Cost Accounting

Published on July 2016 | Categories: Documents | Downloads: 36 | Comments: 0 | Views: 428
of 29
Download PDF   Embed   Report

This project is done by the students of North South University of Bangladesh.

Comments

Content

Managerial Accounting
ACT 333
Section: 01
Project Topic: Implications of the mechanics of Managerial Accounting
Group Name: Team AMBIGUOUS

Prepared For:
Afrin Rifat
Lecturer
Department of Finance and Accounting
School of Business
North South University

Prepared By:
Name

ID

Nabila Tasnim

1220122030

Wasiuddin Ahmed

1210190030

Atikur Rahaman Shaown

1210525030

Arzumand Rahman Sabik

1230184630

S. M. Mostafizur Rahman

1210175030

Page 1 of 29

Letter of Transmittal

Date: August 7, 2015
Ms. Afrin Rifat
Lecturer,
Department of Accounting and Finance,
School of Business,
North South University.

Subject: Submission of Group Project Report.

Dear Miss,
We are glad to submit you the report entitled Implications of the mechanics of Managerial
Accounting on a product. We manufacture a product called “Globe Shaped Lamp”. As we were
advised, we have successfully manufactured our product “Globe Shaped Lamp” for the mass
market by keeping a very competitive price and adding a small mark-up. It gives us immense
pleasure to tell you that working on this report has given us vast experience. We applied all our
knowledge gathered in this course to judge and evaluate the issues related with Managerial
Accounting and different costing methods. We believe this will be very helpful in our
professional life also.
It was truly a great honor for us that we were provided the opportunity to work on such a great
project. We hope you find this report satisfactory.

Sincerely Yours,
Team AMBIGUOUS

Page 2 of 29

GLOBESHAPED LAMP

Page 3 of 29

Abstract
According to our project requirements first we select a product that we can manufacture. In our
group we were five people and we choose to manufacture “Globe Shaped Lamp” as our product
which has some simple production process. By using our knowledge from Managerial
Accounting and different costing methods we analyzed the cost of our product “Globe Shaped
Lamp” and determined what will be our selling price by comparing it with our competitors and
made the master budgets. We also determined the break-even point in unit sales and in revenue.
Our production cost includes direct material like ball, glue, thread, socket, wire and holder. We
selected direct manufacturing labor hour as allocation base and calculated the labor hours based
on the total hours all of our five members worked by assuming that our group members are the
only labors available
We have planned to sell 140 units of “Globe Shaped Lamp” at a price of 799 taka in order to
make total revenue of 111,860 taka. After analyzing our master budget we found that our
operating income has a good-looking amount of 13,651 taka. Our margin of safety is 60,407.36
taka and the operating leverage is 1.85times.

Page 4 of 29

Content

Page Number

1. Product Background

6

2. Industry and the competitors

7

3. Manufacturing process

8

4. Maximum production in a month

8

5. Production cost

9

6. Support costs and selling cost

10

7. Analyzing and Classifying cost

10

8. Full cost

11

9. Product cost under Job Costing System

12

10. Break Down of the costs

13

11. Activity-based costing system

15

12. The product-line profitability reports

16

13. Pricing strategy

17

14. Master Budget

18

15. A budgeted income statement

24

16. A budgeted contribution format income statement

25

17. Break-even point in unit sales and in revenue.

25

18. The margin of safety

26

19. Degree of operating leverage

26

20. Sensitivity analysis

27

Page 5 of 29

1. Product background and cryptic for selecting:

We choose Globe Shaped Lamp as our final product which is called showpiece lamp or electric
lamp. The lamp we selected is different from our country’s traditional lamp. It’s mainly made of
thread which is available in everywhere and has various color. We choose violet color thread for
our lamp but we can make various colorful lamp for our customer. While making this lamp, we
used glue, thread, ball, holder, plug, wires, and socket as direct materials and rent, cleaning cost
& transportation cost as manufacturing overhead. People can use this lamp on the table or in
drawing room as a home decorator. We used 60watts soft-white bulb inside the lamp but can be
use anykind of bulb available in the market. To maintain a nice size and shape we use a medium
size ball. People can hang the lamp anywhere they like as it is easy to hang up. And it’s very easy
to light up the lamp. Only need to put the plug into the socket, and the light will be on. Mainly
interior designers use this lamp to design their artifice.
Purpose to select this product is the availability of the raw materials of making this product and
make some different that is not our traditional lamp. It also easy for us to make this product
within a short time. Even we can compete with other retailers with this product. Most
importantly, our group members were comfortable working this lamp and thought it as the best
option available for.

2. Associated industry and opponent party:
Page 6 of 29

Now a days most of the consumers are looking for oriental and unique looking products rather
than traditional looking products that follow simple technological architectures, for decorating
their houses. Majority of lamp products are used by the interior decoration industry. Our
country’s local competitors are Deshi Dosh, Aarong and many single shop located at Badda,
Gulshan, Bashundhara and in various locality who are selling local and imported lamps. Some
online shops like Kaymu is also selling similar products in the market. The main previlage we
will get is the price! As our manufacturing cost is low we offered the lamp to the customer with a
very cheap and attainable price. Though some websites sell modern LED lamps which are very
cheap in price (around 300 taka). However, there is a problem with those product. As it uses
LED lights instead of traditional bulbs, the replacement of lights is not as easy as ours.
Traditional bulbs are widely available in the market and lasts longer than cheap LED lights.
The companies & shops we are considering as our competitors are mainly targeted the upper
middle class and upper class customers of the society whereas we are targetting the middle and
lower middle class along with upper middle class customer with our simple but nice looking type
of lamp. As we are selling the simple type of lamp at a very attainable price and have different
target customers than others we might say that we have no big competitors in the market! We
hope that effective price of our product will help us to increase our sells.

3. Manufacturing Process:

Page 7 of 29

Our process of manufacturing “Globe Shaped Lamp” is discussed below:
 For making the outlook of our lamp by using the thread we first marked the upper
side and the lower side of the ball which will not be covered by the thread. Then we
mix some water with the glue. After mixing up those glue and water we applied it in
our ball and thread for 2 to 3 minutes by using our hand. Then we start slowly
covering the ball with the thread. After covering the ball with the thread we again
applied glue in the thread form the upper side so that it would be stick to the ball
deeply. Then we have to keep it to dry for 2 days without any touch.
 After two days we detached the ball from the solid thread. And attach the
globeshaped solid thread with the electric wire which is connected with socket and
holder. And thus our lamp become ready for sell!

4. Maximum Production:
Assuring that we are the only labors available to produce the lamp, we decide to work 9.00 a.m
to 6.00 p.m each day and will have an hour break in-between. So basically we will work 8 hours
a day.
According to our calculation if takes 0.5 hours to round the ball by threads, 2 days to dry it, 0.2
hours to detach the ball from thread and 0.2 hours for electrical connection.
So it takes 1.1 hours to make and 2 days to dry to produce a single lamp. Which mean a working
days of 8 hours we can produce (8hrs/1.1hrs) on 7.27 approximately 7 lamp each day and (722)
=154 lamp in 1 month which take 2 days to dry up. But the last 2 days lamps (72 days) or 14
lamps will not dry up within the month. So our total finished product will be (154-14) or
140lamps in a month.

5. Production Cost:

Page 8 of 29

PER UNIT (TAKA)

TOTAL (PER UNIT *
140 )

BALL ( 1*70 TK)

70

9800 TAKA

GLUE (1* 120 TK)

120

16800

WIRE (5FT * 8 TK/FEET)

40

5600

SOCKET (1 * 15 TK)

15

2100

HOLDER (1 * 30 TK /
HOLDER)

30

4200

THREAD ( 2 OUNCE* 50
TK / OUNCE)

100

14000

TOTAL DIRECT
MATERIAL
DIRECT LABOR (1.1 HR
*200 TK/ LABOR HR)

375 TAKA

52500 TAKA

220 TAKA

30800 TAKA

DIRECT MATERIAL :

MANUFACTURING
OVERHEAD:
RENT

4000

CLEANING COST

300

TRANSPORTATION COST

200

TOTAL
MANUFACTURING
OVERHEAD COST
PRODUCTION COST

**32.14

4500

627.14

87800

**4500 ÷ 140 = 32.14

6. Support and Selling costs:
Page 9 of 29

As we are new in this business the main supporting cost we need is the advertising cost. Now a
days everybody is so much active in face book so we decide advertise our product in the
Facebook.
According to facebook policy we can fix a budget for advertising our product.
We budgeted we will be spending 6000 taka per month. Thus per unit advertising cost is (6000
taka 140 unit) 0r 43 taka (Rounded).
As we advertising on FB we will incur internet bill and electricity bill also as our support cost.
According to our calculation we have to pay 1000 taka as internet bill and 800 taka as electricity
bill.
The selling cost of our product will be the product delivery cost. We assume that we will spend
3000 taka to deliver our product.

7. Analyzing and classyfying costs:
Direct Cost
COSTS

Fixed

Variable

Indirect
Cost
Fixed

Variable

Prime
Cost

DIRECT
MATERIALS
BALL





GLUE





WARE





SOCKET





HOLDER





THREAD





DIRECT
LABOR
MOH :





RENT



Conversion
Cost




Page 10 of 29

CLEANING



TRANSPORTA
TION
SUPPORT
AND SELLING
COST
INTERNET
BILL
ELECTRICITY
BILL
PRODUCT
DELIVERY
COST
ADVERTISING
COST





















8. Full Cost:

COST ITEMS

TAKA

VARIABLE COSTS:
VARIABLE MANUFACTURING COST:
BALL

70

GLUE

120

WARE

40

SOCKET

15

HOLDER

30

Page 11 of 29

THREAD

100

DIRECT LABOR

220

TRANSPORTATION

1.43

VARIABLE NON MANUFACTURING
COST
ELECTRICITY BILL(800 TAKA/140 UNITS) 5.71
PRODUCT DELIVERY( 3000 TAKA/ 140
UNITS)
TOTAL VARIABLE COST

21.43
623.57

FIXED COST:
FIXED MANUFACTURING COST:
RENT (4000 TAKA/ 140 UNITS)

28.57

CLEANING(300 TAKA/140 UNITS)

2.14

FIXED NON MANUFACTURING COST:
INTERNET BILL

7.14

ADVERTISEMENT COST

42.86

TOTAL FIXED COST

80.71

FULL COST

704.28

9. Product Cost:
We select direct manufacturing labour hour as our allocation base.
Our budgeted manufacturing overhead rate is 100 taka per direct labour hour.
So the product cost is:
Page 12 of 29

TAKA
DIRECT MANUFACTURING LABOUR
COST

30800

DIRECT MANUFACTURING LABOUR
HOURS (30800 TAKA/ 200 TAKA PER
HOUR)
MANUFACTURING OVERHEAD COST
ALLOCATED(154 HOURS *100 TAKA)

154 HOURS

15400 TAKA

JOB COST
TAKA
DIRECT MATERIALS

52500*

DIRECT LABOR

30800*

MOH ALLOCATED

15400*

TOTAL COST

98700

PER UNIT COST (98700/140)

705

*From production cost (number 5)

10. BREAK- DOWN OF THE SUPPORT COST:

To break down the cost we choose step down method.
Here we choose selling & advertisement as our support department and production &
maintenance as our operating department.
Hence selling department provide support cost to the advertisement department but
advertisement department does not provide support cost to selling department , we choose the
step down method as our cost allocation method and assuming selling as our first department.
Page 13 of 29

Support
department
selling

Operating
department

Total( taka)

advertisemen
t
6000

production

maintenance

52500

4500

67800

Budgeted labour
hours

17.6

132

26.4

176

percentage

10

75

15

100

Budgeted minutes of
advertise

1848

462

2310

percentage

80

20

100

Budgeted overhead
cost

4800

Support work
finished :
By selling cost:

By advertising cost

Allocation of the support cost of the table allow:

Budgeted Overhead
Cost
Allocation of selling
costs(4800 * 10% ;
75%; 15% )
Allocation of
Advertisement(6480 *
80%; 20%)
Total cost after
allocation

SUPPORT
DEPARTM
ENT
SELLING
ADVERTI
-SEMENT

OPERATING
DEPARTMEN
T
PRODUCTIO
MAINTANA
N
NCE

TOTAL

4800

6000

52500

4500

67800

(4800)

480

3600

720

0

(6480)

5184

1296

0

61284

6516

0

67800

Page 14 of 29

11. ABC Costing system:

Allocation of MOH & Support Cost

Activity

Cost Driver

Total cost

Activity

Taka

Rates

Rent

-

4000

-

Cleaning

-

300

-

Transpiration

No. of Unit

200

1.43/Units

Internet Bill

-

1000

-

Machine hours

800

20/mhs

-

6000

-

No. of Unity

3000

21.43 units

Electrical Bill
Advertising
Delivery Cost

We allocated different cost driver to all the variable MOH and support costs to determine their
activity mates. As fixed fixed cost has no cost driver for short term we only choos cost
drivers for the variable ones.
Here transpiration & delivery cost were allocated base on no. of units. Because this cost can
increase or decrease based on the change on no. of units. Then we allocated electricity bill
based on machine hours as the more hours we will use the machine the more will be the bill (vice
versa).

Unit cost as per ABC System
Cost (Taka)

Total Taka

(140 Unit)
Total Direct Material

-

52500

Total Direct Labor

-

30800

T. Manufacturing overhead

-

4500
Page 15 of 29

Support & selling cost:
Internet Bill

1000

Electricity Bill

800

Advertisement

6000

Delivery cost

3000
10800

Total Cost-

98600

() Number of units produced in month

140

Cost per units

704.29

From production cost (Number 5)

12. Product line Profitability Report

Taka
Simple costing

704.29

ABC costing

705

Differences

0.71

Simple cost
{799*-704.28)704.29}

13.45%

ABC costing system

13.33%

{799* taka-705)/705}
*From the number 13

Page 16 of 29

We compare the Profitability of each unit of the product under simple costing system and ABC
system for our product, ABC cannot make much different result than the simple casting system.
But as ABC casting provide better measurement and not biased like simple costing method, we
will use this method.

13. Pricing Strategy:

As we have a product of less competitive market, we do not necessarily have to depend on
market demand and market supply to determine our pricing. We have followed ‘Cost based’
approach to determine our full cost (Number 8). Thus we just chosen a desired mark up
percentage for our product.
We have chosen a denied mark percentage of 13.5%

In Taka
Full cost
Mark up (704.2813.5%)
Selling price

704.28
95.08
799.36

To round it we have chosen 799 taka per unit selling price.

Page 17 of 29

14. Master Budget:
Schedule 1:

Sales Budget
For the month ended

Product

Unit

Selling price

Revenue

Globe Shaped Lamp

140

799 taka

111,860 taka

We are planning to sell all our 140 units of lamp in a month at a selling price of 799 taka in order
to make a total revenue of 111.860 taka.

Schedule 2:

Production Budget
For the month ended
Units

Budgeted sales
Add: Ending finished goods inventory
Total requirements
Less: beginning finished goods inventory
Units to be produced


140
14 *
154
000
154

140 units* 10% = 14 units

Page 18 of 29

Schedule 3A:

Direct material Usage Budget
For the month ended
Ball

Glue

Wire

Socket

Holder

Thread

Total

Physical unit budget
Ball (154 units *1)
Glue (154 units *1)

154unit
s

Wire (154 units *5 ft.)

154
units

770 feet

Socket (154 units *1)

154 units

Holder (154 units *1)

154 units

Thread(154 units *20
ounce)

308 ounce

Cost Budget
Purchase in this period
Ball (154u*70tk)

10780tk

Glue (154u*120tk)

18480
tk

Wire (770ft.*8tk)

6160 tk

Socket (154u*15tk)

2310 tk

Holder (154u*30tk)
Thread(308ounce*50tk
)

4620 tk
15400 tk
10780

18480

6160

2310

4620

15400

57750 tk

Total cost of direct
material to be used in
production

Page 19 of 29

Schedule 3B:

Direct material Purchase Budget
For the month ended
Ball

Glue

Wire

Socket

Holder

Thread

154unit 154unit

770 unit

154 unit

154 unit

308 ounce

31 unit

31 unit

154ft.

31 unit

31 unit

62 ounce

185unit 185unit

924 ft.

185 unit

185 unit

370 ounce

------

---------

---------

---------

---------

924 ft.

185 unit

185 unit

370 ounce

total

Physical unit budget
Production needs
(schedule 3A)
Add: Desired ending
inventory
Total need
Less: beginning
inventory
Units to be purchased

--------

185unit 185unit

Cost Budget
Purchase in this period
Ball (185u*70tk)
Glue (185u *120tk)

12950
tk

22200
tk

Wire (924ft.*8tk/ft.)

7392 tk

Socket (185u*15tk)

2775 tk

Holder (815u*30tk)

5550 tk

Thread(370ounce*50tk
)

18500 tk

12950

22200

7392

2775

5550

18500

69367 tk

Total cost of direct
material to be
purchased

Page 20 of 29

Schedule 4:

Direct Manufacturing Labor Cost Budget
For the month ended

Product

Globe Shaped
lamp

Units to be
produced

154 units
(Schedule 2)

Schedule 5:

Direct
manufacturing
labor hour per
unit
1.1 hour

Total hours

169.4

Hourly wage
rate

200 taka

Total cost

33880 taka

Manufacturing Overhead Cost Budget
For the month ended
Taka

Variable manufacturing overhead cost:
Transportation (154 units * 1.43 taka)

220*

Fixed manufacturing overhead cost:
Rent

4000

Cleaning cost

300

Total manufacturing overhead cost

4520 taka

*Rounded up

Page 21 of 29

Schedule 6A:

Unit cost of ending finished good inventory
For the month ended

Input

Cost per unit of input

Input per unit of output

Total cost (taka)

Ball

70

1

70

Glue

120

1

120

Wire

8

5 feet

40

Socket

15

1

15

Holder

30

1

30

Thread

50

2 ounce

100

Direct Labor

200

1.1

220

Manufacturing overhead

-----

-----

29.35*

Direct material:

Total cost/unit

624.35

*Budgeted MOH cost per unit= 4520 taka/154 units
= 29.35 taka per unit

Page 22 of 29

Schedule 6B:

Ending Inventory Budget
For the month ended
Quantity

Cost per unit (taka)

Total

Ball

31 units

70

2170

Glue

31 units

120

3720

Wire

154 feet

8

1232

Socket

31 units

15

465

Holder

31 units

30

930

Thread

62 ounce

50

3100

Direct material:

Total direct material ending
inventory

11617 taka

Finished Goods:
Globe Shaped Lamp

14 units

624.35

8741*

Total Ending Inventory

20358 taka

*Rounded up

Schedule 7:

Cost of Goods Sold Budget
For the month ended
Total
From Schedule

Taka

3A

57750

4

33880

Taka

Beginning finished goods
Cost of good manufactured
Direct material used
Direct manufacturing labor

Page 23 of 29

Manufacturing overhead

5

4520

Cost of goods available for sell

96150

Less: Ending Finished goods inventory

8741

Cost of goods sold

87409

15. Budgeted Income Statement:
Budgeted income statement
For Team Ambiguous
For the month ended
Total (Taka)

From Schedule
Revenue

1

111860

Less:Cost of goods
sold
Gross margin

7

87409
24451

Less:Operating cost
Selling cost

4800*

Advertisement cost

6000*

OPERATING
INCOME

(10800)
13651

From selling and support cost (number 6)
Page 24 of 29

16. Contribution format income statement:
Contribution format income statement
For Team Ambiguous
For the month ended
Per Unit (Taka)

Total for 140units (Taka)

Revenue

799

111860

Less: Total variable cost**

623.57

87300

Contribution Margin

175.43

24560

Less: Total fixed cost**

80.71

11299

OPERATING INCOME

94.72

13261

**Total variable and fixed cost is from number 8

17. Break even points in unit’s sales and revenue:
Breakeven point in unit = (Fixed cost / Contribution margin per unit)
= (11,299/175.43)
= 64.41
CMR = (Contribution margin/ Sales)
= (24,560/111,860)
= 0.2196
So, Breakeven points in sales = (Fixed cost/CMR)
= (11,299/0.2196)
= 51452.64 Tk.

Page 25 of 29

18. Margin of safety:
Margin of safety (in Tk.) = Budgeted revenue- Breakeven revenue
= (111,860-51,452.64) Tk.
= 60,407.36 Tk.
Margin of safety (in units) = Budgeted sales in units – Breakeven sales in units
= (140-64) units
=76 units
Margin of safety (percentage) = Margin of safety in taka/Total budgeted sales
= 60,407.36/111,860
= 54%
Comments:
This means that we are safe up to 60,407.36 taka or 76 units decrease in our sales.
A decrease in sales less than taka 60,407.36 will make profit but a decrease in sales greater than
taka 60,407.36 will cause loss.
It also means that if sales decrease by 54% then we will be operating at breakeven point.
So, the margin of safety gives us the confident that we are unlikely to suffer loss.

19. Degree of operating leverage:
Degree of operating leverage = (Contribution margin/ Operating income)
= (24,560/13,261)
= 1.85 times

Page 26 of 29

Comments:
These means that if we sale 140 units, a percentage change in sales and contribution margin will
result in 1.85 times change in operating income.

20. Sensitivity analysis:

Units
Sold

Sellin
g
Price

Key Assumptions
Reven Variab Total
ue
le Cost Variabl
per
e cost
unit

Contrib
ution
Margin

Fixed
Cost

Budgeted Operating
Income

In Taka

Master
Budget
Case A
12%
Increase
Case B
16%
Decline

140

799

111860

623.57

87300

24560

11299

13261

Change
from
master
budget
0

157

799

125443

623.57

97900

27543

11299

16,244

22.49%

118

799

94282

623.57

73581

20701

11299

9402

-29.10%

For our sensitivity analysis we have assumed that changes in demand directly affect our unit
sales. a) In case A, a 12% increase in demand will increase our unit sales to 157units (rounded).
This will decrease our total variable cost and contribution margin. As a result, our operating
income will also change from 13261 taka to 16,244 taka, which is an increase of 22.49%.

Page 27 of 29

Margin of Safety:
Change in Total Contribution Margin Ratio = CM/Sales
= 27543/125443
= 0.22
Change in Break Even sales = Fixed Cost/ CMR
= 11299/0.22
= 51359.09 Taka
Change in Margin of safety = Total budgeted revenue – Breakeven sales
= 125443-51359.09
= 74083.91 Taka
This means that we are safe upto 74083.91 taka decrease in our sales. A decrease in sales less
than 74083.91 taka will make profit but a decrease in sales greater than 74083.91 taka will cause
loss.

b) In case B, a 16% decrease in demand will decrease our unit sales to 118units (rounded). This
will decrease our total variable cost and contribution margin. As a result, our operating income
will also change from 13261 taka to 9402taka, which is a deccrease of -29.10%.
Margin of Safety:
Change in Total Contribution Margin Ratio = CM/Sales
= 20701/94282
= 0.22

Change in Break Even sales = Fixed Cost/ CMR
Page 28 of 29

= 11299/0.22
= 51359.09 Taka
Change in Margin of safety = Total budgeted revenue – Breakeven sales
= 94282-51359.09
= 42886.91 Taka
This means that we are safe upto 42886.91 taka decrease in our sales. A decrease in sales less
than 74083.91 taka will make profit but a decrease in sales greater than 42886.91 taka will cause
loss.

Page 29 of 29

Sponsor Documents

Or use your account on DocShare.tips

Hide

Forgot your password?

Or register your new account on DocShare.tips

Hide

Lost your password? Please enter your email address. You will receive a link to create a new password.

Back to log-in

Close