Course: Strategic Cost Management

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NMIMS Global Access

School for Continuing Education (NGA-SCE)

Course: Strategic Cost Management

Internal Assignment Applicable for December 2016 Examination

Assignment Marks: 30

Instructions:

·       All Questions carry equal marks.

·       All Questions are compulsory

·       All answers to be explained in not more than 1000 words for question 1 and 2 and for question 3 in not more than 500 words for each subsection. Use relevant examples, illustrations as far as possible.

·       All answers to be written individually. Discussion and group work is not advisable.

·       Students are free to refer to any books/reference material/website/internet for attempting their assignments, but are not allowed to copy the matter as it is from the source of reference.

·       Students should write the assignment in their own words. Copying of assignments from other students is not allowed.

Question. 1. Nine Gems Ltd has just installed Machine-R at a cost of Rs 2,00,000. The machine has a five year life with no residual value. The annual volume of production is estimated at 1,50,000 units, which can be sold at Rs 6 per unit. Annual operating costs are estimated at Rs 2,00,000 (excluding depreciation) at this output level. Fixed costs are estimated at Rs 3 per unit for the same level of production. Nine Gems Ltd has just come across another model called Machine-S capable of giving the same output at an annual operating cost of Rs 1,80,000 (exclusive of depreciation). There will be no change in fixed costs. Capital cost of this machine is Rs 2,50,000 and the estimated life is for 5 years with no residual value. The company has an offer for sale of Machine-R at Rs 1,00,000. The cost of dismantling and removal will be Rs 30,000. As the company has not yet commenced operations, it wants to sell Machine-R and purchase Machine-S. Nine Gems Ltd will be a zero-tax company, for seven years in view of several incentives and allowances available. The cost of capital may be assumed at 14 per cent. Advise whether the company should opt for replacement. (10 Marks)

Answer:

Financial evaluation of whether to replace Machine-R

Cost of Machine-S: Rs 2,50,000

Less: Effective sale proceeds of Machine-R (Rs 1,00,000 – Rs 30,000, dismantling/removal costs)

70,000

1,80,000

Incremental cash inflows and NPV (for years t = 1 – 5)

Savings in annual operating costs:

Question. 2. A restructuring expert has been hired to explain to the management of a loss making company the symptoms that are normally seen before a company qualifies for being called as a restructuring candidate. You being an Executive Assistant to the expert are required to present a small write up briefly explaining those symptoms.

Answer: Executive Assistant is a post of great responsibility. There are certain responsibilities that you will necessarily need to follow in order to maintain the management of company. In this case, there is some loss making symptoms that you have to address in order to restructure the present strategy so that the loss possibilities can be reduced with the more efficient strategy development advantage.

Question. 3. a) As a qualified cost accountant, explain to the Board of Directors what are the objectives and scope of Cost Audit. (5 Marks)

Answer:

Objectives

1. To build up the accuracy of data costing. This is finished by checking the arithmetical precision of data cost accounting sections in the books of records.

2. To guarantee that data cost accounting standards are administered by the management targets and these are entirely followed in planning cost accounts.

3. To guarantee that cost records are right to find out the errors, cheats and wrong practice in the current system.

b) A small team from amongst the corporate management group has been hearing about target costing of late. Can you explain some of the key characteristics of Successful Target Costing? (5 Marks)

Answer: Corporate sector is always filled with a lot of competition and target costing can be a huge success for any corporate strategy. Target costing can be successful when you pay attention to all the necessary aspects of it and below are some of the most common characteristics of Target Costing.

Key characteristics of Successful Target Costing

1. Price Led Costing: The target costing should be determined with the value led costing analysis. Target product cost should be determined with the help

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