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Sherpe Te we consolete New Sparget contro pu 3. These two Timber ra Materas Drect to VOM 9 (76) (?) ? 25 Solving, we have 17. So, 17 2.2 Hours - 2.125 Hours per Time Reduction required per unit 3 - 2.125 0.15 hours po of Time Reduction from present time 0.875 29.16% 3 Total Labour Time required for 30,000 units - 2.125 x 30,000 63,750 hours Note: It is given that "hourly rate should be increased by * 3 per unit and is understood as 3 pfy in the above computation. Alternatively, if it is assumed that the Wages are increased by " 3 per unit", the revised Labour Cost per unit will be (H x 3) + 3). In such case, the revised Labour Time per unit will be 2.8 Hours pu, and Time Reduction required will be 0.2 hours per unit, le. 6.67% reduction from present time. (1) Answer to Requirement No.(I) Problems that may arise in production due to decrease Remedial Measures to overcome Page in unit production time problems Reference Quality Issues: Excessive focus on Cost Reduction, Quality Management and Quality Page 7.4, Para leading to use of cheaper components and materials, may Compliance should not be lead to reduction in quality of the product. 7.1.8, Point 4 compromised. Design Change: If applied to products which involve Design Team should be headed by a repetitive manufacturing, reduction in time per unit may Leader who has good knowledge of Page 7.11, lead to unwanted pressure on product design and its the design process, good inter- Para 7.2.8 implementation stage. personal skills, and commitment. Short Term Focus: The reduction in unit production time Replace short-term reaction with long-term planning. may be viewed as a short-term reaction to handling Page 3.7, Para business problems. Create constancy of purpose 3.2.6, Point 1 towards improvement. Lack of Training: If people are inadequately trained in Institute training on the job. Page 3.7, Para time reduction, they will not all work the same way, and Communicate the revised way of 3.2.6, Point 6 this will introduce variation. work, to achieve time reduction. Evaluation: Production Targets and Numerical Measures Eliminate Management by Page 3.7, Para encourage the delivery of poor quality goods, and hence to Objectives. 3.2.6, Point 11 be removed. Focus on both Quality & Quantity. . 5. Refer Page 7.6, Para 7.1.12 (iii) Answer to Requirement No.(iii): 0. ROCE Pricing, Target Costs Ramu is the Managing Partner of a business that has just finished building a Motel. He anticipates that he will rent these rooms for 16,000 room-nights next year. All rooms are similar and will rent for the same price. The following Operating costs are expected to be incurred for next year- Variable Operating Costs 3 800 per room night Fixed Costs: Salaries and Wages 317,50,000 Maintenance of Building 3,70,000 14,00,000 Other Operating and Administrative Costs Total Fixed Costs 35,20,000 The Capital invested is 60 Lakhs and the Firm expects 25% return on its investment 7.19 or they Copa Royal Car Activity Cosg Principles the Carrer bethe Forecast Cost Target Total cost of the Royal Car ON for Royal (0) 2,31,00.000 1.Computation of Overhead using Activity Based Casting Active Cost Cost ABC Rate Paths) Driver Driver Qty 0.000 2310 3.850 per MC Hours M/C Hour Resource required for Royal (1,000 Cars 61.000 = 6,000 Mc Hours 94,37,500 -100 Deliveries 1,000 Cars 10 Cars 80,00,000 3,95,37,500 39,537.50 Given = 50,000 Km No. 640 84,375 50%= 50 Deliveries Deliveries Per Delivery d x 40% = 350 Nos of 2.25.000 160 per Ks kim km Total ON for 1,000 Cars of Model Royal So, OH Cost per Car = Total OH Cost = 1,000 Cars per Car 9,75,000.00 2,43,750.00 7,31,250.00 2. Target Cost Forecast Total Cost and Cost Gap Particulars Target Selling Price per Car Less Target Profit on the above Selling Price (9,75,000 x 25%) Target Total Cost Forecast Total Costs: Material 4,75,000.00 Labour 2,50,000.00 OH (WN 1) 39,537.50 Cost Gap between Forecast Total cost and the Target Cost (1 - 2) (Cost reduction required) 7,64,537.5 33,287.50 3 12. Target Costs using ABC System, Effect of product design changes on Product Costs category (Dired Materials) and three indirect-Cost categories - Kata Ltd manufactures many products. To compute Manufacturing Cost, it uses a Costing System with one Direct-Co Batch-related Set-up, Production Order , and Materials-Handling Costs, all of which vary with the number of batches. Manufacturing Operations costs that vary with machine-hours. Costs of Engineering Changes that vary with the number of engineering changes made. In response to competitive pressures at the end of year 1, Product Designers at the Company employed Value Engineer techniques to reduce Manufacturing Costs. Actual Information for Year 1 and Year 2 follow- Particulars Actual Results for Year 1 Actual Results for Ye Total Setup, Production-Order, and Material Handling Costs 72,00,000 75,00 Total Number of Batches 900 Total Manufacturing Operations Costs 1,21,00,000 1,25,0 Total Number of Machine Hours worked 220,000 25 Total Costs of Engineering Changes 26,40,000 20. Total Number of Engineering Changes made 220 The Company wants to evaluate whether Value Engineering has succeeded in reducing the Target Manufacturing Cost of one of its main products, KL-69, by 12%. Actual Results for Year 1 and Year 2 for KL-69 are - 7.22 . thered to produce housed to produce of Engineering Changes made - for Year Dhe Company heve the Tage Wetten for a show your des Activity ABC Rate 72,00 000 = 8,000 per batch 900 Janufacturing 121,00,000 55 perche Operations 220.000 Engineering 26,40.000 = 12,000 per change hangs 220 Total OH Cost Output Quantity OH Cost per unit Add: Direct Materials Cost per unit Total Cost per unit Target Cost for Year 2 Comments on Target Cost Reduction Yes 3.000 -5.50,000 21.00055 11.55.000 14x12.000 1,68,000 18.83.000 3.500 units 538.00 1,200.00 1.738.00 ARC Rate 75.00.000 -7.50 per batch LOGO 125,00.000 -50 per me 2.50.000 200.000 10.000 per change 200 Yew 3.000 - 5.40.000 22.000 -11.00.000 10 10.000 -1.00.000 18,40,000 4,000 units 460.00 1,100.00 1.560.00 1.529.44 1,738 less 12% thereon Not achieved S2 ABC, Target Costing and Pricing Decisions M06 Computo Ltd manufactures two parts P' and Q for Computer Industry. P: Annual Production and Sales of 1,00,000 units at a Selling Price of 100.05 per unit. Q: Annual Production and Sales of 50,000 units at a Selling Price of 150 per unit. Direct and Indirect Costs incurred on these two parts are as follows - Rin thousands) Particulars P Q Total Direct Material Cost (Variable) 4,200 3,000 7,200 abour Cost (Variable) 1,500 1,000 2,500 Direct Machining Costs (See Note) 700 550 1.250 direct Costs: Machine Set Up Cost 462 Testing Cost 2,375 Engineering Cost 2,250 Total 16,037 Direct Machining Costs represent the cost of machine capacity dedicated to the production of each product. These costs are fixed and are not expected to vary over the long-run horizon. ote: Q Additional information is as follows - Particulars oduction Batch Size Set up Time per batch Testing Time per unit ngineering Cost incurred on each product 1,000 units 30 hours 5 hours 78,40,000 500 units 36 hours 9 hours 14,10,000 7.23 Life Cycle Costing Better Decision Making: Based on a more accurate and realistic assessment of revenues and conts, at least within a particular life cycle stage, better decisions can be taken Long Run Wholistic view: PLC thinking can promote tong term rewarding in contrast to short term profitability rewarding. It provides an overall framework for considering total incremental conts over the entire fe span of a product, which in turn facilitates analysis of parts of the whole where cost effectiveness might be improved Life Cyce Budgeting: Life Cycle Budgeting, ie. Ulte Oyde Costing with Target Costing principles, facilitates scope for cost reduction at the design stage itself. Since costs are avoided before they are committed or locked in the Company is benefited. Review: PLC Costing provides scope for analysis of long term picture of product line profitability, feedback on the effectiveness of life cycle planning and cost data to clarify the economic impact of alternatives chosen in the Design, Engineering Phase, etc. PLC as Management Tool: (a) As a Planning Tool, PLC Concept identifies the marketing challenges in each stage and leads to identification of various alternative strategies. (b) As a Control tool, PLC Concept allows the Entity to measure product performance against similar products launched by it in the past, or with Competitors' Products. (C) As a Forecasting tool, PLC Concept is comparatively less useful, since sales histories exhibit diverse patterns and the stages vary in duration Questions for Revision What is the meaning of Product Life Cycle? Z What are the phases in Product Life Cycle? N 11. N 14 What are the characteristics of Product Life Cycle concept? RTP, N 04 4. Compare the Stages during various stages of Product Life Cycle with respect to - (a) Pricing, (b) Product. (C) Customer. (d) Advertising, (e) Distribution, and (1) Sales Promotion. What do you understand by Life Cycle Costing? RTP, M 02, N 03, N 04, M 06, M 07. M 10 6. Bring out the importance of Product Life Cycle Costing. RTP, M02 What are the benefits of Product Life Cycle Costing? RTP, N 02, N 04,M06, M 10 Illustrations RTP Life Cycle Cost with Time Value of Money Company has a choice to purchase either Machine A or B for producing its product. If the Machine has a life of 12 years, and lance Costs 12% a year, advise which Machine is preferable. The Annuity of 12% Finance Costs for 12 years is 6.194. B Machine mitial Cost 328,000 340,000 18,000 p.a. *24,000 p.a. nual Operating costs lution: Total Costs including Time Value of Money Particulars A Initial Cost 28,000 40,000 d: PV of Annual Operating Costs (24,000 X 6.194) = 1,48,656 R18, 000 X 6.194) = 1,11,492 Total Life Cycle Costs 1,76,656 1,51,492 Jservation: Considering Finance Costs also, Machine B is preferable. Life Cycle Costing - New Product Launch Decision N 15 Company is planning a new product. Market Research information suggests that 40,000 units of the product can be sold at a ximum of 25 per unit. The Company seeks as minimum mark-up of 25% on Product Cost. It is estimated that the lifetime sts of the product will be under. You are required to advise whether the product be manufactured. 1,50,000 16 per unit End of Life Costs 70,000 Promotion and Capacity Costs 20,000 Research and Development, Design Costs Manufacturing Costs 8.5