Ocha Limited Harvard Case Solution & Analysis

Ocha Limited Case Study Solution

Value of cost classification & reason for importance in making decision

Cost classification is the process in which cost is categorised into groups according to their similar characteristics. Grouping costing is based on the nature of the expense, the source of the expense, and other attributable.

It can also be classified on the basis of variability and functions. Thus it depends on the need of categorization of the business. Cost classification is very important as it helps in profit planning, effective cost control, and predicting selling price, proper absorption of overheads and assists in decision making.

Companies also use different costing methods where they compute profits for each decision applying the cost pertaining to the different groups. Ocha Limited has also faced different characteristics .i.e. cost is directly attributable to products, fixed cost of overheads may also face some opportunity cost if any decision taken. Without grouping cost it is not possible for Ocha Limited to take an optimum decision. If Ocha Limited wants to close the old product but due to closing it the company will be unable to get discounts from the supplier or if over heads are not classified between each product it may lead to closure of the profitable product, similarly if Ocha Limited wants to start a new product it needs to examine the cost directly attributable to product and cost of opportunities that can be availed due to it.

If the cost is categorised fairly it will not only assist the company to take the finest decision but also assist in imposing control over certain factors.

The market faced by Ocha Limited is dynamic and highly competitive, where there will be competition to provide high-quality products to the buyer in lower prices. Ocha Limited is currently struggling to maintain its momentum as competitors offer a lower price and fast deliveries. Ocha Limited needs to compute the cost of these two remedies.

Costing Techniques available for Ocha Limited.

Ocha Limited is a major manufacturer of tea based drinks and desserts. It includes different costs associated .i.e. variable cost on production which includes raw material, labour that is involved in the production, expense directly is attributable to production and fixed costs. Following are the Costing Techniques available for Ocha Limited:

Direct costing

This technique is very similar to marginal costing where the additional cost is considered,although the difference is that direct costing may include some fixed costs that are directly affiliated in appropriate circumstances. Direct cost can be defined as a cost that can be directly traced in each product.

Sometimes manufacturing company dealing in manufacturing of multiple products face cost, which are categorised under general and indirect over heads resem bling to fixed cost. But they can directly pertain to each product.e.g. Electricity expense, maintenance expense, salary expense of a supervisor involved solely in a single project is the directly fixed cost of the project.

Absorption costing

This technique is followed practically by manufacturing companies considering the concept of direct costing technique. The technique includes expenses that are directly determinable and also includes general overheads/fixed cost on the basis of variable factors. Ocha Limited. can also use this technique before taking any decision if Tomohiro (CEO) believes that they are facing fixed cost which needs to be incorporated in the particular decision.

Activity based costing

Activity-based costing system that includes manufacturing overheads for each project on the basis of its activity. This can be done through identifying cost pool pertaining to the overhead such as: Maintenance charges of machines is allocated by Ocha Limited on the basis of hours used. ABC system allows manufacturing companies’ decent allocation of each overhead expense if the multiple products are same similar to the case of Ocha Limited. as it is involved in manufacturing iced tea, tea flavoured ice cream and tea flavoured confectionery. Here,Ocha Limited would be facing accumulated cost produced every product of a single factor.

Machine Maintenance –machine hours

Electricity – Machine hours

Factory Rent – square feet

Factory Maintenance– square feet,..................

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