Question

Using an example, describe two types of management accounting information that might assist a mobile phone manufacturer that followed a cost-leadership strategy. Using an example, describe one planning decision and one control decision I ITAAL. Using an example, what is meant by a learning curve and explain it's role in cost estimation.

Answer 1

Cost Leadership :-  A cost leadership meand our Product be more profitable than a competitor at the same price point. In the Cost Leadership strategy not only one or two process focused, Management Accoutant focus on entire process right from Procurement to Logistics.

Following are the two types of Management Accounting Informations which can help to drive cost leadership:-

1) Margin Analysis- Managerial accounting analyzes the incremental benefit of increased production – this is called margin analysis. This flows into the breakeven analysis, which involves calculating the contribution margin on the sales mix to determine the unit volume at which the business’ gross sales equal total expenditures. A managerial accountant will use this information to determine the price point for products and services.

In below example, you can see with the incremental sale of 10000 Quantity Profit margin goes up 13%, because fixed cost is remained constant.

XYZ Mobile Manufacturer	10000 Qty.	20000 Qty.
Sales	380,000	760,000
Variable cost	250,000	500,000
Contribution Margin	130,000	260,000
Contribution Margin %	34%	34%
Fixed Cost	100,000	100,000
Profit	30,000	160,000
Profit %	8%	21%

Constraint Analysis- Constraint analysis indicates the limitations within a sales process or production line. Managerial accountants find out where the constraints occur and calculate the impact on cash flow, profit and revenue.

Following Points management accountant find after constraint Analysis

1) Inventory Carrying Cost is much higher than Expected, so he Planned to apply "Just in Time Inventory" Process, due to this company's ordering cost goes up 2% but at the same time, Carrying cost is reduced by 7%, so it's results in decreasing our Finance Cost.

2) Labour cost also found to be higher side, so after analysis he founds some unskilled labour are working there, their efficiency % is only 50%, so arrange training sessions to them from skilled labour, due to this their efficiency increase to 70 % and 90%, so they are producing 10 number @ 50% efficiency per hour, after @70% efficiency they produced 14 numbers and @90%, 18 numbers per hour, this is the best example of "Learning Curve"

In above cases, 1st one is Planning decision and 2nd one is Control Decision, it results in reduce our Fixed cost as well as Variable cost, which make our mobile manufacturer cost leader in Market.

Table:

XYZ Mobile Manufacturer	Before Constraint Analysis	After Constraint Analysis
Sales	380,000	380,000
Variable cost	250,000	220,000
Contribution Margin	130,000	160,000
Contribution Margin %	34%	42%
Fixed Cost	100,000	80,000
Profit	30,000	80,000
Profit %	8%	21%