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Strategic Cost Management

Jun 2025 Examination

Q1. Tachi Ltd. is a mid-sized manufacturing company producing two product lines: Standard Widgets and Custom Widgets. The company has been using Traditional Costing to allocate overhead costs, based on machine hours. However, the management has noticed that despite increased production efficiency, profit margins are declining, especially for Standard Widgets.

A cost consultant suggests implementing Activity-Based Costing (ABC) to allocate costs more accurately based on actual resource consumption. After an initial analysis, it is found that Custom Widgets require more design modifications, customer support, and quality checks compared to Standard Widgets. The consultant argues that the current system is over-costing Standard Widgets and under-costing Custom Widgets. Analyze the situation and compare Traditional Costing and Activity-Based Costing in the context of Tachi Ltd. Justify whether implementing ABC would benefit Tachi Ltd. (10 Marks)

Q2. Active Ltd. is a consumer electronics company operating in a highly competitive market. The management wants to evaluate the company’s financial performance over the last two years to understand its profitability and efficiency trends. The following financial data is provided for the past two years:

Particulars	Year 1 (Rs. in Lakhs)	Year 2 (Rs. in Lakhs)
Sales	1,200	1,400
Cost of Goods Sold	720	920
Net Profit	120	110
Total Assets	800	1,100
Shareholders’ Equity	500	650

You’re required to calculate the following financial ratios for both years:

Gross Profit Margin
Net Profit Margin
Return on Assets (ignore taking average)
Return on Equity (ignore taking average)

Analyze the trends in these ratios and comment on the company’s financial performance. (10 Marks)

Q3A. Beta Ltd. is a growing manufacturing company that produces a single product. The company’s management is evaluating its cost structure to prepare a budget for different production levels. The finance team has provided the following cost details: Variable Costs per unit:

■ Direct Materials: Rs.50

■ Direct Labor: Rs.30

■ Variable Overheads: Rs.20

Fixed Costs:

■ Fixed Overheads: Rs.40,000 per month

The company is considering two possible production levels: 1,000 units and 1,500 units. You’re required to, based on the given cost structure, prepare a Flexible Budget for both capacity levels (5 Marks)

Q3B. Beta Ltd. is a growing manufacturing company that produces a single product. The company’s management is evaluating its cost structure to prepare a budget for different production levels. The finance team has provided the following cost details: Variable Costs per unit: