Arpat Company: Costing Method for Internal Reporting

Abstract

The case is about Vaishali, the recently hired CEO of the Arpat Company, who finds it puzzling why in spite of an increase in sales volume and the introduction of just in time (JIT) manufacturing, company profits have significantly declined. She does not know whether the variable costing method for internal reporting purposes should be used. Her predecessor, Tamanna, originally put this method in place. Vaishali has a debate on the issue with Absar, the management accountant of the company. She wonders if the problem is with JIT, accounting, pricing or capacity levels. One day before her scheduled meeting with Absar, he suddenly resigns. The case intends to help students understand the nuances of variable costing, the absorption costing method and the choice of capacity for pricing and performance evaluation. It engages them in a number of decision scenarios involving ethical implications.The case can be used in ‘Cost Management’ or ‘Management Accounting’ courses for MBA and executive programs. The case would be very effective if the instructor uses it after the students have learned the basics of absorption costing, cost volume profit (CVP) analysis, budgeting, and variance analysis.