Taxmann's Operations Management & Strategic Management (OMSM) | CRACKER

<>3D;4 F8B4 <0A:B 38BCA81DC8>=

S. No.

Module

June Dec. June Dec. June Dec. Dec. Dec. June Aver2017 2017 2018 2018 2019 2019 2021 2022 2023 age

1.

Operations 7 Management Introduction

9

7

7

7

8

5

10

9

7.66

2.

Operations Planning

12

18

11

13

4

12

33

10

10

13.66

3.

Designing of 9 operational System and Control

9

1

8

7

9

16

9

8

8.44

4.

Production Planning & Control

24

23

33

30

53

19

25

11

22

26.66

5.

Productivity 8 Management and Quality Management

1

9

-

-

10

13

20

9

7.77

6.

Project Management

8

8

-

8

-

9

7

12

10

6.88

7.

Economics of Maintenance and Spares Management

11

10

8

12

21

11

10

8

11

11.33

Section A: Operations Management

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I-5

I-6

MODULE-WISE MARKS DISTRIBUTION

Section B: Strategic Management 8.

Strategic Management-Introduction

6

12

10

4

21

10

5

12

11

10.11

9.

Strategic Analysis & Strategic Planning

22

16

22

25

10

20

6

14

27

18

10.

Formulation 17 & Implementation of Strategy

15

14

12

15

10

4

20

8

12.77

11.

Digital Strategy

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Note: Module 11 : Digital Strategy has been newly added in Syllabus.

<>3D;4 F8B4 2><?0A8B>= F8C7 BCD3H <0C4A80; Module No.

Name of Module

Study Material Module

Section A: Operations Management Operations Management - Introduction

Module 1

2

Operations Planning

Module 2

3

Designing of Operational System and Control

Module 3

4

Production Planning & Control

Module 4

5

Productivity Management and Quality Management

Module 5

6

Project Management

Module 6

7

Economics of Maintenance and Spares Management

Module 7

Section B: Strategic Management 8

Strategic Management - Introduction

Module 8

9

Strategic Analysis & Strategic Planning

Module 9

10

Formulation & Implementation of Strategy

Module 10

11

Digital Strategy

Module 11

I-7

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1

2>=C4=CB PAGE

Module-wise Marks Distribution Module-wise Comparison with Study Material

I-5 I-7

SECTION A OPERATIONS MANAGEMENT MODULE 1 OPERATIONS MANAGEMENT - INTRODUCTION

1.3

OPERATIONS PLANNING

2.1

MODULE 3 DESIGNING OF OPERATIONAL SYSTEM AND CONTROL

3.1

MODULE 4 PRODUCTION PLANNING & CONTROL

4.1

MODULE 5 PRODUCTIVITY MANAGEMENT AND QUALITY MANAGEMENT

5.1

MODULE 6 PROJECT MANAGEMENT

6.1

MODULE 7 ECONOMICS OF MAINTENANCE AND SPARES MANAGEMENT

7.1

SECTION B STRATEGIC MANAGEMENT MODULE 8 STRATEGIC MANAGEMENT - INTRODUCTION

I-9

8.3

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MODULE 2

I-10

CONTENTS

MODULE 9 STRATEGIC ANALYSIS & STRATEGIC PLANNING

PAGE

9.1

MODULE 10 FORMULATION & IMPLEMENTATION OF STRATEGY

10.1

MODULE 11

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DIGITAL STRATEGY

11.1

2

>?4A0C8>=B ?;0==8=6

M O D U L E A Quick Review

CHAPTER 2.1 DEMAND FORECASTING

FORECASTING

Forecast must see that they are very nearer to the accuracy.

In long range forecast, the normal period used is generally 5 years. In some cases it may extends to 10 to 15 years also. The purpose of long range forecast is: (i) To work out expected capital expenditure for future developments or to acquire new facilities, (ii) To determine expected cash flow from sales, (iii) To plan for future manpower requirements, (iv) To plan for material requirement, (v) To plan for Research and Development. Here much importance is given to long range growth factor.

In case of medium range forecasting the period may extend over to one or two years. The purpose of this type of forecasting is: (i) To determine budgetary control over expenses, (ii) To determine dividend policy, (iii) To find and control maintenance expenses, (iv) To determine schedule of operations, (v) To plan for capacity adjustments.

In case of short-term forecast, which extends from few weeks to three or six months and the following purposes are generally served: (i) To estimate the inventory requirement, 2.1

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Forecasting means peeping into the future. As future is unknown and is anybody’s guess but the business leaders in the past have evolved certain systematic and scientific methods to know the future by scientific analysis based on facts and possible consequences. Thus, this systematic method of probing the future is called forecasting. In this way forecasting of sales refers to an act of making prediction about future sales followed by a detailed analysis of facts related to future situations and forces which may affect the business as a whole.

2.2

SECTION A : OPERATIONS MANAGEMENT

(ii) To provide transport facilities for despatch of finished goods, (iii) To decide work loads for men and machines, (iv) To find the working capital needed, (v) To set-up of production run for the products, (vi) To fix sales quota, (vii) To find the required overtime to meet the delivery promises.

Steps in forecasting Whatever may be the method used for forecasting, the following steps are followed in forecasting: (a) Determine the objective of forecast: What for you are making forecast?

Is it for predicting the demand? Is it to know the consumer’s preferences?

Is it to study the trend? You have to spell out clearly the use of forecast.

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(b) Select the period over which the forecast will be made? Is it long-term forecast or medium-term forecast or short-term forecast? What are your information needs over that period? (c) Select the method you want to use for making the forecast: This method depends on the period selected for the forecast and the information or data available on hand. It also depends on what you expect from the information you get from the forecast. Select appropriate method for making forecast. (d) Gather information to be used in the forecast: The data you use for making forecasting to produce the result, which is of great use to you. The data may be collected by: (i) Primary source: This data we will get from the records of the firm itself. (ii) Secondary source: This is available from outside means, such as published data, magazines, educational institutions etc. (e) Make the forecast: Using the data collected in the selected method of forecasting, the forecast is made.

Forecasting Methods: Methods or techniques of sales forecasting: Different authorities on marketing and production have devised several methods or techniques of sales or demand forecasting. The sales forecasts may be result of what market people or buyers say about the product or they may be the result of statistical and quantitative techniques. The most common methods of sales forecasting are: 1. Survey of buyer’s intentions or the user’s expectation method: Under this system of sales forecasting actual users of the product of the concern are contacted directly and they are asked about their intention to buy the company’s products in an expected given future usually a year. Total sales forecasts of the product then estimated on the basis of advice and willingness of various customers. This is most direct method of sales forecasting. The chief advantages of this method are: (i) Sales forecast under this method is based on information received or collected from the actual users whose buying actions will really decide the future demand. So, the estimates are correct.

MODULE 2 : OPERATIONS PLANNING

2.3

(ii) It provides a subjective feel of the market and of the thinking behind the buying intention of the actual uses. It may help the development of a new product in the market. (iii) This method is more appropriate where users of the product are numbered and a new product is to be introduced for which no previous records can be made available. (iv) It is most suitable for short-run forecasting.

2. Collective opinion or sales force composite method: Under this method, views of salesmen, branch manager, area manager and sales manager are secured for the different segments of the market. Salesmen, being close to actual users are required to estimate expected sales in their respective territories and sections. The estimates of individual salesmen are then consolidated to find out the total estimated sales for the coming session. These estimates are then further examined by the successive executive levels in the light of various factors like proposed changes in product design, advertising and selling prices, competition etc. before they are finally emerged for forecasting.

4. Experts’ opinions: Under this method, the organisation collects opinions from specialists in the field outside the organisation. Opinions of experts given in the newspapers and journals for the trade, wholesalers and distributors for company’s products, agencies or professional experts are taken.

By analysing these opinions and views of experts, deductions are made for the company’s sales, and sales forecasts are done.

5. Market test method: Under this method seller sells his product in a part of the market for sometimes and makes the assessment of sales for the full market on the bases of results of test sales. This method is quite appropriate when the product is quite new in the market or good estimators are not available or where buyers do not prepare their purchase plan.

6. Trend projection method: Under this method, a trend of company’s or industry’s sales is fixed with the help of historical data relating to sales which are collected, observed or recorded at successive intervals of time. Such data is generally referred to as time series. The change in values of sales is found out. The study may show that the sales sometimes are increasing and sometimes decreasing, but a general trend in the long run will be either upward or downward. It cannot be both ways. This trend is called secular trend. The sales forecasts with the help of this method are made on the assumption that the same trend will continue in the future. The method which is generally used in fitting the trend is the method of least squares or straight line trend method. With this method a straight line trend is obtained. This line is called ‘line of best fit’. By using the formula of regression equation of Y on X, the future sales are projected.

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3. Group executive judgment or executive judgment method: This is a process of combining, averaging or evaluating, in some other way, the opinions and views of top executives. Opinions are sought from the executives of different fields i.e., marketing; finance; production etc. and forecasts are made.

2.4

SECTION A : OPERATIONS MANAGEMENT

PAST EXAMINATION QUESTIONS OBJECTIVE QUESTIONS MULTIPLE CHOICE QUESTIONS Q. 1 A method in which a trend line is drawn in such a way that the sum of the squares of deviations of the actual points above and below the trend line is at the minimum is known as: (a) Squared trend method. (b) Equal square method. (c) Adjusted square method. (d) Least square method.

[June 2013, 1 Mark]

Ans. (d) Least square method Q. 2 For a marketing manager, the sales forecast is: (a) Estimate of the amount of unit sales for a specified future period. (b) Arranging the salesmen to different segments of the market.

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(c) To distribute the goods through transport to satisfy the market demand. (d) To plan the sales methods.

[June 2017, 1 Mark]

Ans. (a) Estimate of the amount of unit sales for a specified future period TRUE/FALSE Q. 1 In general, long-range forecasting is more useful in production planning.

[June 2013, 1 Mark] Ans. True (in production planning, short term forecasting is useful) Q. 2 In general short term forecasting will be more useful in production planning.

[December 2017, 1 Mark] Ans. True Q. 3 Short-term forecasting is useful to serve the purpose of estimating the inventory requirement.

[December 2017, 1 Mark] Ans. True FILL IN THE BLANKS Q. 1 After forecasting human resource needs, it is logical to ________ how these needs can be ________ [December 2016, 1 Mark] Ans. determine, met Q. 2 In Regression and Correlation analysis, the ratio of explained variation to the total variation is called _________________ [December 2017, 1 Mark] Ans. Coefficient of determination

2.5

MODULE 2 : OPERATIONS PLANNING

THEORY QUESTIONS Q. 1 What are two measures of forecasting

[December 2013, 1 Mark]

Ans. MEAN absolute deviation (MAD) and bias.

Q. 2 What are the merits of Delphi method of forecasting technique?

[December 2013, 5 Marks] Ans. Delphi is preferred for the following reasons: It involves knowledgeable persons on the subject.

Members in Delphi exercise come from different subject area and therefore the method is able to consider and pool up various aspects of the issue.

The members do not meet each other, their views are not influenced by the views of other.

No conflict of personality is seen in the process.

No dominance by any influential expert on the other experts.

It gives quick results as compared to quantitative techniques and helps in timely decisions.

Q. 3 What is measured by regression analysis?

Ans. Regression analysis is a statistical tools for measuring the change in dependent variable due to change in independent variable.

It helps in estimation of dependent variable on the basis of dependent variable

PRACTICAL QUESTIONS Q. 1 With the help of the following data, project the trend for the next five years: Year

2002

2003

2004

2005

2006

2007

Sales (Lakhs)

100

110

115

120

135

140

[December 2013, 5 Marks] Ans. Time deviations X

Sales ` (Lakhs) y

X2

XY

2002

-5

100

25

-500

2003

-3

110

9

-330

2004

-1

115

1

-115

2005

1

120

1

120

2006

3

135

9

405

2007

5

140

25

700

n=6

6X = 0

6Y=720

6X = 70

6XY = 280

Year T

2

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[December 2014, 2 Marks]

2.6

SECTION A : OPERATIONS MANAGEMENT

Let linear trend be: Y = a + bX ------- (1)

where X is time deviation, X = 2(T – 2004.5) ORIGIN YEAR – 2004.5

6 Y = 6 a + b X .........................(2) 6 Y = na + b 6 X .......................(3) 6 XY = a6 X + b 6 X2 ................(4) PUT 6 X = 0, 6Y=720, 6X2 = 70, 6XY = 280 and n = 6 in Equation (2), (3) and (4) Then equation (3) becomes 720 = 6 a, a = 120 From equation (4 ) 280 = 70b, b = 4 Put value of a and b in equation (1) So linear trend be, y = 120 + 4x Sales forecast for the next 5 years i.e. 2008 to 2012 Y2008 =120 + 4 (+7) = 120 + 28 = ` 148 lakhs TAXMANN®

Y2009 =120 + 4 (+9) = 120 + 36 = ` 156 lakhs Y2010 =120 + 4 (+11) = 120 + 44 = ` 164 lakhs Y2011 =120 + 4 (+13) = 120 + 52 = ` 172 lakhs Y2012 = 120 + 4 (+15) = 120 + 60 = ` 180 lakhs Q. 2 The annual sales of truck tyres manufactured by a company are as follows: YEAR Sales (’000 units)

(Y)

2008

2009

2010

2011

2012

25

34

45

38

53

[June 2014, 4 Marks] Ans. Years T

X

X2

Sales in (’000 units)Y

XY

2008

-2

25

4

-50

2009

-1

34

1

-34

2010

0

45

0

0

2011

+1

38

1

+38

2012

+2

53

4

n=5

6X = 0

6Y = 195

6X = 10

+106 2

Let linear trend be: Y = a + bX ------- (1) where X is time deviation, X = (T – 2010) ORIGIN YEAR - 2010 6 Y = 6 a + b X .........................(2) 6 Y = na + b 6 X .......................(3)

6XY = + 60

2.7

MODULE 2 : OPERATIONS PLANNING

6 XY = a6 X + b 6 X2 ................(4) Put 6X = 0, 6Y=195, 6X2 = 10, 6XY = 60 and n=5 in Equation (2), (3) and (4) Then equation (3) becomes 195= 5 a, a = 39 From equation (4 ) 60 = 10b, b = 6 Put value of a and b in equation (1) So linear trend be, y = 39 + 6x ESTIMATION OF SALES for 2013 Y 2013 = 39 + 6 (3) = 39 + 18 = 57 The estimated sales for 2013 will be 57,000 units.

Q. 3 The following data on the exports of an item by a company during the various years fit a straight line, (for the time being, assume that a straight line gives a good fit). Give a forecast for the years 2014 and 2015.

[December 2014, 6 Marks] No. of items (’000)

2005

15

2006

20

2007

25

2008

28

2009

30

2010

35

2011

35

2012

40

2013

45

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Year

Ans. X

Y

X2

XY

-4

15

16

-60

-3

20

9

-60

-2

25

4

-50

-1

28

1

-28

0

30

0

0

1

35

1

35

2

35

4

70

3

40

9

120

4

45

16

180

6X = 0

6Y = 273

6 X = 60

6XY = 207

2

2.8

SECTION A : OPERATIONS MANAGEMENT

Let y = a + bX ----------1 be linear trend Where X = year – origin (Deviation in time) Origin – 2009 6 Y = 6 a + bX .........................(2) 6 Y = na + b 6 X .......................(3) 6 XY = a6 X + b 6 X2 ................(4) HERE 6 X = 0 and Then from equation (3) 6 Y = na and 273 = 9a then a=273/9 = 30.33 From equation (4) 6 XY = b6 X2, 207= b 60 then b = 207/60 = 3.45 Put value of a and b in equation (1) The equation of a straight line fitting the data is: Y = 30.33 + 3.45X (a) Forecast for 2014, (i.e., X = 5): Y = 30.33 + 3.45 (5) = 47.58 (in 000)

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(b) Forecast for 2015, (i.e., X = 6): Y = 30.33 + 3.45 (6) = 51.03 (in 000) Q. 4 The demand for Personal Computers was estimated as 1100 per month for 5 months. Later on the actual demand was found as 1050, 1000, 1200, 1100 and 1050 respectively.

Workout Mean Absolute Deviation (MAD) and Bias. Analyze whether the forecast made was accurate.

[December 2014, 2 + 2 + 1 = 5 Marks] Ans. MAD =

1100 − 1050 + 1100 − 1000 + 1100 − 1200 + 1100 − 1100 + 1100 − 1050 5

(1100 − 1050) + (1100 − 1000) + (1100 − 1200) + (1100 − 1100) + (1100 − 1050) 5 (1100 − 1050) + (1100 − 1000) + (1100 − 1200) + (1100 − 1100) + (1100 − 1050) BIAS = 5 MAD =

= 100/5 = 20 units In this case, MAD is 60 units whereas Bias has deviation of 20 units. Since MADmeasures the overall accuracy of the forecasting method, it is found that the forecast is not based on accurate model and the error is (60/1100) × 100 = 5.5% Q. 5 The demand for three months for 60 watt bulbs is given below: Period

January

February

March

Demand

540

620

760

If the weight assigned to the period of January, February and March are 0.2, 0.3 and 0.45 respectively, forecast the demand for the month of April by using Weighted Moving Average Method [December 2017, 6 Marks]

2.9

MODULE 2 : OPERATIONS PLANNING

Ans. D1 = 540 W1 = 0.20 D2 = 620 W2 = 0.30 D3 = 760 W3 = 0.45 The Weighted Moving Average = W1 × D1 × W2 × D2 × W3 × D3 = 540 × 0.2 + 620 × 0.3 + 760 × 0.45 = 636. Therefore the Demand for the month of April is 636 nos. of 60 watt bulbs.

Q. 6 The following table relates to the tourist arrivals in India during 2016 to 2022.

Year

2016

2017

2019

2021

2022

Tourist arrivals (in Lakh)

36

40

50

56

60

(Present calculation upto three decimal points) Required: (i) Fit a straight line trend by method of least squares. (ii) Estimate the number of tourists (in lakh) in the year 2018 and that would arrive in the year 2026.

[July 2023, 6+1+1=8 Marks]

(i) X2

Year (t)

Tourist (Y) arrival (in lakh)

x = t – 2019

xy

2016

36

-3

-108

9

2017

40

-2

-80

4

2019

50

0

0

0

2021

56

2

112

4

2022

60

3

180

9

¦y = 242

¦x=0

¦ x y = 104

¦ x = 26

Let straight line trend be y = a+bx

(1)

Here x = t origin -2019 Now

¦y = na + b¦x

(2)

¦xy = a¦x + b¦x2

(3)

Here ¦x=0 Then From Eq (2) 242 = 5a + 0 a=

242 = 48.4 5

From Eq (3) 104 = 0 + b × 26

2

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Ans.

2.10

SECTION A : OPERATIONS MANAGEMENT

b=

104 =4 26

Put value of a & b in Eq (1) y = 48.4 + 4x (4) This is straight line trend (ii) Estimation tourist arrive in 2018, For 2018 x = 2018 – 2019 = - 1 Put x = – 1 in Eq (4) y2018 = 48.4 + 4 (-1) = 44.4 i.e. 44.4 Lakh Estimation of tourist arrive in 2026 x = 2026 -2019=7 Put x = 7 in Eq (4) y 2026 = 48.4 + 4 (7)

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=48.4 + 28 = 76.4 i.e. 76.4 Lakh.

A Quick Review

CHAPTER 2.2 CAPACITY PLANNING & UTILIZATION

Capacity Planning: The effective management of capacity is the most important responsibility of production and operations management. The objective of capacity management i.e., planning and control of capacity, is to match the level of operations to the level of demand.

Capacity planning is concerned with finding answers to the basic questions regarding capacity such as: (i) What kind of capacity is needed? (ii) How much capacity is needed? (iii) When this capacity is needed?

Capacity planning is to be carried out keeping in mind future growth and expansion plans, market trends, sales forecasting, etc. Capacity is the rate of productive capability of a facility. Capacity is usually expressed as volume of output per period of time.

Capacity planning is required for the following: Sufficient capacity is required to meet the customers demand in time, Capacity affects the cost efficiency of operations, Capacity affects the scheduling system, Capacity creation requires an investment,

MODULE 2 : OPERATIONS PLANNING

2.11

Capacity planning is the first step when an organisation decides to produce more or new products.

Capacity planning is mainly of two types: (i) Long-term capacity plans which are concerned with investments in new facilities and equipments. These plans cover a time horizon of more than two years. (ii) Short-term capacity plans which takes into account work-force size, overtime budgets, inventories etc.

Capacity refers to the maximum load an operating unit can handle. The operating unit might be a plant, a department, a machine, a store or a worker.

Capacity of a plant is the maximum rate of output (goods or services) the plant can produce.

Effective Capacity can be determined by giving due consideration to the following factors: Facilities - Design, location, layout and environment.

Product - Product design and product-mix.

Process - Quantity and quality capabilities of the process or to be followed.

Operational factors - Scheduling, materials management, quality assurance, maintenance policies, and equipment break-downs.

External factors - Product standards, safety regulations, union attitudes, pollution control standards.

Measurement of capacity Capacity of a plant is usually expressed as the rate of output, i.e., in terms of units produced per period of time (i.e., hour, shift, day, week, month etc.). But when firms are producing different types of products, it is difficult to use volume of output of each product to express the capacity of the firm. In such cases, capacity of the firm is expressed in terms of monetary value (production value) of the various products produced put together.

Capacity Planning Decisions Capacity planning involves activities such as: (i) Assessing the capacity of existing facilities. (ii) Forecasting the long-range future capacity needs. (iii) Identifying and analysing sources of capacity for future needs. (iv) Evaluating the alternative sources of capacity based on financial, technological and economical considerations. (v) Selecting a capacity alternative most suited to achieve strategic mission of the firm.

Factors affecting determination of plant capacity (i) Capital investment required,

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Human factors - Job content, Job design, motivation, compensation, training and experience of labour, learning rates and absenteeism and labour turn over.

2.12

SECTION A : OPERATIONS MANAGEMENT

(ii) Changes in product design, process design, market conditions and product life cycles, (iii) Flexibility for capacity additions, (iv) Level of automation desired, (v) Market demand for the product, Factors Affecting Capacity Planning: Two kinds of factors affecting capacity planning are: (i) Controllable Factors: amount of labour employed, facilities installed, machines, tooling, shifts of work per day, days worked per week, overtime work, subcontracting, preventive maintenance and number of production set ups. (ii) Less Controllable Factors: absenteeism, labour performance, machine break-downs, material shortages, scrap and rework, strike, lock-out, fire accidents, natural calamities (flood, earthquake etc.)

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PAST EXAMINATION QUESTIONS OBJECTIVE QUESTIONS MULTIPLE CHOICE QUESTIONS Q. 1 Out of the following factors that are affecting Capacity Planning, which one is Less Controllable one? (a) Machine break-downs (b) Amount of labour employed (c) Facilities installed (d) Shifts of work per day

[June 2017, 1 Mark]

Ans. (a) Machine breakdowns Q. 2 The effective capacity is NOT influenced by which of the following factors: (a) Forecasts of demand (b) Plant and labour efficiency (c) Subcontracting (d) None of the above

[December 2017, 1 Mark]

Ans. (d) None of the above Q. 3 Effective capacity can NOT be determined by which of the following factors? (a) Product design and product-mix (b) Quantity and quality capabilities (c) Facilities (d) None of the above Ans. (d) None of the above

[June 2018, 1 Mark]

2.13

MODULE 2 : OPERATIONS PLANNING

TRUE/FALSE Q. 1. Capacity refers to the minimum load an operating unit can handle.

[June 2018, 1 Mark] Ans. False Q. 2. Strikes and lock-out are controllable factors affecting Capacity Planning.

[December 2019, 1 Mark] Ans. False FILL IN THE BLANK Q. 1 Efficiency is a ratio of the actual output of a process relative to some ____.

Ans. Standard

THEORY QUESTIONS Q. 1 How Can you identify a bottleneck in a process ?

[June 2017, 1 Mark]

Q. 2 Which type of capacity plan takes into account workforce size, overtime budgets, inventories, etc.?

[December 2021, 1 Mark] Ans. Short-term capacity plan.

PRACTICAL QUESTIONS Q. 1 A manufacturing company has a product line consisting of five work stations in series. The individual work station capacities are given. The actual output of the line is 540 units per shift.

Work station No.

1

2

3

4

5

Capacity/shift

700

650

700

650

600

Calculate (i) System capacity (ii) Efficiency of the production line.

[December 2011, 3 Marks] Ans. (i) System capacity is decided by the work station, with minimum capacity/ shift. i.e., the bottleneck.

In the given question, the work station ‘5’ has minimum capacity 600 units/shift.

Hence, the system capacity = 600 units/shift. (ii) The Actual output of the line = 540 units/shift.

Therefore, the system efficiency = Actual Output/System Capacity × 100 = 540/600 ×100 = 90%

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Ans. A bottleneck can be identified by determining points at which excessive amounts of work-in-process inventories are accumulated.

2.14

SECTION A : OPERATIONS MANAGEMENT

Q. 2 A manufacturing company has a product line consisting of five work stations in series. The individual workstation capacities are given. The actual output of the line is 440 units per shift.

Workstation No.

1

2

3

4

5

Capacity/shift

550

650

700

650

600

Calculate (i) System capacity (ii) Efficiency of the production line.

[December 2012, 3 Marks] Ans. (i) Workstation decides the capacity of the system with minimum capacity/ shift, i.e., the bottleneck. In the given question, the work station ‘1’ is having a capacity of 550 units/shift which is minimum. Therefore, the system capacity = 550 units/shift. (ii) The actual output of the production line = 440 units/shift.

Therefore, the system efficiency = Actual output/System Capacity × 100

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= 440/550 × 100 = 80% Q. 3 In a firm, there are four workstations: A, B, C, & D working in series and their individual capacities in units per day are 400, 380, 350 and 410 respectively. The raw materials are fed to Machine A and the system output is obtained from Machine D. If the actual output is 320 units per day, what is the system efficiency?

[December 2013, 1 Mark] Ans. The bottle neck centre is C i.e. the work centre which has minimum capacity.

So System capacity i.e. the capacity of the bottle neck centre is 350 units. System efficiency = Actual output/System capacity = (320/350) × 100 = 91.43%.

Q. 4 Calculate the number of components that can be produced in a month when available equipment hours are 480 per month, efficiency of utilization is 85%, and it takes 36 minutes of processing time in the equipment for each component.

[June 2015, 2 Marks] Ans. Actual Equipment Hrs. that can be used = (480 × 85) ÷ 100 = 408 Hrs. Possible output = 408 × (60 ÷ 36) = 680 Components.

Q. 5 A department works on 8 hours shift, 288 days a year and has the usage data of a machine, as given below: Product

Annual Demand (units)

Processing time (Standard time in hours)

A

325

5.0

B

450

4.0

C

550

6.0

Calculate (a) Processing time needed in hours to produce products A, B and C, (b) Annual production capacity of one machine in standard hours, and (c) Number of machines required.

[June 2015, 7 Marks] Ans. (a) The processing time needed in hours to produce products A, B and C in the quantities demanded using the standard time data

2.15

MODULE 2 : OPERATIONS PLANNING

Product

Annual Demand (units) 325 450 550

Processing time (standard Processing time time in hours) needed (hrs.)

A 5.0 325 × 5 = 1625 B 4.0 450 × 4 = 1,800 C 6.0 550 × 6 = 3,300 Total = 6,725 hrs. (b) Annual production capacity of one machine in standard hours = 8 × 288 = 2,304 hours per year. (c) Number of machines required = Work load per year/Production capacity per Machine = 6,725 /2,304 = 2.92 machines = 3 machines.

Q. 6 A department works on 8 hours per day, 250 days a year and has the usage data of a machine, as given below: Product

Ans. Calculation of processing time needed in hours to produce product X, Y and Z in the quantities demanded using the standard time data Product

Annual demand (units)

Processing time needed (standard time in hours)

X

200

4.0 × 200 = 800 hrs.

Y

300

6.0 × 300 = 1800 hrs.

Z

400

3.0 × 400 =1200 hrs.

TOTAL 3800 hrs.

Annual production capacity of one machine in standard hours = 8 × 250 = 2000 hours per year.

Number of machines required = Work load per year/Production capacity per machine = 3800/2000 = 1.9 machines = 2 machines.

Q. 7 A firm has four work centres, A, B, C & D, in series with individual capacities in units per day shown in the figure below: RAW MATERIAL

A

B

C

D

ACTUAL OUTPUT

(450)

(420)

(360)

(390)

(310)

(i) Identify the bottleneck centre ? (ii) What is the system capacity ? (iii) What is system efficiency ?

[December 2017, 9 Marks]

TAXMANN®

Annual demand Processing time (standard time in (units) hours) X 200 4.0 Y 300 6.0 Z 400 3.0 Determine the number of machines required.

[June 2016, 6 Marks]

2.16

SECTION A : OPERATIONS MANAGEMENT

Ans. (i) The bottle neck centre is the work centre having the minimum capacity.

Hence, work centre ‘C is the bottleneck centre. (ii) System capacity is the maximum units that are possible to produce in the system as a whole. Hence, system capacity is the capacity of the bottle neck centre i.e., 360 units. (iii) System efficiency = Actual output/System capacity = (310/360) × 100 (i.e. maximum possible output) = 86.11% Q. 8 A manager has to decide about the number of machines to be purchased.

He has three options i.e., purchasing one or two or three machines. The data are given below:

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Number of machine

Annual fixed cost

Corresponding range of output

One

` 14,000

0-350

Two

` 17,000

351-550

Three

`23,000

551-900

Variable cost is ` 30 per unit and revenue is ` 70 per unit. (i) Determine the break-even point for each range. (ii) If projected demand is between 540 and 570 units, how many machines should the manager purchase?

[December 2017, 7 Marks] Ans. (I) Break-even point Let QBEP be the break-even point. FC = Fixed Cost.

R = Revenue per unit, VC = Variable Cost Then BEP (quantity)= FC/(R-VC) Let Q1 be the break-even-point for one machine option Then, Q1 = 14000/(70 – 30) = 14000/40 = 375 units (Not within the range of 0 to 300) Let Q2 be the break-even-point for two machines option.

Then, Q2 = 17000/(70 – 30) = 17000/40 = 425 units (within the range of 351 to 550) et Q3.

Let Q3 be the break even-point for three machines option.

Then, Q3 = 23000 /(70 – 30) = 23000 /40 = 575 units (within the range of 551 to 900) (II) The projected demand is between 540 to 570 units. The break-even point for single machine option (i.e., 375 units) is not feasible because it exceeds the range of volume that can be produced with one machine (i.e., 0 to 350).

Also, the break-even point for 3 machines is 575 units which is more than the upper limit of projected demand of 540 to 570 units and hence not feasible.

For 2 machines option the break even volume is 425 units and volume range is 351 to 550. Hence, the demand of 540 can be met with 2 machines and profit is earned because the production volume of 550 is more than the break even volume of 425.

If the manager wants to produce 570 units with 3 machines, there will be loss because the break even volume with three machines is 575 units.

Hence, the manager would choose two machines and produce 540 units and meet demand upto 550 units.

2.17

MODULE 2 : OPERATIONS PLANNING

Q. 9 A firm has four work centres, A, B, C and D, in series with individual capacities in units per day shown in the figure below: Work Centres A

B

C

D

ACTUAL OUTPUT

(350)

(410)

(380)

(370)

(310)

RAW MATERIAL

(i) Identify the bottle neck centre. (ii) Determine the system capacity. (iii) Determine the system efficiency

[December 2019, 3 × 3 = 9 Marks]

Ans. (i) the bottle neck centre is the work centre having the minimum capacity.

Hence, work centre ‘A’ is the bottleneck centre. (ii) System capacity is the maximum units that are possible to produce in the system as a whole. Hence, system capacity is the capacity of the bottle neck centre i.e., 350 units. (iii) System efficiency = Actual output/System capacity = (310/350) × 100 (i.e. maximum possible output) = 88.57%

CHAPTER 2.3 ECONOMIC BATCH QUANTITY

Determination of Economic Lot Size for Manufacturing The factors to be considered in arriving at the economic lot size are: (i) Usage rate: The rate of production of parts should match with the rate of usage of these parts in the assembly line. (ii) Manufacturing cost: High the lot size, lower will be the cost per unit produced because of distribution of set up costs for setting up production or machines and preparing paper work (production orders). But the carrying cost (handling and storing costs) will increase with increase in lot size. (iii) Cost of deterioration and obsolescence: Higher the lot size, higher will be the possibility of loss due to deterioration (items deteriorating after self life) or obsolescence (due to change in technology or change in product design).

Economic Batch Quantity (EBQ) Or Economic Lot Size (ELS) Or Economic Manufacturing Quantity (EMQ) = A = Annual Demand S = set up cost per set up C = carrying cost per unit per annum

2 AS C

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A Quick Review

2.18

SECTION A : OPERATIONS MANAGEMENT

ECONOMIC RUN LENGTH:When a firm is producing an item and keeping it in inventory for later use instead of buying it, the formula used to calculate Economic Order Quantity (EOQ) can be used to calculate the economic production quantity referred to as Economic Run Length (ERL).

If ‘P’ is the production rate and ‘d’ is the demand rate (or consumption rate), A is the annual demand for the item in units, I is the inventory carrying charges (percentage), C is the production cost per unit, then,

Economic Run Length (ERL)

=

A = Annual Demand

2 AS ⎛ d⎞ c ⎜1 − ⎟ ⎝ p⎠

S = Set up cost per set up C= Carrying cost per unit per annum D= Demand rate P = Production rate

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2 AS ⎛ d⎞ c ⎜1 − ⎟ p⎠ ⎝

PAST EXAMINATION QUESTIONS OBJECTIVE QUESTIONS MULTIPLE CHOICE QUESTION Q. 1 MBT LTD. is the manufacturer of bearing. The inventory holding cost per bearing per month is 20 paisa. If its Economic Batch Quantity (EBQ) is 4000 units (bearings) then the minimum inventory holding cost at optimum run size will be:— (a) ` 4320 (b) ` 4510 (c) ` 4800 (d) None of these

[July 2023, 1 Mark]

Ans. (c) ` 4800 Minimum inventory holding cost = EBO × holding cost per unit per annum = 4000 × 0.20 × 12 = ` 4800 2

2

Operations Management & Strategic Management (OMSM) | CRACKER AUTHOR PUBLISHER DATE OF PUBLICATION EDITION ISBN NO NO. OF PAGES BINDING TYPE

: : : : : : :

AMARENDRA KUMAR TAXMANN NOVEMBER 2023 2023 EDITION 9789357783422 296 PAPERBACK

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Description This book is prepared exclusively for the Intermediate Level of Cost & Management Accountancy Examination requirement. It covers the topic-wise questions & detailed answers as per the syllabus of ICMAI. The Present Publication is the latest 2023 Edition for the CMA Intermediate | New Syllabus | Dec. 2023 Exam. This book is authored by Amarendra Kumar, with the following noteworthy features: u

Strictly as per the New Syllabus of ICMAI

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Coverage of the book concludes: 

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[Past Exam Questions – Topic-wise] including CMA-Intermediate July 2023 Exam

[Tabular Summary] at the beginning of each chapter is given in this

book u

[Marks Distribution] is given Module-wise from June 2017 onwards

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[ICMAI Study-Material Comparison] is also given module-wise

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