Case Study: Cost Management and Analysis of Malgaaz Kwality Balls

The assignment is a detailed case study on Malgaaz Kwality Balls, a company manufacturing Lacrosse and Stress balls. The case explores the company's cost management issues, particularly the decline in profits despite increasing sales. The core objective is to analyze the manufacturing overhead costs using both traditional and Activity-Based Costing (ABC) methods. The assignment requires preparing diagrams to illustrate the activities and cost flows under both costing systems, calculating the cost per product under each method, and drawing conclusions by comparing the results. The analysis covers cost distortions, advantages, and disadvantages of each method concerning costing, planning, control, and decision-making. The case highlights how ABC can provide more accurate cost information than traditional methods, enabling better planning and control. The solution includes calculations of overhead rates, product costs, and a comparison of the two costing methods, demonstrating the impact of each method on product costing and profitability.

A Case Study on Malgaaz Kwality Balls
Cost Management of Malgaaz Kwality Balls

Malgaaz Digital Printing &
Photography
In 1989, Nono a graduate in medicine was struck with the thought of helping people
living with pain in certain body parts. With this thought in mind and expertise in
medicine, the foundation of Malgaaz Kwality Balls was laid on the lands of Volos,
Greece.
Malgaaz Kwality Balls has successfully carried the mission and vision of the
company. At present it has established the customer base in more than 400 locations
worldwide. In the last 30 years, it has always believed in providing a premium class
product and is now enjoying the position of business leader.

Malgaaz Kwality Balls majorly covers an expansive array of health related products.
There are two balls available at Malgaaz Kwality Balls.
Lacrosse balls: Lacrosse balls are produced for those people who suffer from pain in
certain body parts. This ball strongly massages in those painful areas and improves
functionality of sore muscles.
Stress Balls: Stress balls help the people in relieving their stress. The person in stress
presses this balls using his palm and fingers and also helps in performing muscles
exercise.
Malgaaz Kwality Balls is a low cost producer of Lacrosse balls from the last 27 years
Recently it has started producing stress balls
Both Lacrosse balls and Stress Balls are produced using the same manufacturing
machine
After manufacturing lacrosse balls, the machine is properly cleaned, maintained and
finally set up in the required configuration for producing stress balls.
The profit of the company has come down after the introduction of Stress Balls

Budgeted sales for Lacrosse balls is 50000 units and for stress balls is 20000 units
Data for the year 2020 budget for two types of balls, Lacrosse and stress balls include
monthly overhead budget of 200000 euros allocated on the basis of each ball’s
production (in units)
The overhead amounts of 200000 euros include 80000 euros and 120000 euros for
indirect labour cost and machine cost respectively.
The indirect labour cost amounting 80000 euros has been used as:50000 for machine
set up, 20000 for packaging and 10000 for maintaining
The machining cost amounting to 120000 euros has been used as : 60000 euros for
machine set up, 40000 for packaging and 20000 for maintaining
Table A
Lacrosse Balls Stress Balls
Direct Material 0.6 0.9
Direct Labour 0.5 0.5
The production manager of Malgaaz Kwality Balls has a doubt that the information
provided by the traditional costing system is not correct. Therefore, an analysis of the
manufacturing overhead cost of the two balls has been demonstrated in the chart
shown below:
Table B
ACTIVITY COST
DRIVER
BUDGETE
D COST
BUDGETED
USE
LACROSSE
BALLS
STRESS
BALLS
Machine Set
Up
# setups 110000 50000 30000 20000
Packaging #Containers
filled
60000 30000 21000 9000
Maintaining runs 30000 10000 6000 4000
Total 200000
Traditional costing method recognises the fixed cost however ABC does not do so.
Also, ABC is more time consuming and involves more cost as compared to traditional
costing. Still, ABC is better over traditional or existing costing method because it
allocates the manufacturing overhead costs more correctly to the products as well as

processes that used the activities. It considers more of direct costs and since its
emphasis is not on total costs it makes the decision, planning and control easy for the
management.
Required
1. What is the major objective of this case?
2. Which are the major problems faced by this firm?
3. Prepare a diagram (similar to the one shown in module 3) to show all the activities
which are taking place in your organization (in sequence).
4. Prepare two diagrams, one under the existing traditional cost system and the other
under the ABC system. In each diagram identify a) overhead or indirect costs, b)
activity cost pools, c)cost drivers, and d) products (types of pens). [for suggested
diagrams see Classic Pen or Gourmet Coffee cases and Lecture notes module 3].[to
simplify your case, you may use, if you want to, max 5 activities out of those
presented in #2 above]
5. Find the cost per product or service line under:
a.the traditional costing system
b.the ABC system.
6. What conclusions can you draw by comparing the results of the above two
methods?
7. Which are the major differences between traditional and ABC systems?
8. Which are the major advantages and disadvantages of each method regarding a)
costing, b)planning (budgeting, CVP analysis, etc), c) control (eg performance
evaluation, balanced scorecard), d) decision making and pricing?

CASE BACKGROUND
Malgaaz Kwality Balls manufactures two types of balls which are:
 Lacrosse balls (Introduced 27years back; high volume product)
 Stress balls (Recently launched; low volume product)
New ball has proved profitable but overall profitability has come down!!!
Controller is worried about the fall in profits.

1. Major Objective of the Case
Using contemporary cost management methods (ABCM) to the company “Malgaaz
Kwality Balls” in order to avoid the issue of cost distortions which might be present.
At the end, providing the exact and correct cost information and facilitating
management to make better planning, decisions and better control.
2. Major Problems Faced by Malgaaz Kwality Balls
Issues related to the operating results (profit) of the Malgaaz Kwality Balls and the
reason could be an inaccurate cost information
Sales have shown an increasing trend but the profits have come down!!! Puzzle!!!
The Puzzle: Sales Up, Profits down!!! Why!!!
Huge Costs Differences between the two methods. Why?
Traditional Method
Stress Balls Lacrosse Balls
4.25 3.95
ABC Method 5.10 3.62
Difference in cost % -16.67% 9.12%

3. Manufacturing Activities Taking Place in Malgaaz Kwality Balls
Processes/Activities involved in the production of balls
Machine
Set Up
Maintaining
Packaging
ACTIVITIES

4. Diagrams of Traditional Costing System and ABC Costing System
Traditional Costing System
It is a costing method wherein only a single, volume based cost driver is used. Mostly, this
system of costing assigns the cost of overhead to products on the basis of direct labour used.
For allocating the overhead cost incurred during the manufacturing process, this system uses
the drivers which are volume based like direct labour hours, machine hours, volume etc.
In simple words, under the traditional costing method the cost is assigned directly to the
product and not to the activities and then to the product units (Weebly, 2009).

4a Figure 1: Traditional Cost System
Overhead Costs
(200000 Euros)
Indirect Labour
(80000 Euros)
Machine
(120000 Euros)
Total Overhead Costs
(200000 Euros)
Lacrosse Balls
50000 units
Stress Balls
20000 units
Overhead rate per unit= 2.85 Euros per unit
(200000/70000)
Single cost driver: production (units)

Activity Based Costing (ABC)
ABC costing is a costing approach wherein the activities and resource consumption are
monitored to arrive at the final cost of output. The main focus of this costing technique is cost
drivers that actually increase the cost. It makes use of drivers which are based on transaction
like, production runs, machine hours, set up time hours etc.
The activity-based costing process
Source: (CGMA, 2013)

4b Figure 2: ABC System
Overhead Costs
(200000 Euros)
Indirect Labour
(80000 Euros)
Machine
(120000 Euros)
Maintaining
(30000
Euros)
Packaging
(60000
Euros)
Machine
Set Up
(110000
Euros)
Euros 50000
Euros
10000
Euros
20000
Euros
60000
Euros
40000
Euros
20000
ACTIVITY
COST
POOLS
Set Ups
(50000
Euros)
Containers
filled
(30000
Euros)
Runs
(10000
Euros)
Drivers
€2€2.2 €3
Lacrosse Balls
50000 units
Stress Balls
20000 units
Products