Management - Mal Ltd. - Assessment Answer

Management Assignment

Assignment Task

1 Value of Cost Classifications and their Impact to the Decision making process

By classifying the direct costs which can directly be identified with the finished or imported product from the indirect costs, Mal Ltd. and the owner Mr Long, will gain the following advantages:

• Decisions with regard to cost reduction and cost control are highly aided by the classification process. Fixed costs being the managed at top and permanent in nature have less scope for control while the variable costs being managed at the lower levels of management have more scope for reduction and control.
• By being able to analyse the behaviour of costs and profits in relation to volume, profit planning would be aided. Profits could be increased through cost reduction or increase in sales price and or volume.
• Estimation of variable costs will ensure that they don’t sell flowers product during off season below the variable cost, so as to justify the continuity of business.
• The classification is also important for Budgetary analysis and Break even analysis as Budgets are prepared on the basis of level of activity. It also helps in the proper allocation of overheads by identifying the nature of the overheads.
• Correct assessment of the costs of the flowers by analysis of the activities involved in the production and marketing of flowers. This would then assist them in correctly pricing its products.
• Another advantage of the classification process would be doing away with unwarranted non value-added activities which consume unnecessary costs.
• Finally, decisions like make or buy decisions, product mix, capacity and continue or shut down decisions would also be aided by the process.

("What are the Advantages of Cost Classification? | BMS.co.in", 2012)

2 Cost technique for Product Costing of flower production and import

In order to select the ideal options available for costing the flower manufacture and import; it is pertinent to understand that the products of Mal Ltd. are identical for the main product lines and warrant the computation of per unit cost of production. The unit for this purpose could be a dozen flowers belonging to the same variety. Out of the available costing techniques like absorption costing or full costing, marginal costing, standard costing, uniform costing and direct costing; marginal costing appears most appropriate owing to the following reasons:

• The produce is seasonal in nature and computation of variable costs will ensure that the management is aware of the variable costs so as to at least sell the produce at a price so as to recover the variable costs of production during off season.("Marginal Costing: Meaning, Uses and Other Details", 2015)
• The technique will be simple to execute and understand, given the nature of business and volume of operation of Mal Ltd.
• The technique will aid in profit planning at different level of production and sale of the flowers.
• It will also aid in fixation of selling price and in the computations for Breakeven analysis through the Contribution approach.
• Evaluation of various processes like delivery, packaging, planting would be possible through marginal costing.
• It would avoid arbitrary allocation of fixed cost and help in the control of variable cost.
• Fixed overhead would be recovered using a pre-determined rate and inventory valuation would be logical using the marginal costing approach.

("Methods and Techniques of Costing", 2015)

It is also important to understand at this juncture, the reasons for not adopting the Activity based costing technique in the setup of Mal Ltd business. ABC would logically allocate costs to activities like producing, packaging, transporting on the basis of the costs that make up these activities depending on how the actual costs were incurred. This would aid the identification of activities and products with low cost and low profit per unit as well as the profitable activities and products. ABC would also help in the identification of non-value added activities and products by tracing wasteful and non-value added activities.

However, given the size of operations and nature of business of Mal Ltd. it may be noted that ABC would be expensive and time consuming requiring specific software. The cost computations may be cumbersome if done manually and complicated to understand. The ABC based costing reports may be difficult to understand. ("The Disadvantages & Advantages of Activity-Based Costing", 2016)

Since Mal Ltd. does not carry on diverse activities or deal in multi products, adoption of ABC at this juncture may not be a good idea. Also to be noted that Mal Ltd has low overhead cost and produces identical products with simple activities, so it would not gain much from the implementation of ABC. (Gunasegaram and Sarahi, 1998) (Kaplan and Anderson, 2007)

Marginal Product Cost sheet

• The allocation of manufacturing overheads could be done on the basis of production for each product line. The allocation of selling and administrative overheads could be done on the basis of sales for each product line.
• The direct and indirect costs of import are applicable only for the imported tulips and other products.

As demonstrated by the Marginal cost sheet drawn above, it would be possible to calculate the total and per unit variable cost for each main flower line which would benefit Mal Ltd. in a multitude of decisions as enumerated above.

3 Benefit of Chosen Method to Mal Ltd.

• The chosen method of Marginal Costing, if adopted by Mal Ltd. would very specifically help Mal Ltd. by aiding in the Pricing decisions; given the competitive nature of the flower industry and the pricing pressures faced by the company.
• The method would aid by clearly indicating the attributable variable cost for each main flower product line. Mal Ltd. could fix the rock bottom prices during off season to just cover the variable costs. Similarly, the sky rocketing prices during the peak demand season could be fixed so as to cover a reasonable profit margin over and above the total cost for the products. The competitive pricing strategy could be adopted by keeping prices lower than the competitors to increase the sales volume during peak season.
• The owner’s dilemma of getting a feel of the performance of the business; given the scale of operations would also be reasonably justified with the choice as it would enable the calculation of the contribution and profit earned by each product line.
• The owner’s dilemma regarding the management of the product range in short supply is very aptly tackled through the technique by clearly pointing out the profit attributable to each product. By linking the incentives of the sales persons to the sale of high volume and high profit products rather than selling for themselves, the problem could be reasonably tackled.