Assessment item 3 - Divine Denim and Kota Mills case studies back to top Value: 20% Due Date: 10-May-2020 Return Date: 29-May-2020 Length: See individual questions for length Submission method...

Question no 1
i) Conventional process costing :-
ii) ABC Costing :-
iii) Comparison of cost as per ABC Costing and cost as per conventional costing
Cost misstated in the conventional system because it does not allocate the cost based on the actual activity consumption rather then it uses a simplified rate such as no of units produced for allocation of the cost.
iv) Kota Mills manager can use ABC costing system to identify the true cost of the production. Hence those products which are originally understated or overstated can be sold at the correct price in the market. This can also be used to identify the those products which are actually not profitable but just because of wrong allocation of cost it was presenting as profitable for the organization.
Thus Kota mills manager can focus on identifying its core products and work on marketing and improvement of other products which are not profitable. Based on the above assessment manager can increase the price of 8 ounce and 16 ounce and reduce the price of 13 ounce. Since sale of 13 ounce is already highest among the three category reducing the price will results in more sale of 13 ounce.
Note: - For formula view of the spreadsheet results please check the attached Excel file
Question no 2.
i) Flexible budget
ii) Direct Cost variance
    a) Material
    
    1) Material rate variance
    
    (Standard Price- Actual price)*Actual Material purchased
    (10-11)*1200
    = -1200
    
    2) Material Quantity variance
    (Standard quantity- Actual Quantity)*standard Material price
    (1130-1150)*10
    = -200
    
    3) Material cost variance
    (Material quantity variance + Material Rate variance)
    (-1200)+(-200)
    = -1400
    b) Labour
    
    
    
    1) Labour rate variance
    
    
    
    (Standard rate- Actual rate)*Actual hours worked
    
    (20-20.42)*1200
    
    = -500
    
    
    
    2) Labour hours variance
    
    (Standard Hours- Actual Hours)*standard labour rate
    
    (1130-1200)*20
    
    = -1400
    
    
    
    3) Labour cost variance
    
    (Labour hours variance + Labour Rate variance)
    
    (-1400)+(-500)
    
    = -1900
    
    iii) Factory overhead cost variance
    
    a) Fixed cost variance
    (Budgeted cost- Actual cost)
    (4800-4020)
    = 780
    
    b) Variable cost variance
    (Standard cost- Actual cost)
    (2260-2750)
    = -490
    iv) Selling and distribution cost variance
    (Standard cost-Actual cost)
    5630-3770
    1860
v) Production cost variance report
vi) Report of variance :
    Variance
    Amount
    Material rate variance
    -1200
    Material Quantity variance
    -200
    Material cost variance
    -1400
    Labour rate variance
    -500
    Labour hours variance
    -1400
    Labour cost variance
    -1900
    Fixed cost variance
    780
    Variable cost variance
    -490
    Selling and distribution cost variance
    1860
vii) Helen might have the following questions :-
· What leads to purchase of Raw material at an extra price of Rs. 1
· Why 20 meter extra raw material has been used in the production
· Why the variable overhead variance is more than 10 % of the standard cost
Note: - For formula view of the spreadsheet results please check the attached Excel file
Question no 3
i) Total contribution margin
ii) Break-even point
BEP - Avoidable fixed cost/Contribution per unit
iii) Evaluation of the offer of the Haywood Mills

Haywood Mills offer should accept the offer as it will leads to profit of $ 5 per unit
iv) Qualitative factors to keep production of Polyester :-
· Segments – Dropping a product from the range will reduce the business segment. This can leads to impact the bottom line of the organization.
· Goodwill – Usually when an organization decide to discontinue a product it impact its goodwill. Managers of kota mills have to check whether there is any adverse effect on its brand image of discontinuing polyester form its operations.
· Customers – Those customers which are buying polyester brocade from Kota mills will be lost. These customers can be a prospective customers for other range of products as well. So it has to be kept in mind and a complete research has to be done about the customer range that whether they can be our prospective customer for Polyester.
· Market share- Kota mills market share for the polyester is low however dropping the products leads to complete exit from the market.
· Capacity- It has to be considered whether the freed up capacity can be used for some other purpose. Assessing this will help kota mills to take a decision regarding the polyester. If the Opportunity cost of the freed up capacity is more than the benefit occurring then the alternative which is providing the opportunity cost should be considered instead of continuing the product.
Note: - For formula view of the spreadsheet results please check the attached Excel file
Question 4
Lean Thinking:-
It is a term which is used in Business It means how to think in new way so that the business operations can be done more efficiently so that the waste can be reduced and the ultimate benefit can be delivered to the society. Organization needs to identify what value it will be creating for its customers. Also understanding of the process is important as it will ultimately eliminate the waste.
There are 5 principles of lean thinking
1. Value
2. The value stream
3. Flow
4. Pull
5. Perfection
The concept of Lean thinking was evolved by studying the growth of Toyota Motor Company
The company which was bankrupt in early 1950 became a dominant player in global automobile industry. Toyota adopted the strategy of developing peoples reasoning ability instead of forcing them to use a traditional specialist-derived systems. In understanding the Toyota approach it is discovered that it has a unique group of experts and coordinators which is dedicated to help the managers to think in a different way which is different from other larger companies. TPS is considered as origin of lean thinking and used across the world for modern day lean manufacturing practices.
The three main ways for lean thinking are
· Identify the moments when someone clicks a new idea by any means such as visiting some places or read something
· Join the lean self-study groups. The lean methodology has been developed in the recent times hence there are many groups as well which has evolved so the organizations can join those groups as well
· Everyday practice of the lean thinking
How to implemented lean thinking:-
The most important part of lean thinking is that the instructor should not just explain the things rather than show the workers how to execute by demonstrating. The common techniques for using lean thinking are
1) Kaizen activity :- Kaizen method focus on scheduling the time in day to day business activities for improvement such as workshops in different functions, Suggestions from each individual and many more activities. This is planned by a teacher who make sure that everyone should follow the guidelines properly.
2) Visualization: - When we see what we want to happen by visualization. It became easy for us to work on that. The team which see together often learn together. This technique is a useful tool in creative thinking. This help in identifying the gap in what was standard or planned and what are the actual results.
3) Standardization: - Standardization in work is most powerful tool to makes the things simple and controllable This see the problems in a sequence and resolve them in a sequence so that workflow can be improved. This thinking teach lean thinking.
4) Kanban: - It is foundation practice of Lean thinking. Infact Toyotas production system is firstly known as Kanban system. This teaches about challenging the market behavior assumptions and our own flexibility.
5) Just in time (JIT): - JIT is a modern approach for cost optimization it means that inventory should be ordered as and when required so as to reduce the cost of holding the inventory to some extent. This has been widely used by the companies as a part of lean thinking.
6) Automation: - Automation reduce the cost associated with the manpower. Automation is a key for success for the new age companies. There are many companies which automated their production and stay ahead in competition from its competitors. This is a process of continuously reducing the human involvement in the production process.
Benefits of Lean thinking: -
The importance of this practice is more than just improving the organizational profitability there are so many benefits an organization can achieve from lean thinking some of which are as follows:
1. Improved productivity: The main objective of lean thinking is reducing waste and any activity which is not creating value for the customer is considered as waste. This ultimately results in improved productivity.
2. Smooth operation: Making standardization and understanding the work flow results in smooth operation of the business. Also when waste activities are removed from the process it will leads to smooth operations.
3. Reduction in defects: when organization follows the approach of zero waste it can leads to reduction in defects because defects leads to rework and rework leads to more time, money and also labor cost.
4. Improved quality: Quality of the product also increase with the lean thinking
5. Satisfied consumer: when consumer gets the maximum value of its spending its satisfaction level increase to multiple times.
6. Improved staff morale: In lean thinking benefits can be for the workforce too having a set of goal and achieving those helps the staff to increase their morale.
7. Bottom line: - The benefits as mentioned above will also improve bottom line of the organizations. Because better quality products force the customers to back again to the organization and this relation with the customer leads to improve bottom line and profitability.
References used in question 4:
1) https://www.kaizenkulture.com/blog/10-benefits-of-applying-a-lean-methodology
2) https://en.wikipedia.org/wiki/Lean_thinking
3) https://in.kaizen.com/blog/post/2015/07/28/what-is-lean-manufacturing-or-lean-thinking.html
Question 1
        Working notes
    1    Basic details
            8 ounce    13 ounce    16 ounce    Total
        Production in units    1000    4000    2000    7000
        Direct Material cost    8000    24000    20000    52000
        Direct Labour cost    660    1320    920    2900
        Direct Labour Hour    33    66    46    145
        Machine hours    500    1333    1500    3333
        No of set ups    10    30    20    60
        Inspection time    83    333    167    583
    2    Calcuation of Activity based cost
        Activity    Total activity    Total cost    Cost/activity
        Machine hours    3333    40000    12.00
        No of set ups    60    11000    183.33
        Inspection time    583    6996    12.00
    3    Calculation of department wise cost
            Department 1    Department 2
        Direct labour cost    1100    1800
        Production in units    7000    7000
        Direct labour cost/Unit    0.16    0.26
        Overhead cost    19332    38664
        Production in units    7000    7000
        Overhead cost/Unit    2.76    5.52
        Solutions
    1    Cost as per conventional costing
                8 ounce    13 ounce    16 ounce    Total
            Direct Material
            Dept 1    6000.00    16000.00    15000.00    37000.00
            Dept 2    2000.00    8000.00    5000.00    15000.00
            Direct Labour
            Dept 1    157.14    628.57    314.29    1100.00
            Dept 2    257.14    1028.57    514.29    1800.00
            Overhead
            Dept 1    2761.71    11046.86    5523.43    19332.00
            Dept 2    5523.43    22093.71    11046.86    38664.00
            Total cost    16699.43    58797.71    37398.86    112896.00
            Production in units    1000    4000    2000
            Cost/unit    16.70    14.70    18.70
    2    Cost as per ABC costing
                8 ounce    13 ounce    16 ounce    Total
            Direct Material    8000.00    24000.00    20000.00    52000.00
            Direct Labour    660.00    1320.00    920.00    2900.00
            Overhead cost
            Machine cost    6000.60    15997.60    18001.80    40000.00
            set up cost    1833.33    5500.00    3666.67    11000.00
            Inspection cost    996.00    3996.00    2004.00    6996.00
            Total cost    17489.93    50813.60    44592.47    112896.00
            Production in units    1000    4000    2000
            Cost/unit    17.49    12.70    22.30
    3    Comparison of cost as per ABC Costing and cost as per conventional costing
                8 ounce    13 ounce    16 ounce
            Cost as pert ABC    17.49    12.70    22.30
            cost as per conventional    16.70    14.70    18.70
                0.79    -2.00    3.60
                Understated    Overstated    Understated
        Cost misstated in the conventional system because it does not allocate the cost based on the actual activity consumption rather then It uses a simplified rate such as no of units produced for allocation of the cost
    4    Kota Mills manager can use ABC costing system to identify the true cost of the prodcution. Hence those products which are originally understated can be sold at the correct price in the market.
Question 2
    Working notes
    1    Basic data
        Standard cost
            Qty    Price    Unit    cost per pair
        Denim fabric    2    10    meter    20
        Direct labour hours    2    20    hour    40
        Variable factory overhead    0.4    10    hour    4
        Fixed factory overhead    0.4    20    hour    8
                        72
    2    Actual data of April
        Particulars    Quantity    Unit    Price/Unit    Amount
        Units produced    565
        Material
        Purchase    1200    mtr    11    13200
        used    1150    mtr        12650
        Direct Labour cost    1200    Hours    20.42    24500
        Variable Overhead cost                2750
        Fixed Overhead cost                4020
        Selling and distribution cost                3770
    Solutions
    1    Flexible budget
            Qty    Price    Unit    cost per pair
        Units produced in April    565
        Denim fabric    1130    10    meter    11300
        Direct labour hours    1130    20    hour    22600
        Variable factory overhead    226    10    hour    2260
        Fixed factory overhead            hour    4800
        Selling and distribution overhead
        Fixed                 4500
        variable                1130
        Total cost of production                46590
    2    Direct Cost variance
        Material
    a)    Material rate variance
        (Standard Price- Actual price)*Actual Material purchased
        (10-11)*1200
        -1200
    b)    Material Quantity variance
        (Standard quantity- Actual Quantity)*standard Material price
        (1130-1150)*10
        -200
    c)    Material cost variance
        (Material quantity variance + Material Rate variance)
        (-1200)+(-200)
        -1400
        Labour
    a)    Labour rate variance
        (Standard rate- Actual rate)*Actual hours worked
        (20-20.42)*1200
        -500
    b)    Labour hours variance
        (Standard Hours- Actual Hours)*standard labour rate
        (1130-1200)*20
        -1400
    c)    Labour cost variance
        (Labour hours variance + Labour Rate variance)
        (-1400)+(-500)
        -1900
    3    Factory overhead cost variance
        Fixed cost variance
        (Budgeted cost- Actual cost)
        (4800-4020)
        780
        Variable cost variance
        (Standard cost- Actual cost)
        (2260-2750)
        -490
    4    Selling and distribution cost variance
        (Standard cost-Actual cost)
        5630-3770
        1860
    5    Production cost variance report
        Standard cost     46590
    Less    Material cost varince    -1400
    Less    Labour cost varince    -1900
    Less    Variable cost variance    -490
    Less    Fixed Cost variance    780
    Less    Selling and distribution cost variance    1860
        Actual cost    47740
    7
Question 3
    1    Total contribution margin
            Polyester    Silk
        Selling price     95    225
        Direct materials     40    95
        Variable cost    5    25
        Contribution per unit    50    105
        No of units sold    450    4000
        Total contribution margin    22500    420000
    2    Break-even point (BEP)
        BEP    Avoidable fixed cost/Contribution per unit
        Avoidable fixed cost
        Corporate fixed cost    10000
        Product line fixed costs    4500
        Labour    2250
        Contribution per unit    50
        BEP    335
    3    Particulars    Amount
        Selling price     95
        Direct Material    40
        Variable cost    5
        Contribution    50
        Amount offered    55
        Profit per unit    5
        Haywood Mills offer should accept the offer
    4    Qualitative factors to keep production of Polyster :-
Flexible budget
QtyPriceUnitcost per pair
Units produced in April565
Denim fabric113010meter11300
Direct labour hours113020hour22600
Variable factory overhead22610hour2260
Fixed factory overheadhour4800
Selling and distribution overhead
Fixed 4500
variable1130
Total cost of production46590
Question 1
        Working notes
    1    Basic details
            8 ounce    13 ounce    16 ounce    Total
        Production in units    1000    4000    2000    7000
        Direct Material cost    8000    24000    20000    52000
        Direct Labour cost    660    1320    920    2900
        Direct Labour Hour    33    66    46    145
        Machine hours    500    1333    1500    3333
        No of set ups    10    30    20    60
        Inspection time    83    333    167    583
    2    Calcuation of Activity based cost
        Activity    Total activity    Total cost    Cost/activity
        Machine hours    3333    40000    12.00
        No of set ups    60    11000    183.33
        Inspection time    583    6996    12.00
    3    Calculation of department wise cost
            Department 1    Department 2
        Direct labour cost    1100    1800
        Production in units    7000    7000
        Direct labour cost/Unit    0.16    0.26
        Overhead cost    19332    38664
        Production in units    7000    7000
        Overhead cost/Unit    2.76    5.52
        Solutions
    1    Cost as per conventional...