘Kaizen Costing Concepts’.
Kaizen Costing emphasizes on small but continuous improvement. Targets once set at the beginning of the year or activities are updated continuously to reflect the improvement that has already been achieved and that are yet to be achieved.
The suggestive changes which are required to be adopted Kaizen Costing concepts in MIL are as follows:
Standard Cost Control System to Cost Reduction System: Traditionally Standard Costing system assumes stability in the current manufacturing process and standards are set keeping the normal manufacturing process into account thus the whole effort is on to meet performance cost standard. On the other hand Kaizen Costing believes in continuous improvements in manufacturing processes and hence, the goal is to achieve cost reduction target. The first change required is the standard setting methodology i.e. from earlier Cost Control System to Cost Reduction System.
Reduction in the periodicity of setting Standards and Variance Analysis: Under the existing planning and control system followed by the MIL, standards are set semi-annually and based on these standards monthly variance reports are generated for analysis. But under Kaizen Costing system cost reduction targets are set for small periods say for a week or a month. So the period covered under a standard should be reduced from semi-annually to monthly and the current practice of generating variance reports may be continued or may be reduced to a week.
Participation of Executives or Workers in standard setting: Under the Kaizen Costing system participation of workers or executives who are actually involved in the manufacturing process are highly appreciated while setting standards. So the current system of setting budgets and standards by the Finance department with the mere consent of Board of Directors required to be changed.
ABC Ltd. is planning to introduce Kaizen Costing approach in its manufacturing plant. State whether and why the following are Valid or Not in respect of Kaizen Costing.
- VP (Finance) is of the view that company has to make a huge initial investment to bring a large scale modification in production process.
- Head (Personnel) has made a point that introduction of Kaizen Costing does not eliminate the training requirement of em
- General Manager (Manufacturing) firmly believes that only shop floor employees and workers’ involvement is prerequisite of Kaizen Costing approach.
- Manager (Operations) has concerns about creation of confusion among employees and workers regarding their roles and degradation in quality of
- Invalid: Kaizen Costing is the system of cost reduction procedures which involves making small and continuous improvements to the production processes rather than innovations or large-scale investm
- Valid: The training of employees is very much a long-term and ongoing process in the
Kaizen costing approach. Training enhances the abilities of employees.
- Invalid: Kaizen costing approach involves everyone from top management level to the shop floor employees. Every employee’s active participation is a must require
- Invalid: Though the aim of Kaizen Costing is to reduce the cost but at the same time it also aims to maintain the quality. Kaizen costing also aims to bring the clarity in roles and responsibilities for all employees.
Life Cycle Costing
Fiona is a news reporter and feature writer for an economic daily. Her assignment is to develop a feature article on ‘Product Life-Cycle Costing’, including interviews with the Chief Financial Officers (CFO) and Operating Managers. Fiona has been given a liberal budget for travel so as to research into company’s history, operations, and market analysis for the firm she selects for the article.
Fiona has asked you to recommend industries and firms that would be good candidates for the article. What would you advice? Explain your recommendations.
The product life cycle span the time from the initial R & D on a product to when customer service and support is no longer offered for that product.
Life Cycle Costing technique is particularly important when:
- High percentage of total life-cycle costs are incurred before production begins and revenue are earned over several years and
- High fraction of the life cycle costs are locked in at the R & D and design stage
Fiona should identify those industries and then companies belonging to those industries where above mentioned feature are prevalent. For example, Automobile and Pharmaceutical Industries companies like Tata Motors Ltd., Ranbaxy Laboratories Ltd., and Dabur India Ltd. will be good candidates for study on product life cycle costing.
Cost Control Vs Cost Reduction
Classify the following items under the more appropriate category: Category (CC) – Cost Control Or Category (CR) – Cost Reduction:
(i) Costs exceeding budgets or standards are investigated.
(ii) Preventive function
(iii) Corrective function
(iv) Measures to standardize for increasing productivity
(v) Provision of proper storage facilities for materials.
(vi) Continuous comparison of actual with the standards set.
(vii) Challenges the standards set
(viii) Value analysis
Classification of Items under Cost Reduction (CR)/ Cost Control (CC)
|(i)||Costs exceeding budgets or standards are investigated||CC|
|(iv)||Measures to standardize for increasing productivity||CR|
|(v)||Provision of proper storage facilities for materials||CC|
|(vi)||Continuous comparison of actual with the standards set||CC|
|(vii)||Challenges the standards set||CR|
Value Chain Analysis- Porter’s Value Chain
ABC Ltd. is engaged in business of manufacturing branded readymade garments. It has a single manufacturing facility at Ludhiana. Raw material is supplied by various suppliers.
Majority of its revenue comes from export to Euro Zone and US. To strengthen its position further in the Global Market, it is planning to enhance quality and provide assurance through long term warranty.
For the coming years company has set objective to reduce the quality costs in each of the primary activities in its value chain.
State the primary activities as per Porter’s Value Chain Analysis in the value chain of ABC Ltd with brief description.
Primary activities are the activities that are directly involved in transforming inputs into outputs and delivery and after-sales support to output. Following are the primary activities in the value chain of ABC Ltd.:-
- Inbound Logistics: These activities are related to the material handling and warehousing. It also covers transporting raw material from the supplier to the place of processing inside the fact
- Operations: These activities are directly responsible for the transformation of raw material into final product for the delivery to the consumers.
- Outbound Logistics: These activities are involved in movement of finished goods to the point of sales. Order processing and distribution are major part of these activities.
- Marketing and Sales: These activities are performed for demand creation and customer solicitation. Communication, pricing and channel management are major part of these activities.
- Service: These activities are performed after selling the goods to the consu
- Installation, repair and parts replacement are some examples of these activities.
Examine the Validity of following statements along with the reasons:
- The concepts, tools and techniques of value chain analysis apply only to all those organizations which produce and sell a produc
- Procurement activities are included in the Primary activities as classified by Porter under value chain analysis c
- As per Porter’s five forces model, bargaining power of buyers does influence the profitability of an industry or m
- Value chain analysis in the strategic framework consists of single cost driver con
The concepts, tools and techniques of value chain analysis apply to organizations which produce and sell a product and also to organizations which provide a service.
Procurement activities are included in the support activities rather than primary activities.
Bargaining power of buyers is one of the factor or force that influences the profitability of a market or industry. More the bargaining power buyers have, more the pressure on the industry to not increase the price of product or service. They may even have to reduce the price sometimes.
Value chain analysis in the strategic framework consists of multiple cost drivers concept. In value chain analysis, a set of unique cost drivers is identified for each value activity instead of single cost driver application at the overall firm level. Multiple cost drivers may be classified into Structural drivers and Executional drivers.
Classify the following business activities into primary and support activities under value chain analysis.
- Material Handling and warehousing – Primary
- Purchasing of raw materials, supplies and other consumables – Support
- Order Processing and distribution – Primary
- Selection, placement and promotion of employees – Support
- Installation, repair and parts replacement – Primary
- Transforming input into final products – Primary
- General Management, Planning, finance, accounting – Support
- Communication, pricing and channel management – Primary
Just In Time
Indian Petrons Ltd. (IPL) is a leading manufacturing company. Under increasing pressure to reduce costs, to contain inventory and to improve service, IPL’s Costing Department has recently undertaken a decision to implement a JIT System.
The management of IPL is convinced of the benefits of their changes. But Supplies Manager
Mr. Brian fears with the Costing Department’s decision. He said:
“We’ve been driven by suppliers for years … they would insist that we could only purchase in thousands, that we would have to wait weeks, or that they would only deliver on Mondays!”
Is Mr. Brian’s view point correct and why?
“For successful operation of JIT inventory system, the suppliers chosen must be willing to make frequent deliveries in small lots. Rather than deliver a week’s or a month’s material at one time, suppliers must be willing to make deliveries several times a day and in the exact quantities specified by the buyer.”
It is described in the problem that suppliers are not willing to
– make frequent deliveries and
– make supplies in the exact quantities as required
Accordingly Mr. Brian’s doubt is correct on successful implementation of JIT System.
Pricing Policy/ Strategy
Rapid Heal Tech Ltd. (RHTL) is a leading IT security solutions and ISO 9001 certified company. The solutions are well integrated systems that simplify IT security management across the length and depth of devices and on multiple platforms. RHTL has recently developed an Antivirus Software and company expects to have life cycle of less than one year. It was decided that it would be appropriate to adopt a market skimming pricing policy for the launch of the product. This Software is currently in the Introduction stage of its life cycle and is generating significant unit profits.
(i) Explain, with reasons, the changes, if any, to the unit selling price that could occur when the Software moves from the Introduction stageto Growth stage of its life cycle.
(ii) Also suggest necessary strategies at this stage.
Following acceptance by early innovators, conventional consumers start following their lead. New competitors are likely to now enter the market attracted by the opportunities for large scale production and profit. RHTL may wish to discourage competitors from entering the market by lowering the price and thereby lowering the unit profitability. The price needs to be lowered so that the product becomes attractive to different market segments thus increasing demand to achieve the growth in sales volume.
Strategies at this stage may include the following
- Improving quality and adding new features such as Data Theft Protection, Parental Control, Web Protection, Improved Scan Engine, Anti Spyware, Anti Malware
- Sourcing new market segments/ distribution channels.
- Changing marketing strategy to increase dema
- Lowering price to attract price-sensitive buyers.
State the appropriate pricing policy in each of the following independent situations:
- ‘A’ is a new product for the company and the market and meant for large scale production and long term survival in the market. Demand is expected to be elastic.
- ‘B’ is a new product for the company, but not for the market. B’s success is crucial for the company’s survival in the long term.
- ‘C’ is a new product to the company and the market. It has an inelastic market. There needs to be an assured profit to cover high initial costs and the usual sources of capital have uncertainties blocking th
- ‘D’ is a perishable item, with more than 80% of its shelf life over.
|Situation||Appropriate Pricing Policy|
|(i)||‘A’ is a new product for the company and the market and meant for large scale production and long term survival in the market. Demand is expected to be elastic.||Penetration Pricing|
|(ii)||‘B’ is a new product for the company, but not for the market. B’s success is crucial for the company’s survival in the long term.||Market Price or Price Just
Below Market Price
|(iii)||‘C’ is a new product to the company and the market. It has an inelastic market. There needs to be an assured profit to cover high initial costs and the unusual sources of capital have uncertainties blocking them.||Skimming Pricing|
|(iv)||‘D’ is a perishable item, with more than 80% of its shelf life over.||Any Cash Realizable Value*|
(*) this amount decreases every passing day.
State the most appropriate pricing policy to be adopted in the following independent situations:
- Modern patented drug entering the mark
- The latest version of a mobile phone is being launched by an established, financially
- An established company has recently entered the stationery market segment and launched good quality paper for printing at home and
- A car manufacturer is launching an innovative, technologically advanced car in the highly priced seg
|Situation||Appropriate Pricing Policy|
|(i)||Modern patented drug entering the market.||Skimming Pricing|
|(ii)||The latest version of a mobile phone is being launched by an established, financially strong company.||Penetration Pricing|
|(iii)||An established company has recently entered the stationery market segment and launched good quality paper for printing at home and office.||Market Price|
|(iv)||A car manufacturer is launching an innovative, technologically advanced car in the highly priced segment.||Skimming Pricing|
Zero Based Budgeting
In each of the following independent situations, state with a brief reason whether ‘Zero Based
Budgeting’ (ZBB) or ‘Traditional Budgeting’ (TB) would be more appropriate for year II.
- A company producing a certain product has done extensive ZBB exercise in year I. The activity level is expected to marginally increase in year II.
- The sale manager of a company selling three products has intuitive feeling that in year II, sales will increase for one product and decrease for the other two. His expectation can not be substantiated with figu
- The top management would like to delegate responsibility to the functional managers for their results during year II.
- Resources are heavily constrained and allocation for budget requirements is very
- The company has done extensive exercise in year-I that can be used as a basis for budgeting in year-II by incorporating increase in costs / revenue at expected activity level. Hence, Traditional Budgeting would be more appropriate for the company in year-II.
- In Traditional Budgeting system budgets are prepared on the basis of previous year’s budget figures with expected change in activity level and corresponding adjustment in the cost and prices. But under Zero Base Budgeting (ZBB) the estimations or projections are converted into figures. Since, sales manager is unable to substantiate his expectations into figures so Traditional Budgeting would be preferred against Zero Base Budgeti
- Zero Base Budgeting would be appropriate as ZBB allows top-level strategic goals to be implemented into the budgeting process by tying them to specific functional areas of the organization, where costs can be first grouped, then measured against previous results and current expectation
- Zero Base Budgeting allocates resources based on order of priority up to the spending cut-off level (maximum level upto which spending can be made). In an organisation where resources are constrained and budget is allocated on requirement basis, Zero Base Budgeting is more appropriate method of budgeting.
Transfer Pricing –
Fox-2-Tec Ltd (F2TL) has Division ‘Dx’ and Division ‘Dz’ with full profit responsibility. The Division ‘Dx’ produces Component ‘X’ which it sells to ‘outside’ customers only. The Division ‘Dz’ produces a product called the ‘Z’ which incorporates Component ‘X’ in its design. ‘Dz’ Division is currently purchasing 2,500 units of Component ‘X’ per year from an outside supplier at a cost of ` 35 per unit, less a 10 percent quantity discount. ‘Dx’ Division can sell its entire Component ‘X’ to outside customers at the normal ` 35 price. Costs associated with manufacturing of a unit of Component ‘X’ are as follows:
Variable Expenses ` 21
Fixed (based on a capacity of 25,000 units per year) ` 9
F2TL’s new managing director agrees for internal transfer if an acceptable transfer price can be worked out. Accordingly, he requires solution of following questions:-
- If the ‘Dz’ Division purchases 2,500 units of Component ‘X’ per year from the ‘Dx’ Division, what price should control the transfers? Why?
- Refer to your computations in (1). What is the lower limit and the upper limit for a transfer price? Is an upper limit relevant in this situation?
- If the ‘Dx’ Division meets the price that the ‘Dz’ Division is currently paying to its supplier and sells 2,500 units of Component ‘X’ to the ‘Dz’ Division each year, what will be the effect on the profits of the ‘Dx’ Division, the ‘Dz’ Division, and the company as a whole?
- If the intermediate market price for Component ‘X’ is ` 35 per unit, is there any reason why the ‘Dx’ Division should sell to the ‘Dz’ Division for less than ` 35? Expla
(i) The transfer price should be `35 per unit, the regular price charged to other customers.
Since the ‘Dx’ Division is operating at capacity, it will lose `14 in contribution margin for each outside sale given up in favor of sales to the ‘Dz’ Division (` 35 – ` 21 = `14).
(ii) The lower limit is `35, the price obtained in (1). The upper limit is also `35, since `35 is the intermediate market price. That is, it would not be fair to charge the other Division more than the price being charged to regular customers. However, an upper limit is not really relevant in this situation since no transfers will be made between the two Divisions.
(iii) The price being paid to the outside supplier, net of the quantity discount, is only `31.50.
If this price is met by the ‘Dx’ Division, then profits in the ‘Dx’ Division and in the company as a whole will drop by `8,750 per year.
Minimum Transfer Price `35
Outside Supplier’s Price `31.50
Loss in Contribution Margin per unit `3.50
No. of units per year 2,500
Total Loss in Profits `8,750
Profits in the ‘Dz’ Division will remain unchanged, since it will be paying the same price internally as it is now paying externally.
(iv) Yes, if costs can be avoided as a result of the inside business. The price would then be
`35 less the avoided costs.
Uniform Costing and Inter Firm Comparison
What are the requisites for the installation of a Uniform Costing system?
Essential requisites for the installation of Uniform Costing are as under:
- The firm in the industry should be willing to share or furnish relevant data or inform
- A spirit of co-operation and mutual trust should prevail among the participating
- Mutual exchange of ideas, methods used, special achievement made, research and know- how etc. should be fre
- Bigger firms should take the lead towards sharing their experience and know- how with the smaller firm to enable the later to improve their performan
- In case of accounting methods, principles, procedure and production method uniformity must be establishe
What is Uniform Costing? Why is it recommended?
It is not a distinct method of costing when several undertakings start using the same costing principles or practices, they are said to be following uniform costing. Different concerns in an industry should adopt a common method of costing and apply uniformly the same principles and techniques for better cost comparison and common good and helps in mutual cost control and cost reduction. Hence, it is recommended that a uniform method of costing should be adopted by the member units of an industry.
State the limitations of Uniform Costing.
Limitations of Uniform Costing are:
- Sometimes it is not possible to adopt uniform standards, methods and procedures of costing in different firms due to differing circumstances in which they operate. Hence, the adoption of uniform costing becomes difficult in such firms.
- Disclosure of cost information and other data is an essential requirement of a uniform costing system. Many firms do not wish to share such information with their competitors in the same indu
- Small firms in an industry believe that uniform costing system is only meant for big and medium size firms, because they cannot afford
- It induces monopolistic trend in the business, due to which prices may be increased artificially and supplies withhe
What are the advantages of Uniform Costing?
The advantages accruing from the use of Uniform Costing System are as follows:
- The management of each firm will be saved from the exercise of developing and introducing a costing system of its
- A costing system devised by mutual consultation and after considering the difficulties and circumstances prevailing in different firms is readily adopted and successfully implem
- It facilitates comparison of cost figures of various firms to enable the firms to identify their weak and strong points besides controlling costs.
- Optimum achievement of efficiency is attempted by all the firms by utilising the experience of other concerns in the industry.
- Standing in the industry of each firm will be known by making a comparison of its cost data with
- Services of cost consultants or experts may be available jointly to each firm in the industry by sharing their experiences and expense
- Research and development benefits of bigger firms may be made available to smaller firms.
- It helps in the reduction of labour turnover, as a uniform wage system is the pre- condition of a uniform costing system.
- It helps Trade Associations in negotiating with the Government for any assistance or concession in the matters of taxation, exports, subsidies, duties and prices determination
- Unhealthy competition is avoided among the firms in the same industry in framing pricing policies and submitting tender
- Prices fixed on the basis of uniform costing are representative of the whole industry and thus are
- Uniform costing provides a basis for the comparative assessment of the performance of two firms in the same industry but in different se
- It helps the Government in regulating the prices of essential commodities such as bread, sugar, cement, steel etc.
Enumerate the objectives of Uniform Costing.
The main objectives of Uniform Costing are as follows:
- Facilitates Comparison: To facilitate the comparison of costs and performances of different units in the same industry; it provides objective ba
- Eliminates Unhealthy Competition: To eliminate unhealthy competition among the different units of an industry.
- Improves Efficiency: To improve production capacity level and labour efficiency by comparing the production costs of different units with each othe
- Provides Relevant Data: To provide relevant cost information/ data to the Government for fixing and regulating prices of the product
- Ensures Standardisation: To bring standardisation and uniformity in the operation of participating un
- Reduces Cost: To reduce production, administration, selling and distribution costs, and to exercise control on fixed c
What are the advantages of Inter-firm Comparison?
The main advantages of Inter-firm Comparison are:
- Such a comparison gives an overall view of the industry as a whole to its members. The present position of the industry, progress made during the past and the future of the industry.
- It helps a concern in knowing its strengths or weaknesses in relation to others so that remedial measures may be taken.
- It ensures an unbiased specialized reporting on particular problems of the concer
- It develops cost consciousness among members of the indu
- It helps Government in effecting price regulatio
- It helps to improve the quality of products manufactured and to reduce the cost of production. It is thus advantageous to the industry as well as to the
What are the limitations of Inter-firm Comparison?
The following are the limitations in the implementation of a scheme of Inter-firm Comparison:
- There is a fear of losing secrecy of the production method or some peculiar process or method among the top managem.
- Middle management is usually not convinced with the utility of such a comparison.
- In the absence of a suitable cost accounting system, the figures supplied may not be reliable for the purpose of comp
- Suitable basis for comparison may not be availabl
Balanced Scorecard- Resort
“Hard Rock Coconut” is an exclusive resort located in a famous Island of Pacific Ocean that vows to isolate its guests from the hustle and bustle of everyday life. Its leading principle is “all contemporary amenity wrapped in old-world charisma”. Each of the resort’s 18 villas has a separate theme like Castle, Majestic, Ambassador, Royal Chateau, Coconut, Lemon, Balinese etc and guests often ask for a specific villa when they make reservations. Villas are Ideal for families or friends travelling together and these villas feature luxurious accommodation spanning two floors. Since it is located within a 300-acre estate on white sand beach, the resort offers its guests a wide variety of outdoor activities such as horseback riding, hiking, diving, snorkeling, sailing, golf and so on. Guests could also while away the day relaxing in the pool and availing themselves of the resort’s world-famous spa “Hard Coco Spa”. The dining room, which only has three tables for the public, is acceptable proud of its 4-star rating.
Develop a Balanced Scorecard for “Hard Rock Coconut”. It is sufficient to give two measures in each of the four perspectives.
The following is a possible Balanced Scorecard for “Hard Rock Coconut”
|Financial Perspective||Economic Value Added|
|Revenue per villa|
|Customer Perspective||% repeat customers|
|Number of customer complaints|
|Internal Business||Service rating of spa|
|Staff hours per guest|
|% cost spent for maintenance|
|Travel guide rank for restaurant|
|Innovation and Learning||Employee retention|
|Number of new services offered|
Balanced Scorecard- Supermarket
ABC Ltd. has supermarkets located in most towns and cities. Over the last few years, profits have fallen. ABC Ltd. has recognized that customer care has been paid insufficient attention. ABC Ltd. has now realized the importance of the customer experience at its supermarkets.
ABC Ltd. has introduced a loyalty card scheme that rewards customers with discount vouchers based on their spend and buying patterns at supermarkets in an attempt to earn the loyalty of its customers.
The management of ABC Ltd. is considering the introduction of a Balanced Scorecard approach to manage the performance of its stores.
Recommend an objective and a suitable performance measure for each of three non-financial perspectives of a Balanced Scorecard that ABC Ltd. could use to support its new strategy of improving the customer experience. You should state three perspectives, an objective and a performance measure for each one of the three perspectives.
|Non- Financial Perspective||Objective||Performance Measure|
|Customer Perspective||Increase the customer loyalty.
Or Retaining the existing customers.
|Percentage of customers using loyalty cards.
No. of discount vouchers redeemed.
|For customers to pay for goods in a reasonable time.
Paying proper attention to the customers and their product enquiries.
Provide necessary support to the existing loyal customers.
|Time spent by customers in queuing to pay for products at a check out.
Time spent by customers care executives in handling customers queries.
No. of times home delivery made.
|Learning and Growth Perspectives|| To have qualified staffs able to meet the needs of the customers
Or Adding new products for new segments
|No. of staff training days
No. of schemes launched
Balanced Scorecard- Banking Company
Classify the following measures under appropriate categories in a Balanced Scorecard for a banking company which excels in it s home loan products:
- A new product related to life insurance is being considered for a tie up with the successful housing loan disbursements.
- e.g. every housing loan applicant to be advised to take a life policy or compelled to take a fire insurance policy.
- How different sectors of housing loans with different interest rates have been sanctioned, their volumes of growth in the past 4 quarte
- How many days are taken to service a loan, how many loans have taken longer, what additional loans are to be released soon, et
|(i)||New Product tie up||— Innovation / Learning Perspective|
|(ii)||Growth of Volume||— Financial Perspective|
|(iii)||Time for Loan / Fresh Products||— Customer Perspective|
Your Bank Ltd., was established on the 30th September, 1940 under the provisions of Co- operative Societies Act by the eminent professionals to encourage self-help, thrift, cooperation among members. Bank was issued Banking License under Banking Regulation Act, 1949 on October 25, 1986 to carry out the Banking Business within the national capital and since then the Bank has been growing continuously. At present, Bank has large number of membership of individuals from different sections. The Bank has 12 branches in the NCT of Delhi. Bank offers ‘traditional counter service’. Opening hours are designed to coincide with local market days.
Board of Directors were worried from growing popularity of new style banks. These banks offer diverse range of services such as direct access to executive management, a single point of contact to coordinate all banking needs, appointment banking to save time, free online banking services 24/7, free unlimited ATM access etc.
It has now been decided that the bank will focus on “What Customers Want” and will use a balanced scorecard to achieve this goal.
Produce, for each of the three non-financial perspectives of a ‘Balanced Scorecard’, an objective and a performance measure that the bank could use with appropriate reason.
Internal Business Process Perspective
Objective: Cross-sell Products
Measure: Products Purchased per customer
Reason: Cross-selling, or encouragement customers to purchase additional products e.g. insurance, forex etc. is a measure of customer satisfaction. Only if a service is perceived as highly satisfactory the service would be repeated/ additional products or services would be accepted.
Learning and Growth Perspective
Objective: Increase the Number of New Products or Services Sold
Measure: Number of Customers Buying the New Products/ New Services
Reason: Long term financial success requires bank to create new products / services (e.g. internet banking, ATM access) that will meet emerging needs of current / future customers such as 24/7 banking.
Objective: Increase Customer Loyalty
Measure: Number of Accounts Closed or Closure Request Received
Reason: Customer loyalty describes the extent to which bank maintains durable relations to its customers. The share of existing customers should have a high importance as it indicates about image and reputation. Closure request is not a good sign for bank. Bank should investigate reasons for the same and take appropriate actions to improve services offered to retain customers.
Balanced Scorecard- Telecom Company
Standard Telecom Ltd. is a leading cellular service provider having a global presence. It aims to be the most innovative and trusted telecom company in the world. To achieve this aim, it is constantly working on its overall functioning. It is trying to adopt best managements practices in the world. Following are some information related to the company’s performance for a particular period:
|Operating Ratio||60%||54%||Reduce it to 50%|
|Average Revenue per user||` 225||` 210||Increase it to `250|
|Unresolved Consumer Complaints||27,500||25,000||Reduce it by 20%|
|Customer Relationship Centres||280||200||Take the total to 250|
|Employee Coverage under Training
|10%||8%||At least 15%|
Evaluate the performance of the company using Balance Scorecard approach.
The balanced scorecard is a method which displays organisation’s performance into four dimensions namely financial, customer, internal and innovation. The four dimensions acknowledge the interest of shareholders, customers and employees taking into account of both long-term and short-term goals. The detailed analysis of performance of the company using Balance Scorecard approach as follows:
- Financial Perspective: Operating ratio and average revenue will be covered in this prospective Company is unable to achieve its target of reducing operating ratio to 50% instead it has increased to 60%. Company is required to take appropriate steps to control and manage its operating expenses. Average revenue per user has increased from ` 210 to ` 225 but remains short of targeted ` 250. This is also one of the reasons of swelled operating ratio. Company can boost up its average revenue per user either by increasing the price of its services or by providing more paid value added services.
- Customer Perspective: Service complaints will be covered under this perspective. The company had set a target of reducing unresolved complaints by 20% instead unresolved complaints have risen by 10%[(27,500-25,000)/(25,000) × 100]. It shows dissatisfaction is increasing among the consumers which would adversely impact the consumer’s general perception about the company and company may lose its consumers in long
- Internal Business Perspective: Establishing customer relationship centres will be covered under this perspective. Company has established 80 relationship centres in the current period exceeding its target of 50 (250-200) to cater to the needs of existing consumers as well as soliciting new consumers. This shows the seriousness of the company towards the consumer satisfaction and would help them in the long run .
- Learning and Growth Perspective: Employee training programmes are covered under this perspective. Company had set a target to cover at least 15% employee under its training programmes but covered only 10%. This could hurt capabilities of the employees which are needed for long term growth of the organisation necessary to achieve the objectives set in the previous three perspectives. People or the human resource of the company is one of the three principle sources where organisational learning and growth comes.
Balanced Scorecard- Fitness Centre
Fitness Solution is a family owned fitness club, founded in 2010 by Peter and Albert with traditional style equipment. Club commenced operations in February 2011 within a shopping mall so that members after working out, can conveniently shop, dine, pick up their children from enrichment classes or go to the cinema.
Peter and Albert, the owners, pride themselves for providing a customized / tailored program by taking into account a person’s medical history, present fitness level, fitness goals, fitness interests and offer many other small amenities that might be difficult to get in a larger Fitness Centre. They believe –
“Each individual is unique and requires a specialized program plan which should be customized and tailored to his/her needs.”
They have a number of loyal members even though they offer the traditional style equipment. Peter and Albert take care of most of the routine operations, along with a small permanent staff, and temporary staff.
(i) Identify at least three ‘Critical Success Factors’ for Fitness Solution.
(ii) Construct a ‘Balance Scorecard’ for Fitness Solution. (2 measures for each of the 4 perspectives are sufficient)
(i) Fitness Solution’s main Critical Success Factors are
(a) Developing and maintaining a high level of customer satisfaction.
(b) Offering facilities that are not much below that offered by competition.
(c) Keeping a tight cap on costs as there is considerable competitive pressure in this industry and entry barriers are not high.
(ii) The following is a possible Balance Scorecard for Fitness Solution
|Operating expenses relative to budget|
|Total daily operating revenue|
|Turnover rate among members|
|Customer satisfaction rate|
|Number of employee complaints|
|Number of equipment not available on average day (due to maintenance)|
|Number of new equipment put into service|
|Number of staff participating in training courses|
Balanced Scorecard- Miscellaneous
Identify Balance Scorecard Perspectives from the following potential measures observed in different business sectors (Healthcare/ Airlines/ Banking).
- Weekly Patient Complaints
- Patient Satisfaction Survey
- Flight Cancellation Rate
- On-time Performance of an Airline
- Number of Grants Awarded to a Healthcare unit
- Outstanding Loan Balances / Deposit Balances of a Banking Company
- Employee Turnover Rate of a Healthcare unit
- Patient Referral Rate
- Non-interest Income of a Banking Company
- Lost of Bag Reports per 5,000 Passengers
Statement Showing “Balance Scorecard Perspectives for Different Business Sectors”
|Health Care Airlines Banking Banking|
|Weekly Patient Complaints||Internal Operating
|Patient Satisfaction Survey||Customer Service & Satisfaction||—||—|
|Flight Cancellation Rate||—||Customer Service
|On-time Performance of an Airline||—||Internal Operating
|Number of Grants Awarded to a
|Outstanding Loan Balances / Deposit Balances of a Banking Company||—||—||Financial
|Employee Turnover Rate of a
|Patient Referral Rate||Customer Service & Satisfaction||—||—|
|Non-interest Income of a Banking
|Lost of Bag Reports per 5,000
In the context of a balanced scorecard, identify the perspectives of the following independent situations:
|Sl. No.||Organisation||Target Parameter||Perspective|
|(i)||Courier Company||100% on-time delivery of priority dispatches.|
|(ii)||Tuition Centre||Set up class-on-internet facility for better reach of more number of students and absentees.|
|(iii)||Computer Manufacturing Company||Set up service centres is all major cities for after sales support.|
|Ensure Computer training to all officers above a certain rank to improve their capabilities.|
Identification of Perspectives of Independent Situation – ‘Balance Scorecard’
|(i)||Courier Company||Customer Perspective|
|(ii)||Tuition Centre||Learning and Growth Perspective|
|(iii)||Computer Manufacturing Company||Internal Business Perspective|
|(iv)||Government Taxation Department||Learning and Growth Perspective|
Simplex Method – Miscellaneous Concepts
(Slack/ Surplus Variable, Shadow Price, Feasible/ Alternate Solution/ Optimal Solution)
The following information is given relating to the simplex method of a linear program with the usual notations.
Z = x1 + 5×2 → (1)
6×1 + 8×2 ≤ 12 → (2)
5×1 +15×2 ≥ 10 → (3)
x1, x2 ≥ 10 → (4)
Let s1 be the variable introduced to restate (2) as an equality and let s2 and A2 be variables to restate (3) as an equality.
If the objective is to maximize Z,
- What will be the coefficients of s1, s2 and A2 in equation (1) and (3) restated as equality?
- Identify the slack and surplus variab
- Which variables will form part of the initial solution? Why?
- If the objective is to minimize Z what will be your answer to (i) above?
Introducing Slack/ Surplus/ Artificial Variables
In Case of Maximization…
|Z||=||x1 + 5×2 + 0s1 + 0s2 – MA2||… (1)|
6×1 + 8×2 + s1
|5×1 + 15×2 – s2+ A2||=||10||… (3)|
|x1, x2, s1, s2, A2||≥||0||… (4)|
For Equation (1)
Coefficients of s1, s2, and A2 are 0, 0 and – M respectively.
For Equation (3)
Coefficients of s1, s2, and A2 are 0, –1 and 1 respectively.
(ii) s1 is Slack Variable and s2 is Surplus Variable.
(iii) In any Maximisation problem, this tableau must satisfy the following requirements:
– All the Slack Variables (and thus Surplus Variables as well) must form part of the initial solution mix (basis).
– The table must contain as many rows as there are constraints.
– The elements in the columns of variables appearing in the basis must form a unit vector.
If s2 is included in the basis, the elements of the s2 will be 0 and –1 and thus not a unit vector. This is contrary to the non-negativity restriction i.e. all variables must have a positive value. This problem is solved by adding an Artificial Variable (denoted by Ai) to the equation, that is, a variable that has a positive value. Artificial variables do not represent any quantity relating to the decision problem and must not be present in the final solution (if at all they do, it represents a situation of infeasibility). Accordingly, in the initial tableau we will place A2 along with s1 to eliminate the impact of them first.
Introducing Slack/ Surplus/ Artificial Variables
In Case of Minimization…
Z = x1 + 5×2 + 0s1 + 0s2 + MA2 … (1)
6×1 + 8×2 + s1 = 12 … (2)
5×1 + 15×2 – s2+ A2 = 10 … (3)
x1, x2, s1, s2, A2 ≥ 0 … (4)
For Equation (1)
Coefficients of s1, s2, and A2 are 0, 0 and M respectively.
For Equation (3)
Coefficients of s1, s2, and A2 are 0, –1 and 1 respectively.
Given below is an iteration in a simplex table for a maximization objective linear programming product mix problem for products X1, X2 and X3.
|Cj – Zj||0||0||-2||0||-2||0|
Answer the following questions:
- Is the above solution feasible?
- Perform one more iteration with X2 entering the solution to get a solution with the same value for the objective
- Indicate the shadow pr
- If customer is prepared to pay higher price for product X3 then by how much should the price be increased so that the company’s profit remains unchanged?
- From the given table, derive any one original constraint inequality with the coefficients of variables in their simplest whole number
|Cj − Zj||0||0||–2||0||–2||0|
(i) Yes, because the given solution has no artificial variables in the basic column.
(ii) Perform one more iteration with X2:
|Cj − Zj||0||0||–2||0||–2||0|
(iii) Shadow Price is `0, `2 and `0 (or any other given monetary unit) for Constraint 1, Constraint 2 and Constraint 3 respectively and same has been obtained from row Cj − Zj.
(iv) Cj − Zj for X3 being –2, production of each unit of X3 would cause a reduction of `2 (or any other given monetary unit). Thus, the price for X3 should be increased by at least two rupee per unit to ensure no reduction of profits.
(v) Original Constraint Inequality with the coefficient of variables:
Let us consider the given iteration is the 2nd one. The first iteration (I1) must have had S2 instead of X1. Row X1 of I2 has been computed by dividing the S2 row of I1 by 3. S2 of I1 (in Identity Matrix) would have been 1. Now it is 1/3. Working backwards, we multiply row X1 of I2 by 3 to get Row S2 of I1.
Original Row S2 [X1 of I2 × 3]:
(1X1 + 2/3X2 + 2X3) × 3 ≤ 400 x 3
3X1 + 2X2 + 6X3 ≤ 1,200
Similarly Original Row S1 [S1 of I2 + X1 of I2]:
(0X1 + 4/3X2 + 0X3) + (1X1 + 2/3X2 + 2X3) ≤ 400 + 400
X1 + 2X2 + 2X3 ≤ 800
Similarly Original Row S3 [S3 of I2 + 2 × X1 of I2]:
0X1 + 5/3X2 + 0X3 + (1X1 + 2/3X2 + 2X3) × 2 ≤ 400 + 400 × 2
2X1 + 3X2 + 4X3 ≤ 1,200
Given below is an iteration in a simplex table for a maximization objective linear programming product mix problem for products x, y and z. Each of these products is processed in three machines KA-07, KB-27 & KC-49 and each machine has limited available hours.
|Value of Basic
Variables b (=XB)
s1, s2 and s3 are slack variables for machine KA-07, KB-27 and KC-49 respectively.
Answer the following questions, giving reasons in brief:
- Does the table above give an ‘Optimal Solution’?
- Are there more than one ‘Optimal Solution’ / ‘Alternate Optimal Solution’?
- Is this solution ‘Feasible’?
- Is this solution ‘Degenerate’?
- Write down the ‘Objective Function’ of the problem.
- Write the ‘Optimal Product Mix’ and ‘Profit’ shown by the above solut
- Which of these machines is being used to the full capacity when producing according to this solution?
- How much would you be prepared to pay for another hour of capacity each on machine KA-07, machine KB-27, and machine KC-49?
- If the company wishes to expand the production capacity, which of the three resources should be given priority?
- What happens if 16 machine hours are lost due to some mechanical problem in machine KB-27?
- A customer would like to have one unit of product z and is willing to pay higher price for z in order to get it. How much should the price be increased so that the company’s profit remains unchanged?
- A new product is proposed to be introduced which would require processing time of 4 hours on machine KA-07, 2 hours on machine KB-27 and 4 hours on machine KC-49. It would yield a profit of `12 per unit. Do you think it is advisable to introduce this product?
(i) Yes, the given solution is optimal because all Cj − Zj are less than, or equal to, zero.
|Value of Basic
Variables b (=XB)
|Cj – Zj||0||0||-35/4||-5/4||-5/2||0|
(ii) No, because for each of the non – basic variables z, s1 and s2, the Cj − Zj is strictly negative. Alternate optimal solution (s) exist when either of non-basic variables has a zero Cj − Zj.
|Non Basic Variables||z||s1||s2|
|Cj – Zj||-35/4||-5/4||-5/2|
(iii) Yes, because the given solution has no artificial variable in the basis.
(iv) No, solution is not degenerate as none of the basic variables has zero quantity.
(A solution degenerates if the Quantity of one or more basic variables is zero)
(v) Maximize Z = 30x + 40y + 20z
(vi) According to the given solution, 250 units of x and 625 units of y are being produced.
The total profit is `32,500 (250 units × `30 + 625 units × `40).
(vii) Machine KA-07 and KB-27 are being used to the full capacity because, the slack variable s1 and s2 corresponding to them has a zero value in the solution.
(viii) The shadow price of hours on machine KA-07, machine KB-27 and machine KC-49 are being `5/4, `5/2 and `0, respectively, these are the maximum prices one would be prepared to pay for another hour of capacity for these three machines.
(ix) Machine KB-27 may be given priority as its shadow price is the highest.
(x) When 16 hours are lost, then production of x would increase by 12 units and that of y would decrease by 10 units and the total profit decrease by `40.
(xi) Cj − Zj for z being -35/4, production of each unit of z would cause a reduction of 35/4 rupee. Thus, the price for z should be increased by at least 35/4 rupee to ensure no reduction of profits.
(xii) Shadow prices of times on machines KA-07, KB-27 and KC-49 are `5/4, `5/2 and `0. Production of a unit of the proposed new product would, therefore, reduce profit by `10
[(4 hrs. × `5/4) + (2 hrs. × `5/2) + (4 hrs. × `0)].
Since the product would yield a profit of `12, it would result in a net increase in profit at a rate of `2 per unit. It is advisable, therefore to introduce it.
Transportation– Basic Concepts
In a 3 x 4 transportation problem for minimizing costs, will the R2C1 cell (at the intersection of
the 2nd row and 1st column) always figure in the initial solution by the North West Corner Rule? Why?
The Initial solution obtained by the North-West Corner Rule in transportation need not always contain the R2C1 cell. In the North-West Corner Rule the first allocation is made at R1C1 cell and then it only moves towards R2C1 cell when the resources at the first row i.e. R1 is exhausted first than the resources of first column i.e. C1. On the contrary if resources at first column i.e. C1 is exhausted first then the next allocation will be at R1C2.
For example the resource availability at first row (R1) is 1,500 units and the demand in first column (C1) is 1,000 units. In this case resource availability of first row (R1) will be exhausted to the extent of the demand in first column (C1) first and then the remaining resource availability at first row (R1) will be used to meet the demand of the second column (C2). In this example cell R2C1 will not come in initial solution obtained by the North-West Corner Rule.
In a transportation problem for cost minimization, there are 4 rows indicating quantities demanded and this totals up to 1,200 units. There are 4 columns giving quantities supplied. This totals up to 1,400 units. What is the condition for a solution to be degenerate?
The condition for degeneracy is that the number of allocations in a solution is less than m+n-1. The given problem is an unbalanced situation and hence a dummy row is to be added, since
the column quantity is greater than that of the row quantity. The total number of rows and columns will be 9 i.e. (5 rows and 4 columns). Therefore, m+n-1 (= 8), i.e. if the number of allocations is less than 8, then degeneracy would occur.
Assignment Problem – Basic Concepts
Explain following statement
Assignment problem is special case of transportation problem; it can also be solved by transportation methods.
The assignment problem is special case of transportation problem; it can also be solved by transportation method. But the solution obtained by applying this method would be severely degenerate.This is because the optimality test in the transportation method requires that there must be m+n-1 allocations/assignments. But due to the special structure of assignment problem of order n × n, any solution cannot have more than n assignments. Thus, the assignment problem is naturally degenerate. In order to remove degeneracy, n-1* number of dummy allocations will be required in order to proceed with the transportation method. Thus, the problem of degeneracy at each solution makes the transportation method computationally inefficient for solving an assignment problem.
In an assignment problem to assign jobs to men to minimize the time taken, suppose that one man does not know how to do a particular job, how will you eliminate this allocation from the solution?
In an assignment minimization problem, if one task cannot be assigned to one person, introduce a prohibitively large cost for that allocation, say M, where M has a high the value. Then, while doing the row minimum and column minimum operations, automatically this allocation will get eliminated.
Answer the following independent situations relating to an assignment problem with a minimization objective:
- Just after row and column minimum operations, we find that a particular row has 2 zeroes. Does this imply that the 2 corresponding numbers in the original matrix before any operation were equal? Why?
- Under the usual notation, where a32 means the element at the intersection of the 3rd row and 2nd column, we have, in a 4 × 4 assignment. What can you conclude about the remaining assignments? Why?
(i) Under the Hungarian Assignment Method, the prerequisite to assign any job is that each row and column must have a zero value in its corresponding cells. If any row or column does not have any zero value then to obtain zero value, each cell values in the row or column is subtracted by the corresponding minimum cell value of respective rows or columns by performing row or column operation. This means if any row or column have two or more cells having same minimum value then these row or column will have more than one zero. However, having two zeros does not necessarily imply two equal values in the original assignment matrix just before row and column operations. Two zeroes in a same row can also be possible by two different operations i.e. one zero from row operation and one zero from column operation.
(ii) The order of matrix in the assignment problem is 4 × 4. The total assignment (allocations) will be four. In the assignment problem when any allocation is made in any cell then the corresponding row and column become unavailable for further allocation. Hence, these corresponding row and column are crossed mark to show unavailability. In the given assignment matrix two allocations have been made in a24 (2nd row and 4th column) and a32 (3rd row and 2nd column). This implies that 2nd and 3rd row and 4th and 2nd column are unavailable for further allocation.
Therefore, the other allocations are at either at a11 and a43 or at a13 and a41.
PERT/ CPM – Basic Concepts
State the validity of following statements along with the reasons:
- Two activities have common predecessor and successor activities. So, they can have common initial and final node
- In respect of any activity whether real or dummy, the terminal node should bear a number higher than the initial node numbe
- The difference between the latest event time and the earliest event time is termed as free
- For every critical activity in a network, the earliest start and the earliest finish time as well as the latest finish time and the latest start time are the same.
- The optimal duration of a project is the minimum time in which it can be com
- Resource leveling aims at smoothening of the resource usage rate without changing the project duration.
Reason: As per the rules of network construction, parallel activities between two events, without intervening events, are prohibited. Dummy activities are needed when two or more activities have same initial and terminal events. Dummy activities do not consume time or resources.
Reason: As per the conventions adopted in drawing networks, the head event or terminal node always has a number higher than that of initial node or tail event.
Reason: The difference between the latest event time and the earliest event time is termed as slack of an event. Free float is determined by subtracting head event slack from the total float of an activity.
Reason: For every critical activity in a network, the earliest start time and the latest start time is same and also the earliest finish time and the latest finish time is same.
Reason: The optimum duration is the time period in which the total cost of the project is minimum.
Reason: Resource leveling is a network technique used for reducing the requirement of a particular resource due to its paucity or insufficiency within a constraint on the project duration. The process of resource leveling utilize the large floats available on non- critical activities of the project and cuts down the demand of the resource.
Application of Learning Curve
State whether the learning curve theory can be applied to .the following independent situations briefly justifying your decision:
- A labour intensive sculpted product is carved from the metal provided to the staff. The metal is sourced from different suppliers since it is scarce. The alloy composition of the input metal is quite different among the suppl
- Pieces of hand-made furniture are assembled by the company in a far off location. The labourers do not know anything about the final product which utilizes their work. As a matter of further precaution, rotation of labour is done fre
- Skilled workers have been employed for a long time. The company has adequate market for the craft pieces done by these expe
- A company funds that it always has an adverse usage of indirect material. It wants to apply learning curve theory to improve the way standards have been se
- ‘Learning Curve Theory’ will not be applicable as alloy combination of the input metal is quite different among the suppliers hence learning experience with one type of metal may not be beneficial for the workers to deal with other metal with separate alloy com
- ‘Learning Curve Theory’ will not be applicable as in this situation rotation of labour is done frequently, labours will not be able to get the benefit of learning and apply their learning. Hence, learning curve theory can not be app
- ‘Learning Curve Theory’ will not be applicable as in this situation as workers are skilled and employed for a long time, they have already achieved maximum level of expertise by taking advantage of learning. Hence, at this point of time learning curve theory can not be
- ‘Learning Curve Theory’ will not be applicable as indirect materials are the materials which are not used directly in the production (not directly proportionate with volume of output) and usually used machines (e.g. lubricants, spares parts et) with less human interactions. Adverse usage of indirect materials can be controlled through proper monitoring and appropriate standard settings and not from applying learning curve theory.
The following information is provided by a firm. The factory manager wants to use appropriate average learning rate on activities, so that he may forecast costs and prices for certain levels of activity.
- A set of very experienced people feed data into the computer for processing inventory records in the factory. The manager wishes to apply 80% learning rate on data entry and calculation of inventory.
- A new type of machinery is to be installed in the factory. This is patented process and the output may take a year for full fledged production. The factory manager wants to use a learning rate on the workers at the new m
- An operation uses contract labour. The contractor shifts people among various jobs once in two days. The labour force performs one task in 3 days. The manager wants to apply an average learning rate for these workers.
Advise to the manager with reasons on the applicability of the learning curve theory on the above information.
The learning curve does not apply to very experienced people for the same job, since time taken can never tend to become zero or reduce very considerably after a certain range of output. This is the limitation of the learning curve.
- Data entry is a manual job so learning rate theory may be applied. Calculation of inventory is a computerized job. Learning rate applies only to manual labour.
- Learning rate should not be applied to a new process which the firm has never tried befor
- The workers are shifted even before completion of one unit of work. Hence learning rate will not apply.
State whether and why the following are valid or not for learning curve theory:
- Learning curve theory applies to a division of a company which is fully auto
- Learning curve theory helps in setting standards.
- Learning curve helps in pricing decis
- Experienced workmen are more prone to learning effe
Valid or Invalid
|Sl. No.||Situation||Valid or Not
|(i)||Learning curve theory applies to a division of a company which is fully automated||Not Valid||It can be very effective in labour oriented industry but not in fully automated company.|
|(ii)||Learning curve theory helps in setting standards||Valid||If budgets and standards are set without considering the learning effect, meaning less variances are likely to occur. The learning curve is quite helpful in setting standards in learning phase.|
|(iii)||Learning curve helps in pricing decisions||Valid||The use of cost data adjusted for learning effect helps in development of advantageous pricing policy.|
|(iv)||Experienced workmen are more prone to learning effect||Not Valid||Activities being performed by experienced workmen, who are thoroughly familiar with those activities, will not be subject to learning effect.|
Life Saving – Resources List on www.sjc.co.in
Click on Resources > E- library > CA > Final
- Comparative Study of LP Methods
- Assignment Rule
- Transportation Algorithm
- Simplex Method
- Relevant Costing – Full Concepts
- Standard Costing Formula
- Decision Making – Comparative Study
- How to approach any question
- List of Important Theory Questions
- Sleeping Capsule Book
Click on Resources > Video Library > Costing
- Throughput Accounting,
- Simplex Basics,
- Transfer Pricing – Main Concepts,
- Standard Costing – Concepts,
- Marginal Costing – Evolution.
REVISION CHECK LIST
|Detailed Chapter wise – Snapshot of Amendment Cum Revision|
|Chapter Name||Marks||Revision Contents – Theory and Practicals|
|New (Amendments)||Old (Existing)|
|Activity Based Costing
|Break Even with ABC||Traditional Cost System Vs Activity Based System|
|Direct Product Profitability Based||Variance Analysis of Activity Based Cost|
|Customer Profitability Analysis Based|
|Case Study Based Applicability of ABC|
|Value Chain Analysis for Cost Reduction||Steps in Target Costing|
|Case Study Based Value Analysis||Value Engineering and Value Analysis|
|Pricing Policies (External)
|Pareto Analysis – Practical Questions||Return on Investment Pricing Calculations|
|Case Study Based Pricing Strategies Selection||Cost Sheet Based Questions|
|Calculas Based Optimum Price Determination|
|Budget Variance with Responsibility Accounting||Budget Ratios|
|Budget Variance with Performance and Summary Budgeting||Cash Budgets|
|Budget with Inventory Control and Stock levels|
|Applications of Zero Based Budgeting|
|Standard Costing – Selling Cost Variances||WIP Effect|
|Profit Reconciliation – New Variety with Marginal costing||Profit Reconciliation – all varieties|
|Case Study Based Question on CSF||Mix, Yield, Capacity,Efficiency, Market Size, Market Share Variance|
|Chart of Standard Costing Formulas||Missing Figures Problem|
|Planning, Operating and Traditional Variances|
|Standard Cost Determination Based on Learning Curve|
|Single Plan and Partial Plan Accounting Features|
|6||Balanced Score Card and Profitability||5||Case Study Based Questions on Perspectives and KPI Identification||Four Perspectives of Score Card with examples|
|Profitability Analysis into Growth, Price Recovery and Productivity / Cost Leadership, Product Differentiation and Market Share|
|Chart of Relevant Costing Concepts||Different Approaches of Evaluation|
|Concept of Minimum Price|
|Relevant Cost of Material, Labour, Overheads and Depreceiation|
|Calculas Based Optimum Price Determination||Cost Centre and Profit Centre Disticnction|
|International Taxation Based Questions||Goal Congruency – Meaning and Importance|
|Case Study Based Questions||Transfer Price based on Opportunity Cost/ Goal Congruency|
|Strategy Based Questions|
|Dual Tariff, Shared Profit Transfer Pricing|
|Probability Based Break Even Analysis||Break Even Point and Potential Break Even Point|
|Sensitivity Analysis||Combined Break Even Point for multi products|
|Multiple Break even Point for slab fixed costs|
|Indifference Point for evaluation of alternatives|
|Shut Down Point for Shutdown or Continue decision|
|Chart of Decision Making||Make or Buy – Using Relevant Costing or Indifference Point|
|List of Tips to Read the Questions||Key Factor/ Principle Budgeting Factor – Different Situations|
|Sub Contracting – with Incremental Fixed Costs|
|Export Offers – Using Incremental Approach|
|Any other – using Relevant Costing Approach|
|Total Quality Management
|Four Types of Quality Cost|
|Six C’s of Quality|
|P’s of Quality|
|Incremental Approach to Evaluate Quality Programmes|
|TOC or Throughput Accounting
|Drum – Buffer – Rope Theory Concept||Three Perspective of TOC|
|Synchronous Manufacturing – Optimised Prodcution Technology|
|MRP and MRP II|
|Throughput Accounting – Constraint or Bottleneck Optimisation|
|Overall profit Statement under Throughput Accounting|
|13||Service Sector||5||Utility Services||Break Even Point in Services|
|Just In Time
|5||Backflush Costing Journal Entries||Just In time Features|
|Backflush Costing System|
|Practical Problems based on Incremental Approach|
|Life Cycle Costing
|Practical Questions based on Profitability Statement||Theory on Phases in Product Life Cycle|
|Practical Question Based on Learning Curve|
|LP Formulation and Graph||8||Comparative Study of LP Methods Chart||Conditions of LP|
|Unbounded Minimisation and Maximisation Problems|
|Situations of Constraints|
|Steps to Solve|
|Sensitivity Analysis – Interpretations|
|10||Chart of Hungarian Rule||Hungarian Rule Steps|
|Special Cases Implication|
|Airlines Idle Time Minimisation|
|Travelling Salesman Cycle Optimisation|
|Transportation||Chart of VAM and Optimality Test||Initial Solution Methods – NWCR, LCAM, VAM|
|Steps to solve full problem|
|Special Cases Implication|
|Sensitivity Analysis – Interpretations|
|Solving Transportation Problem by Hungarian Rule|
|Errors in Network|
|Time Schedule and Float Analysis|
|Updating the Network|
|Crashing of Network|
|PERT – S.D., Variance, Expected Time, Probability of Completion|
|Resource Allocation Table|
|8||Cakes – Simulation|
|Dentist Chamber – Simulation|
|Bank or Service Counter Simulation|
|Assembly Line Simulation|
|Inventory Control – Book Store Simulation with Lost demand|
|Applicability of LCT|
|Relationship expressed in Learning Curve Theory|
|Use of Learning Curve Equation|
|Use of Learning Curve Table|
|Pricing and Standard Cost Computation using LCT|
|Determining the values where learning stops|
|23||Theory Exclusives||List of Theory Questions and Case study based Questions||Sleeping Capsule Book|