Comprehensive Cost Analysis Report: Intel Semiconductor, MACB Module

This report provides a comprehensive cost analysis of Intel Semiconductor, examining cost classifications (direct, indirect, fixed, variable), and applying various costing techniques such as absorption costing, marginal costing, Activity-Based Costing (ABC), FIFO, and LIFO methods. It delves into the identification and analysis of cost information within the company, exploring different cost classifications and behaviors. The report also calculates costs for products C1 and C2 using appropriate techniques and analyzes cost data using one, two, and three-dimensional diagrams. Furthermore, it utilizes performance indicators to identify potential improvements and recommends strategies for cost reduction, enhancing value, and implementing Total Quality Management (TQM) to optimize financial performance. The conclusion summarizes the key findings and recommendations for improving cost management and overall efficiency within Intel Semiconductor.

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Table of Contents
I. Introduction.......................................................................................................................................................2
II. Identify and analyse the cost information within Intel Semiconductor Ltd................................................2
1. Using the cost classifications to classify different categories of cost incurred in Intel
Semiconductor.........................................................................................................................................................2
 Direct costs............................................................................................................................. 4
 Indirect costs.......................................................................................................................... 4
 Fixed costs............................................................................................................................. 7
 Variable costs......................................................................................................................... 7
 Semi-variable costs................................................................................................................ 8
 Step costs............................................................................................................................... 9
 Product costs........................................................................................................................ 10
 Period costs.......................................................................................................................... 10
2. Apply different costing techniques on the given information for Intel Semiconductor.......................11
 Absorption costing................................................................................................................ 14
 Marginal costing:..................................................................................................................16
3. Using appropriate techniques to calculate costs for product C1 and C2............................................19

 Activity Based Costing (ABC) method...............................................................................19

 Standard costing............................................................................................................... 24

 FIFO method (First in, First out)........................................................................................25

 LIFO method (Last in, First out).........................................................................................26
4. Using appropriate techniques to analyse the cost data on the basis of above cost classification. .28

 One dimensional/direction diagrams.................................................................................28

 Two-dimensional diagrams................................................................................................28

 Three-dimensional diagrams.............................................................................................28
5. Utilize performance indicators to find out the potential improvements...............................................37
6. The recommendation for improvements to reduce costs, appreciate the value and quality................44

 Cost reduction................................................................................................................... 44

 Enhancing value................................................................................................................ 45

 Total Quality Management................................................................................................49
III. Conclusion......................................................................................................................................................52
IV. Reference........................................................................................................................................................53
I. Introduction
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In fact, each and every company needs accounting to manage their costs and budgets. Intel
Semiconductor is also no exception. From that point, this report will show how the company
apply Cost Classification to categorize each of their costs into Cost behaviour (Fixed or
Variable) and Management function (Direct or Indirect).
Moreover, in order to value its stock, the report will try to apply both LIFO and FIFO methods for
Intel Semiconductor so that the company can easily choose the most appropriate one.
Besides, this report will also emphasize on Marginal and Absorption costing then
recommending the better method to be applied into the company to reduce tax liability. In
addition, process costing, standard costing, AVCO method, TQM, KPIs will also be introduced
in this report.
II. Identify and analyse the cost information within Intel Semiconductor Ltd.
1. Using the cost classifications to classify different categories of cost incurred in
Intel Semiconductor
There are two main types of accounting including: Management Accounting and Financial
Accounting.
Management Accounting is on the behalf of internal activities, which specifically relate to the
careful calculation of the costs incurred in the company so that Intel Semiconductor can easily
analyse them and based on these results, they can anticipate what will happen in the
forthcoming period. Since then, due to this, the company can improve and fix the situation so
that it can easily increase profits once increasing the productivity effectively. For instance, in
Intel Semiconductor, the company can apply management accounting to foresee how cost will
increase in the next period in terms of the costs for health, welfare system to ensure the fitness
of its human resources, or the level of increase or decrease of some production activities. Since
then, Intel can easily find out the most effective way to balance all the changes in such costs
and then remain the stable situation for the company. Furthermore, as it is just related to
internal activities and operations, Management Accounting can be flexible rather than ensuring
the strict rules and regulations.
In contrast, financial accounting is on the behalf of external activities and instead of predicting
what is going on in the forthcoming period, financial accounting is applied to record, summarise
and analyse the costs that incurred in the past. Besides, as it is referred to the outside activities
of the organization, this type of accounting relate directly to external stakeholders rather than
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internal ones like the first mentioned types of accounting, it includes customers, government,
bank, creditor, debtor, distributor, supplier, etc.
In this report, the main ideas will be emphasised on the first type that mentioned above,
management accounting.
As for business, cost is actually important. In fact, each and every business needs to calculate
the amount that they have to be paid or given up in order to get something. In other words, cost
in business is usually a monetary valuation of its effort, material, labour, time and other
resources or risk incurred as well as opportunity forgone in production and the delivery of
products or services. Therefore, controlling the cost effectively helps businesses achieve their
objectives easily. However, the question here is how to keep control of unexpected changes.
This is the issue that is concerned solely by most of businesses. Intel Semiconductor is also no
exception. In order to control the cost, one of the most important things this technological
company needs to do is to classify all of their incurred cost which related to three elements as
follows:
o Materials
o Labours
o Other expenses
First of all, the cost can be classified as follows:
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Figure 1.1: The diagram of direct and indirect costs
From the chart that given above, there are two main types of cost including direct and indirect
cost that Intel Semiconductor will have to pay to sustain its operations.
 Direct costs: are the costs that can be completely identified with a particular cost centre
or cost object such as departments, products, processes, services (Business Dictionary
Website)
Direct costs include direct labour, direct material as well as direct expenses for production. It
means: Direct costs = direct material costs + direct labour cost + other direct expenses.
Moreover, the level of some of this type of cost will change and vary according to the rate of the
output. For instance, in terms of the direct labour and direct material, the more amount of
products that Intel Semiconductor produce, the more cost of these categories they will pay.
In addition, such cost will be recognised under the unit of production such as per labour, per
hour, per unit, etc. such as an amount of wage that an assembly worker is paid per hour or the
expense paid for each plastic board used to mount the chip, etc.
 Indirect costs: are whatever costs that are not related directly to any specific product or
function within the general operation of a business though it provides the services or running a
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department. Therefore, this type of costs will absolutely have an impact on the entire operation
of any business in general and Intel Semiconductor in particular. And since it influences on the
whole activities, making it hard to charge them into a specific function or department
Similarly, indirect cost will be calculated as follows:
Indirect cost = indirect material cost + indirect labour cost + indirect expenses
Moreover, in order to identify the wide application of this cost, there is a term that indirect costs
are sometimes called as ‘overhead’.
In terms of Intel Semiconductor, the cost for the administration of its business is a good
example. In particular, when manufacturing a computer chip, the company has to pay a sum of
salary for indirect labours for the monitoring and evaluating processes including supervisors,
production manager, etc. Additionally, with a technological company, Intel will definitely need to
pay a huge amount for a hundred of engineers within its company. Besides, there are a
thousand of non-productive personnel within Intel Company such as officers including
accountants, assistants, managers, etc. will also receive monthly salary incurred from indirect
costs of this organization. Moreover, the materials that used for negligible amounts after making
a defective chip will be classified as indirect material costs since this part of material cannot
function normally and will be thrown away instead of being traded into the market. In addition,
the items such as paper, pens and other essential stationary to serve for the use of recording
and keeping the level of productivity in factory or other functions in each department are also
classified in this category. Furthermore, the payment for services such as auditing and
preparation of legal documents that impact on the overall operation are also considered as
indirect expenses of Intel in nature. Besides, with the technological company like Intel, it has
applied many state-of-the-art technologies for manufacturing products, from that point, the
payments for upkeep and maintenance of such modern business facilities are also considered
as huge indirect expenses for Intel to pay. In addition, in terms of selling overheads, Semi
Conductor also need to spend commission for its salesperson which depend on their weekly or
monthly sales.
All of these ideas mentioned above can assume in the chart below:
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Figure 1.2
In the other words, it can also be assumed that:
Total cost = Direct material costs+ Direct labour costs + Overheads.
From the above formula to calculate the total cost, the total cost of direct materials and direct
labour can be seen as Product cost or Prime cost. The rest of the amount, overheads (in terms
of Admin and S&D Overheads) will be seen as Service cost for this IT Company.
Then, for Intel Semiconductor, based on the given scenario, those mentioned costs will be
classified clearly in the table below:
Direct costs Indirect costs
Labours Materials Labours Manufacturing
Overheads
Admin
Overheads
S&D
Overheads
Assembl
y worker
who
attach
chips to
plastic
board
Plastic
board
used to
mount
the chip
Salary for factory
maintenance
workers
Real Estate taxes
paid on the
factory
Real Estate
taxes paid on
the company
office
Advertising
costs to
promote
products
Factory supervisor Depreciation
costs on
Salesperson’
6
MATERIAL OVERHEADLABOUR
Direct
cost
Direct
cost
Indirect
cost
Indirect
cost
Indirect expenses for
Production overheads
Admin overheads
S&D overheads
TOTAL COST

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machinery commissions
Salary for the chief
financial officer
From the above table, there are only two direct costs including the assembly workers and
plastic boards. The rest of them are overheads in terms of manufacturing, selling and
administration overheads.
Secondly, based on Cost behaviour, apart from the above classification, cost can also be
classified into three other small groups including fix, variable and semi-variable costs. Let’s
have a look to examine the characteristics of each single group as follows:
 Fixed costs: are the costs that do not vary or depend on the increase or decrease of
production or the level of other operations. It tends to be time-related such as the monthly
salaries or payments of rent and often relate to the overhead costs. For instance, Intel
Semiconductor will need to pay salaries for officers, accountants, managers, etc. no matter how
high level in sales or productions.Besides, the expenses for advertising, marketing, R&D after
manufacturing chips are also a good example for fixed costs that this company has to pay.
However, this type of costs is not permanently fixed at all, they may change over time, they just
fix in relation to the quantity of production in the relevant period. For example, Intel
Semiconductor will need to pay just a fixed amount of renting for their ware houses within the
period that they signed in the contract with the owner.
 Variable costs: is in contrast to fixed costs as such variable costs are changed in
proportion to the activity of a business.This type of costs is sometimes called unit-level costs as
they vary with the number of units produced (Wikipedia Website). Let’s take an example of the
payment of labour in Intel Semiconductor, when the activity is decreased, fewer labours are
needed, so the spending for labours falls. By contrast, once the level of operation in factory is
increased as the demand for computer chips grows unexpectedly, the number of labours
needed to manufacture will definitely increase, it is when the spending for labours is higher than
the previous mentioned period.
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Figure 1.3
(Source: Wikipedia)
From the chart, the horizontal line shows the amount of fixed costs and the going-up line
represent for variable costs. It is easy to figure out that fixed costs and variable costs made up
the two components of total costs. Direct costs, can be easily associated with a particular cost
object. However, not all variable costs are direct costs. In Intel Semiconductor, for example, the
commissions for salespersons are variable and increase according to the higher number of
goods sold, but it is seen as indirect expense for the company.
 Semi-variable costs: are expenses that consist of the mix characteristics of both fixed
costs and variable costs (Wikipedia Website). In fact, the fixed cost element is a part of the cost
that needs to be paid without considering or being influenced by the level of activity. On the
other hand, the variable component of the cost is considered as a payable amount according to
the proportion of the level of activity. For example, Intel Semiconductor will pay for maintenance
fees in each period regardless of how much power gets used. It shows similarities to some
electrical equipment such as air conditioning, lighting, etc. They also may be kept running even
in periods of low activity. In this period, these expenses can be classified as fixed. However,
beyond this, the company will use electricity to run machinery or other plants as required. Since
then, when the output is experienced changes, the demand ramps up, therefore the busier the
company, the more power will be required and run. For this reason, the more electricity gets
used as the cost of electrical energy will rise accordingly as the production activities increase.
This extra expense can be regarded as variable. Another example is salaries for salesperson
who receive commissions. Although this group is paid on a fixed salary, they still can get reward
(which is regarded as variable) based on the volume of sales that they achieved
In the given scenario about Intel Semiconductor, those costs can also be classified into these
mentioned categories of costs based on Cost behaviour as follows:
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Fixed cost Variable cost
Real Estate taxes paid on the factory Plastic board used to mount the chip (per unit)
Salary for factory maintenance workers Wage for assembly worker who attach chips to
plastic board (per hour)
Factory supervisor Salesperson’ commissions
Real Estate taxes paid on the company office
Depreciation costs on machinery
Advertising costs to promote products
Salary for the chief financial officer
From the above table, in terms of fixed costs, it consists of Salary for factory maintenance
workers, payment for factory supervisor, real estate taxes paid on the factory, real estate taxes
paid on office, depreciation costs on machinery used by workers, salary paid to the chief
financial officer, advertising costs. Besides, the variable costs include plastic board used to
mount the chip, salary for assembly worker and salespersons commissions.
In addition, costs may also be classified as step costs.
 Step costs are seen as constant for just a given level of activity, but increase of
decrease once a threshold is beyond. Therefore, it can be assumed that step cost will
experience changes when the levels of production grow or fall.
Lecturer’s slide, Session 1, ppt 34
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Figure 1.4

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One good example for Intel Semiconductor in this step of cost is the number of labour. In
particular, the factory may need 200 workers to assemble 1000 units of product. If the company
just need to manufacture from 0 to 1000 units at that time, they will only need to pay the cost of
having 200 workers. However, if Intel Semiconductor starts to provide 2000 units of product for
its customers, the company must hire 100 more workers, increasing its costs of doing business.
Furthermore, costs can also be classified into two other main types including Product costs and
Period costs.
Product costs: are costs consist of direct labour, direct material and manufacturing overheads
that are consumed to create a finished product. In Intel Semiconductor, Product costs include:
o Wage for assembly worker who attach chips to plastic board (per hour) (Direct labour)
o Plastic board used to mount the chip (per unit) (Direct material)
o Real Estate taxes paid on the factory (Manufacturing overhead)
o Depreciation costs on machinery (Manufacturing overhead)
Moreover, the cost of a product on a unit basis is typically compiled the costs associated with a
batch of units, and dividing by the number of units manufactured. The calculation is
Totaldirectlabour +Totaldirectmaterials+Totalallocatedoverhead
Totalnumberofunits =Product unit cost
Period costs: are more closely associated with the duration of time rather than with the event
of activity. As it is charged to expenses at once, it may more appropriately be called a period
expense. This type of cost is not included within the cost of goods sold on the income
statement. Instead, it is typically included the administrative, S&D expenses, etc.
(AccountingTools Website)
In terms of Semiconductor, from the scenario, the company has already paid for advertising
costs to promote and spread its products more widely.
 To sum up, as cost is important for each and every business around the world, it is
necessary for Semi Conductors to classify all of its costs so that the company can
effectively anticipate unexpected changes in their expenses in the forthcoming period.
Besides, thanks to the above part of this report, this IT Company can also calculate
easily all the incurred costs by using their accounting calculation and then, find out its
exact revenues, profits.
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2. Apply different costing techniques on the given information for Intel
Semiconductor
Costing methods are accounting techniques used to help organizations understand the value of
inputs and outputs in the process of manufacturing. By recording and categorizing this data and
information according to a rigorous accounting system, the organization can determine with a
high degree of accuracy the cost per unit of production as well as make other key performance
indicators. Besides, management needs this information in order to make informed decisions
about production levels, pricing, competitive strategy, future investment, etc. This report will
mention three costing methods including: Process costing, Absorption & Marginal costing
Process costing
Process costing is an accounting method used for manufacturing industry, to allocate all
production costs on the behalf of labour, materials and overheads. This kind of method
commonly used for a large organization that produces homogeneous products, production
process will therefore take place for even a month or more. In addition, costs in process costing
will have to be allocated to individual units of product.
Figure 2.1
(Source: Lecturer’s slide, Session 9, ppt 8)
It can be seen from the above picture that there are some manufacturing industries produce a
large quantity of products with the same designs and same figures such as soft drink, oil,
chemicals and computer chips industry like Intel Semiconductor. Indeed, Intel Semiconductor is
a large organization that manufactures mass products in accordance with the principle of
process costing. For instance, when producing a chip, there are many steps involved in the
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manufacturing process in terms of material transferring, assembling parts, quality testing, etc.
Each step of producing product must be finished before continuing to the next step of the
process. With the use of this process costing, the cost of manufacturing operations of a product
at each stage will be allocated on the behalf of labour, material and overhead.
From that point, it can be sure that process costing is completely appropriate for the It company
like Intel Semiconductor. In order to apply this technique, the company will deal with the 4 steps
as follows:
Figure 2.2
In the first step, the term ‘output’ here is understood as the return of Intel Semiconductor. It
means that the company needs to initially define which return they can be able to get and which
losses they have to incur in terms of normal lost and abnormal lost (they will be explained in
more detail in the next paragraph). After that, the company needs to find out the cost per unit of
output. In the third step, when the company already have the cost per unit, they will easily find
out the total cost of output by taking cost per unit multiply by number of units. However, in some
cases, if there is not any closing work in progress, this step may be eliminated. With the last
stage, Intel Semiconductor also has to calculate exactly how many units they are lost and work
in progress, how many normal and abnormal gain/lost (the way to calculate will be shown later)
During the production process, a loss may occur due to the wastage, evaporation, etc.
Normal loss is the loss that is inevitable during the process and not be traced in the input costs.
For example, when the selling price of Intel Semiconductor is £700.000 while there is even
£850.000 in the costs of goods sold, then, the difference will be the loss of the company and
vice versa. If the cost of goods sold is less than the selling price, it is when Intel Semiconductor
will get return (profit).
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Abnormal loss is the extra loss resulting when actual loss is greater than normal loss and it is
given a share of the input costs. For example, when producing chip, the assembly worker was
careless and then make the plastic board got ruin. Therefore, this board will be wasted, but still
be calculated in the input costs. Besides, this report will give one specific example to calculate
abnormal cost as follows:
Input = 1000 plastic boards at a cost of £3.500
Normal loss = 1/5 of input
Actual output = 700 plastic boards are used
CPU = £3500/ Expected output = £3500/ (1000- 200) = £4.4
Cost of completed production = 700 x 4.4 = £3080
Cost of abnormal loss = (800-700) x 4.4 = 100 x 4.4 = £440
This abnormal loss focus on what Intel Semiconductor is putting in. The company has the input
of 1000 plastic boards at a cost of £3.500. The normal loss is 1/5 the amount of input, which
equivalent to 200 plastic boards. The actual output is 700 units. Then the expected output can
be calculated by taking the amount of input minus the normal loss (1000-200). With this result,
cost per unit will be equal the total cost (£3500) divided by the expected output. Then we have
the figure at £4.4. By using this, the cost of completed production will be calculated by the
actual output multiply by this one. Finally, cost of abnormal loss will be equal the difference
between the expected and the actual output multiply by CPU.
Abnormal gain is the gain resulting when actual loss is less than the normal loss and will be
given a negative cost. One similar example will be given for this abnormal gain as follows:
Input = 1000 plastic boards at a cost of £3.500
Normal loss = 1/5 of input
Output = 900 plastic boards are used
Scrap value = £ 0.5 per plastic board
CPU = Cost of productionless scrap value of normal loss
Expected output = (£3500-
£100)/ 800= £ 4.25 per plastic board.
This abnormal gain is to focus on what Intel Semiconductor put out. Similarly, the company has
the input of 1000 plastic boards at a cost of £3.500. The normal loss is 1/5 of input, which
equivalent to 200 plastic boards. The output is 900 units and scrap value is £0.5 per plastic
board.
In order to calculate cost per unit, the company will take the cost of production (£3500) less
scrap value of normal loss (scrap value of normal loss = 200 x 0.5= £100), then dividing this
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figure by expected output (800). With this calculation, the result Intel Semiconductor can get is
£4.25 per plastic board.
Absorption costing
Figure 2.3
(Source: Lecturer slides, session 5, ppt 6)
It can be seen from this chart, absorption costing means that all of the manufacturing costs
are absorbed by the units produced. In other words, the cost of a finished unit in inventory will
include direct materials, direct labour, and both variable and fixed manufacturing overhead. As a
result, absorption costing is also referred to as full costing or the full absorption method. From
that point, cost of goods sold in this method will be manufacturing costs or it means absorption
costing consists of anything that is regarded as direct costs in producing a computer chip as
cost base. For example, in Intel Semiconductor, some of costs associated directly with
manufacturing a chip include wages for workers physically produce a product, the raw materials
used in producing a product, and all of other manufacturing overhead costs such as all utility
costs used in manufacturing a chip. Moreover, in absorption costing, Gross profit = Sales –
Direct cost (including both fixed and variable cost)
In terms of non-manufacturing cost, Intel Semiconductor will have to pay other overheads or
period cost such as insurance, tax, advertising and marketing cost, etc.
In particular, for Intel Semiconductor, based on the information from scenario, before preparing
an absorption costing statements, this report will arrange them into categories as follows:
Direct materials:
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Cost
Manufacturing cost Non-manufacturing
cost
Direct Materials Direct Labour Overheads (F+ V) Period cost
Finished goods Cost of goods
sold
Profit and loss account
sold

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- Plastic board used to mount the chip, £3.5 each
Direct labours:
- Assembly worker pay for £15 per hour to attach chips to plastic board
Indirect labours:
- Salary for factory maintenance workers who maintain factory equipment
- Factory supervisor pay of £55.000 per year to supervise employees
- Salary paid to the chief financial officer, £95.000 (Administration Overheads)
Manufacturing Overheads:
- Real estate taxes paid on the factory, £14.500
- Depreciation costs on machinery used by workers, £30.000
Administration Overheads:
- Real estate taxes paid on the company office, £6.000
Selling Overheads:
- Advertising costs of £7.800 paid to promote products
- Salespersons’ commissions of £0.5 for each assembled chip sold
Absorption costing statement
Sales x
Less: Cost of goods sold:
Direct materials:
- Plastic board used to mount the chip, £3.5 each x
Direct labours:
- Assembly worker pay for £15 per hour to attach chips to plastic board x
Other manufacturing expense:
- Salary for factory maintenance workers who maintain factory equipment x
- Factory supervisor pay of £55.000 per year to supervise employees x
- Real estate taxes paid on the factory, £14.500 x
- Depreciation costs on machinery used by workers, £30.000 x x
Gross profit: x
Less: Operating Expense
Selling expenses:
- Advertising costs of £7.800 paid to promote products x
- Salespersons’ commissions of £0.5 for each assembled chip sold x
Administration expenses:
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- Real estate taxes paid on the company office, £6.000 x
- Salary paid to the chief financial officer, £95.000 x x
Net profit x
With this absorption costing methods, firstly, all costs will be arranged into categories in terms of
direct and indirect costs. In order to calculate gross profit, Intel Semiconductor will take Sales
minus direct material, direct labour and other manufacturing expenses. It means that gross
profit will equal sales minus cost of goods sold. Then, in order to calculate net profit, it will take
gross profit minus Operating Expense including: Selling expenses and Administration expenses.
Marginal costing:
Figure 2.4
(Source: Lecturer slides, session 5, ppt 6)
Marginal costing is a technique that conventionally distinguished between fixed and variable
costs. In this method, the above chart show that only variable manufacturing costs are regarded
as costs of product including variable elements: direct labour, direct material, direct expenses
and other variable parts of overheads. Therefore, it can be assumed that if the production is
equal 0, the marginal cost is also equal 0. Besides, the amount of fixed overheads is a period
cost which will be charged in full to the profit and loss account of the accounting period.
Besides, because in marginal costing consists of only variable elements, therefore, when the
level of production increase, the cost will definitely increase. But in terms of period costs, it does
not matter how much the rate of production, it is fixed, because more or less operations, Intel
Semiconductor also have to pay insurance, advertising, etc.
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Manufacturing cost Non-manufacturing
cost
Direct
Materials
Direct
Labour
Variable
Overheads
Period cost
Finished goods Cost of goods
sold
Profit and loss account
sold
Cost
Fixed
Overheads

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Additionally, for Marginal costing, there is a term called ‘contribution’ which shows the difference
between sales value and the marginal cost of sales (Lecturer slide, session 5).
It means: Contribution = Sales – Marginal costs
But Marginal costs = Variable costs = Direct Labour + Direct Material + Direct Expenses +
Variable Overheads
Thus: Contribution = Sales - Variable costs
Besides, Contribution rises from Trading account.
Similarly, before preparing a marginal costing statement, this report will initially arrange all
involved costs into categories including: variable cost of goods sold, variable non-manufacturing
expenses and fixed expenses as follows:
Variable cost of goods sold:
- Plastic board used to mount the chip, £3.5 each
- Assembly worker pay for £15 per hour to attach chips to plastic board
Variable non-manufacturing expenses
- Salespersons’ commissions of £0.5 for each assembled chip sold
Fixed selling expenses
- Advertising costs of £ 7.800 to promote products
Fixed administration expenses
- Real estate taxes paid on the company office, £6.000
- Salary paid to the chief financial officer, £95.000
Other fixed expenses
- Salary for factory maintenance workers who maintain factory equipment
- Factory supervisor pay of £55.000 per year to supervise employees
- Real estate taxes paid on the factory, £14.500
- Depreciation costs on machinery used by workers, £30.000
Marginal costing statement
Sales x
Less: Variable cost of goods sold:
- Plastic board used to mount the chip, £3.5 each x
- Assembly worker pay for £15 per hour to attach chips to plastic board x x
Production contribution margin x
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Less: Variable non-manufacturing expenses
- Salespersons’ commissions of £0.5 for each assembled chip sold x x
Total contribution margin x
Less: Fixed expenses
Fixed selling expenses
- Advertising costs of £ 7.800 to promote products x
Fixed administration expenses
- Real estate taxes paid on the company office, £6.000 x
- Salary paid to the chief financial officer, £95.000 x
Other fixed expenses
- Salary for factory maintenance workers who maintain factory equipment x
- Factory supervisor pay of £55.000 per year to supervise employees x
- Real estate taxes paid on the factory, £14.500 x
- Depreciation costs on machinery used by workers, £30.000 x x
Net profit x
In order to calculate net profit based on marginal costing, it takes Sales minus Variable cost of
goods sold. Then, the result is Production contribution margin. Take this figure and minus for
Variable non-manufacturing expenses to collect Total contribution margin. With this, we will
minus Fixed expenses including: Fixed selling expenses, Fixed administration expenses and
Other Fixed expenses. After all these steps, Net profit will be calculated.
To sum up, the main difference between absorption costing and marginal costing is:
o In absorption costing, fixed manufacturing overheads are categorized as product costing.
With this method, it stated that products cannot be produced without the resources
provided by fixed manufacturing overheads.
o For marginal costing, by contrast, fixed manufacturing overheads are not regarded as
product costs. Instead, it is classified as period cost. Therefore, there are only variable
costs are not irrelevant to decision-making.
Furthermore, among the two methods, there is only a change in gross profit, not in net profit
because no matter the method used to calculate the costs, in the end of the year, the profit will
be same. In addition, the gross profit by absorption costing always appear lower that the results
of marginal costing. From that point, the former can be used by Intel Semiconductor to help
reducing tax expenses by reducing gross profit.
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3. Using appropriate techniques to calculate costs for product C1 and C2
There are several techniques to calculate costs. However, this report will present 4 types of
them including ABC (Activity Based Costing), standard costing, FIFO, and LIFO as follows:
 Activity Based Costing (ABC) method
According to Value Based Management.net, ABC method is an alternative technique to the
traditional way of accounting. Traditionally, it stated that high volume customers are customers
that bring profit for the company and loyal customer is also a profitable element. However, up to
now, it is not completely true. In fact, with effective modern technique, ABC is a costing method
that helps organizations to find out the cost pools and cost drivers (unlike the two previous
methods, cost units and cost centres are now replaced by cost drivers and activity cost pools)
which help to assign costs to products or services based on the activities or operations relate to
the process of manufacturing products. Therefore, ABC method can facilitate the management
to maximize the value of Intel Semiconductor’s shareholders value and the cooperate
performance.
Figure 3.1
The chart above is a good example for ABC method. In this chart, activity cost pool is a
particular type of activity in the manufacturing process and cost drivers are the elements or
transactions that have a direct cause-effect relationship with the resources consumed. The
mentioned relationship means the movement of costs that if Intel Semiconductor produces
more, they will absolutely have to pay more for this high level of activity. In fact, it can be made
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out easily from the chart that if Intel Semiconductor needs more purchase, they will need more
money not only to order from Purchase Department for more materials but also for expenses for
the involved employees in this department. For example, if the cost pool for ordering chips
totalled £10.000 and there were 1.000 orders (the cost driver). Then each chip would therefore
be charged with £10 for each order required. A batch requiring 15 orders then would be charged
£150. Similarly, in case there are excessive stocks in the inventory, it is time for IT company to
enlarge its space and then, will definitely pay more money for this. In addition, when the
activities of production are increased, Intel Semiconductor will need more labours. Since then,
more supervisors are absolutely needed to monitor these extra workers.
One another example, when purchasing materials for producing 2 types of chips, the material
department will order 200 parts for both of them with charge them £400. It means that each part
will charge £2. However, there are only 80 parts for chip 1 while 120 parts are ordered for chip
2. From then, the costs for materials used to produce chip 1 will be £160 and for chip 2 is £240.
It can be seen easily that the more materials the product used, the more costs for them to pay.
Similarly, the capacity of store department will be 2000m2 which charge them £4000 each month
(£2 per m2). Besides, there are bigger amount of chip 2 which take 1200 m2 to store while only
800 m2 used to store the total amount of chip 1. Then, it will definitely charge more cost for chip
2 (£2400) than chip 1 with only £1600.Put in a nutshell, applying ABC method will help Intel
Semiconductor to calculate the costs on the behalf of activities.
In practice, based on the information given from scenario, the costs to produce C1 and C2 will
be as follows:
Indirect manufacturing
cost pool
Allocation Base Allocation Rate (Rs.)
1. Materials handling No. of parts £ 1.20 per part
2. Assembly management Hours of assembly time £40 per hour of assembly time
3. Machine insertion of parts No. of machine inserted part. £0.7 per machine inserted part
4. Manual insertion of parts No. of manually inserted
parts
£2.10 per manually inserted
part
5. Quality testing Hours of quality testing time £25 per testing hour.
Product C1 C2
Direct materials costs £407.50 £292.10
Number of parts 85 46
Hours of assembly time 3.2 1.9
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Number of machine – inserted parts 48 31
Number of manually inserted parts 36 15
Hours of quality testing time 1.4 1.1
It can be seen that, it consists of 5 activity cost pools in producing C1 and C2 including
materials handling, assembly management, machine insertion of parts, manual insertion of
parts and quality testing. In the first activity, materials handling, before producing, raw materials
need to be moved from store department to manufacturing department. The cost driver of this is
number of parts are transferred. With this stage, there are 85 parts for C1 and totally 46 parts
for producing C2, each part will be charged £1.2. In the second activity, in terms of assembly
management, the cost driver here is the hours of assembly time and each hour will take £40. In
particular, there are 3.2 hours of assembly time for C1 and only 1.9 for C2. Moreover, in regard
to the activity that using machines to assemble parts, the cost driver is therefore the number of
machine-inserted parts. And there are 48 machines and 31 machines used to product C1 and
C2 respectively. Similarly, each product also needs a stage of manually assembling and instead
of number of machine, the cost driver here is the number of manually inserted parts: 36 hours
for C1 and 15 hours for C2 (each hour is charged £2.1). Finally, with the last cost pool from the
table, both products need to have a stage of testing the quality which is calculated by the
numbers of hours (£25 per hour), and there are 1.4 hour and 1.1 hours for testing C1 and C2
respectively.
After summarizing the table, this report will now calculate the total costs of producing C1 and C2
as follows:
C1 C2
Direct Materials £ 407.5 £292.1
Overhead-Material handling 85 x 1.2=102 46 x 1.2=55.2
Assembly Management 3.2 x 40 =128 1.9 x 40=76
Machine insertion 48 x 0.7=33.6 31 x 0.7=21.7
Manual insertion 36 x 2.1=75.6 15 x 2.1= 31.5
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Quality testing 1.4x25= 35 1.1 x 25=27.5
Present cost £781.7 £504
Target cost £680 £390
From the summary above, it can be seen that total costs (for both C1 and C2) will be equal
Direct materials, Material handling, Assembly managing, Machine inserting, Manual inserting,
Quality testing. The cost for each factor will be the result of cost pool multiplied by the cost
driver. For example, the cost for the last cost pool, quality testing will equal the number of hours
to test product multiply by the cost charged by each hour and it is similar to other cost pools.
However, at present, there is a foreign competitor that introduced products very similar to C1
and C2.Therefore, in order to sustain the market shares and profits, it forces Intel
Semiconductor to adjust their prices. For this reason, Product Manager set the target cost for
C1 at about £680 and C2 at approximately £390 (which shown in the above table). In order to
do that, the design of both two products will be changed as well as the cost for the second
activity, assembly managing, will be reduced from £40 to £28 per assembly hour.
In particular, these changes will be shown in the below table:
Particulars C1 – Revised C2- Revised
Direct materials costs £381.2 £263.1
Number of parts 71 39
Hours of assembly time 2.1 1.6
Number of machine-inserted time 59 29
Number of manually inserted parts 12 10
Hours of quality testing time 1.2 0.9
It can be seen that each product is not only changes in the design, cost for labour but also
changes in the components of raw materials. Then, the total costs after having changed will be
similarly calculated as follows:
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C1 C2
Direct Materials £ 381.2 £263.1
Overhead-Material handling 71 x 1.2=85.2 39 x 1.2=46.8
Assembly Management 2.1 x 28 =58.8 1.6 x 28=44.8
Machine insertion 59 x 0.7=41.3 29 x 0.7=20.3
Manual insertion 12 x 2.1=25.2 10 x 2.1= 21
Quality testing 1.2x25= 30 0.9 x 25=22.5
Present cost £621.7 £418.5
Target cost £680 £390
Unfortunately, there is only C1 that meet the requirement of Intel Semiconductor with only cost
£621.7 compared to £680 of target cost, while it must to pay for C2 even £28.5 higher than the
accepted amount.
With this method, a chip will be broken down into activities so that costs can be estimated and
prepared for each activity (purchasing, producing, supervising, storing, etc.). Therefore, ABC
method will bring a number of values for Intel Semiconductor as the company can be able to
assess the real value of each product as well as find and eliminate the unprofitable costs in
order to get better by saving cost and establish new appropriate strategy to bring profit.
Moreover, as the early recommendation that among absorption and marginal method, the
former is considered better compared to the later. However, absorption method is usually used
for small organization based on the percentage of use while ABC model is applied for large
organization based on activities and transactions. From that point, with a world-class company
like Intel Semiconductor, it is more appropriate if the IT Company opt for this technique to serve
for its accounting system.
 Standard costing
23

STANDARD
DIRECT
LABOR
RATE
x =
STANDARD
DIRECT
LABOR HOURS
STANDARD
DIRECT
LABOR COST
PER UNIT
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This is a method that helps business to control costs of single product and its operations.
Without setting standard cost, it will definitely hard for the company to achieve its objectives,
find out the gap between its standard to the actual results and make profits as well.
Figure 3.2
In particular, especially when Intel Semiconductor needs to reduce as much as its costs as
possible to maintain the market shares reduce risks in competition market, the use of standard
costing will help the company to plan or re-determine single cost of unit in terms of how much to
pay for labour, materials, other overheads expenses, etc.
For example, in order to calculate the cost for direct labour, based on standard costing, the
standard direct cost per unit will be calculated as follows:
Figure 3.3 (Source: Lecturer Slide, session 3, ppt 18)
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Since then, if there is 1.2 hours for worker to test the product C1, and the standard of labour
cost that Intel Semiconductor have set per unit is £20, then, the rate for direct labour per hour
will be 20/1.2= £16.67. If the standard cost per unit is over 21, it means that this cost is
unfavourable and need to be adjusted. Therefore, due to this type of costing techniques, the
company will control the cost easily and effectively.
 FIFO method (First in, First out)
This method is an asset management and valuation method that which assets produced or
received first will be sold, used or disposed first (Investopedia Website). Relating to the real life,
when standing in a line, each person will leave the queue in the order they arrive. Moreover,
according to Accounting for Management Website, this method assumes that materials are
issued from the oldest supply in inventory and the cost of those units when put in stock will be
the same with the cost when they are issued.
Let’s take the below table for an example:
Stock bought Stock issued £ £
Beginning balance:
800 units, £6 per unit
£4.800
April 200 units, £7 per unit £1.400
200 units, £8 per unit £1.600
£7.800
800 units, £6 per unit £4.800
Balance 200 units, £7 per unit
200 units, £8 per unit
£1.400
£1.600
£3.000
May 400 units, £8 per unit £3.200 £6.200
200 units, £7 per unit £.1.400
300 units, £8 per unit £2.400
Balance 300 units, £8 per unit £2.400
Note: Sales = 1300 units x £10= £13.000
This table shows that, the closing stock of the company in the end of the last financial year is
800 units(£6 per unit). In the beginning of the next financial year, Intel Semiconductor is
assumed to buy 200 units, £7 per unit, which equivalent to £1.400. Two weeks later, the
company continued to buy 200 units,£8 per unit (equal £1.600 for 200 units). After that, when
Intel Semiconductor need to issue 800 units, they will collect the oldest supply, which has£6 per
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unit to issue first. Then, it left 200units, £7 per unit and 200 units, £8 per unit (equal £3.000).
Similarly, in the next month, it continued to buy 400 units, £8 per unit. After that, when they
need to issue 500 units, they will absolutely choose 200 units, £7 per unit and 300 units, £8 per
unit. Finally, the stock will be left 300 units, which £8 per unit (equal £2.400)
From the period of April to May, there are 800 units, which £6 per unit; 200 units, which £7 per
unit and 300 units, which £8 per unit are sold. From then COGS = (800x6) + (200x7) + (300x8)
= £8600
 Profit= £13000 - £8600= £4400
 LIFO method (Last in, First out)
Opposite with FIFO method, in LIFO method, it assumes that most recently bought items will be
issued first and are priced accordingly (Lecture slides, session 2)
Let’s examine a similar example for this method as follows:
Stock bought Stock issued £ £
Beginning balance:
800 units, £6 per unit
£4.800
April 200 units, £7 per unit £1.400
200 units, £8 per unit £1.600
200 units, £8 per unit £1.600
200 units, £7 per unit £1.400
400 units, £6 per unit £2.400
£5.400
Balance 400 units, £6 per unit £2.400
May 400 units, £8 per unit £3.200
400 units, £8 per unit £.3.200
100 units, £6 per unit £600 £3.800
Balance 300 units, £6 per unit £1.800
Note: Sales = 1300 units x £10 = £13000
This table shows that, the closing stock of the company in the end of the last financial year is
800 units (£6 per unit). In the beginning of the next financial year, Intel Semiconductor is
assumed to buy 200 units, £7 per unit, which equivalent to £1.400. Two weeks later, the
company continued to buy 200 units,£8 per unit (equal £1.600 for 200 units). After that, when
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Intel Semiconductor need to issue 800 units, they will collect the newest supply in turn, which is
200 units(£8 per unit), 200 units (£7 per unit) and 400 units(£6 per unit) to issue first. Then, it
left 400units, £6 per unit (equal £2.400). Similarly, in the next month, it continued to buy 400
units, £8 per unit. After that, when they need to issue 500 units, based on this principle, they will
absolutely choose 400 units (£8 per unit) and 100 units (£6 per unit). Finally, the stock will be
left 300 units, which £6 per unit (equal £1.800)
Similarly, COGS = £5400+ £5800= £11200
Profit= £13. 000 - £11.200= £1800
The two mentioned method is reverse together. Its advantages and disadvantages therefore will
also be opposite with each other as follows:
ADVANTAGES DISADVANTAGES
FIFO Logical pricing method: practically,
the oldest deliver will be used first
so that it will be not difficult to
explain to superiors
In a period of inflation, the price of the stock
issued will lag behind by the value of current
market
LIFO Last product will match with the
inflation
Opposite way to what physically happening. Old
product will be out of date. Therefore, it is not
easy to explain to managers
FIFO As first it first out, the stock
valuation will be close to a
valuation based on replacement
cost
The later product will have a higher price than
the older. Therefore, it is hard for the company
to find the appropriate price
LIFO Stocks are issued at a price near
to current market value
Hard for Intel Semiconductor to make decision
because old and new plastic boards, for
example, will have different price (may be
confused which are new and which are old)
Furthermore, applying LIFO method will help Intel Semiconductor to reduce its tax liability
effectively in case prices are increasing time-to-time. For instance, the company buy iron for
£2.00 per pound and sells it for £2.2 per pound. After three months, the company has 10.000
pounds of iron in stock at a cost of £20.000. Then, the company carry out the next purchase of
20.000 pounds but the price is increase a little bit, now each pound is at £2.1. Since then, Intel
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Semiconductor has to increase its selling price by 5% per pound and sold 10.000 pounds of iron
for £2.3. Then, when preparing financial report, Intel Semiconductor will report its sales of
£23.000. If the company using LIFO method, the cost of iron sold will be £21.000. Then the
company will earn £2.000 (£23.000 - £21.000). However, with FIFO method, the cost of them
will be £20.000. Since then, under this method, the company will earn a greater amount of sales
(£3.000) than the former method. Therefore, with a less amount of sales under LIFO, Intel
Semiconductor can take this chance to reduce the tax expense. This is also a good way to save
more spending so that the company can reduce cost that helps to reduce price accordingly
4. Using appropriate techniques to analyse the cost data on the basis of above cost
classification
From the above information about all involved costs and some related calculations, Intel
Semiconductor can be able to figure out what are the expenses they have, how to calculate the
total cost of their computer chips as well the way to estimate the standard cost, etc. However, in
order to examine more carefully and clearly, the company can compare these costs by using
several graphical forms as follows:
 One dimensional/direction diagrams
This is a kind of diagram that only has one-dimensional measurement; especially height is
commonly used, while the width is not considered in this type. Such kind of diagrams is in the
form of bar or line charts including: line, simple, multiple bar, sub-divided bar and percentage
bar diagram (Lecture slide, session 6)
 Two-dimensional diagrams
Different from the first one, two-dimensional diagram not only present only the length. Instead, it
takes into account both the length and the breadth as well. Such types of diagram are known as
area diagrams or surface diagrams including some important types such as rectangles,
squares, and pie-diagrams (for percentage and proportion) (Lecture slide, session 6)
 Three-dimensional diagrams
This type of diagram is also called as volume diagram, consists of cubes, cylinders,
sphere/surface, etc. In such diagram, it represents three factors including length, width and
height. The side of a cube is drawn in the proportion to the cube root of the magnitude of
data(Source: Lecture slide, session 6)
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In particular, with the variable costs of direct labour, Intel Semiconductor will have to pay an
amount of wages for assembly workers to attach chips to plastic boards and receive £15 per
hour. Let’s assume that each single labour can work for at least10 hours per day.
No work 1 hour 2 hour 3 hour 4 hour 5 hour 6 hour 7 hour 8 hour 9 hour 10 hour
0
20
40
60
80
100
120
140
160
Wages for assembly workers
Wages
Figure 4.1
Analysis:
It can be seen that, with the characteristics of variable cost, when assuming a worker can work
from 0 to 10 hours per day, the wages of them also increase accordingly to the number of
hours. The line above is to demonstrate the increasingly amount of payment of Intel
Semiconductor for their direct labour when experience the increase of working hours.
Similarly, the following chart is to demonstrate the total cost, direct labours, direct materials
costs and overheads (the unit will vary from 0 to 10.000 for direct labours and direct materials
costs
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Figure 4.2
Note:
Direct labour cost
Direct material cost
Manufacturing overheads
Total cost
Analysis:It can be seen that when this report assumes the unit is from 0 to 10.000, there are
£35.000, £150.000 and £44.500 for direct materials cost, direct labour cost and manufacturing
overheads respectively. In terms of overheads, as the tax that pay for plant, factory (£14.500) is
fixed, this is the payment that Intel Semiconductor needs to pay even when they did not
produce any chip. Besides, from these figures, the costs that Intel Semiconductor has to pay for
30
Direct
materials cost
Manufacturing
overhead
£35.000 £44.500
Direct labour cost
£150.000
Total cost
£229.500
£
1
4
.
5
0
0

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labour to manufacture chips are actually high, which is over 3 times greater than the costs of
materials and overheads. Therefore, the company had better to re-consider any element that
can minimize their labour costs such as: utilizing more machineries, increasing the productivity
of each person by motivating them, etc.
 It can be seen that based on cost classification, in terms of variable cost like the first
graph, the more chips are produced, the more costs for labour. Specifically, in the
second graph, there are also two variable elements including direct labour and direct
material costs. Besides, in this graph, it shows that Intel Semiconductor has paid a huge
expense for labour costs (£150.000, equivalent to 10.000 unit to produce) while there are
only £35.000 and £44.500for direct material costs and overhead costs. Meaning to say,
Intel Semiconductor has to consider carefully the costs that they pay for labours.
 LIFO & FIFO method
Profit
0
500
1000
1500
2000
2500
3000
3500
4000
4500
The profit of Intel Semiconductor based on FIFO &
LIFO method
Profit
Figure 4.3
Analysis: It can be seen that compare to the profit of FIFO method, LIFO method produced a
lower one. In particular, with this assumed figure, by LIFO method, there are only achieved
about a half of profit when comparing to FIFO method. Thus, using LIFO method will help Intel
Semiconductor to reduce their tax liability as they will get a lower of profit compared to the other
method.
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 ABC method
 Direct material cost of C1 and C2
Direct material cost Direct material cost-REV
0
200
400
600
407.5 381.2
292.1 263.1
Direct material costs for C1 and C2 before and after being
revised
Cost (£)
Figure 4.4
Analysis: From the chart, the costs of direct materials for producing C1 are double the amount
of C2. Therefore, it can be assumed that manufacturing C2 will be cheaper in terms of direct
material costs. It is therefore help Intel Semiconductor save more investment rather than C1.
However, compared to the price of other foreign competitor, the both product still have to
reduce their costs so that the prices of them can be decreased to adapt with the intensity of
competition. With the similar difference between the two amounts, but the direct material costs
for C1 and C2 are now reduced to £381.2 and £263.1 respectively. It means that there are
£26.3 and £29 (>26.3), are decreased for the former and the later. Meaning to say,
manufacturing C2 now also help Intel Semiconductor to get benefits much more than C1.
Unfortunately, the total costs of C2-REV still did not meet the target cost of the company at all,
whereas the amount of costs for C1-REV is lower than it is before revising as follows:
 Total costs of C1 and C2 before and after being revised:
32

Handle
Dept
Ass.
Dept Machines Ass. line
No. of parts: 85/$1.2
Ass.
Hours
3.2/$40
No.
Machine
48/$0.7
No. of Parts
36/$2.1
$10
2
Mater
ial$4
07.5
$128 $33.6 $75.
6 $35
Testing.
Hours of
1.4/$2
$781.7
Cost drives
Activity Cost Pool
Product C1
Handle
Dept
Ass.
Dept Machines Ass. line
No. of parts: 46/$1.2
Ass.
Hours
1.9/$40
No.
Machine
31/$0.7
No. of Parts
15/$2.1
$55
.2
Mater
ial$2
92.1
$76 $21.7 $31.
5 $27.5
Testing.
Hours of
1.1/$2
$504
Cost drives
Activity Cost Pool
Product C2
Handle
Dept
Ass.
Dept Machines Ass. line
No. of parts: 71/$1.2
Ass.
Hours
2.1/$28
No.
Machine
59/$0.7
No. of Parts
12/$2.1
$85
.2
Mater
ial$3
81.2
$58.
8 $41.3 $25.
2 $30
Testing. l
Hours of
1.2/$2
$621.7
Cost drives
Activity Cost Pool
Product C1
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These two diagrams demonstrate the amount of total costs for C1 and C2 like the calculation in
the previous chapter.
33

Handle
Dept
Ass.
Dept Machines Ass. line
No. of parts: 39/$1.2
Ass.
Hours
1.6/$28
No.
Machine
29/$0.7
No. of Parts
10/$2.1
$46
.8
Mater
ial$2
63.1
$44.
8 $20.3 $21 $22.5
Testing.
Hours of
0.9/$2
$418.50
Cost drives
Activity Cost Pool
Product C2
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(Source: Tutor slides)
The two above diagrams are to show the changes in the total costs of C1 & C2 after Intel
Semiconductor try to adjust the costs. The specific differences between the costs for the two C1
and C2 will be as follows:
Hours of assembly time before revising
Hours of quality testing time before revising
Hours of assembly time after revising
Hours of quality testing time after revising
0 0.5 1 1.5 2 2.5 3 3.5
The number of hour needed to complete stage 2 &
stage 5
Figure 4.5
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Analysis:
It can be seen that C1 always consume more hours to complete both assembling and testing
steps. In particular, there are 3.2 and 1.9 hours needed to assemble the chip with plastic board.
Besides, the number of hours for testing the quality of C1 and C2 are 1.4 and 1.1 hours
respectively. However, in order to meet the requirement of Intel Semiconductor, the both times
are decreased, but still in the same difference between C1 and C2 (Hours for C1 still not lower
than C2
No. of machine-inserted
parts before adjusting No. of machine inserted
parts after adjusting No. of manually
inserted parts before
adjusting
No. of manually
inserted parts after
adjusting
0
10
20
30
40
50
60
Number of machine and manually inserted parts for
both products
Hours
Figure 4.6
Analysis: From the above chart, it is also similar to the previous one. The number of hours for
both stage of C1 is always higher than C2. In particular, there are nearly 50 hours for machine-
inserted parts for C1 compared to only 31 hours for C1. Even when being adjusted, this amount
of C1 is also double the C2. (31 hrs compared to 15 hrs). This is also happen with the next step,
hours of manually inserted parts. Since then, it can be assumed that C1 consume more costs to
produce rather than C2, which is supposed to be not the advantage of this product.
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Number of parts before adjusting
Number of parts after adjusting
0 10 20 30 40 50 60 70 80 90
Number of parts to produce C1 & C2
Figure 4.7
Analysis: What the above bar chart are demonstrated from also show the same things like the
two previous charts stated. In particular, the number of parts needed to manufacture C1 before
revising is 85 parts, while there is only 46 parts involved in the production process of C2.
Similarly, after revising, C1 still do need double parts to produce. Therefore, it takes more
expenses for Intel Semiconductor to manufacture C1 rather than C2
 OVERALL COMMENT
C1 C1-REV C2 C2-REV
0
100
200
300
400
500
600
700
800
900
Total costs of C1 and C2 before and after revising
Total cost (£)
Figure 4.8
36
Desired total costs

MACB - 1 Prepared by
Analysis:
It can be seen that there are £781.7 and £504 of the total costs of C1 and C2 respectively
before revising. After adjusting, the both amount are reduced but with different proportion.
In particular, the total cost for C1 and C2 are deducted by 20% (from £781.7 to £621.7) and
17% (from £504 to £418.5) respectively. In terms of direct material costs, number of hours to
assemble, number of parts (like mentioned before), C2 seemed to have more advantages than
C1. However, the total costs of C2 still did not meet the requirements of Intel Semiconductor
compared to C1 even when all necessary changes are made including raw materials, labour
costs and other expenses. If the both products are still launch into the market, only C1 can help
Intel Semiconductor to sustain its market shares and profits as it is not easy for Vietnamese
customers to choose product with higher price while there is an another cheaper one imported
from overseas. With C2, if it is keep producing, Intel Semiconductor will definitely take more
risks
5. Utilize performance indicators to find out the potential improvements
In each and every business, in order to know about their performance, they will identify
whatever signs or signals that will help them to identify their current position and condition. The
mentioned idea is called Performance Indicator. For example, if Intel Semiconductor is making
profit, it indicates a good sign and vice versa. If the company is lost their money, it shows a bad
signal for their investment. Moreover, within whatever company, they have Key Performance
Indicators (KPI) to help them maintain company’s performances, indicate what are their
strengths, weaknesses and the reason why as well.
There are three inputs to managed in Performance Indicators as the diagram as follows:
Figure 5.1
(Lecture slide, session 10)
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In the first stage, there are three sub-elements including Design Practices, Operating Practices
and Maintenance Practices.
 Design Practices: are what designs that the company is going to use to make their
products more attractive. In Intel Semiconductor, the design of a chip is also extremely
important as they always try to make their products as small and convenience as
possible so as to compete professionally with other rivals
 Operating Practices: are the operating systems that include raw materials, labours,
prime costs, etc. If the company’s operating systems are good, they can easily manage
the costs or understand their purchasing and revenue, etc. In Intel Semiconductor, if they
know exactly what are their labours, raw materials, direct costs, etc. they will easily
calculate all costs, manage their order, purchase and profit as well.
 Maintenance Practices: are that they have to maintain their company by using
strategies, for example, to make customers satisfy, meeting the company’s objectives,
goals, visions, missions. For Intel Semiconductor, in order to executive its maintenance
practices, especially to serve for the decrease the intensity of competition, the company
plans to carry out Price Leadership Strategy to launch Chipsets with a lower price than
other companies in the market so as to attract customers and increase the market shares
effectively.
Both Operating practices and Maintenance practices are the part of equipment condition or
machinery condition. Especially in a manufacturing company like Intel Semiconductor, when
using machine to produce chips, after a period of time, the equipments will have to face with a
period of downtime, when this machine will not function like normal any more. In particular,
there are three types of downtimes including:
o Unscheduled/ Unplanned downtime: which we cannot be able to know in advance when
this machine will be down so as to maintain it timely. In particular, if there is a machine in
Intel Semiconductor suddenly stops working, the company then need 3hours to fix it.
These 3 hours will be called as machinery downtime and this machine cannot work within
it 3 hours until it had already repaired.
o Scheduled/Planned downtime: opposite with unplanned downtime, the company can be
able to anticipate when their machines will need to be fixed with the scheduled downtime.
For example, in Intel Semiconductor, they will have the schedule for each machine in
terms of the purchasing date, the latest date that this machine is maintained, etc. so they
can easily put more oils to which machines that are needed based on the schedule.
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o Shutdown overrun: Unlike the two above types, this is the most serious downtime that
cannot do any maintain for the equipments any more as they are permanently stop
working and completely cannot use.
Therefore, Intel Semiconductor needs to maintain time to time their equipments such as putting
more oils, like mentioned example above. By doing this, with the good condition, the
machineries will definitely product a good product with the highest level of its capacity. This is all
related to equipment condition in the above diagram.
Moreover, in terms of manufacturing performance requirements there are including 5 other sub-
elements as follows:
 Safety: is a very important factor, especially in manufacturing industry. For example, if a
worker in Intel Semiconductor was cut his hand in the manufacturing process, it will affect
the level of productivity and reduce the quality of the products this person make.
Therefore, safety is the most concerning issue for the benefits of labours
 Environment: is when people cooperate with each other, they are willingly to give help
and support each other toward individual tasks or common tasks as well.
 Quality: this is the quality of production. In fact, good production will definitely lead to the
good quality, and the good quality is the most concerning of customers nowadays.
Therefore, quality is a crucial element that Intel Semiconductor has to focus on if they
want to improve and develop their current position.
 Availability: means the delivery of goods of the company. For instance, if there is a
customer in Hanoi that order a large quantity of chips, exactly at 1000 ones and they ask
to receive this amount of products in the beginning of next month, then Intel
Semiconductor has to meet this special requirement and delivery exactly when this
customers demand.
 Cost: In fact, cost is also an important factor to attract customers at his/ her first sight.
Therefore, if Semiconductor provides chips with a very high price compared to others,
customers will definitely not choose them to try to use.
In addition, the last input to manage in PIs is the customer needs. They also include three other
sub-factors as follows:
 Quality: Different from the past, in modern times, most of people concern about the
quality that offered in their purchases. Therefore, if Intel Semiconductor provide chips
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with the low quality, it is hard for the customers to choose and the company to expand its
market share
 Delivery: Almost customers do not want to wait. Indeed, they all want to get what they
purchased as soon as possible. Therefore, the delivery system is really important for Intel
Semiconductor to focus on
 Price: Together with quality, price is also one of the most priority concerns of customers
when choosing a product. Therefore, Intel Semiconductor had better to save as much as
costs as possible so that they can offer affordable prices for its customers
Moreover, in terms of the aspect of maintenance, there is an asset reliability process that
represents ‘all’ involved tasks required to support the maintenance function as follows:
Figure 5.2
(Source: Lecturer Slides, session 10, ppt 10)
In this process, at first, Intel Semiconductor needs to identify or plan what the company is going
to produce, particularly what products, how and when. Then, in the step of work identification,
activities are evaluated to judge if they are worth doing based on the consequences of failure
(Note: the company has to try as much as they could to minimize the all related costs).
Besides, with the control planning, Intel Semiconductor has to identify the procedures,
resources requirements, special works requirement to carry out the tasks, etc. Moreover, in the
work schedule step, the company has to plan all the resources beforehand and prepare in
advance what equipments or machines will be shut down, or just a temporary downtime. By
doing this, the use of all involved resources will be balance out effectively. After that, the
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executive step is carried out by the experienced, qualified or trained persons. In the stage of
follow-up, it responds to the information that collected when executing the plan such as actual
time, manpower, work order, etc. Finally, after producing a chip, the company had better to
make continuous improvements by making the comparison between the current and the
previous one, then making the conclusion in terms of what needs to be improve and what
additional features can be made so as to innovate and attract more customers.
In particular, for Intel Semiconductor, within the two quarters, based on some KPIs, the
company had prepared the management reports including totally 5 KPIs such as Website hits,
Number of Chip sold, On time delivery, Sales returns and System downtime which are showed
in more details as follows:
Quarter 1 Quarter 2
Website hit 690.789 863.492
Number of Chip sold 27.631 38.857
On time delivery 95% 89%
Sales returns 12% 18%
System downtime 2% 4%
 Website hit: is the number of visitors who open the home page of Chipsets that is
automatically counted. It can be seen from the above table that the number of people visit
website increased by 172.703 from Quarter 1 to Quarter 2. It means that there are increasingly
number of people that concern about the chips produced by Intel Semiconductor, especially C1
and C2. On average, in each quarter, the attraction of the two products has increase by 25%.
Therefore, with this trend, the increased amount will be double after one year. This is actually a
good trend for Intel Semiconductor. For that reason, the company can catch this chance to let
customers order and buy their Chipsets online. By this way, the sales will definitely increase
 Number of Chip sold: as there is more and more people are visiting the home page of
Chipsets and a growing concern of them towards the products, it therefore leads to the
increased sales. In particular, the number of Chip sold ramped up by 11,226 from the first
quarter to the second quarter, which is equivalent to exactly 40% in the increase.
Moreover, the conversion of rates into sales is as follows:
Quarter 1= Sales/ Website hits= 27631/690789=4%
Quarter 2= Sales/ Website hits= 38857/863492=4.5%
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 The conversion rate has been increase by 0.5% which means that if there is 0.5%
increase in website hit, the sales will increase
 On time delivery: it can be seen that, as there is an increase in sales (40%), it leads to
the appreciation in the number of orders from customers. Therefore, with the number of existing
employees, it is hard for Intel Semiconductor to deliver all of the customer’s purchases on time.
In fact, there are 6% in the decrease (from 95% to 89%) between the two quarters. With this
situation, Intel Semiconductor had better to enhance its capacity into the higher level in terms of
the bigger inventory to have more space to store Chips, the increased labour to deliver or
providing and supporting the existing workers with a full of motivation so that they can be able to
put as much as efforts into their jobs as they could. Besides, Intel Semiconductor should
provide them a short training course to train them how to manage their time effectively so that
they can increase the productivity and deliver more orders quickly and on time more than
before.
 Sales return: this is a number of chips that not meet the standard of the market and
requirement of customers. Unfortunately, with the increase in sales, there is also the increase in
sales return as well. In particular, there is 12% and 18% in the Chip sold that are returned in
Quarter 1 and Quarter 2 respectively. It means that there are the enhancements in
manufacturing process and sales, but the quality of service in terms of delivering, serving as
well as the quality of products is also decreased. Moreover, the accepted rate of sales return in
Intel Semiconductor is just at 13%, with 12% in the first quarter, it seemed to be accepted, but
with a number of potentials risks there. However, it is completely not favourable for the second
quarter to reach even 18% in the sales return. In particular, these figure in sales return will
affect directly to gross profit of the company as follows:
Assume that sales are 100 chips at £2000 (£20 per unit) and costs are at £1000. We have:
Gross profit = Sales – Cost= £2000 - £1000= £1000
However, when sales return is 12%, it means that sales also decrease 12% in its total number,
which equivalent to 88 units left in the first quarter
 Gross Profit = (88 x £20) - £1000= £760
Similarly, when there is 18% in the decrease of the sales in second quarter, it means that there
are only 82 chips in sales at this period.
 Gross Profit = (82 x £20) - £1000= £640
Therefore, it can be seen that the decrease in sales return will not only influence on sales but
also on the gross profit of Intel Semiconductor as well.
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From that point, the company had better to consolidate its evaluating and monitoring process by
establishing a Quality Control Program to check carefully all inputs, manufacturing process,
quality testing stage, etc. Besides, Intel Semiconductor should train its employees especially
assembly workers to be more dedicated, diligent and hard-working as well.
 System downtime: this problem means that there is always a busy network or even loss
of connection in the system of Intel Semiconductor that cause customers cannot be able to
connect to the home page of Chipsets anymore. Besides, there may some machines that are
down and reduce the productivity of manufacturing process. For that reason, once the company
did not produce and provide timely product, it is hard for delivery system to be on time. From
that point, it will affect the sales as it is rarely that customers will wait for the supplement of Intel
Semiconductor instead of switching to another one. Unfortunately, the proportion of this problem
had badly increased twice times from 2% to 4% after the second quarter. Therefore, the
question that the company has to answer is how to repair its system as soon as possible. To do
this, Intel Semiconductor has to upgrade its server, softwares time-to-time so as to decrease the
problem of system downtime as much as possible.
 Put in a nutshell, the new business of Intel Semiconductor is quite well as it is growing
rapidly and ignoring non-recurring costs is profitable. However, in order to grow more
perfectly, it needs to focus on some weaknesses including: delivery inaccuracy, low
speed and low quality of product. However, any above recommendation for
improvements should put costs into careful consideration. Whatever the company
implement to consolidate current situation, they have to think carefully whether it will
affect the costs of the operations or not. By doing this, with these improvement, Intel
Semiconductor will definitely can be able to decrease the falling in gross profit margin
effectively
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6. The recommendation for improvements to reduce costs, appreciate the value and
quality
As in the fourth session of this report, costs are considered as the most important element when
launching C1 and C2 into the market. Therefore, the issue of reducing costs while still
enhancing the value of the products are focused carefully by Intel Semiconductor. Let this report
examine each of them as follows:
 Cost reduction: is the method that aims to reduce costs below the accepted level of the
previous period. However, by whatever way of reducing, it should not affect the quality of
provided products. For example, when Intel Semiconductor try to reduce costs for C1 to
£680 which lower than £781.7 in the first period without decrease the value of C1. To do
that, the company can using some little common sense including:
- Reduce the wastage of raw materials by improving the efficiency of raw materials. It
means that Intel Semiconductor will cut down as much as costs for raw materials as
possible by utilizing or re-using whatever wastages for more production.
- Improve labour productivity. In fact, the cost for labour is also an issue that concerned by
Intel Semiconductor. It will not easy to adjust one more time for the wages for assembly
workers after revising C1 and C2. However, the company can still be able to utilize
effectively this cost by increasing the productivity of worker per hour. For example, a
worker can assemble 30 parts per hour, but after adjusting to increase the quality of
work, an assembly worker can know assemble up to 40 parts per hour effectively. By this
way, the more products are produced at a limited time, the more costs will not be wasted.
- Improve the efficiency of equipment usage. To achieve this, Intel Semiconductor has to
time by time maintain its equipments if these machines are planned downtime type. By
this way, the company can prevent the downtime of its equipment and utilize them more
effectively and efficiently
- Reduce material costs. It means that the company had better to purchase a large
quantity of plastic board to take advantage of discounts. Besides, they can also enlarge
its store department so that more raw materials are purchased and stored at the same
time as much as possible so as to prevent if there is an increase of material’s prices in
the next time.
- Reduce labour costs. In fact, in modern manufacturing industry, most of companies are
now replacing labours by machineries because it will help them increase the level of
accuracy between the design and actual product, reduce defect made by workers.
Moreover, using machineries instead of workers also help to reduce a great deal of
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salary that Intel Semiconductor has to pay for them in the end of the month. Therefore, in
the stage of manually-inserted parts to produce C1 and C2, the company had better to
reduce as much as this process as possible
- Save on finance costs. To do that, the company have to assess again all their sources of
finance so that any gain in capital can be taken. Besides, the company can also take
advantage of promotion or discount from suppliers to save more finance costs as well.
- Improving control over spending decisions
 Enhancing value: To achieve that, when the producer want to increase their selling
price without increasing cost value, they will provide to customers the products that
attached more value so that customers will willingly to pay for the higher price. For
instance, when Intel Semiconductor add extra features to C1 and C2 that create for both
of them a number of competitive advantages, then the selling prices of the two products
will definitely appreciate in the market
Having understood the problem presented in the previous session, Intel Semiconductor now
has carried out a quality-improvement programmed for Chipsets that reduce the number of
defective units produced. In particular, by the end of the year, from the production manager, a
report is prepared to inform about the decrease in the scrap and rework by collecting some
financial data as follows:
Preceding year
£
Current year
£
Sales 10.000.000 10.000.000
Scrap 400.000 300.000
Rework 600.000 400.000
Product inspection 100.000 125.000
Product warranty 800.000 600.000
Quality training 40.000 80.000
Materials inspection 60.000 40.000
Total 2.000.000 1.545.000
(Source: Scenario)
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With these above data, Intel Semiconductor has prepared the quality cost report as follows:
Smith John
Production Manager
Intel Semiconductor, Ltd.
Michael Jackson
General Manager
Intel Semiconductor, Ltd.
Subject: Quality Cost Report
Dear Mr John,
I am writing this letter to inform you in the relation to the Quality Cost Report of Intel
Semiconductor Ltd. as follows:
INTEL SEMICONDUCTOR LTD.,
QUALITY COST REPORT
Quality cost Percentage of sales
Prevention costs:
Quality training $80,000 $80,000 0.80%
Appraisal costs:
Product inspection $125,000
Materials inspection $40,000 $165,000 1.65%
Internal failure costs:
Scrap $300,000
Rework $400,000 $700,000 7.00%
External failure costs:
Product warranty $600,000 $600,000 6.00%
Total quality costs $1,545,000 15.45%
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I hope you will find it useful for your management. If there is any detail, I am willing to discuss
and help you to figure all out in the next meeting.
Yours sincerely,
Production Manager
Intel Semiconductor Ltd.
Analysis:
It can be seen from the report that the internal failure costs for scrap and rework are actually
decreased. In particular, the cost of scrap is reduced by £100.000 (£400.000 - £300.000) from
the preceding year to current year. Moreover, compared to sales, the scrap of the former year is
hold 4% of its sales (= 400.000 x 100
10.000 .000 ). Similarly, the scrap costs of the later year are 3% out of
the total sales (= 300.000 x 100
10.000.000 ). In addition, the expense for rework is decreased £200.000 from
£600.000 to £400.000 in the same period. In the same method of calculation by taking this cost
multiply by 100% and then take the result to divide by the sales, we will have the percentage of
this cost that convert into the rate of sales. By doing this, there are 6% and 4% of the rework
cost out of 10.000.000 of sales. From that point, this annual report has showed that the defect
chips are decreased that lead to the decrease of the number of sales return effectively
compared to the above quarterly report.
Moreover, in terms of the appraisal costs for ensuring the quality of product, only one of them
showed the increases. In particular, there is £25.000 increase in the cost of product inspection
from the preceding to the current year, which equivalent to 0.25% increase in the proportion of
sales. The raise in the costs for inspection is to show that Intel Semiconductor has emphasized
strongly on the process of evaluating and monitoring. Therefore, the more carefulness they put
into this process, the more defect can be found. This is the reason why fewer products are
under warranty after being launched to the market. In particular, the cost for external, namely
product warranty is deducted from £800.000 to £600.000 from the previous to the current year,
which indicated 2% decrease (8% - 6%) in the rate of sales. However, for materials inspection,
Intel Semiconductor seemed not focus strongly on so that the expense is reduced from £60.000
to £40.000 from the previous to the current financial year, which held 6% and 4% in the
proportion of sales for the same period.
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In addition, as being mentioned that Intel Semiconductor has focused on the quality of products,
they also did invest more money for the quality training as well. Specifically, they spent a double
amount in expense for this cost from £40.000 to £80.000 after one year, which showed an
increase from 0.4% to 0.8% out of £10.000.000 of sales.
In particular, all of the expenses which are convert into sales rate as presented specifically as
the table below:
Preceding year
£
Current year
£
Sales 10.000.000 10.000.000
Scrap 400.000 x 100
10.000 .000 =4% 300.000 x 100
10.000.000 =3%
Rework 600.000 x 100
10.000 .000 =6% 400.000 x 100
10.000 .000 =4%
Product inspection 100.000 x 100
10.000.000 =1% 125.000 x 100
10.000.000 =1.25%
Product warranty 800.000 x 100
10.000 .000 =8% 600.000 x 100
10.000 .000 =6%
Quality training 40.000 x 100
10.000 .000 =0.4% 80.000 x 100
10.000 .000 =0.8%
Materials inspection 60.000 x 100
10.000 .000 =0.6% 40.000 x 100
10.000 .000 = 0.4%
Total 20% 15.45%
It can be seen that, from £2.000.000 to £1.545.000 in the total costs from the preceding to the
current year. There is £455.000 in the difference between the costs of the two year. Similarly,
there is also a 4.55% in the difference between sales rates. It means that if there is a 4.55%
decrease in sales, there is also £455.000 deducted in costs. Therefore, whenever sales are
decreased by 1%, it is when costs are also reduced £100.000. Importantly, as other costs are
remained the same, it is therefore this £100.000 will be add to the gross profit of Intel
Semiconductor in the end of the financial year.
 It can be seen that the company has now recognized that the more quality of testing and
appraisal process, the more costs for defect products are eliminated. This point has
indicated that Intel Semiconductor is now focusing on TQM that presented in the
following part as follows:
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Total Quality Management (TQM) is an integrative philosophy of management for continuously
improving the quality of products and processes (Wikipedia Website). Meaning to say, TQM is
completely focus on the quality of the products instead of focusing on how many products the
company is going to produce. Therefore, everyone involved in the creation and consumption of
the products or services will be the one that responsibility for the quality of the products and
processes. From that point, TQM needs the involvement of some stakeholders such as
management, workforce, suppliers, customers, etc. so as to meet or even beyond the
customer’s expectation.
Furthermore, in order to control the level of quality, a control system is established as follows:
Figure 6.1
Under the control system, Intel Semiconductor must initially establish the standard for the chips.
In particular, the chips after producing planned to be used well at least three years. Moreover, in
order to ensure this plan, Intel Semiconductor needs to set the strict procedures or
manufacturing methods to evaluate and monitor during the process of production so that this
required standard can be made sure to meet in a high proportion of quality. However, as
sometimes they cannot get exactly what they want, the company therefore should assess the
actual quality of chips after producing the finished goods, and then compare with the planned
standard to check whether the gap is accepted or under the standard. From then, Intel
Semiconductor will determine if there is anything should be modified.
These are all steps involved in TQM that Intel Semiconductor should take into consideration if
they want to ensure the good quality of products is delivered to its customers. Besides, in TQM,
there are also some principles including:
 Get it right, first time. It means that the costs for preventing the defect, mistakes will
absolutely less that the costs of correcting them. In fact, as Intel Semiconductor is emphasizing
49
Step1EstablishstandardsofqualityforaproductorserviceStep2EstablishproceduresorproductionmethodswhichoughttoensurethattheserequiredstandardsofqualityaremetinasuitablyhighproportionStep3MonitoractualqualityStep4Takecontrolactionwhenactualqualityfallsbelowstandard

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on the quality of products, they are investing more money into the process of product inspection
and materials inspection. Besides, the increase in costs for quality training is also regarded as
the increase in preventing costs for Chipsets as well. They are all the reason why the costs for
rework and the number of sales return to have warranty are deducted 2% for each one.
 Continuous improvement. To follow this principle, Intel Semiconductor had better to
improve time-to-time its finished products. It means that once C1 and C2 are already launched
into the market, if there is any complain or feedback from customers, such as the two of them
are not fast enough, then the company has to think a more effective way to improve and fix it so
as to adapt to what the market is demanding, maybe by launching C3 and C4 with more special
features.
 Employees and quality-empowerment, freedom to decide how to do. Indeed, in
order to develop and innovate, Intel Semiconductor should offer its people the rights to talk, to
give ideas, opinions and involved in the decision-making process as well. In fact, two or more
people always better that one. Therefore, the coordination between members within the
company play a vital role for the improvement of the entire organization
 Quality control and inspection-preventing the manufacture of defective items. This
principle is relatively similar to the first one because it also emphasize on the inspecting and
preventing steps during and after the manufacturing process
 Quality assurance procedures. With the last principle of TQM, it asks Intel
Semiconductor to ensure all the raw materials or inputs of the company such as plastic boards
must be met the required standard of the company, if not, they will be rejected and returned to
suppliers immediately. Indeed, if there are good materials, good products will be produced.
Moreover, in order to inspect carefully the chips before being launched to the market, the
supervisors in Intel Semiconductor need to check again the outputs by taking randomly some
sample of one batch to examine. In addition, when these accepted chips are reached by
customers, the company should listen carefully all what customers assess instead of ignoring it.
By doing this, the products will be corrected and improved based on exactly the requirements of
customers so that the next launching will definitely make them satisfied.
In addition, there is also one more technique that emphasize on the quality of finished products,
namely Value analysis.
According to Business Essentials, BPP Learning Media, Finance: Management Accounting and
Financial Reporting, Value analysis involves assessing the value of every aspect of a product/
services in order to devise ways of achieving the products/ services purpose as economically as
possible while maintaining the required standard of quality and reliability. Meaning to say, value
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analysis uses many techniques to improve the quality of products. By contrast, conventional
cost reduction techniques only focus on the costs of producing products, not techniques and
quality. In particular, when Intel Semiconductor apply Value analysis, they will try to find the
least cost method of making chips that achieves its intend purposes, enhancing the quality of
Chipsets based on the requirements of customers and the anticipation of the trend in the
market.
Indeed, at modern time, customers want everything around them to be perfect. Manufacturing
industry is also no exception. Therefore, this is the reason why Intel Semiconductor should
focus on TQM and Value analysis. In fact, if the company produce products on the behalf of
customers, the quality and value or goodwill of the company will be high. However, the term
“Quality” also contain some sub elements which this report will figure out as follows:
 Cost: Besides producing a high degree of excellent of computer chips, they also should
not set an extremely high price for the products. Meaning to say, the provided chips must be
sold in affordable prices, or even if it is set in a high price, it must be reasonable.
 Life: Nowadays, most of customers demand for the more modern and innovative
products, they always ask for the improvement time to time in each and every product they
purchase. Therefore, when setting the standard for the life of chips, Intel Semiconductor should
know that the products will not be last for too long or too short. It means that, a chip will last for
a specific of time and become old-fashionable so that customers will demand for a more
modern one.
 Manner of production: As customer always demand for the high class products with the
use of highly skilled labour and expensive raw materials. From that point, when Intel
Semiconductor is going to launch a new product, they must examine whether other big and
strong rivals are also intending to introduce a super similar product or not. Because it is hard for
Intel Semiconductor to stand firm the competition when their new products competing with the
new exclusive ones from others. Meaning to say, this new product has to launch before or must
wait for a period of time after other products are launched so that their market share can be
expand more effectively and efficiently.
 Esteem: It means that the customer’s assessments about the quality of product also
depend on the brand name of the company. In particular, if Intel Semiconductor has a high
degree of reputation, their chips will be likely to have a high price.
 It can be seen that these fitness for purpose and the prestige or esteem attached are
considered as the value of a product. However, from the point of view of the producer of
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the product like Intel Semiconductor, the company has to control the costs and prices so
as to not let them too high because it will affect the market value.
III. Conclusion
There are a number of costing methods that can be used by Intel Semiconductor. However, in
terms of marginal and absorption costing, the former seemed to be dominant. Indeed, with
marginal costing, Intel Semiconductor will not have to worry about fixed costs. Therefore, if
there is not any production process taken place, the company will not need to pay fixed costs
such as the fees for renting plant, the electricity for lighting, etc.
In addition, in terms of LIFO and FIFO for stock valuation, it is specifically useful in the period of
inflation. In particular, as there is a decreasingly value of money and increasingly payment for
products/ goods/ services, it therefore always ask the company to pay more money for raw
materials. For this reason, with the increase in the price of each and every input used in
production, Intel Semiconductor had better to utilize LIFO method to reduce its gross profit so
as to deduct the tax payment effectively.
Furthermore, with ABC method, it can be seen that the more activities, the more costs for the
company to pay. Therefore, compared to C2, as C1 has more number of parts, higher number
of assembling, quality testing, so Intel Semiconductor needs to pay higher costs for
manufacturing C1 than C2. Fortunately, although C1 costs more, it has effectively met the target
costs of Product Manager while C2 cannot be able to achieve and maintain this competitive
advantage for the company.
For KPIs, there are a number of key performance indicators used by Intel Semiconductor
including: website hits, number of chip sold, on time delivery, sales returns, system downtime.
From these KPI, it showed that the company has now attracted 25% of people after a quarter
through its homepage. Therefore, it leads to the increase in sales as well. However, the quality
of service and the number of returns are badly decreased. Besides, the number of system
downtime’s hour also increased a double time between Q1 and Q2. Meaning to say, Intel
Semiconductor has not taken advantages of the advertising’s usefulness and focused on the
quality that deliver to customer. For that reason, they had better to re-consider and invest more
in preventing costs so as to improve its effectiveness and efficiency in producing and working
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IV. Reference
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Accounting Tools. What is period cost? [Online] Available at:
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Advameg, Inc., 2013. Costing method (Manufacturing). [Online] Available at:
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Accounting for Management, 2012. Last In First Out (LIFO) –Materials and Inventory Costing
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BPP Learning Media Ltd, 2010. Management Accounting, Cost and Budget 1st ed.
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Dhull, S. (2013, January 16th). CostMeasurement: stock valuation, LIFO, FIFO, AVCO. [ppt]
Dhull, S. (2013, January 17th). Standard costing. [ppt]
Dhull, S. (2013, January 23rd). CostMeasuremen – Tradition Overhead Absorption, AVCO. [ppt]
Dhull, S. (2013, January 24th). Marginal and Absorption Costing [ppt]. Marginal and Absorption
Costing ppt 6
Dhull, S. (2013, February 7th). Process costing[ppt]
Dhull, S. (2013, January 16th). Cost report, Performance Indicator, Quality and Value. [ppt]
WebFinance, Inc, 2013. Cost [Online]. Available at:
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Wikipedia. Variable cost. [Online]. Available at: http://en.wikipedia.org/wiki/Fixed_cost
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http://en.wikipedia.org/wiki/Variable_cost [Assessed 5th March 2013]
Wikipedia. Semi-variable cost. [Online]. Available at: http://en.wikipedia.org/wiki/Semi-
variable_cost [Assessed 5th March 2013]
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