Arpan Khare WMP10059 MANAC Case Study -Inexperience WMP TERM 2

S.No Issues under consideration
Loss of Rs. 30 million in 3rd quarter
1 of 2008 to MGPM (owned by Mr.
Joginder Singh Marwah)
Study of reasons for loss &
challenges in studying
2 4) analyze them for planning , control& decision making purpose
Desired Information
- Net P&L of the quarter
- Calculation of projected profit - Owner(Joginder) extremely surprised with the result, Expectation was profit
Procedure for studying
Available information Gap Possible sources of information
- CA educational background. Calculation of projected profit Projection & Estimates made begining of
year
Procedure No scientific method to ovecome Expert advice/CA
Accumulate, classify & group all the cost for challenges
1) ascertain all total & unit cost
2) observe trend
3) control them
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
3 - Depreciation: 60%- for factory machines , equipments, fixtures.
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
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
charges & import duty), transporation
charges, storage , insurance cost of
4 raw material should be added to
invoice price.
Analysis of product cost break -Raw material: 50% cost of total cost of high demand items. Absorbtion of Import Duties, Invoice, BOM, Expert advice
up - Raw cotton, wool & clay - direct cost(conveniently traced to spefic items) Transportation charges be considered
Process:Price of raw material - Synthetic gum ,minor regional jewellery & decoration pieces : form insignificant portion of total cost in Invoice price
& semi finished products
(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

If purchased from TMC : Rs. 425/kg

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
discotinuing unprofitable products
9 sales of other product due to
a) Change in processing of Jute
b) Change in handicrafts assembly
10 proces
Opportunity to supply of premium
items to Cottage Emporium
11
Total loss in jewellery boxes &
opportunity cost (Increase in
visibility of variety)
Saving percentage
1) Minimum quantity
2) Competetive price
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
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
where these boxes are manufactured of variety
2) Less customer preference to other products as well because of reduction in range of products
a) Saving of 20% through Jute processing. Nil
b) Saving of waste by 15% by change in assembly process
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.
firm expects 55% profit margin on specially ordered items) Increase in sales quanity projection if Sales increase projection from Marketting
- 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
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

Wages 205000 Raw Material 362500

Utilities 37500 Work In Progress 387500 60%
Depreciation 97500 Finished Goods 862500 70%
Raw Material purchased 412500 Machine and Equipment 1575000 80%
Insurance 10000 Debtors 402000 90%
Rent 125000 Cash in Hand 375000 100%
Salesforce salary 40000 Cash in Bank 582500 110%
Admin Staff Salary 40000 Accumulated Loss 4612500 120%
Advertising 2E+05 130%
Net Operating Loss -30000 140%
150%
Corrected Income statement

Income Statement Expenses (COGS)

Revenues 1125000 Raw materials Cost Profit change percentage with change in raw m
Cost of Goods Manufactured 555250 Opening stock of raw materials 217500
Beginning Inventory of Finished Goods (85%) 733125 Purchases of raw materials (60%) 412500 125
Ending Inventory of Finished Goods -862500 Closing stock of raw materials 362500
Cost of Goods Sold 425875 Raw material 267500 120
Gross Margin 699125
Operating Expenses Labor Cost (15%) 30750 115
Utilities (30%) 11250
Depreciation (40%) 39000 Manufacturing Overhead Costs 110

Percentage change in profit

Insurance (20%) 2000 Inraw Labor 174250
Rent (15%) 18750 Utilities cost (70%) 26250 105
Sales staff Salary 40000 Insurance Premium (80%) 8000
Office staff Salary 40000 Rent (85%) 106250 100
Advertisements 187500 Depreciation (60%) 58500
Total Operating Costs 338500 Total Manufacturing Overhead Costs 373250
95
Operating Income (Profit) 360625 Manufacturing costs incurred 671500
Beginning Work in Progress Inventory (70%) 271250
90
Ending Work In Progress Inventory -387500
Cost of Goods Manufactured 555250
85

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

Every 0.6 217500 302625 84 232500

10%
decrease 0.7 253750 317125 88 271250
0.8 290000 331625 92 310000
0.9 326250 346125 96 348750
BASE VALUE 1 362500 360625 100 387500
Every 1.1 398750 375125 104 426250
10%
increase 1.2 435000 389625 108 465000
1.3 471250 404125 112 503750
1.4 507500 418625 116 542500
1.5 543750 433125 120 581250

Profit change percentage with change in raw material, WIP, FInished goo
125

120

115

110 Profit cha

raw mate
Percentage change in profit

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%

Percentage change in closing inventory

80
50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% 160%

Percentage change in closing inventory

AC Case Study -Inexperience WMP T

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

314125 87 517500 308875 86

325750 90 603750 321813 89
337375 94 690000 334750 93
349000 97 776250 347688 96
360625 100 862500 360625 100
372250 103 948750 373563 104
383875 106 1035000 386500 107
395500 110 1121250 399438 111
407125 113 1207500 412375 114
418750 116 1293750 425313 118

WIP, FInished goods closing inventory

CONCLUSION:
Profit is most sensitive with respect t
material followed by closing inventor
followed by closing inventory of finis
Profit change with change in
raw material closing inventory
Profit change with change in
WIP closing inventory
Profit percentage with change
in finished goods closing
inventory

160%
160%
 WMP TERM 2

at every 10% interval)

tive with respect to closing inventory of raw

by closing inventory of WIP inventory
g inventory of finished goods