Professional Documents
Culture Documents
Cost Accounting
Term Project
Submitted by
Abdul Ali Khan
Aryish Fawad
Hasan Khan
Rabia Inayat
Contents
Introduction....................................................................................................................................................3
Manufacturing process of Gul Ahmed............................................................................................................4
Spinning......................................................................................................................................................4
Weaving......................................................................................................................................................5
Yarn Dyeing................................................................................................................................................5
Wet Processing/Finishing............................................................................................................................6
Cutting and Stitching...................................................................................................................................6
Retail and Distribution................................................................................................................................7
Job Order Costing System..............................................................................................................................7
Direct Material Costs, Direct Labor Costs & Factory Overhead.....................................................................8
Fixed & Variable Cost Analysis.................................................................................................................... 10
Order Point................................................................................................................................................... 12
The Gul Ahmed group was founded in March 1986 with a vision to be a provider of innovative
textile solutions worldwide. They are a manufacturer and supplier of distinguished fabric for
apparel, home and industrial markets with clients all over the world. Their ability to create
forward-thinking solutions that give their clients a competitive advantage is what sets them apart.
They are one of the few vertically integrated operations in Pakistan. Offering a diversified range
of products, our customers can mix and match from a wide variety of print, yarn dyed, solids,
dobby and jacquard. They also deal in twill, sateen, basket weave and percale, knitted to woven
fabric; and thread counts ranging from 130 to 1000. Gul Ahmed also provides customers with
complete in-house design solutions. Their creative center is equipped with state of the art
designing and sampling equipment and skilled textile artists.
Gul Ahmed is a textile manufacturing company that has also gone into retail business by opening its
exclusive retail outlets. The company’s products are also available through other big local retail
stores. The company offers fabrics for each season but is most famous for its summer clothing
especially lawn. The company offers products for both men and women. The summer and
midsummer collections have an exquisite range of fine quality printed cotton lawns, voiles, 100% silk
chiffon with jacquards and embellishments, embroidered cottons and fine quality yarn-dyed fabrics,
while the winters collection has the best of printed linen fabrics to dress up the woman of today.
Men’s fashion collections comprise of 100% cotton fabrics like chairman latha, poplin, cambric,
taxana, woven and embroidered collections and other fine quality fabrics like 100% bosky silk in
plain and woven styles. Gul Ahmed also has a complete line of 100% cotton fine count formal and
semi-formal shirts for men. The company though is one of the preferred brands of men clothing but is
more famous for its women range of products and enjoys the status of the most preferred brands of
women clothing especially in the unstitched category. The company also offers high quality home
fabrics like curtains, bed sheets, quilts, and pillows etc. which are one of a kind.
As a “Super brand” of Pakistan, Gul Ahmed operates successfully not only in the domestic
market, but is also in the league of the top few companies of the world that have been awarded
with such an honor. With an expending retail network across the country, Gul Ahmed offers a
high service shopping experience.
Spinning
'Weaving', the second step of the vertical textile chain is the art
of interlacing yarn to make a piece of cloth/fabric. It involves
taking two sets of formed yarn and interlacing them at right
angle. The lengthwise yarn is known as warp threads and the
crosswise or filler yarn, weft threads.
Yarn Dyeing
• Cotton PKR200,000 +
• Yarn PKR.300,000+
• Dye PKR.75,000+
• Polyester PKR.50,000+
• Starch PKR.50,000
Total PKR.675,000
For Direct labor that is involved in production, they have fixed wages for all employees:
PKR PKR
Manufacturing cost of
production: Direct
materials 675,000
Direct labor 1,360,000
Factory Overheads 2,000,000
The costs that remain constant despite the amount of goods produced are referred as the fixed costs,
the fixed costs associated for Gul Ahmed textile mills (for two years) are given as following:
A cost that varies with the level of units produces is referred as the variable cost, the variable costs
associated for Gul Ahmed textile mills are given as following:
Another point to be noted is that the organization does not follows any formal method of estimating
variables costs as they are only accounted for the actual costs.
Work in process
Opening (variable) 310,160 167,278
Closing (variable) (233,153) (310,160)
Purchases and processing charges (variable) 2,058,598 5,803,104
Closing stock of finished goods (variable) (4,945,923) (6,216,882)
Order Point
Order point refers to the minimum level of inventory an organization should maintain or in other words
the point at which an item should be ordered is also called as the order point. In order to calculate order
point three components are taken into account; usage, lead time and safety stock. Gul Ahmed textile
mills usage rate refers to the anticipated rate at which a material will be used, so taking in account the
raw material for cotton lawn, its usage rate turns out to be Rs 85 per kg. The lead time i.e. the
estimated time interval between the placement of an order and the receipt of material for Gul Ahmed
textile mills (in case of raw cotton used for cotton lawn) turns out to be 7 days.
Whereas lastly the safety stock, the estimated minimum level of inventory needed to protect against
stock outs (running out of stock) occurring because of unforeseen events, for Gul Ahmed mills is
282,427,925.
So identifying through these components the order point for Gul Ahmed textile turns out to be
282,248,775 kg of raw cotton.
The calculation is as given below:
= 282,248,775
Economic Order Quantity
The order point establishes the time when an order should be places but it does not indicate the
most economical number of units to be ordered. To determine the quantity to be ordered for
Gul Ahmed Textile Mills we take in account “C” its cost of placing an order (involves of the
purchasing, receiving, inspection wages, the charges of telecommunications, stationery, software
and alike) which is Rs 450 per kg. The next thing we incorporate is “N” the number of units
required annually which is 3,690,989,817 for the organization and lastly we consider “K” the
annual carrying cost per unit inventory which is 3,493,333 for the organization. So the economic
order quantity according to the formula given below turns out to be 975.15 kg.
= 975.15 kg
Inventory System – Just in Time or Not?
Gul Ahmed Textile Mills does not follow a Just in time inventory system because it is a must for
the organization to have safety stock in order to protect itself from running out of the inventory. For
example the supply of raw cotton in case of floods can come to a stop so it is important for the
company to have its safety stock all prepared and another reason is that the textile industry is huge
with a great demand which eventually makes the organizations in this industry responsive to every
movement so they should be already well prepared for it.
The organization had a safety stock costing of Rs. 282,427,925 for the year 2017. Following is also
the cost break up of their consumption of raw materials which proves with such massive quantity
they don’t follow the just in time inventory system:
Details of Payroll
Gul Ahmed has two types of employees, permanent and contractual. The average number of permanent
employees who worked during the year 2016 was 6,210 and in 2017 they were 6,234 which show an
increase of 24 workers during the year. Moreover, the average number of contractual employees during
the year 2016 was 438 and in year 2017 they were 472 indicating an increase of 34 workers. The pay
for permanent and contractual workers varies according to their posts and the contracts given to them.
For example Muhammad Imran, a permanent payroll executive at Gul Ahmed is currently earning
PKR. 60,000. Further payroll break up is given below in the table.
Budgets
A budget is a plan for your future income and expenditures that you can use as a guideline for
spending and saving. The following budgets tend to analyze Gul Ahmed operations on a yearly
(2017) basis.
Sales Budget
2017
Budgeted Sales 8500
The budgeted sales for the year 2017 according to Gul Ahmed Studio were 8500 units. The
average selling price of all its products is almost Rs. 3000 making the budgeted revenue for a
year turns out be to be Rs. 25,500,000.
Production Budget
2017
Sales in units 8500
Add: desired Inventory 3400
Total needed 11900
Less: beginning Inventory 1050.07
Units to be produced 10849.93
The sale in units is 8500 units. The desired ending inventory is kept at a rate of 40% of the previous
year sales by the management. Therefore, the total needed becomes 11900 units. The beginning
inventory is also 40% of the last year ending inventory.
The production in units comes from the production budget. The material per unit is calculated by
dividing the total raw materials by the number of units. The production needs coming by
multiplying the production in units by the materials per unit. Beginning inventory comes from the
2016 purchases of materials making total materials to be purchased Rs. 2,370,558.
2017
2346531.3
Wage rate 73.797085
The direct labor budget tends to analyze the total direct labor cost incurred on the staff employed
in the production of Gul Ahmed Studio finished inventory. The production in unit comes from
the production schedule multiplied by the direct labor hours comes from the yearly hours spent
by the labor (11 hours*230days=2530 hours). The wage rate came from the total direct labor cost
incurred in previous year divided by number of staff. The total staff is 29000 and the cost
incurred is2,582,898 making the wage rate to be 73.797.
Gul Ahmed Studio Textile Ltd.
Overhead budget (000s)
Fixed cost 2017
Overhead Budget
The overhead budget analyzes the fixed and variable overheads incurred by Gul Ahmed Studio.
The total fixed overheads are 3989409.6 and the variable costs are 22700923.3 making the total
overheads to be Rs. 26690332.9
2016
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Sales in units 8500
The sales in units come from the revenue budget. Variable selling and administration rate
comes from dividing the expense by the total units sold. The fixed selling and administration
expenses come from the notes of the income statement, adding these two makes the total
expenses. The non-cash expenses include depreciation and amortization.
Budgeted Income statement
22
These calculations of Gul Ahmed textile clearly show the breakeven point of income over units.
At 300 units fixed expenses exceeds contribution margin which results in Net Income loss
whereas at 400 units there is no loss neither profit, this shows that breakeven point is near to 400
units of production. As we increase the quantity it results in profit.
Income 300 Income 400 Income 500
Units Units Units
Sales 150,000 200,000 250,000
Less: Variable 90,000 120,000 150,000
expenses
Contribution Margin 60,000 80,000 100,000
Less: Fixed Expenses 80,000 80,000 80,000
Net Income (Loss) (20,000) - 20,000
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Break Even Analysis
Breakeven is the point where the company’s total costs equal its total revenues resulting in zero
profits.
This is the minimum a company should achieve in sales to avoid a loss.
Step 1
The formula shows that given the financial statements of the company, the first step in
conducting break even analysis is to classify costs into fixed and variable components. So
the costs provided in the Income statement are classified into three categories i.e.
Fixed Cost
Variable Cost
Partial costs
Step 2
The partially variable and fixed costs are further decomposed into fixed and variable
components to get just two cost classifications to be used in breakeven formula i.e.
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Fixed cost and
Variable cost
These cost classification gives the total fixed cost and total variable cost amounts as determined
previously.
Step 3
The total sales of the company from income statement are as under:
Sales (000s)
Step 4
For calculating break even sales contribution margin %age is calculated by formula:
Step 5
25
The calculations for step 4 and 5 are as under:
2016 2017
Contribution margin %age 15% 19%
Break Even Sales 26838610.48 19225235.43
Flexible
Budget Sales Volume
Budget Actual Flexible Budget
Variance Variance
Variance
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Total Variable
11539926 21,370,233 21,330,075 9,830,307.18 U 9,790,149.68 U 40,157.50 U
Costs
Contribution
13,960,074 3,693,691 (2,532,132) (10,266,383.18) U (16,492,206.68) U 6,225,823.50 F
Margin
Fixed
Manufacturing
3,626,736 3,955,228 3,626,736 328,492 U - 328,492 U
Costs
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Conclusion & Recommendations
From analyzing Gul Ahmed’s costing process we conclude that:
• Not a favorable year for the business Sales and income went down
• Local sales flourished
We recommend that the company should work on promotional efforts to increase its exports, and
to get rid of the financial crunch. Focus on effective strategies to increase sales, as sales are
going down due to excess competition but the running and operating expenses are not. The
overhead budget showed huge outlays of cash for the company this means that the company is
not effectively managing its operating expenses and is becoming very risky so there is a need to
control and keep a check on them to bring them down.
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