Institute of Cost Accountants of India
WIRC Bulletin-May 2018

Maximum Permissible Cost of Key Raw Material A in Product Cost X to sustain Given Profitability of Product X by CMA Rajesh Kapadia

Many times, company faces a problem as to what would be the Maximum Permissible Cost of its Key Raw Material Content ( say Raw Material A ) in Product X which company can afford to have in order to get the desired margin ( Rs / MT ) for Product X when Maximum Permissible Selling Price is provided by its Marketing Department.

Here, CMA Department can very well guide the management by providing working as per ANNEXURE 1.

Here, maximum permissible cost of Key Raw Material A is worked out as per ANNEXURE 1.

To achieve this, company can explore the following options :

  • To try to procure material at the maximum permissible procurement cost which in turn results in maximum permissible cost.

           For Controlling price of  A category of Raw Materials,any emergency

purchase should be avoided. This may require proper coordination

between Sales Department,Production Department & Purchase

Department.

Company can also explore the possibility of entering into Rate Contracts

for given period with proven suppliers.

This will obviate the risk of paying any higher price during the period of

contract.

  • To reduce Per MT consumption of Raw Material A to keep its cost within permissible cost.

           Usage of A category of Raw Materials can be brought down with the help

of R & D Dept which can suggest suitable modification in the existing

process.

  • To procure same material of superior quality at higher rate.

Usage of A category of Raw Materials per MT of Finished Product can also

be brought down by purchasing the same Raw Materials of Superior

Quality at higher price whereby gain to the company by reducing usage

of A category of Raw Materials far exceeds the higher price paid for it.

Due to superior quality, its Per MT consumption will come down thus keeping the cost of Raw Material A within the maximum permissible cost.

4) Company may explore the possibility of putting up its own Mfg Facility for A category of Raw Materials after carrying out proper Cost Benefit Analysis. This will ensure uninterrupted supply of A category of Raw Materials at reduced rate (i.e.at mfg cost ).

 

ANNEXURE 1

Sr No Particulars Rs / MT
1 Selling Price of Product X  
2 Less : Desired Margin  
3 Target Cost for Product X ( Maximum Permissible Cost )  
4 Less : Conversion Cost  
5 Total Raw Material Cost of Product X  
6 Less : Cost of Other Raw Materials  
7 Maximum Permissible Cost of Key Raw Material A  
8 Usage of Raw Material A in Product X          ( MT / MT )  
9 Maximum Permissible Procurement Cost of Key Raw Material A  ( 7 / 8 )  

 

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