case v beefix

8/7/2019 case V Beefix

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11

Cost ManagementCost ManagementFMB 11FMB 11

p1c6p1c6



2 2

Road MapRoad Map

This contact This contact

Session 1 & 2:Session 1 & 2:

Relevant Costs for Decision MakingRelevant Costs for Decision Making Time and SpaceTime and Space

Short Term Tactical Decision MakingShort Term Tactical Decision Making CasesCases



3 3

The Relevant costThe Relevant cost--revenue Approachrevenue Approach

f or f or

Eff ective & Eff icient Decision Making«.Eff ective & Eff icient Decision Making«.



5 5

Is it Fut uristic?

Willit vary with

alter.?

Yes

No

Yes

No

Irrelevant for Decision Making

Relevant

for

Decision

Making

Relevant

information

is f ut uristic& varies

with alternative

Relevant Inf ormation f or Relevant Inf ormation f or

Decision MakingDecision Making

Y

N

Y

N



6 6

What if Mr. A is a Gangster?What if Mr. A is a Gangster?

Will your decision vary?Will your decision vary?

Is the rule for Relevant Information stillIs the rule for Relevant Information still

valid?valid?

Relevance depends uponTime and Space



7 7

Decision MakingDecision Making

DecisionDecision--making is concerned with the f ut ure making is concerned with the f ut ure

involves a choice between alternatives.involves a choice between alternatives.

Many factors, both qualitative and quantitative,Many factors, both qualitative and quantitative,need to be considered.need to be considered.

For many decisions financial information is aFor many decisions financial information is acritical factor.critical factor.



9 9

Are all f ut ure costs relevant ?Are all f ut ure costs relevant ?

* Fut ure costs that differ across the alternatives are* Fut ure costs that differ across the alternatives are

relevant.relevant.

Are all fixed costs relevant ?Are all fixed costs relevant ?

* Traceable Fixed Costs* Traceable Fixed Costs

* Apportioned Fixed Costs [BEWARE!]* Apportioned Fixed Costs [BEWARE!]

Are all variable costs relevant ?Are all variable costs relevant ?

* Variable costs that do not differ across the alternatives* Variable costs that do not differ across the alternativesare irrelevant!are irrelevant!

Dropping a branch ?

Buy or Lease abus, whenrunning costs aresame for both!



10 10

Rs. W orking

Material Cost

A 10500 5000x2.1

B 4050 1500x2.7

C 4400 800 x 5.5

D 90000 2000x45

-21000 3000x(-7)

Total Material Cost 87950

Labour Cost (to be

outsourced) Incremental 50000

Overhead Cost

Total Relevant Cost 137950

Offered Price 250000

Likely profit 112050

1.80 - Sunk

2.10 - Incremental

Remarks

2.50 - Sunk

2.65 - Irrelevant

2.70 - Incremental8.50 - Sunk

9.50 - Irrelevant

5.50 - Opportunity

45 - Incremental (2000)

33 - Sunk

Apportioned

45 - Irrelevant

7 - Avoidable

Relevant Cost (STTDM)

Case IV : HerendethelessenCase IV : Herendethelessen



1111


Rs

Material C t

A

C x 8.5

D x45

99000 3000x33


Labour Cost (to be

outsourced) 50000

Overhead Cost 100000

Total Relevant Cost 358550Offered Price 250000

Likely profit -108550

Acc u 's V w



12 12

Rs

Material Cost

A 10500 5000x2.1

B 4050 1500x2.7

C 7600 800x9.5

D 90000 2000x45

135000 3000x45


Labour Cost (to be

outsourced) 50000

Overhead Cost 100000

Total Relevant Cost 397150

Rounded off to 400000

Long Term V ew




13 13


STTDM LTDM His o ic

Ma rial C s

A

B

C

D

T al Ma rial C s

Lab r C s ( b

s r d)

v r ad C s

T al l va C s

o pa iso of th th p sp ctiv s



14 14

Case V: Beef ixCase V: Beef ix

If

c

n¡ ¢

n£ ¤

d

If

d¢ ¥

c

un¡ ¢

n

u¤ d

Inc¦ ¤ § ¤

n¡ ¨ © ¤

/

¢ ff

¤ ¦ ¤ n

¡ ¢ ¨ © c

s¡

(A) (B) (A) - (B)

Sale ceeds f

m G

3000000 3000000

C s

c

ed date -1500000 -1500000

! aterial

Purc"

ased -600000 -600000

# is sal c st -50000 50000

$ abour

W ages -400000 -4000001500000 -1500000

-600000 600000

% esearc

" staff

Cost f or the roject -600000 -600000

Severance

ay -250000 250000

Share of general bldg -350000 -350000

Net relvant revenue & $ oss ' -450000 -2250000 1800000

% evenue f rom (

utsourcing

Addl. ! atl cost of outsourcing

T

¡ ̈ l C

s¡

A) ) ¦

̈ c

0



15 15

Case V: Beef ixCase V: Beef ix

Not

onsi ere Consi ere Re r sSale p 1 2 3 eed4

5

1 2 6 G 2 7 t 3000000 I 8 3 1 eme 8 tal

C 2 4 t 9 8 3 @ 1 1 ed t 2 date 1500000 Sunk 3 2 4 t

A ate 1 9 al

Purchased 600000 Sunk cost

B 9 sposal cost 50000 A

7 oidable cost

C abour

W ages 400000 Irrle7 ant costD 1500000 E pportunity cost

600000 A7

oidable cost

F esearch staff

Cost for the projectD 600000 Incremental cost

Se7 erance pay 250000 A7 oidable cost

Share of general bldg 350000 Apportioned cost

Net relvant revenue G C

oss) 1800000

F evenue G loss) from E utsourcing

Addl. A

atl cost of outsourcing

Rele nt Cost pproach

f continue instead of discontinuing

case v beefix

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