Sample Paper

Strategic Cost Management
Professor HariHaran
End Term Exam
Advanced Corporate Finance and Banking Management
GMBA April 2010
Date: December 29, 2010
Time: 2 hours 30 minutes

Question 1: What are the Critical success factors IBA should consider if they intend to do operations in India? How they can address them? (20 Marks)

Answer 1: IBA has a product that has shelf life of not more than 4 hours. It uses cyclotron to produce the product. Setting up of a laboratory takes at least 17months. (all these pieces of information is available in the website). If they look at India as a market, it has to be either Mumbai or Chennai as they are the hubs for cancer treatment in India. Considering Mumbai as a hub, the key client will be Tata Memorial Hospital, who have their facility in a by-lane at Parel. If IBA has to succeed they have to consider the following:

a) Location should be nearer to Tata Memorial as the shelf life is just four hours
b) They need a large space for setting up the facility - They need to look at some open spaces nearer to Tata Memorial
c) As the technology involves cyclotron, pollution control norms and security clearance from home ministry is critical
d) Or alternatively they need to keep the facility outside Mumbai, develop some incubating mechanism to enhance the shelf life or miniaturize the lab to fit within Tata Memorial.

Question 2: ISShicare is designing the costing system. What should be the objective of the costing system and what should be the cost objective(s)? (20 Marks)
Answer 2: ISS Health Care:

They have two kinds of customers Retail Customers and Institutional Customers. Retail customers are given a standardised solution whereas Institutional customers require specific customised solutions.

Objective of the Costing System:
1) Pricing - For Retail customers
2) Quotation - for Institutional customers
3) Cost Control - For Retail Customers
4) Cost Control - for Institutional Customers

Cost Object:
1) Pricing - Retail - Class of houses
2) Pricing - Institutional - Activities - leading to AMC contract
3) Cost Control - Retail - Costing System's role is limited - However, Region wise monthly profitability analysis
4) Cost Control - Institutional - Costing System to report deviations from plan based on QRST pattern (Quantity, Rate, Specs and Time) to ensure the customer is profitable. So Individual Institution Cumulative profitability YTD is required

Question 3: Is Target costing applicable for Demag Cranes? Explain the context of application, if applicable, or if not, why not? (20 Marks)
Answer 3: Demag Cranes:

 Customised high end cranes - Target Costing is not exactly applicable
 Standardised offerings - Target Costing is highly relevant

Question 4: Dukh mein sumiran sab karein……..explain in the context of organization’s response to addressing cost issues. What is the ideal way of addressing cost issues? (10 Marks)
Answer 4: Dukh mein sumiron:

Cost Cutting is brutal. One off initiatives rarely deliver sustainable improvements. We need to go thru' the stages of Cost Control (stability), Cost Reduction (Incremental Improvements) and Cost Management (Breakthru' ideas). Cost Control should be everybody's job; whereas Cost Reduction should be identified and specific functional head should be made responsible. Cost Management needs to touch the design, economics and even look beyond the enterprise boundaries. All these initiatives should cease to be an initiative and the line managers should be ultimately made responsible.

Question 5: When is it appropriate to have the constraint outside the organization? (10 Marks)
Answer 5: Constraint outside the organization:

If the unfilled market potential is low and the possibility of discrete capacity addition/reduction is very low then the constraint should be outside. If the market potential is low and the possibility of discrete capacity addition/reduction is very high, we can play with the constraint outside.

Question 6: Why measure performance of people? (10 Marks)
Answer 6: To implement strategy and to validate strategy.