Team 3

Case 1

Moffat Ltd, which commenced trading on 1 December 2002, supplies and fits tyres and exhaust
pipes and services motor vehicles at thirty locations. The directors and middle management are
based at the Head Office of Moffat Ltd.
Each location has a manager who is responsible for day-to-day operations and is supported by
an administrative assistant. All other staff at each location are involved in fitting and servicing
operations. The directors of Moffat Ltd are currently preparing a financial evaluation of an
investment of £2 million in a new IT system for submission to its bank. They are concerned
that sub-optimal decisions are being made because the current system does not provide
appropriate information throughout the organisation. They are also aware that not all of the
benefits from the proposed investment will be quantitative in nature.
Required:
(a) Explain the characteristics of THREE types of information required to assist in decision-
making at different levels of management and on differing timescales within Moffat Ltd,
providing TWO examples of information that would be appropriate to each level. (10 marks)
(b) Identify and explain THREE approaches that the directors of Moffat Ltd might apply in
assessing the QUALITATIVE benefits of the proposed investment in a new IT system. (6
marks)
(c) Identify TWO QUALITATIVE benefits that might arise as a consequence of the investment
in a new IT systemand explain how you would attempt to assess them. (4 marks)
(20 marks)
A: Key : Performance management information system.
1. Slide 1:
o Strategy information
o Management information
o Operations information

2. Slide 2: Timescale
o Strategy information- Long -term focus
o Management information-Medium- term focus
o Operations information-Short-term focus
3. Slide 3 Character and strucures

o Strategy information -Large , Complex structure

o Management information----High level of interacion between business units.
o Operations information—Responsibilty centres in place..the business is split into
parts which are the responsibility may be a cost centre , profit centre or investment
centre

4. Slide 4
o Strategy information: Long-term focus, broad scope, and often involves external
data. It is used by top management to make decisions that affect the entire
organization.
o Example:
1. Market trends and competitor analysis to decide on expanding to new
locations.
2. Financial forecasts and investment appraisals to evaluate the $2 million IT
system investment.
5. Slide 5
o Management information: Medium-term focus, more detailed than strategic
information, and often involves both internal and external data. It is used by middle
management to allocate resources and manage performance.
o Examples:
1. Monthly sales reports from each location to assess performance and make
adjustments.
2. Inventory levels and turnover rates to otimize stock management and reduct
cost
6. Slide 6
o Operations information: Short-term focus, highly detailed, and primarily internal
data. It is used by lower-level management for day-to-day operations. Required : the
correct information, in the correct form, at the correct intervals.
o Examples:
1. Daily scheduling and workload reports for fitting and servicing operations.
2. Customer feedback and service quality metrics to ensure high service
standards.
B.Approacher assessing Quilitative benefits.

One approach that the directors of Mofflad LLC could apopt would be ignore the qualitative
benefits tha mayarise on the basis that there too much Subjectivity involved in their assessment.

Alternative the management of Moffat Ltd could attempt to express quilitativity benefits in specific
terms linked to a hierarchy of organizational requirements .

For Example , quilitativity benefits could be catergorized as being:

o Essential to business - Бизнесийн хувьд заавал шаардлагатай

o Very useful attributes- Маш хэрэгтэй чанарууд
o Desirable, but not essential - Хэрэгтэй шаардлагатай мэт боловч чухал биш
o Possible , if funding is available- Хэрвээ санхүүжилт байгаа бол боломжтой.
o Doubtful and difficult to justify

C. Quilitative benefits and assesments.

1. Improved Customer Satisfaction
o Assessment: Conduct customer surveys before and after the IT system
implementation to measure changes in satisfaction levels. Analyze feedback for
specific areas of improvement attributed to the new system.
2. Enhanced Employee Productivity
o Assessment: Monitor employee performance metrics, such as task completion times
and error rates, before and after the system is in place. Conduct interviews or focus
groups to gather employee feedback on how the system has impacted their work
efficiency.
By addressing these aspects, Moffat Ltd can make a comprehensive evaluation of the proposed IT
system investment, considering both quantitative and qualitative benefits.
Case 2

Pitlane Electronic Components (Pitlane) manufactures components for use in the electricity
distribution network in Deeland. Demand from Pitlane’s biggest customer, to replace identical
but worn out components, has been constant for many years. Pitlane has recently renewed an
exclusive long-term supply agreement with this customer, who has
always agreed to buy the components for their total standard cost plus a fixed profit margin of
15%. Variances between standard and actual costs of the components are negligible. Pitlane runs
several production lines in two factories located in different areas of Deeland. The factories’
layout is poorly designed and the production process requires components to be transported
around and between the factories.
The Deeland government wants to encourage renewable electricity generation. It is offering a
three-year subsidy scheme, beginning in 2018, for consumers to have solar panels installed on
the roofs of their homes. As an added incentive, businesses will be exempt from tax on profits
made on the sale of solar panels and related components.
To take advantage of this scheme, Pitlane has built a prototype of a new electrical component,
known as the ‘Booster’, which increases the output from domestic solar panels. The Booster
will be sold to installers of solar panels and not directly to consumers. Pitlane’s marketing
department has estimated market data for the duration of the scheme based on a similar scheme
in Veeland (Appendix 1). As a result of its products being unchanged for many years, Pitlane
has little recent experience of developing
new products and estimating costs and potential revenues from them. It is expected that many
competitor products will be launched during the scheme, at the end of which demand is expected
to fall greatly, and production of the Booster will discontinue.
Pitlane’s shareholders insist that for the Booster project to go ahead, it must meet the financial
performance objective of achieving a 15% net profit margin, after all costs, for the duration of
the scheme.

The Booster’s total fixed costs during the scheme are estimated to be $10m, including $2·8m
upfront development costs to enable the Booster to communicate the amount of solar energy
generated directly to consumers’ smartphones via an app. The product development team at
Pitlane believes this feature, and the use of highest quality packaging, will allow it to charge 10%
more that the average price of its competitors. The marketing team, however, has questioned the
overall value of these two features and whether customers would be prepared to pay extra for
them, as most of the Deeland population do not yet own smartphones.

Pitlane has estimated the direct costs for the Booster (Appendix 2). The largest direct cost is for
the four main sub-components. These are bought in bulk from six different suppliers in Deeland,
though all are readily available from suppliers worldwide. The sub-components are fragile. During
production of the Booster prototype, many sub-components were found to be damaged during the
production process by workers incorrectly assembling them.
 This resulted in the completed prototype Boosters being scrapped after testing by the quality
control department. The manufacturing director is concerned that the incorrect assembly of sub-
components by workers may mean that it may not be profitable for Pitlane to start full scale
production of Boosters. To counteract these quality problems, Pitlane will employ more highly
skilled workers, who are paid around 30% more than most other workers in the business which
is accounted for in the cost estimate given in Appendix 2. Pitlane staff have never been
encouraged to suggest any ways to improve the manufacturing process.
Pitlane’s directors are concerned that the Booster project will not meet the shareholders’ financial
performance objective. They have asked you, as a consultant experienced in target costing, Kaizen
costing and other Japanese business practices, for your advice.
Required:
(a) Calculate the cost gap per unit in each of the three years of the Booster’s life, taking into
account all estimated costs. (6 marks)
(b) Advise on the extent to which target costing would help Pitlane to achieve the financial
performance objective set by the shareholders. (12 marks)
(c) Advise Pitlane how Kaizen costing may be used to help the Booster project achieve the
financial performance objective set by the shareholders. (7
marks)
(25 marks)
Appendix 1 – Estimated market data for Booster
2018 2019 2020

Total market size (units) 600,000 500,000 460,000

Average price of competitors products ($/unit) 180 170 160

Booster market share of total market 10% 15% 20%

Appendix 2 – Estimated unit direct cost of Booster

$
Sub-components 94
Assembly labour 21
Packaging 10
Distribution 2
Internal transport and handling 7
Total 134
A.Calculate the Cost Gap per Unit

Target cost qap = Estimated product cost – Targeted cost

Step 1: Selling price ?

 The Booster can be sold at 10% more than the average competitor price.
 2018: $180 + 10% = $198
 2019: $170 + 10% = $187
 2020: $160 + 10% = $176

Step 2: Profit margin ?

 The shareholders require a 15% net profit margin.

 Target cost per unit = Selling price × (1 - Profit margin)
Target Costs:
 2018: $198 × (1 - 0.15) = $168.30
 2019: $187 × (1 - 0.15) = $158.95
 2020: $176 × (1 - 0.15) = $149.60

Step 3: Fixed cost per unit?

 Given direct costs per unit = $134

 Fixed costs = $10 million over 3 years
 Total units over 3 years = 600,000 + 500,000 + 460,000 = 1,560,000
 Fixed cost per unit = $10,000,000 / 1,560,000 = $6.41

Step 3: Cost gap per unit?

 $134 (direct costs) + $6.41 (fixed costs) = $140.41
 2018: $168.30 - $140.41 = $27.89
 2019: $158.95 - $140.41 = $18.54
 2020: $149.60 - $140.41 = $9.19

B. Advise on Target Costing

Target Costing Benefits:

 Focus on Cost Management: Target costing helps Pitlane focus on managing costs to
meet the desired profit margin.
 Market-Driven Pricing: Ensures that the product is priced competitively while
maintaining profitability.
  Cross-Functional Collaboration: Encourages collaboration between departments to
achieve cost targets.
Challenges:
 Initial Cost Estimates: Pitlane's lack of experience in new product development may
lead to inaccurate cost estimates.
 Market Acceptance: The added features may not justify the higher price if the market
does not value them.
Recommendations:
 Cost Reduction Strategies: Identify areas for cost reduction, such as optimizing the
supply chain or improving production efficiency.
 Value Analysis: Evaluate whether the smartphone app feature and premium packaging
add sufficient value to justify the price increase.

C. Advise on Kaizen Costing

Kaizen Costing Benefits:

 Continuous Improvement: Encourages ongoing cost reduction and efficiency
improvements throughout the product's life.
 Employee Involvement: Engages employees in suggesting improvements, which can
lead to innovative cost-saving ideas.
 Quality Improvement: Focuses on reducing defects and improving product quality,
which can lower costs associated with rework and scrap.
Implementation:
 Training and Culture: Train employees in Kaizen principles and foster a culture of
continuous improvement.
 Process Optimization: Regularly review and optimize production processes to reduce
waste and inefficiencies.
 Feedback Mechanisms: Establish systems for collecting and implementing employee
suggestions for cost improvements.
By applying target costing and Kaizen costing, Pitlane can better align its production costs with
the financial objectives set by shareholders,

Team 03:

 M22PC1014 Khaliunaa Chinbileg

 M23PC1005 Tsogtbaatar Tsogjargal
 M24PC1006 Munkhzul O.