NARSEE MONJEE INSTITUTE OF MANAGEMENT STUDIES (NMIMS)
GLOBAL ACCESS SCHOOL FOR CONTINUING EDUCATION
(NGA-SCE)
INTERNAL ASSIGNMENT
COURSE: STRATEGIC COST MANAGEMENT
APPLICABLE FOR SEPTEMBER 2022 EXAMINATION
NMIMS GLOBAL ACCESS SCHOOL FOR CONTINUING EDUCATION (NGA-
SCE)
COURSE: STRATEGIC COST MANAGEMENT
INTERNAL ASSIGNMENT APPLICABLE FOR SEPTEMBER 2022
EXAMINATION
QUES 1.) You are running an ice cream parlour. The ice cream is manufactured in house
and is served to the customers at the outlet. You want to improve the customer service
and customer satisfaction near to perfection. Your consultant advised to adopt Six Sigma
to drive process improvement.
Discuss the concept, its three critical success factors and relevant break through strategies
of six sigma philosophy (10 Marks)
ANSW 1.) As per the advice given for the purpose of improvement of customer service
for ice cream parlour, six sigma policy is enumerated and explained below as follows-
CONCEPT OF SIX SIGMA
Definition
It is a set of management techniques intended to improve business processes by greatly
reducing the probability that an error or defect will occur.
Meaning
Six sigma is a quality control and process improvement methodology that takes a data-
driven approach to solving challenges in any type of operation. Its success rests on the
fact that it’s a proven strategy that applies to any type of business.
Practitioners of Six Sigma designed tools that allow project teams to identify the root
causes of problems, collect data on how a process currently works, develop solutions to
the problem, test those solutions and then put best option into place. They then measure
the results of the change and start the entire process again.
Explanation
The term Six Sigma refers to a set of quality-control tools that businesses can use to
eliminate defects and improve processes to help boost their profits. It was developed by a
scientist in the 1980’s while he was working at Motorola 1.
Six sigma is a statistical-and-data-driven process that works by reviewing limit mistakes
or defects.It emphasizes cycle-time improvements while reducing manufacturing defects
to no more than 3.4 occurences per million units or events. This means that an error
generally occurs with a six-standard deviation event from the mean because only 3.4 out
of a million events along a bell curve would fall outside of six standard deviations.
THREE CRITICAL SUCCESS FACTORS
There are three critical success factors of six sigma which are as follows-
PROCESS IMPROVEMENT
1. Define- Define what the issue is. Form a Project Team responsible for the
eradication & resolution of the issue.
2. Measure- Gather data surrounding how the given process is currently operating
to gather initial thoughts on what may be causing the problem with the process.
3. Analyse- Stage where the root cause is identified through testing many theories
based upon what may be causing the problem. Thus, the root cause is ultimately
obtained.
4. Improve- The crucial stage of devising/ designing the necessary changes to
substantially improve the process.
5. Control- Controlling the effective implementation of the changes and making
adjustments/ tweaks when necessary if issues arise with the new change in
process.
PROCESS DESIGN/ REDESIGN
1. Define- Define the target/ aims and objectives of the new process and the
quality of product/ service the consumer requires to be produced.
2. Match- Develop performance requirement that are aligned with the targets
identified in the ‘Define” stage.
3. Analyse- Analyse these performance requirements and build an outline
framework as to what the basis of the design will consist of.
4. Design & Implement- The process of designing and implementing the new
process/process change. The design must consider Consumer Requirements
and can deliver the ‘Targets’ and incorporating the ‘Performance
Requirements’.
5. Verify- Ensure the process is opening effectively and as it was designed to
do so. Produce Control Mechanisms to ensure that standards are maintained
and mitigate the risk of problems from this new process design.
Process Management
Process Management is often perceived as the most complex and time consuming
aspect of six sigma. Process Management is a structured approach to performance
improvement that centers on the disciplined design and careful execution of a
company’s end to end business processes. Process Management focuses on
operating as a team and a guide as to which activities should be done when and by
whom. Process Management is responsible for the overall design of concept and
ensuring the employees are acutely aware they are part of a larger picture/process.
Ensuring that an end-to-end process is designed enables Key Decision Makers to
make Operational Adjustments as they are dealing with one process that is inter-
connected rather than dealing with isolated separate processes which can be
difficult to control and improve.
RELEVANT BREAK THROUGH STRATEGIES OF SIX SIGMA PHILOSOPHY
1. RECOGNISE
The “states” of a business are the global business conditions used to guide and mange
a business. These could be “levels of customer satisfaction”, for example, which
impact the economics of a business. Knowing this can help a company leverage its
efforts and resources to improving customer satisfaction, which will in turn impact
the bottom line of the business in a positive way.
2. DEFINE
Let’s assume that “levels of customer satisfaction” is one of the states of business”
that is being considered for improvement. What parts of the company’s organization
are correlated to this state? Is it manufacturing system, the engineering (design)
system, the delivery system and the service system? Are the characteristics of these
syatems which are critical to quality (in the sense of customer satisfaction).
3. MEASURE
The first question here to ask is “what” to measure, and then the second question to
ask is “how” to measure it. The third question to ask “is there executive
(management) commitment to go after the right measurements?”
4. ANALYSE
Let us say that the company analyzes its own performance in an area and finds that it
is operating at a 3.4 sigma level. Let’s say that the company has analyzed a
competitor which operates in the same or similar area at a 4.6 sigma level. What is
that other business doing that makes its performance better.
5. IMPROVE
Once the system that needs to be improved has identified those elements which
comprises it, a company then needs to identify those elements which need to be
improved first, which are considered to be most likely those that affect quality. This
ensures that the company’s resources spent on Six Sigma projects to improve those
elements are getting the most bank for the buck.
6. CONTROL
Once an improvement is identified and proved with Six Sigma techniques, then it is
important to monitor and control this solution over a period of time to make sure that
it is a permanent solution and that the system does not fall back into previous
patterns, which could cause the gains made in the previous stage to erode over time.
QUES 2.) The cost of an article at the capacity level of 5000units is given as under. For
the variation in 25% in the capacity above or below this, the individual expenses vary as
mentioned in the column C
Prepare the production cost budget at 4000 units and 6000 units
(10 Marks)
Amount (in Rs.) C (%)
Material cost 250000 100 % variable
Labour cost 150000 100 % variable
Power 12500 80 % semi variable
Repairs 20000 75 % semi variable
stores 10000 100 % variable
ANSW 2.) PRODUCTION BUDGET
Particulars Per/unit 4000 units 6000 units
Material cost 250000 = Rs. 50 p/u 200000 300000
5000 (4000 * 50) (6000 * 50)
Labour cost 150000 = Rs. 30 p/u 120000 180000
5000 (4000 * 30) (6000 * 30)
Power cost 10000 = Rs. 2 p/u 8000 12000
5000 (4000 * 2) (6000 * 2)
Repairs cost 15000 = Rs. 3 p/u 12000 18000
5000 (4000 * 3) (6000 * 3)
Stores cost 10000 = Rs. 2 p/u 8000 12000
5000 (4000 * 2) (6000 * 2)
TOTAL VARIABLE 348000 522000
COST
Add: Fixed cost
Power 2500 2500
Repairs 5000 5000
TOTAL FIXED COST 7500 7500
TOTAL PRODUCTION 355500 529500
COST
(348000+7500) (522000+7500)
Working notes-
Semi variable cost = Fixed cost + variable cost
Calculation of semi variable cost
Power = 12500 * 20/100 = Rs. 2500
Repairs = 20000 * 25/100 = Rs. 5000
QUES 3.) AMBER Ltd manufactures and sells four types of tyres namely, Small,
medium, Large and XL. The sales mix in values comprises 33.33%, 41.67%,16.67% and
8.33%for the all four products. The total budgeted sales (100%)are Rs60000 per month.
The associated variable cost as a percent of selling value is as under- Product- Small
60%, medium 68%, Large 80% and XL40% The fixed cost per month is Rs15000
a. Define the term PV Ratio and Calculate the PV Ratio for all the four products
(5 Marks)
b. Calculate the Breakeven sales and for the BEP sales, indicate the fixed cost, variable
cost total cost and total sales revenue
(5 Marks)
Answ 3.) a. PV Ratio
The term PV ratio (Profit Volume Ratio) is defined as
P/V ratio = Contribution
Sales
It is used to measure the profitability of the company. Contribution is the excess of sales
over variable cost. So basically P/V ratio is used to measure the level of contribution
made at different volumes of sales.
Calculation of PV ratio for all four products
Particulars Small Medium Large XL
Total Budgeted Sales 720000 720000 720000 720000
(60000 * 12) (60000 * 12) (60000 * 12) (60000 * 12)
- Variable cost of
selling price
60% 68% 80% 40%
%age 432000 489600 576000 298000
A (720000* (720000* (720000* (720000*
mount 60/100) 68/100) 80/100) 40/100)
CONTRIBUTION 288000 240400 144000 422000
P/V Ratio 40% 3.38% 20% 58.61%
= Contribution * 100 (288000*100) (240400*100) (144000*100) (422000*100)
Sales 720000 720000 720000 720000
Answ 3) b. Calculation of cost:-
Particulars Small Medium Large XL
Variable 432000 489600 576000 298000
cost (720000*60/100) (720000*68/100) (720000*80/100) (720000*40/100)
Fixed cost 180000 180000 180000 180000
Total cost 612000 669600 756000 478000
(Fixed cost
+ variable
cost)
Total sales 720000 720000 720000 720000
revenue
Calculation of Break even Sales:-
Particulars Small Medium Large XL
BEP Sales= 0.625 0.748 1.25 0.426
Total fixed (180000/288000) (180000/240400) (180000/144000) (180000/422000)
cost
Contibution
margin
288000 489600 576000 298000
Contribution (720000-432000) (720000-489600) (720000-576000) (720000-298000)
margin=
Revenue-
Variable cost
Calculation of BEP Sales and BEP units:-
Particulars Small Medium Large XL
Breakeven 450000 531443 884521 (7217)
Sales= (180000/40%) (180000/33.87%) (180000/20.35% (180000/-
Fixed cost ) 249.39%)
Contribution
margin
percentage
BEP in units 150000 124138 (75949)
= Fixed cost (180000/3-1.8) (180000/4.28- 529412 (180000-0.83-
Revenue p/u- 2.83) (180000/1.67- 2.9)
Variable cost 1.33)
p/u)
Working notes:-
Calculation of variable cost per unit:-
Particulars Small Medium Large XL
Variable 432000 489600 576000 298000
cost 240000 172786 431914 864345
Units Rs. 1.8p/u Rs. 2.83p/u Rs. 1.33p/u Rs. 2.9p/u
Variable
cost p/u (432000/240000) (489600/172786 (576000/431914) (298000/864345)
Variable )
cost p/u =
Variable
cost/Units
Calculation of selling price per unit:-
Particula Small Medium Large XL
rs
Sales mix 33.33% 41.67% 16.67% 8.33%
Sales 720000 720000 720000 720000
revenue 240000 240000 240000 240000
Units (720000*100/30 (720000*100/416 (720000*100/166 (720000*1000/83
Units = 0) 7) 7) 3)
Sales
/Sales mix
Selling
price per Rs. 3 p/u Rs.4.28 p/u Rs. 1.67p/u Rs. 0.83 p/u
unit = (720000/240000 (720000/172786) (720000/431914) (720000/864345)
Sales/Unit )
s
