Professional Documents
Culture Documents
LETTEROFTRANSMITTAL
Date: 8th August, 2015
Afrin Rifat
Course Instructor, Introduction to Managerial Accounting
School of Business
North South University,
Bashundhara, Dhaka.
Dear Madam:
It is our pleasure to submit this report, which is a part of this course: ACT 333
(Managerial Accounting). While accomplishing this project we had to start a
manufacturing company from scratch and manufacture our selected product i.e. Birds
House. In doing so we had to set a price of our product, determine various costs, allocate
these costs and prepare budgeted financial statements. Moreover we had to conduct
detailed analysis e.g. margin of safety, break-even analysis and sensitivity analysis for
given situations. All these activities have corroborated our accounting concepts to a
significant extent. In our report we have included all relevant calculations and supporting
information. We sincerely hope that this report will fulfill the requirements suggested by
you for the course ACT 333.
Sincerely Yours
No
1
2
3
4
Name
Md.MirajHossen
Sakib Md. Shafiuddin
Tariqul Islam
Md. Al Mamun
ID
1210744030
1320413030
1320456030
1311210630
ABSTRACT
This report is aimed to exhibit major accounting practices used by a company for which
we had to open a new manufacturing company and manufacture our selected products. In
the Introduction of the report reasons behind selecting the product has been described.
The next section Birds House Industry Birds House about the competitors of the
company. This section is followed by Manufacturing Process which gives a precise
description of how our selected product i.e. Birds House has been manufactured. In the
next section, we have showed a calculation of maximum number of units that will be
produced in a month for which we have assumed that, we, the members of the group are
only available labors. Production cost of the product includes Direct Materials Cost,
Indirect Materials Direct Manufacturing Labor Cost, and Indirect Manufacturing
Overhead Cost. Based on all relevant and necessary calculations a per House production
cost of 373 TK has been calculated. The support cost to manufacture the product includes
administrative expenses and selling cost includes transportation, advertising and sales
commission. All the costs have been classified in several categories i.e. fixed and
variable, direct and indirect, prime and conversion cost. Each of month birds house
produce 500 house and capacity of the company produce almost 550 house. In the
following sections we have described the costing strategy and pricing strategy that we
have applied. While formulating pricing strategy we have also taken into account the
prices of the products of competing companies. As per project guideline, we have
prepared some forecasted statements i.e. forecasted sales budget, forecasted production
budget, Direct Materials usage budget, Direct Manufacturing Labor budget etc. in the
section entitled Forecasting. While forecasting these, we followed the strategy to keep
15% of the budgeted unit sales as finished goods inventory and 25% of the materials used
in production as ending inventory. Based on the forecasted statements we have prepared
budgeted income statement and budgeted contribution format income statement. This
section is followed by the calculation of Break-even point in both unit sales and in
revenue. Moreover with a view to get an idea about riskiness of the product we have
calculated margin of safety for our product. Based on all the previous calculations, degree
of operating leverage is also calculated. Finally a sensitivity analysis has been conducted
for two different situations i.e. 12% increase and 16% decrease in the demand of
theproduct.
Table of Contents
Serial No.
Content
Background
Industry (Handicraft)
Manufacturing process
Maximum capacity
Production cost
(direct material, direct manufacturing labor, manufacturing
overhead cost )
Selling and administrative cost
Page no.
10
Cost analysis
(fixed/variable, direct/indirect, prime/conversion)
11
Full cost
15
15
10
16
11
18
12
Pricing strategy
19
13
20
14
Budgets
21
15
26
16
27
17
27
18
Margin of safety
28
19
28
20
Sensitivity analysis
29
1. Introduction
The product we have decided to manufacture is Birds House. It is basically made from
wood, board, grill, water pot, food pot etc. now a days, bird houses are becoming
interesting to a lot of people as they are more concern about expressing the hobbies. It is
basically considered as a product which is used to keep our birds. But bird house is not
only for birds to stay, it can be used as a show-piece too. Recently the popularity of using
of birds house has become more and more popular and people find it really interesting to
use something that they can make by their own. Though the house is made of wood,
board ,girl but it does not seem like that because the manufacturing process of the house
is quite tricky. The house looks like a beautiful house and the design of the house is quite
unique. Basically we have found the manufacturing process of the house from internet
and it's been same modify by all group members. We have uploaded the manufacturing
process in the internet and we found it quite enticing and that is why we chose to
manufacture the product.
2. Industry Analysis
The product of ours belongs to the birds sale stores and gift shop industry. These two
industries are considered as one of the prolific industry in the world as well as in
Bangladesh. The demand for among people is quite high as these things are comparably
cheap to purchase as well as liked by all class of people who lives if birds. In terms of
there is no gender problem as most of the products in these two industries are made for
unisex. The products that belong to industries are gift shop, birds stores, furniture shop
etc . The market of showpiece items is still growing in Bangladesh and in the near
future there is a huge possibility that this market will be the next big thing in the country.
Competitors
The competitors that we have in the market are not in great numbers but not also in small
number either. The main competitor that we have is the Furniture and small birds stores .
This market is dominated by these few stores and they act as a dominant stores in the
industry. In every market there are storeitems which we also considered as our
competitors. Though the competition seems a bit tougher but we are quite hopeful about
the sustainability of our business. The reason of being optimistic about the product is
because it is being made by using eco-friendly materials and also the design of the
product is alluring. In order to compete with our competitors we will distribute our
products among local birds stores and furniture shop to compete with those branded shop
rather than taking risk of opening up a new store to run the business.
3. Manufacturing Process
We will have two portions in the manufacturing process. All the work will be done by one
person. In the first part we will make the roof and in the second part we will make the
walls of the bird house ready. After finishing both portions we will join them and make a
beautiful bird house . manufacturing process is given below
1. First we have to draw the roof top design in the board with a pencil . then we will
cut those boards using the saw according to the design.
2. After that we have to add the boards together by using pin and glue. We will use
hammer for joining the different parts. Our roof is ready
3. Now we have to make our bird house walls. For that we will first cut wood sticks
and then make a frame . we can use glue and pin to make our frame.
4. At this time we need to attach grills with the wooden frame.
5. After that we will join our roof and walls together using a hammer and pins. So
our basic bird house is completely made.
6. Now we have to add some value to our house. As it is a bird house we will add a
water pot for the birds to drink water and a food pot in order to feed them.
7. At last we can make our bird house more beautiful and glassy if we polish it with
a leaker burnish. this particular step is not compulsory but this step can be taken
as an option.
4. Maximum Productivity
According to the project rule we have to consider our group members as our labor. In our
group we have four members and each of them agreed to work eight hours per day. Also
the labors are willing to work extra two hours each day if they are being paid fifty percent
more than their original wage per hour. To make profit, we need to produce a good
amount of birds house and for that reason we agreed to the proposal. The number of days
the labors will work is twenty six days and every Friday will be a day off for them.
Below is the table that illustrates the maximum number of units we will be able to
produce.
Numbe
r of
labors
4
Total
working
hours for
each labor
per day
Total
working
hours by
all the
labor each
day
Number
of
working
days
Total
number of
working
hours
each
month
Number
of hours
to produce
each
house
10 hours
=10*4
=40
26
=26*40
=1040
Maximum
Number
of houses
can be
produce
each
month
=1040/2
=520
Calculationformaximumnumberofunits:
Number of Labors= 4
Total working hours for each labor per day= 10 hours (8 hours+2 hours)
Total working hours by all the labors per day= (10 Hours4)= 40 hours
Number of working day= 26 days
Total number of working hours each month=(26 Hours40)=1040 hours
Number of hours to produce each unit of product=2 hours ( Basically it takes two hours
to manufacture one product by each labor .
Maximum number of units can be produced each month= (1040 Hours2 Hours) =520
units
5. Production Cost
Determination
The production cost of our selected product i.e. birds house includes Direct Materials
cost, Direct Manufacturing Labor cost, and Manufacturing Overhead cost. We are
expecting to produce 500 units of products.
DirectMaterialCost:
Direct material
Units needed
1.Wood stick
1.5 piece
2. Board
4 square feet
3.Grill
4 piece
4.Water pot
1 piece
5.Food pot
1 piece
6.Tray
1 piece
Total
For producing 500 house of birds house in a month,
1)
2)
3)
4)
5)
6)
TotalDirectMaterialCost:
=(37500+50000+30000+2500+7500+2500)
=130000tk
DirectManufacturingLabor(DML)Cost:
Direct manufacturing labor cost
Cost per direct labor hour
50 tk
1000 tk
100 tk
40 tk
2500 tk
2500 tk
500 tk
100 tk
111 tk
6851 tk
* Though we dont need any heavy machinery for our production process, we will need
some small equipment in order to manufacture the goods such as hammer and saw. Since
we have only 4 labors available, thats why 4 hammer and saw will be required. We have
decided to purchase 4 hammer at the cost of 600 tk per hammer and 4 saw at the cost of
1000 tk per saw. we will use these guns for 3 years. However the cost of the depreciation
is allocated below in monthly basis
Total
Rent (showroom)
Utilities (showroom)
Sales mans salary
Accountant
Convince
Logistic coordinator
Miscellaneous
Depreciation of office furniture *
7. Cost Analysis
2500 tk
500 tk
2500 tk
3000 tk
1000 tk
1000 tk
500 tk
83 tk
1183 tk
In order to make our house, we have incurred a lot costs. These are different according to
the types. Some are fixed cost, some are variable. We have incurred some direct cost as
well as some indirect cost. However the costs of our product are analyzed and classified
below in different types
Total Costs
(monthly)
Fixed costs
1. Supervisor
2. RentFactory
Showroom
3. UtilitiesFactory
Showroom
4. Depreciation of hammer
5. Depreciation of saw
6. Sales mans salary
7. Accountant
8. Convince
9. Logistic coordinator
10. Miscellaneous
11. Depreciation of office furniture
2500tk
2500tk
2500tk
5
5
500tk
500tk
100tk
111 tk
2500tk
3000tk
1000tk
1000tk
500tk
83tk
1
1
0.2
0.22
5
6
2
2
1
0.17
16794tk
34tk
Total cost
Variable cost
1. Wood stick
75
37500
100
50000
60
30000
4.Water pot
2500
5.Food pot
2500
15
7500
100
50000
8.Pin
0.2
100
9. Pencil
0.08
40
10. Glue
1000
362
181140
2. Board
3. Grill
6.Tray
Total
* pin , pencil and glue are indirect material. So it is not possible to feasibly trace them to
the product. We cannot determine exactly how much glue or pin is used for production.
Thats why we have estimated an amount that will be needed per month. Since we can
produce maximum 500 units in a month, therefore we have determined these costs per
unit through dividing the costs by the units. The calculations are as followsGlue cost per unit = 1000/500 = 2
pencil cost per unit =40/500 = 0.08
pin cost per unit = 100/500 = 0.2
Total cost
Direct cost
1. Wood stick
75
37500
100
50000
60
30000
4.Water pot
2500
5.Food pot
2500
15
7500
100
50000
1000
362
181000
2500tk
5
5
2500tk
2500tk
1
1
0.2
0.22
5
6
2
2
1
0.17
0.08
500tk
500tk
100tk
111 tk
2500tk
3000tk
1000tk
1000tk
500tk
83tk
40
2. Board
3. Grill
6.Tray
7. Direct manufacturing labor
8.Convince
Total
Indirect costs
1. Supervisor
2. RentFactory
Showroom
3. UtilitiesFactory
Showroom
4. Depreciation of hammer
5. Depreciation of saw
6. Sales mans salary
7. Accountant
8. Conveyance
9. Logistic coordinator
10. Miscellaneous
11. Depreciation of office furniture
12. Pencil
13. glue
2
0.2
1000
100
36tk
17934tk
Full cost per unit = variable cost per unit + fixed cost per unit
= 362+34
= 396
Total full cost = total variable cost + total fixed cost
=181140+16794
=197934
9.
There are many different types of systems to determine the manufacturing cost of a
product. Among these systems, job costing system is the most common system. It is also
called simple costing system. For our product , unit manufacturing cost is calculated
under this simple costing system
Allocation Base
Our allocation base is Direct Labor Hour
Direct Labor Hour = per day 8 hour 4 person 26days
832 Direct Labor Hour
Manufacturing overhead cost 6851tk
Manufacturing overhead cost
6851tk
832 hours
260 130000
100
360
8.23
368
50000
180000
4115
184115
10.
we have determined that there will be 2 support departments in our business to assist
operation department. These departments are maintenance and procurement departments.
Moreover from the manufacturing process we can identify that we have 2 operation
departments. These are production and joining department( here roof will be made and
joined with the walls ). Here the cost of each department is shown underneath
1.
2.
3.
4.
5.
6.
7.
8.
Rent (showroom)
Utilities
Accountant
Miscellaneous
Convince
coordinator
Direct material *
Direct manufacturing
labor *
9. Manufacturing overhead
*
Support department
Maintenanc procurement
e
2500
500
3000
500
1000
1000
6500
Operation department
production
Joining
2000
80000
37500
50000
12500
5151
122651
1700
64200
.. total
We have 3 approaches to allocated the support cost to operating department. These are
direct, step-down and reciprocal method. But here we will use direct method because this
is easy to use.
Support department
Maintenanc procurement
e
6500
2000
Operation department
production joining
(6500)
(2000)
0
122651
64200
4290
2210
1320
680
128261
67090
Total
195351
195351
11.
Activity based costing is another system of determining the unit manufacturing cost. But
this type of costing is not alike simple costing system. Here several activities are
established and there are several allocation rates. Here we have found 2 activities to
allocate all indirect costs. So the indirect costs under each activity is shown below
Identifying the indirect costs associated with each cost allocation base
Production
Salaries (supervisor,
accountant,
salesman)
Rent (factory and
showroom rent)
Utility
Depreciation
Miscellaneous
Logistic coordinator
.. total
Administration
Total
2500tk
5500tk
8000tk
2500
2500
5000
500
211
500
83
500
1000
183
500
1000
15683tk
1000
66711tk
9083tk
*production Cost will increase with the level of production. If we increase the production
level we will need more man power and space to support.
*The demand for administrative resources increases with direct manufacturing labor
hours.
Activity cost rates indirect cost pool
No.
Activity
Cost
Hierarchy
category
production
Administration
Output unit
level
Facility
sustaining
Total
Budgeted
Allocation
Budgeted
Quantity
base
indirect
Cost
6711
500 units Number of
unit
9083
832hrs. Direct labor
hrs.
Budgeted
indirect
cost rate
(taka)
13.42
10.92
Per Unit(taka)
Total(taka)
Direct Costs
Direct material (260*500)
260
130000
100
50000
360
180000
13.42
21.84
395
6711
12.
10920
PRISING STRATEGY
Selecting a proper pricing strategy is very important. It helps a business to survive in the
market by providing accurate price based on the market perception, customer demand
and competitors etc. Out of two pricing approaches we have determined to use cost plus
pricing approach to calculate our product price. The reason behind choosing this strategy
is that our business is on handicraft goods. So we are staying in a perfectly competitive
market where we dont have much power to the choice of setting the price by ourselves.
But while pricing, we also have to be careful because too high price may reduce the
demand. However we have decided that the mark up rate of our product will be 25
percent of full cost. Here the price is determined by using this approach belowSelling price = full cost + mark up
= 396 + (396x0.25)
= 49
13.
Revenue (495*500)
(-)cost of goods manufactured (368*500)
Gross profit
Bird house
247500
184000
63500
197631
9500
54000
operating income
Profit margin ratio=
revenue
54000
= 247500
=.2182 or 21.82%
Operating income for product under ABC Costing
Revenue (495*500)
(-)cost of goods manufactured (395*500)
Total operating income
operating income
revenue
247500
= 50000
=.2002 or 20.20%
14.
BUDGETS
Product
Units
Selling price
Total revenue
Bird house
500
495
247500
500
.. Total requirement
550
50
550
board
grill
Water
pot
Food
pot
tray
1.5
825
2200
2200
550
550
550
50
25
15
15
41250
55000
33000
2750
2750
8250
total
143000
in production
board
825
2200
grill
Water
pot
Food
pot
tray
total
165
990
(-) beginning
inventory
440
2640
2200
550
550
550
440
110
110
110
2640
660
660
660
990
2640
2640
660
660
660
50
25
15
15
49500
66000
39600
3300
3300
9900
.. direct material to
be purchased in unit
Cost budget
Cost per unit of
direct material
.. cost of direct
material to be
purchased
171600
Output units
Total hour
Total cost
Bird house
550
1100
50
55000
Variable costs
1. Glue ( 550x2)
2. pin (550x0.2)
3. Pencil 550x0.08)
1100
110
44
1254
Fixed costs
1.
2.
3.
4.
Supervisor
Rent
Utilities
Depreciation of hammer and saw
2500
2500
500
211
5711
6965
75
100
60
5
5
15
100
0.2
0.08
2
4.55
4.55
0.91
0.38
__________
373
Total
Direct material inventory
1. Wood 165*50
2. Board 440*25
3. Grill 440*15
4. Water pot 110*5
5. Food pot 110*5
6. tray 110*15
.. total direct material inventory
8250
11000
6600
550
550
1650
35200
18650
53850
Beginning inventory
(+) cost of goods manufactured
Direct material cost
Direct manufacturing labor cost
Manufacturing overhead cost
143000
55000
6965
204965
(18650)
186315
Total
495
(362)
247500
(181000)
133
66500
2500
5
5
2500
2500
1
1
0.42
5
6
2
2
1
0.17
500
500
211
2500
3000
1000
1000
500
83
(33.59)
99.4
(16794)
49706
Revenue
(-) COGS
From schedule
Total
1
7
247500
(186315)
Gross profit
Operating costs
1. Rent (showroom)
2. Utilities (showroom)
3. Sales mans salary
4. Accountant
5. Convince
6. Logistic coordinator
7. Miscellaneous
8. Depreciation of office
furniture
.. total operating costs
61185
2500
500
2500
3000
1000
1000
500
(11083)
83
50102
= 373units
By observing the analysis, we have noticed that our business is safe by the
revenue of 62865 tk. So we will not incur any loss even if our sale falls by this
amount. But if the actual revenue falls more than the margin of safety, then we
will incur lose.
19. OPERATING LEVERAGE
It is a vital analysis that is needed in every organization. So the operating
leverage is calculated below
Operating leverage = contribution margin / operating income
= 66500/49706
= 1.34 times
The result indicates that, when sales are 500 units, a percentage change in sales
and contribution margin will result in 1.34 times that percentage change in
operating income.
20. SENSITIVITY ANALYSIS
Per unit
Total
495
(362)
277200
(202700)
133
74480
4.5
2500
4.5
4.5
2500
2500
0.9
0.9
0.38
4.5
5.36
1.79
1.79
0.9
0.15
500
500
211
2500
3000
1000
1000
500
83
(30.17)
103
(16794)
57686
if the demand for our product decreases by 16%, then the new reduced sales volume will
be
( 500-500x16%) = 420 units. Now based on the new volume, operating profit or cost will
be
Per unit
Total
495
(362)
207900
(152040)
133
55860
5.9
2500
5.9
5.9
2500
2500
1.19
1.19
0.5
5.9
5.21
2.38
2.38
1.19
0.19
500
500
211
2500
3000
1000
1000
500
83
(39.98)
93
(16794)
39066