Strategic Cost Management at Devi

Manufacturing Ltd.

Submitted to: Prof Anto Joseph

Submitted by: Moumita Panda

Roll no. : 24PGP171
Email id: [email protected]
Phone no. : 8917242677
 Comprehensive Case in Cost and Management Accounting

Case Title: Strategic Cost Management at Devi Manufacturing Ltd.

Background:
Devi Manufacturing Ltd. is a medium-sized business that was established in 2010 with the
primary goal of manufacturing two products: Reflective collar and leash. The company,
employs 150 people and has a production facility in Pune, it has made a reputation for itself
in the electronics sector. However, profit margins have been strained by increased
competition, fluctuating demand, and rising raw material costs. To improve financial
outcomes, executive leadership—which includes the CEO, CFO, and COO—is committed to
implementing advanced cost accounting techniques. The focus is on improving procedures,
honing overall cost management, and making strategic decisions by analysing cost
frameworks.
Ms. Priya Kapoor, the CFO, and Mr. Ramesh Singh, the COO, are working together to
develop strategies that can make use of Activity Based Costing (ABC), Cost Volume Profit
(CVP) analysis, and thorough budgeting procedures to tackle existing challenges.

Section 1: Cost-Volume-Profit (CVP) Analysis

Scenario:
In order to inform strategic pricing decisions, Devi Manufacturing's CFO has been entrusted
with figuring out the business's break-even point (BEP) and evaluating operating leverage.
The information below has been supplied:

Parameter Reflective collar Leash

Selling Price/unit ₹1000 ₹800
Variable cost/unit ₹500 ₹400
Fixed costs ₹2,00,000 per month

Questions:

1. Calculate the break-even point (BEP) in units for the product mix.
2. Calculate the sales volume required to achieve a target operating profit of ₹2,50,000.
3. Calculate the degree of operating leverage at the target sales level.

Solution:

1. BEP Calculation (Weighted Average):

• Contribution Margin (CM) per unit:

o Reflective collar = ₹1000 - ₹500 = ₹500

 o Leash = ₹800 - ₹400 = ₹400
• Sales Mix: 70% Reflective collar and 30% Leash.
• Weighted CM = (500 x 0.7) + (400 x 0.3) = ₹460.
• BEP (units) = Fixed Costs / Weighted CM = ₹2,00,000 / 460 = 4348 units.
o Reflective collar = 4348 x 0.7 = 3044 units.
o Leash = 4348 x 0.3 = 1304 units.

2. Target Sales Volume for Operating Profit: • Targeted Profit = ₹2,50,000.

• Required Sales = (Fixed Costs + Target Profit) / Weighted CM = (₹2,00,000 +
₹2,50,000) / 460 = 4891 units.
o Reflective collar = 4891 x 0.7 = 3424 units.
o Leash = 4891 x 0.3 = 1467 units.

3. Operating Leverage: • Contribution Margin = 4891 x 460 = ₹22,49,860.

• Operating Income = ₹22,49,860 - (₹2,00,000 + ₹2,50,000) = ₹2,49,860.
• Degree of Operating Leverage = Contribution Margin / Operating Income =
22,49,860 / 2,49,860 = 9.

Interpretation: The high operating leverage indicates significant profit sensitivity to sales
volume changes.

Section 2: Marginal Costing Applications in Short-Run Decision Making

Scenario:
Taking into account the following expenses, the COO must determine whether to approve a
special order of 1,000 Leash at ₹500 per unit:

 Variable Cost/Unit: ₹400.

 Incremental Fixed Cost: ₹20,000.

Questions:

1. What is the incremental profit or loss from accepting the special order?
2. Should the order be accepted, and why?

Solution:

1. Incremental Revenue:
• 1,000 units x ₹500 = ₹5,00,000.
2. Incremental Cost:
• (1,000 units x ₹400) + ₹20,000 = ₹4,20,000.
3. Incremental Profit:
• Revenue - Cost = ₹5,00,000 - ₹4,20,000 = ₹80,000.

Interpretation: The special order adds incremental profit of ₹80,000, making it a beneficial
decision.
Section 3: Activity-Based Costing (ABC)

Scenario:
The CFO suggests using Activity-Based Costing (ABC) for overhead allocation instead of
traditional costing. Current data:

Activity Cost Driver Total Cost (₹) Driver Volume

Machine Setup No. of setups 1,00,000 50
Quality Inspection No. of Inspections 80,000 40
Maintenance Machine Hours 1,20,000 600

Questions:

1. Calculate the activity rates for Machine Setup, Quality Inspection, and Maintenance.
2. Assign overhead costs to a batch requiring 5 setups, 4 inspections, and 50 machine
hours.

Solution:

1. Activity Rates:
• Machine Setup: 1,00,000 / 50 = ₹2,000 per setup.
• Quality Inspection: 80,000 / 40 = ₹2,000 per inspection.
• Maintenance: 1,20,000 / 600 = ₹200 per hour.
2. Cost Assignment:
• Machine Setup = 5 x 2,000 = ₹10,000.
• Quality Inspection = 4 x 2,000 = ₹8,000.
• Maintenance = 50 x 200 = ₹10,000.
• Total Overhead = ₹28,000.

Interpretation: ABC improves cost accuracy by allocating overhead based on activity

drivers.

Section 4: Budgeting and Variance Analysis

Scenario:
Devi Manufacturing’s budgeted and actual performance for November is as follows:

Parameter Budgeted(₹) Actual (₹)

Sales Revenue 20,00,000 18,50,000
Variable Costs 10,00,000 9,80,000
Fixed Costs 2,00,000 2,20,000

Detailed Budgets:

1. Sales Budget:

Product Units Selling Price/Unit Total Revenue

Sold(Budgeted) (₹) (₹)
Reflective collar 10,000 1000 10,00,000
 Leash 12,500 800 10,00,000

2. Production Budget:

Product Units to be Opening Stock Closing Stock

Produced
Reflective collar 10,200 200 400
Leash 12,700 300 500

3. Direct Materials Budget:

Material Quantity(kg) Rate Beginning Desired Total

(₹/kg) Inventory(kg Ending Cost (₹)
) Inventory(kg)
Reflective 10,200 50 1000 2000 5,60,000
collar
Leash 12,700 40 1,500 3000 5,68,000

4. Direct Labour Budget:

Product Units to Hours Hours Rate/Hour Total Cost

be per Unit Required (₹) (₹)
produce
d
Reflective 10,200 0.5 5000 100 5,10,000
collar
Leash 12,700 0.47 6000 90 5,37,210

5. Manufacturing Overhead Budget:

Overhead Item Total Cost (₹)

Machine Setup 1,00,000
Maintenance 1,20,000
Quality 80,000
Inspection

6. Selling and Administrative Expense Budget:

Expense Type Total Cost (₹)

 Marketing Expenses 1,50,000
Administrative Salaries 2,00,000

Questions:

1. Calculate variances for sales revenue, variable costs, and fixed costs.

Solution:

1. Variance Calculations:
• Sales Variance: 18,50,000 - 20,00,000 = (₹1,50,000).
• Variable Cost Variance: 9,80,000 - 10,00,000 = ₹20,000 (Favourable).
• Fixed Cost Variance: 2,20,000 - 2,00,000 = (₹20,000) (Un-Favourable).

Interpretation: Variance analysis highlights revenue challenges, fixed cost overruns, and
areas for improvement.

Conclusion:
This case demonstrates the strategic application of CVP analysis, marginal costing, ABC, and
budgeting in addressing Devi Manufacturing’s decision-making challenges. The
comprehensive analysis helps senior management with actionable insights to optimize
financial performance and achieve sustainable growth.