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Cost

Evaluation
Coca Cola
Product

Figure 1

Submitted By
SherjiL Tahir

Table of Contents

Dedication
Introduction
Introduction of product
Element of Cost
Material

Labor

Hypothetical Data
Cost of Goods Sold St
Economic Order Quantity
Unit Cost
Inventory Management System
Reorder point

Max. level
Min. level

Danger level
Income Statement
Break-even Analysis
Break-even sales in Units

Break-even Sales in Rupees


Targeted Profit
Conclusion

DEDICATION

I dedicate this work to Mam Samana


Abbas.

am

very

thankful

to

my

respected Mam, who gave me such a


tremendous opportunity to enhance my
knowledge, confidence and exposure. I
could never have done without your
support and constant Encouragement. I
am very thankful to you for teaching me
to believe in myself.

Introduction Of Project
In this project we will discuss about the establishment of new business or a
new product. We will have brief analysis of cost occurring in producing a
specific product of a company. In this regard we will be able to have brief
proper cost analysis of that product.
For that purpose, we are assigned to select a company and its one single
product, about which we will do cost analysis that will give brief description
about the total costs that takes place in producing that specific product of a
selected company. If there is inventory then what would be the best way to
control that inventory. Then we will have a look on the break even Analysis
with two methods.

Introduction & History Of Coca Cola..


The Coca Cola beverage invented by pharmacist John Pemberton in 1886.
The formula and brand was bought in 1889 by Asa Candler who incorporated
the Coca Cola Company in 1892.In 1916, the company began manufacturing
its famous bottle, which remains signature shape of Coca Cola today. In
1928, Robert Woodruff, whom was the company's president at that time, led
the expansion of Coca Cola overseas when introduced the Coca Cola to the
Olympic Games for the first time. In the 1960s the company decided to
expand with new flavors Fanta, Sprite and Fresca, In addition it acquired the
Minute maid company, adding an entirely new line of business juices to the
company. The 1980s,a time of much change and innovation at the company.
The Introduction of diet coke which become the top low-calorie drink in the
world. The company's presence worldwide was growing rapidly and year
after year Coca Cola found a home in more and more places in the world. As
for today, Coca Cola has grown to be the world's most ubiquitous brand, with
more than 1.4 billion beverage servings sold each day.

In this regard I have selected the Coca Cola product. The product that I have
selected is 500ml bottle of coke. Coca-Cola is a carbonated beverage made
by the Coca Cola Company (Atlanta, GA, USA). It is produced in concentrate,
and then local bottlers make into the soda beverage. The single bottle is
about 20oz / 500ml. It is typically sold for immediate consumption. This
product generates a lot of sales and profit to Coca Cola Company. As we are
assigned I am taking the Hypothetical Data to evaluate the cost on smaller
scale.

Elements of Cost
Specific function (or a group of functions) which is considered a specific
entity for the purpose of estimating, controlling, and reporting costs.

There are three main Elements of Cost and are as Follows

Material
Labor
FOH

Material
In cost accounting, material is defined as the part of inventory. Basically,
material and raw material are used for same purpose. This is main part of
total cost of production. It can reduce or increase according to the fluctuation
in production. It can be direct or indirect Material.

Direct Material
Direct materials are those materials and supplies that are
consumed during the manufacturing of a product, and which
are directly identified with that product. Direct material used in 500ml Coke
are as Follows..

Syrup

caps for the bottles


labels
other ingredients to manufacture
any packaging of the product

Indirect Material
Material (as tools, cleaning supplies, lubricating oil) used in
manufacturing process which does not become an integral part of the
product and the cost of which is not identifiable with or directly chargeable to
it as compare to direct material. Well in this case the product which I have
chosen is 500ml Coke bottle the indirect material would be as follows

Oil for the machines that are used to manufacture the bottles
Electricity
Property taxes
Advertising

Labor
The cost of labor is the sum of all wages paid to employees, as well as the
cost of employee benefits and payroll taxes paid by an employer. The
workforce required to convert material into finished product is called labor.
The cost of labor is broken into direct and indirect Labor.

Direct labor

Direct labor includes labor costs that can be easily traced to a


finished product. The
Employees associated with direct labor can be physically and directly
associated with converting raw materials into finished goods. For Coca-Cola,
direct labor costs would be.

Wages of workers, specifically for those who assemble, cut, mix, package, or other tasks
that directly contribute to producing the product.

Indirect Labor

Cost is the cost incurred on those employees who do not directly


take part in the manufacturing process and cannot identified with the
individual cost centre For Coca Cola indirect labor costs may include cost for

Janitors
Inspectors or human resource departments.

Factory Overhead (FOH)


Factory or Manufacturing overhead consists of only indirect product costs.
These costs cannot be easily traced so specific products, but they are part of
the cost of getting a product ready to sell manufacturing overhead costs
incurred includes indirect labor, indirect materials, and plant related costs.
Coca-Colas manufacturing overhead costs would include

Equipment depreciation
Rent
Insurance, building, utilities, and maintenance for the factory and
equipment.
It would also include the cost of shipping and handling related to the
movement of finished goods from manufacturing locations to sale
distribution centers.

Hypothetical Data for Coke 500ml Bottle


Note : Sale Price of 500ml Bottle of Coke is 50 Rs.

No

Description

Amount

Opening Stock

10,000

Closing Stock

8,000

Net. Purchases

9,000

Direct Labor

1,000

FOH

3,000

OP work in progress

40,000

Closing work in progress

20,000

Op Finished Goods

30,000

Closing Finished Good

15,000

Coca Cola Company limited


Cost of goods sold statement
For the year ending December 31, 2015
Material
Add: OP Stock
10,000
Purchases
9,000
Less: Closing Stock
(8,000)
Material in Use
11,000

Direct Labor
1,000
Prime Cost
12,000
F.O.H
3,000
Total Factory overhead
15,000
Add: OP Work in Progress

40,000

Less: Closing work in Progress

(20,000)

20,000
Cost of Goods to be Manufactured
35,000
Add: OP finished goods

50,000

Less: Closing Finished goods

(35,000)

15,000
Cost of goods Sold
50,000

Unit Cost

A unit cost is the total expenditure incurred by a company to produce, store


and sell one unit of a particular product or service. Unit costs include all
fixed costs, or overhead costs, and all variable costs, or direct
material costs and direct labor costs, involved in production.

Unit Cost Formula


Total cost incurred
Units Produced

Unit Cost

Unit Cost

50 , 000
2, 000

Unit Cost

25 Rs.

Economic Order Quantity


In corporate finance, economic order quantity (EOQ) is the order quantity
that minimizes the total holding costs and ordering costs.

Required units = 2000 units


Order cost = 1,000 Rs
Annual carrying cost per unit = 10% of Unit Cost = 2.5

EOQ =

unit cost x carrying cost


2(Required Units)(Order cost )

EOQ=

EOQ=

2 ( 2000 ) (1000)
2.5

4000000
2.5
EOQ =

1267 units.

Inventory management system

Inventory management software is a computer-based system for


tracking inventory levels, orders, sales and deliveries. It can also be
used in the manufacturing industry to create a work order, bill of
materials and other production-related documents.

Inventory optimization

A fully automated demand forecasting and inventory optimization


system to attain key inventory optimization metrics.

Reorder point
The reorder point (ROP) is the level of inventory which triggers an action to
replenish that particular inventory stock. It is a minimum amount of an item
which a firm holds in stock, such that, when stock falls to this amount, the
item be reordered

Reorder point = Max. Consumption x lead time


= 2,000 x 6
=12000 units

Maximum level
Maximum level is that level of stock, which is not normally allowed to be
exceeded. Beyond the maximum stock level, a blockage of capital should be
exercised to check unnecessary stock. It increases the carrying cost of
holding unnecessary inventory level. It is the opportunity cost of holding
inventory.

Maximum Level = Order level minimum consumption x lead time


= 12000 1800 x 6
= 12000 10800
= 1200 units.

Minimum Level
Minimum level or safety stock level is the level of inventory, below which the
stock of materials should not be fall. If the stock goes below minimum level,
there is a possibility that the production may be interrupted due to shortage
of materials.

Minimum Level = Order level average consumption x lead time


= 12000 1900 x 3
= 12,000 5700
= 6,300 units.

Danger level
Danger level is a level of fixed usually below the minimum level. When the
stock reaches danger level, an urgent action for purchase is initiated.

Danger Level = Average consumption x emergency time

= 1900 x 1
= 1900 units.

Marginal Costing Income Statement


After the creation of CGS statement and calculation of EOQ, order level,
minimum level etc., now we need to calculate the profit earned by the
company through income statement. We will use the marginal costing
technique to calculate the profit earned by the company.
Income Statement under Marginal Costing Technique is as Follows..

Coca Cola Company limited


Income statement under marginal costing
For the year ending December 31, 2015
Description
Amount (Rs)

Sales
(50x1800)
Less: Variable Cost
Rent, rates, and taxes
Sales, promotion
Advertising
Technical Services
other Expense

7,000
2,000
3,000
1,000

500

(13,500)

Contribution Margin
76,500
Less: Op &admin. Expense
Rent, rates, and taxes
Product Transportation
Salaries, wages and Benefits
Inventory maintenance Expense
Research &
Development
3,000

8,500
9,000
13,500
4,500
(38,500)

Net. Profit
38000

Break-even Analysis of Coca Cola

90,000

As we have discussed briefly the Cost evaluation and income statement of


the company, lets put some light now on Break-even point of the company.
Break-even point of a company is the point where revenue becomes equal to
the cost and company is not generating any profitability. At this point, fixed
cost of the company is equal to Contribution margin. This point is actually
calculated by calculating break-even sales of the company which can further
be calculated by two methods viz., break-even sales in rupees or break-even
sales in units. Lets focus on our companys break-even point by both of
these methods.

Break-even Sales (BES) in Units

As we know that Break Even =

Cost
CM Per Unit

To Find CM per unit:


CM Per Unit = Sales Price per Unit VC per Unit
CM Per Unit =
=

50 7.5
42.5

Now
Break Even =

38,500
42.5

Break Even =

905.88

units.

Tabular Form
Sales

(50 x 905.88)

45,294

Less: VC

(7.5 x 905.88)

(16794.1)

Contribution Margin
Less: FC
Net. Profit

38,500
(38,500)
0

Break-even Sales in Rupees

We know that Break Even Sales =

Cost
C
Ratio
S

To find C/S Ratio


C/S Ratio = 13,500/18,000
C/S Ratio = 0.75
Lets Put the value now,

Break even sales =

38,500
0.75

=51333.33 Rs

Tabular Form

Sales

(50 x 905.88)

45,294

Less: VC

(7.5 x 905.88)

(16794.1)

Contribution Margin
Less: FC
Net. Profit

38,500
(38,500)
0

Targeted Profit
Now lets put some twist to our work of our project. Lets find the target profit
through all that process. To find the target profit of our company for any
specific period, we need to find targeted contribution margin and then we
need to find the amount of sales required to earn the target profit.
So, for that purpose lets assume company wants to earn a profit of 100,000
Rs. For that purpose we need to calculate the total CM and then we can find
sales which would be able to generate the targeted profit.
As we know that,
Contribution Margin Fixed Cost = Net. Profit
Or according to required condition, we can say that:
Targeted
Targeted
Targeted
Targeted

CM
CM
CM
CM

Fixed Cost = Targeted Profit


38,500 = 100,000
= 100,000 + 38,500
= 1,38,500

Now,

Bes for target profit in units =

Targeted CM
CM Per Unit
=

1,38,500
42.5

= 3258.8 units

Tabular Form

Sales

(50 x 3259)

1,62,950

Less: VC

(7.5 x 3259)

(24442.5)

Contribution Margin
Less: FC
Net. Profit

138507.5
(38,500)
100,000

Hence, its been proved that we need 3259 units to sell to earn the required
profitability which is 100,000.

Conclusion
In this project, I have learnt so many things that if we have entered into the
market with our brands than how many risks we will be facing along with
that we have come to know that how much investment do we need to start a
new business in the market. We also have calculated the minimum level,
maximum level, danger level, order level, reorder level, and unit costs which
helped us a lot to judge the company from different aspects. After having a
knowledge of cost evaluation of product, we also came to know that what
sales we should project in a certain era.
In this project, we have selected product Coke 500ml and then we have
evaluated the costs of it. We have calculated the Cost of Goods sold
statement to find the total cost incurred on production. Then we also found
the EOQ of manufacturing firm. Then we decided to find the most important
thing Break-even point of company which helped us knowing that if the
company will only be having sales of 45,294 then with the same cost then
there will be no profit for the company. On the other hand we also learnt how
to find the targeted profit which was 100,000 in a specific period then we
should do sale of at least 3259 units with same cost. That would help us to
earn profit of 100,000.