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Gul Ahmed Textiles

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

Economic Order Quantity...................................................................................................................................................... 13


Inventory System – Just in Time or Not?...................................................................................................... 13
Scrap, Spoiled or Defective Goods............................................................................................................... 14
Details of Payroll.......................................................................................................................................... 14
Details of Taxes............................................................................................................................................. 15
Budgets......................................................................................................................................................... 15
Sales Budget.............................................................................................................................................. 15
Production Budget..................................................................................................................................... 16
Direct Material Purchases Budget............................................................................................................. 16
Direct Labor Budget.................................................................................................................................. 17
Overhead Budget....................................................................................................................................... 20
Selling & Admin Expense Budget............................................................................................................. 20
Budgeted Income statement.......................................................................................................................... 21
Cost Volume Profits...................................................................................................................................... 22
Break Even Analysis..................................................................................................................................... 24
The Budgeted & Actual Costs....................................................................................................................... 26
Conclusion & Recommendations.................................................................................................................. 28
Introduction

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.

Manufacturing Process of Gul Ahmed


Each step is carefully planned. They have a fully integrated services facility that uses the latest
technology across all parts of the products' voyage. For this reason, Gul Ahmed products never lose
their way.

Spinning

The term 'spinning' is used to denote the process in the


production of the yarn. The raw cotton arrives in the form of
large bales. From here, the cotton goes to a machine which
cleans the cotton of any remaining dirt and separates the fibers.
The cotton emerges in the form of a thin blanket.
Weaving

'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

Yarn Dyeing is a process of adding color to textile products


like fiber and yarn. It is normally done in a special solution
containing dyes and particular chemical material. After dyeing,
dye molecules have an uncut chemical bond with the fiber
molecules. The temperature and time control are two key
factors in dyeing. There are mainly two classes of dye, natural
and man-made.
Wet Processing/Finishing

If required, the created fabric is reduced in size by


steeping it in diluted acid and then rinsing it. Enzymes
may also be used. 'This is known as 'de-sizing'. If the
Fabric in question is cotton, then it is chemically
washed to remove impurities such as natural wax, non-
fibrous impurities and any dirt that may time been
accumulated over the previous process.

Cutting and Stitching

The finished fabric will now be changed into products. It


goes through the process of cutting and stitching, where one
of numerous techniques may be applied depending on
which type of product is required.
Retail and Distribution

By creating a retail network where each shop is specialized


to suit a certain type of customer, Gul Ahmed focuses on
satisfying each customer via ease of access and the widest
ranges. Gul Ahmed fabric is distributed throughout Pakistan
via a distribution network of independent retail outlets and
fabric stores.

Job Order Costing System


Gul Ahmed textile mills follow a job order costing system; it involves the accumulation of the costs
of materials, labor, and overhead for a specific job. This approach turns out to be an excellent tool
for the company as it helps in tracing specific costs to individual jobs and examining them to see if
the costs can be reduced in later jobs. Essentially, job order costing is attempting to measure the
cost of manufacturing a single unit for a particular job order. It is simple to find the cost per order.
Take the sum of the cost of materials, cost of labor and allocated overhead and divide by the
number of produced for a particular job order.
Direct Material Costs, Direct Labor Costs & Factory Overhead
Gul Ahmed textile mills direct material is listed in the following table.

Direct Materials in Departments Cost

• 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:

Direct Labor Cost

Direct labor in PKR 150,000


Weaving department
Direct labor in Stitching PKR 1,000,000
department
Other departments PKR 210,000
(Embroidery)
Total Direct Labor PKR 1,360,000
Factory overheads included the basic rent of the factory, the electricity bills, and miscellaneous.

Total factory overheads PKR

(Rent, bills & miscellaneous) 5,000,000

The total Cost of Goods Manufactured hence turns out to be Rs 4,035,000.

PKR PKR

Beginning work in progress 0

Manufacturing cost of
production: Direct
materials 675,000
Direct labor 1,360,000
Factory Overheads 2,000,000

Total manufacturing cost 4,035 ,000

Total cost of all Work in 4,035 ,000


process
Less ending work in progress 0

Cost of goods manufactured 4,035 ,000


Fixed & Variable Cost Analysis

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:

Gul Ahmed Studio Textile Ltd.

Fixed Costs (000s)


Fixed cost 2016 2017

Administrative expenses (Fixed cost) 891,511 808,926


Financing cost (Fixed cost) 1,375,463 1,097,981

Distribution cost- fixed component


Insurance (fixed cost) 6,519 3,878
Advertisement and publicity (fixed cost) 334,905 292,550
Depreciation (fixed cost) 59,387 45,412
Amortization (fixed cost) 1,614 1,808
other expenses (fixed cost) 36,673 23,682

Other expenses - fixed component


workers' welfare fund (fixed cost) 31,377
loss on sale of property plant equipment (fixed 44
cost)
Property, plant and equipment scrapped (fixed 609 2,657
cost)

Cost of sales- fixed component


Insurance (fixed cost) 82,231 75,076
Repairs and maintenance (fixed cost) 558,694 651,415
Depreciation (fixed cost) 607,578 591,974
Total fixed cost 3,955,228 3,626,736

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.

Gul Ahmed Studio Textile Ltd.

Variable Costs (000s)


Variable cost 2017 2016

Income tax expense (Variable Cost) 238,947 340,997

Distribution cost- variable component


Freight and shipment expenses (variable cost) 164,782 177,054
Staff cost (variable cost) 333,845 257,719
Cost of samples transferred from COGM (variable cost) 85,586 50,799
Rent rates and taxes (variable cost) 239,888 195,929
Export development surcharge (variable cost) 35,466 41,757

Other expenses - variable component


Workers' profit participation fund (variable cost) 82,570

Cost of sales- variable component


Opening Stock of finished goods (variable cost) 6,216,882 3158863

Raw material consumed (variable cost) 10,225,755 10,733,599


Stores consumed (variable cost) 2,615,106 2,518,573
Staff cost (variable cost) 2,281,152 2,126,625
Fuel, power and water (variable cost) 1,751,515 1,488,592
Other expenses (variable cost) 77,213 71,585
Cost of sample shown under distribution cost (variable cost) (85,586) (50,799)

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)

Total variable Costs 21,370,233 20,637,203

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:

= (10 x 85) + 282,427,925

= 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.

EOQ = √ 2 x 450 x 3,690,989,817/ 3,493,333

= 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:

Raw material consumed

Opening balance 3,166,889,880


Purchases 15,425,588,394
18,592,478,274
Closing stock (3,690,989,817)
Total 14,901,488,457

Scrap, Spoiled or Defective Goods


Gul Ahmed textile mills does consists of the scrap, spoiled or defective goods, in their terms they
refer it as the waste and they are amounted to the costs in their Stock in trade portion. For the year
2016 the waste was amounted to Rs. 39,905,721 and for the year 2017 was amounted to Rs.
17,500,140. The reason behind including this as an amount as cost is because the waste is to be
used by the textile mills, these wastes are majorly utilized in the production of pillow covers and
cushion covers.

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.

Unskilled labor 9 - 11,000


Skilled labor 18 – 22,000
Details of Taxes
Current year: The charge for current taxation is based on taxable income at the current rate of
taxation after taking into account are tax regime, applicable tax credit, rebates and exemptions
available, if any. However, for income covered under taxation is based on applicable tax rates under
such regime. Taxation for the current year involves:

Income tax: 30%

General sales tax: 16%


Taxation

`Current – for the year 298,606,425


Current – prior year (8,771,354)
Deferred (36,217,866)
Total 253,617,205

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

Selling price per unit 3000


Total Revenue 25,500,000

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.

Direct Material Purchases Budget


2017

Production in units 9274.

Materials per unit 241.1

Production needs 22363

Add: desired ending inventory 8945

Total needed 31309

Less: beginning Inventory 760367

Materials to be purchased 2,370,558

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.

Direct Labor Budget

2017

Production in units 9274.

Direct Labor hours 2,530

2346531.3
Wage rate 73.797085

Total direct labor cost 17316717.

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

Administrative expenses (Fixed cost) 889818.6


Financing cost (Fixed cost) 1207779.1
0
Distribution cost- fixed component 0
Insurance (fixed cost) 4265.8
Advertisement and publicity (fixed cost) 321805
Depreciation (fixed cost) 49953.2
Amortization (fixed cost) 1988.8
other expenses (fixed cost) 26050.2
0
Other expenses - fixed component 0
workers' welfare fund (fixed cost) 34514.7
loss on sale of property plant equipment (fixed cost) 0
Property, plant and equipment scrapped (fixed cost) 2922.7
0
Cost of sales- fixed component 0
Insurance (fixed cost) 82583.6
Repairs and maintenance (fixed cost) 716556.5
Depreciation (fixed cost) 651171.4
0
Total fixed cost 3989409.6
Variable cost 2017

Income tax expense (Variable Cost) 375096.7


0
Distribution cost- variable component 0
Freight and shipment expenses (variable cost) 194759.4
Staff cost (variable cost) 283490.9
Cost of samples tranferred from COGM (variable cost) 55878.9
Rent rates and taxes (variable cost) 215521.9
Export development surcharge (variable cost) 45932.7
0
Other expenses - variable component 0
Workers' profit participation fund (variable cost) 90827
0
Cost of sales- variable component 0
Opening Stock of finished goods (variable cost) 3474749.3
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0
Raw material consumed (variable cost) 11806958.9
Stores consumed (variable cost) 2770430.3
Staff cost (variable cost) 2339287.5
Fuel, power and water (variable cost) 1637451.2
other expenses (variable cost) 78743.5
cost of sample shown under distribution cost (variable cost) -55878.9
0
Work in process 0
Opening (variable) 184005.8
Closing (variable) -341176
Purchases and processing charges (variable) 6383414.4
Closing stock of finished goods (variable) -6838570.2
0
Total variable Costs 22700923.3

Total overhead Rs. 26690332.9

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

Selling & Admin Expense Budget

2016

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Sales in units 8500

Variable Selling & Admin rate 95.167764

Variable expense 8089

Fixed Selling & Admin expense 3989409

Total expense 4798335

Less: noncash expenses 703113

Cash disbursements 4095222

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

Budgeted Income Statement 2017


Sales revenue 25,500,000
Cost of sales 20,910,000
Gross Profit 4,590,000

Distribution cost 404,063


Admin expenses 889,818.6
Other operating expenses 37,437.4
Operating Profit 1,808,369.5
Financing costs 1,372,345
Profit before taxation 436,024.5
Income tax expense 130,807.35
Total Profit/Loss 305,217
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The income statement shows a forecast for the profitability for Gul Ahmed Studio. The cost of
sales was 82% of sales as anticipated by the management. The distribution, administrative and
other fixed and operating expenses came from the overhead budget. The financing costs figure
was also given to us by the management leading to a net profit of 305,217.

Cost Volume Profits

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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.

The breakeven point can be calculated by the under-mentioned formula:

Break even revenues= Fixed Cost/(Sales – Variable Cost)

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:

Gul Ahmed Studio Textile Ltd.

Sales (000s)

Sales 2016 2017


Net Sales 25,063,924 25,435,465

Step 4

For calculating break even sales contribution margin %age is calculated by formula:

C.M Margin= (Sales – Variable cost)/Sales

Step 5

Break even sales are calculated.

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The calculations for step 4 and 5 are as under:

Gul Ahmed Studio Textile Ltd.

2016 2017
Contribution margin %age 15% 19%
Break Even Sales 26838610.48 19225235.43

The Budgeted & Actual Costs

Flexible
Budget Sales Volume
Budget Actual Flexible Budget
Variance Variance
Variance

Units Sold 3390 6266 6266 2876 2876 0

Selling Price 3000 4000 3000 1000 0 1000

Revenues 25,500,000 25,063,924 18,797,943 (436,076.00) U (6,702,057.00) U 6,265,981.00 F

Variable cost per


3,404 3,411 3,404 6.41 - 6.41
Unit

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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

Operating Income 10,333,338 (261,537) (6,158,868) (10,594,875.18) U (16,492,206.68) U 5,897,331.50 F

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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

• Exports however saw a downfall

• Observed increased financing expenses



• Expected and actual results are not even close Forecast is not accurate

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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