Harvard Case - Kumar Sweets: Product Profitability Analysis
"Kumar Sweets: Product Profitability Analysis" Harvard business case study is written by Ashutosh Dash, Sangram Jena. It deals with the challenges in the field of Accounting. The case study is 10 page(s) long and it was first published on : Mar 14, 2018
At Fern Fort University, we recommend that Kumar Sweets implement a comprehensive activity-based costing (ABC) system to gain a more accurate understanding of product profitability. This will involve a thorough review of their current cost accounting procedures and policies and a redesign of their cost allocation methodology. The ABC system will enable Kumar Sweets to identify and address profitability issues at the product level, leading to improved decision-making regarding product pricing, production, and marketing strategies.
2. Background
Kumar Sweets is a family-owned business specializing in traditional Indian sweets. The company faces challenges in determining the profitability of its diverse product portfolio, relying on traditional cost accounting methods that fail to capture the complexity of their manufacturing processes. The company's owners, the Kumar brothers, are concerned about the lack of detailed financial performance measurement and are seeking ways to improve their understanding of product profitability.
3. Analysis of the Case Study
The case study highlights several key issues:
- Inaccurate Cost Allocation: Kumar Sweets currently uses a simple cost allocation method based on direct labor hours, failing to capture the true cost drivers for each product. This leads to distorted product profitability estimates.
- Lack of Product-Level Profitability Analysis: The company lacks a system for tracking and analyzing the profitability of individual products, hindering informed decision-making regarding product mix and pricing.
- Limited Financial Data: The company's financial statements lack the necessary detail to support a comprehensive analysis of product profitability.
To address these issues, we recommend using the activity-based costing (ABC) framework. ABC involves identifying and analyzing the activities involved in producing each product and allocating costs based on the actual consumption of resources by each product. This provides a more accurate picture of product profitability by considering the full range of costs associated with each product, including indirect costs.
4. Recommendations
Implement an Activity-Based Costing System: Kumar Sweets should implement an ABC system to accurately allocate costs to individual products. This involves:
- Identifying Cost Drivers: Identifying the activities involved in producing each product and the cost drivers for each activity.
- Tracking Resource Consumption: Tracking the consumption of resources by each product for each activity.
- Allocating Costs: Allocating costs to products based on their actual resource consumption.
Develop a Product Profitability Analysis Framework: Kumar Sweets should develop a framework for analyzing the profitability of individual products. This framework should include:
- Product Costing: Accurate cost accounting for each product using the ABC system.
- Revenue Analysis: Detailed analysis of revenue generated by each product.
- Profitability Calculation: Calculation of profit margins for each product.
Improve Financial Reporting: Kumar Sweets should enhance their financial statements to provide greater detail on product profitability. This includes:
- Product-Level Reporting: Reporting profitability metrics for individual products.
- Variance Analysis: Analyzing variances between actual and budgeted costs and revenues for each product.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Mission: Implementing an ABC system aligns with Kumar Sweets' core competency in producing high-quality sweets and its mission to provide customers with a diverse range of products.
- External Customers and Internal Clients: The ABC system will enable Kumar Sweets to make informed decisions regarding product pricing and availability, benefiting both external customers and internal stakeholders.
- Competitors: Understanding product profitability will allow Kumar Sweets to compete effectively in the market by optimizing product mix and pricing strategies.
- Attractiveness: The ABC system will provide a more accurate understanding of product profitability, leading to improved decision-making and potentially higher overall profitability for the company.
6. Conclusion
By implementing an ABC system and developing a comprehensive product profitability analysis framework, Kumar Sweets can gain a more accurate understanding of their product portfolio's profitability. This will enable them to make informed decisions regarding product pricing, production, and marketing strategies, ultimately leading to improved financial performance.
7. Discussion
Other alternatives to ABC include traditional cost accounting methods and simplified costing approaches. However, these methods are less accurate and may not capture the full complexity of Kumar Sweets' manufacturing processes. The ABC system offers a more comprehensive and accurate approach to cost allocation and product profitability analysis.
The implementation of ABC involves several risks, including:
- Cost of Implementation: Implementing an ABC system requires significant time and resources.
- Resistance to Change: Employees may resist changes to existing accounting procedures and policies.
- Data Accuracy: The accuracy of the ABC system depends on the quality of data collected.
To mitigate these risks, Kumar Sweets should:
- Phased Implementation: Implement the ABC system in phases to minimize disruption.
- Employee Training: Provide employees with adequate training on the new system.
- Data Validation: Ensure the accuracy of data collected for the ABC system.
8. Next Steps
- Develop a Project Plan: Create a detailed project plan outlining the steps involved in implementing the ABC system.
- Identify and Train Resources: Identify the necessary resources for implementing the ABC system and provide them with appropriate training.
- Pilot Test the System: Conduct a pilot test of the ABC system on a small sample of products to ensure its accuracy and effectiveness.
- Full Implementation: Implement the ABC system across all products.
- Monitor and Evaluate: Regularly monitor and evaluate the performance of the ABC system to ensure its effectiveness and identify areas for improvement.
By following these steps, Kumar Sweets can successfully implement an ABC system and gain a more accurate understanding of their product profitability, leading to improved decision-making and enhanced financial performance.
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Case Description
By October 2014, Kumar Sweets was a successful sweets company in Kurukshetra, Haryana, India, well-known for Indian sweets made using a Kumar family recipe that had been passed down for generations. The company's success was largely due to the continued efforts of its founder and head, but the founder's eldest son sensed that something was wrong with the firm's operations. Although revenue had increased over the years, the business had not been able to realize the expected profit. Since its last product expansion effort in 2011, Kumar Sweets' profitability was lower than it had been in previous years; the founder and his son wanted to find out why, because they had hoped to pursue geographic expansion. Kumar Sweets needed to implement appropriate actions that addressed its existing problems as soon as possible.
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