Swaminathan G

Advantages of ABC Analysis, For example we consider a company manufacturing, Product A & Product B. Product A, Production volume: 19,000 units Unit cost of direct materials and labor: ₹45 Product B, Production volume: 11,000 units Unit cost of direct materials and labor: ₹55 Manufacturing Overhead : Total manufacturing overhead costs: ₹30000 Factory supervisor salaries: ₹80000 Further, as product B is more complex to manufacture and needs more attention, the company decides the salaries of the supervisor should be allocated with ₹30,000 to product A and ₹50,000 to product B. Now if we use Full-costing allocation method, we get Total cost of production for Product A: ₹55 Total cost of production for Product A: ₹65 Using ABC method, Product A, Allocation of factory supervisors: ₹30000/19000 = ₹1.6 Manufacturing overhead to be applied to total production volume: ₹2,20,000/30,000 = ₹7.3 Unit cost of manufacturing overhead: ₹1.6 + ₹7.3 = ₹8.9 Total unit cost of production: ₹45 + ₹8.9 = ₹53.9 Product B, Allocation of factory supervisors: ₹50,000 /11,000 = ₹4.5 Manufacturing overhead to be applied to total production volume: ₹2,20,000/30,000 = ₹7.3 Unit cost of manufacturing overhead: ₹7.3 + ₹4.5 = ₹11.8 Total unit cost of production: ₹55 + ₹11.8 = ₹66.8 This proves that, ABC analysis shows that the total cost of production for product A is actually ₹53.9 per unit, not ₹55 as originally calculated. Product B costs ₹66.8 instead of the previous ₹65. These variations in prices of production have implications for profit forecasting, production planning and budget for marketing campaigns. Instances where ABC Analysis will create complications, When we take the above example with only one product or overheads are relatively small or no allocation done on supervisory salaries based on product's complexity, there is no need of ABC Analysis. When the product range is large, cost accumulation and data collection are complex and requires an advanced cost recording system and properly trained staffs. When it is difficult to assign cost to different activities.

Using the NPV calculator, we got the NPV value as 0. A zero NPV means that the investment earns a rate of return equal to the discount rate(rate of interest). Further, this project is not expected to result in any significant gain or loss for the company. With a neutral NPV, management uses non-monetary factors to decide on the investment. The non-monetary factors in this project are increase in Employee Satisfaction scores and Corporate Social Responsibility visibility. Thus we can conclude that the company can/may take up this project if it looks up to bring improvement in the above mentioned factors.