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 (722)
=154 lamp in 1 month which take 2 days to dry up. But the last 2 days lamps (72 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
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 (704.2813.5%)
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.