Nego term water

LETTEROFTRANSMITTAL

Date: 25th March 2016

Afrin Rifat

Course Instructor, Introduction to Managerial Accounting

School of Business

North South University,

Bashundhara, Dhaka.

Subject: Seeking permission for submitting the Project report.

Dear Miss,
We are glad to submit this report, which is a part of ACT333 course. We had to start a
manufacturing company from scratch and manufacture our selected product i.e. Hanging
Lamp. 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
of 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.

Sincerely Yours
Sakib Bin Sayeed
ID: 1311453030
Abstract

According to requirement we had to select a product that we can manufacture. We are five
members in the group and we decided to manufacture Hanging Lamp 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 lamp production cost of 306.82 taka has been calculated. The support cost to
manufacture the product includes selling and support cost and advertising. All the costs have
been classified in several categories i.e. fixed and variable, direct and indirect, prime and
conversion cost.. 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 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 riskyness 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 the product.
Table of Contents

Serial No. Content Page no.

1 Indroduction 4

2 Industry Analysis 6

3 Manufacturing process 7

4 Maximum Production 8

5 Production cost 8
(direct material, direct manufacturing labor, manufacturing
overhead cost )

6 Selling and support cost 10

7 Cost analysis 11
(fixed/variable, direct/indirect, prime/conversion)

8 Full cost 15

9 Simple costing system ( job costing ) 15

10 Allocation of support cost 16

11 Activity-based costing system 18

12 Product line profitability 19

13 Pricing Strategy 20

14 Budgets 21

15 Budgeted contribution format income statement 26

16 Budgeted income statement ( traditional format ) 27

17 Break- even point 27

18 Margin of safety 28

19 Degree of operating leverage 28

20 Sensitivity analysis 29
Introduction:

The product we have decided to manufacture is hanging electric lamp. It is basically made of
plastic wood, bulb, wearing, holder and socket. People can use this lamp in drawing room
or bedroom. It can also be used in restaurants, shops. It is very easy to hang up the
lamp. It is also very easy to light up the lamp. One needs to just put the plug in the
socket and the lamp will turn on.
Reasons for selecting the product:

The reason that we have chosen to manufacture the product is because it looks beautiful and it is
also a low priced product. It is quite easy to manufacture in such a short time. We can compete
with many small retailers with this product. Because of easiness group members were
comfortable working with the lamp.

2.Industry Analysis

The product of ours belongs to decoration industry. This industry is considered as one of the
prolific industry in Bangladesh nowadays. 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 loves to
decorate.

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 small retail stores and online sellers in kaymu.com,
daraz.com.bd and ajkerdeal.com. Lots of sellers are selling lamps in online sites. So we will face
lots of competition from them. Though the competition seems high but we are very much
confident about the sustainability of our business because we are selling simple but nice looking
lamp at a very attainable price and have different target customers.
3. Manufacturing Process:

Procedure:
Here are the procedures of our product Hanging Lamp.
Step-1: plastic wood is taken and cut into 4 pieces. Three of them are for framing and the rest
is for plate.
Step-2: All the plastic woods are pieces into 7.5 inches and designed according to the plan.
Step-3: Yellow color paper is attached to the plastic wood with glue according to the design.
Step-4: Different color of decorating stone is glued on the frame for deigning the lamp.
Step-5: A wire with a holder is arranged and then a light is attached.
Step-6: Around the holder the framing sheets are glued with each other in a pyramid shape
and the light is hanging inside the sheets.
Step-7: On the top the wire is tied up tightly so that the holder cant get out from the frame.
Step-8: At last the plate is set on which the whole lamp is standing.

4. Maximum Production: we have considered our group members as the only labors
available. In our group we have five members and each of them agreed to work ten hours per
day. Friday and Saturday will be off day.

Total Labors: 5 persons

Working hour: 10 hours a day
Total working hours by all the labor each day: 5*10= 50 Hours
Working Days: 22 days a month
Total Working hours each month 22*50= 1100
Number of hours needed to produce each lamp: 1 Hour
Unit production: 20 products a day by one labor
Total production in a day: 50 units of lamp
We are able to produce maximum 1100 unit of lamp in a month.
5. Production Cost:
Direct material cost for paper lamp:

Direct materials Per unit cost Total unit Total(taka)

Plastic wood 40 1100 44000

Bulb 30 1100 33000

Wearing 20 1100 22000

Holder 30 1100 33000

Pin 20 1100 22000

Package 15 1100 16500

Total Dm 155 170500

So total direct materials cost is 170500 taka

Direct Manufacturing Labor (DML) Cost:

Cost item Total unit Total Labor Cost per hour total
hour
Direct labor 1100 1100 30 33000
cost

So Direct labor cost per unit: 33000/1100 = 15 taka per unit

Manufacturing overhead cost :

These are the costs that cannot be traced directly to a specific product. Manufacturing overhead
costs include indirect material, indirect manufacturing labor and all other factory related costs we
incur to produce our product. So manufacturing overhead costs of our product is given below-

Cost item Cost per month

 Rent 20000

Electricity 3000

Indirect materials (glue, stone) 33000

Supervisor salary 10000

Water 500

Maintenance 7000

Others 2000

Total MoH 75500

MoH cost per unit:

Total MoH/Total unit = 75500/1100 = 68.64

6. Support Cost and Selling Cost Determination

These are the selling and administrative costs incurred to operate the business as well as to sell
the product. Like all other companies, our business has also some support and selling costs

Cost item Total(taka)

Orders 10000

Billing 15000

Delivery 35000

Advertisement 15000

Total support cost 75000

7. Cost Analysis:
 In order to make our lamp, we have incurred lots of costs. They 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

Fixed and variable costs

Fixed costs are those costs which are permanent for a certain period of time and do not change
with the volume. On the other hand, variable costs are the costs that varies when activity or
volume changes.

Fixed Costs Total Costs

(monthly)
1. Rent 20000 tk
2. Electricity 3000 tk
3. indirect materials (glue, stone) 33000 tk
4. Supervisor Salary 10000 tk
5. Water 500 tk
6. Maintenance 7000 tk
7. Others 2000 tk
8. Orders 15000 tk
9. Billing 15000 tk
10. Delivery 35000 tk
11. Advertisement 10000 tk

total fixed cost

150500 tk
Fixed cost per unit= 150500/1100= 136.82 tk

Variable Cost:

Variable cost Per unit cost Total(taka)

Plastic wood 40 44000

Bulb 30 33000

Wearing 20 22000

Holder 30 33000

Pin 20 22000

Package 15 16500

Direct labor 30 33000

Total 170 203500

Direct and indirect costs

Direct cost is a cost that can be easily and conveniently traced to a specified cost objects. On the
other hand indirect costs are opposite. These costs are presented in a table below-

Direct Cost:

Direct materials Per unit cost Total(taka)

Plastic wood 40 44000

Bulb 30 33000

Wearing 20 22000

Holder 30 33000

Pin 20 22000

Package 15 16500

Total Dm 155 170500

Indirect cost:

Cost item Cost per month

 Rent 20000

Electricity 3000

Indirect materials (glue,stone) 33000

Supervisor salary 10000

Water 500

Maintenance 7000

Other indirect cost 2000

Total Indirect cost 75500

Prime /conversion costs

Prime Costs are all direct manufacturing cost which is the combination of direct material and
direct manufacturing labour costs. Conversion costs are all manufacturing costs other than direct
material costs. Prime and conversion costs of our product are

Prime cost= (Direct manufacturing labor cost+ Direct material cost)

170500+33000= 203500

Conversion Cost= (Direct manufacturing labor cost+ Manufacturing overhead cost)

33000+75500= 108500

8. Full Cost Determination

Full cost is the sum of all variable and fixed costs in all business functions of the value chain.
Determining full cost is very important because based on this cost, most of the businesses set
their product price. Full cost is calculated below

Full cost per unit = variable cost per unit + fixed cost per unit = 170+136.82= 306.82 taka

9. Simple Costing System

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 hours = 1100 hours

Budgeted indirect cost rate = Budgeted total costs in indirect cost pool/Direct labor hours

=150500/1100

=136.82 tk per hour

Product costs using the simple costing system

Per unit cost (taka) Total cost (taka)

 Direct material (155*1100) 155 170500 tk

Direct manufacturing labor(1100*30) 30 33000

Total Direct cost 185 203500
Manufacturing Overhead(136.82*1100) 136.82 150502
Total cost 321.82 354002 tk

10. ALLOCATION OF SUPPORT COST:

We have determined that there will be 2 support departments in our business to assist operation
department. We have chosen Order and advertisement as our supporting department and
production and joining as operating department. We have 3 approaches to allocate 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. The cost of each department is shown
underneath.

Support department Operation department

Order Advertisement production Joining
1. Order 10000
2. Advertisement 15000
3. Direct material 100000 70500
4. Direct manufacturing 20000 13000
labor
5. Manufacturing overhead 50000 25500

Total
10000 15000 170000 109000

Now we allocate the support costs to operating department

 Support department Operation department Total
Order Advertisement production joining
Cost incurred before 10000 15000 170000 109000 304000
allocation
Allocation of Ordering (10000) 6100 3900
cost (10000*61%,39%)
Allocation of Advertising (15000) 9150 5850
cost (15000*61%,39%)

Total cost after allocation 0 0 185250 118750 304000

Production department: 170000/(170000+109000) = 61%

Joining Department: 109000/(170000+109000)= 39%

11. ACTIVITY BASED COSTING SYSTEM

Activity based costing is another system of determining the unit manufacturing cost. But this
type of costing is not like simple costing system. 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 Selling and support Total

Electricity 3000 3000
Rent 20000 20000
Indirect materials 33000 33000
Supervisor salary 10000 10000
Water 500 500
Maintenance 7000 7000
Other indirect cost 2000 2000
Orders 10000 10000
Billing 15000 15000
Delivery 35000 35000
Advertisement 15000 15000
Total 75500 75000 150500
Production Cost will increase with the level of production.
Selling and support costs increase with direct manufacturing labor hours.
Activity cost rates indirect cost pool

No. Activity Total Budgeted Allocation Budgeted

Budgeted Quantity base indirect
indirect cost rate
Cost (taka)
1 production 75500 1100 units Number of 68.63
unit
2 Selling and 75000 1100hrs. Direct 68.2
support labor hrs.

Product cost using activity based costing:

Per Unit(taka) Total(taka)

Direct Costs
Direct material (1100*155) 155 170500

Direct manufacturing labor(1100hrs*30) 30 33000

Total Direct cost 185 203500
Indirect Costs of Activities
production (68.63*1100) 68.63 75493
Selling and support (68.2*1100) 68.2 75020
Total 321.83 354013

12. PRODUCT LINE PROFITABILITY

Product cost under:

1. Simple costing: 321.82 tk

2. Abc Costing: 321.83 tk

Difference: 321.83-321.82= .01

*From no 13
 Simple costing = [(368.184-321.82)/321.82]*100

=14.41%

Abc costing = [(368.184-321.83)/321.83]*100

= 14.4%

If we compare the profitability of both costing we can see that they are almost the same.

13. PRICING STRATEGY:

Selecting an appropriate price is very important in the business. We have decided to use cost plus
pricing approach to calculate our product price. We have decided that the mark up rate of our
product will be 20 percent of full cost. We also have to be careful about the mark up because a
mark up too high will reduce our product demand. Here the price is determined by using the cost
based approach.
Selling price = full cost + mark up
= 306.82+ (306.82*20%)
= 368.184
14. MASTER BUDGET:
Schedule 1: Revenue Budget
For the month ending March 31, 2016

Product Units Selling price Total revenue

Hanging lamp 1100 368.184 405002

Schedule 2: Production budget

For the month ending March 31, 2016

Total units
Budgeted sales in units 1100
(+) desired ending inventory
( 1100units x 10% ) 110

.. Total requirement 1210

(-) beginning inventory 0

.. total units to be produced 1210
 Schedule 3A: Direct material usage budget
For the month ending March 31, 2016

Plasti Bulb Wear Packa total

c ing Holde Pin ge
wood r
Physical unit budget

Direct material
needed per unit 1 1 1 1 1 1

.. direct material to
be used in
production 1100 1100 1100 1100 1100 1100
(1*1100)

Cost budget

Cost per unit of 40 30 20 30 20 15

direct material
.. cost of direct
material to be used 44000 33000 22000 33000 22000 16500 170500

in production

Schedule 3B: Direct material purchase budget

For the month ending March 31, 2016

Plasti Bulb Wear Holde Pin Packa total

c ing r ge
wood
Physical unit budget

direct material to be 1100 1100 1100 1100 1100 1100

used in production
(+) desired ending 220 220 220 220 220 220
inventory (20%)
 Total requirement 1320 1320 1320 1320 1320 1320

(-) beginning 0 0 0 0 0 0

inventory
1320 1320 1320 1320 1320 1320
.. direct material to
be purchased in unit

Cost budget
Cost per unit of 40 30 20 30 20 15
direct material

Cost of direct 52800 39600 26400 39600 26400 19800 204600

tk
material to be
purchased

Schedule 4: Direct manufacturing labor budget

For the year month ending March 31, 2015

Product Output units Hour per unit Total hour Rate per hour Total cost
Hanging 1210 1 1210 30 36300
Lamp

Schedule 5: Manufacturing overhead budget

For the month ending March 31, 2016

Manufacturing overhead Per item Cost Total

1. Rent 20000
2. Electricity 3000
3. Indirect Materials 33000
4. Supervisor Salary 10000
5. Water 500
6. Maintenance 7000
7. Others 2000 75500 tk
 Schedule 6: Ending inventory budget
For the month ending March 31, 2016

Items Cost Total

Direct material inventory

1. Plastic Wood 220*40 8800

2. Board 220*30 6600
3. Wearing 220*20 4400
4. Holder 220*30 6600
5. Pin 220*20 4400
6. Package 220*15 3300
.. total direct material ending inventory 34100

Finished goods inventory

Hanging Lamp 306.82*110 33750

.. total ending inventory 67850

Schedule 7: Cost of goods sold budget

For the month ending March 31, 2016

Total
Beginning inventory 0

(+) cost of goods manufactured:

Direct material cost 170500
Direct manufacturing labor cost 36300
Manufacturing overhead cost 75500

.. Cost of goods available for sale 282300

(-) ending finished goods inventory (33750)

.. cost of goods sold 248550

Budgeted income statement

 For the month ending March 31, 2016

From schedule Total

Revenue 1 405002
(-) COGS 7 (248550)
Gross margin 156452
Selling and support cost:
1. Orders (10000)
2. Billing (15000)
3. Delivery (35000)
4. Advertisement (15000)
.. total operating costs
(75500)

.. net operating income 80952

Budgeted Contribution Format income statement

 For the year ending December 31, 2015

Per unit Total

Sales (1100 units) 368.184 405002

(-) variable cost (185) (203500)

.. contribution margin 183.084 201502

(-) Fixed cost

1. Rent 20000 tk
2. Electricity 3000 tk
3. indirect materials (glue, stone) 33000 tk
4. Supervisor Salary 10000 tk
5. Water 500 tk
6. Maintenance 7000 tk
7. Others 2000 tk
8. Orders 15000 tk
9. Billing 15000 tk
10. Delivery 35000 tk
11. Advertisement 10000 tk

(150500)

Net Income: 51002

17. Break-even point

Here the break-even point of our product both in units and in revenue is shown below-

Break-even point in units = total fixed costs/ contribution margin per unit

=150500/183.084

= 822 units

Break-even point in revenue = 822*368.184= 302647

 18. MARGIN OF SAFETY

Margin of safety is an aspect of sensitivity analysis. It is the amount by which budgeted

revenues exceed breakeven revenues. The margin of safety answers the what if
question such as if budgeted revenues are above breakeven and drop, how far can they
fall below budget before the breakeven point is reached.
Margin of safety ( in revenues) = budgeted revenues breakeven revenues
= 405002 302647
= 102355
Margin of safety ( in units) = budgeted sales(units) breakeven sales(units)
= 1100-822
= 278 units

By observing the analysis, we have noticed that our business is safe by the revenue of 102355
taka or 278 units. 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

Operating leverage is a measurement of the degree to which a firm or project incurs a

combination of fixed and variable costs.

Operating leverage = contribution margin / operating income

=201502/51002

=3.95 times

It means that 10% increase in sell will result in 39.5% increase in operating income

20. SENSITIVITY ANALYSIS

Sensitivity analysis is a what if technique that managers use to examine how an outcome will
change if the original predicted data are not achieved or if an underlying assumption changes.
a. Now we consider if demand of the product increases by 12%,.then the new increased sales
volume will be 1100+(1100*12%)= 1232

In the contribution format income statement

Per unit Total

Selling price (1232*368.184) 368.184 453602

(-) variable cost (185) (227920)

.. contribution margin 183.084 225682

(-) Fixed cost (150500)

. Net operating incom 75182

b. Now if the demand for our product decreases by 16%, then the new reduced sales volume will
be 1100-(1100*16%)= 924 units

In the contribution format income statement

Per unit Total

Selling price (924*368.184) 368.184 340202
(-) variable cost (185) (170940)

.. contribution margin 183.084 169262

(-) Fixed cost (150500)

. Net operating incom 18762