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. I 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-Cola’s 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
1 Opening Stock 10,000

2 Closing Stock 8,000

3 Net. Purchases 9,000

4 Direct Labor 1,000

5 FOH 3,000
 6 OP work in progress 40,000

7 Closing work in progress 20,000

8 Op Finished Goods 30,000

9 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

Unit Cost = Units Produced

50 , 000
Unit Cost = 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

unit cost x carrying cost

EOQ =
√ 2(Required Units)(Order cost )
¿
¿

EOQ= √ 2 ( 2000 ) (1000)

2.5

EOQ= √ 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 90,000
(50x1800)
Less: Variable Cost
Rent, rates, and taxes 7,000
Sales, promotion 2,000
Advertising 3,000
Technical Services 1,000
other Expense
500 (13,500)
Contribution Margin
76,500
Less: Op &admin. Expense
Rent, rates, and taxes 8,500
Product Transportation 9,000
Salaries, wages and Benefits 13,500
Inventory maintenance Expense 4,500
Research &
Development 3,000 (38,500)
Net. Profit
38000

Break-even Analysis of Coca Cola

As we have discussed briefly the Cost evaluation and income statement of
the company, let’s 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. Let’s focus on our company’s break-even point by both of
these methods.

 Break-even Sales (BES) in Units

¿ Cost
As we know that… Break Even = 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
38,500
Break Even = 42.5

905.88
Break Even = units.

 Tabular Form

Sales (50 x 905.88) 45,294

Less: VC (7.5 x 905.88) (16794.1)
Contribution Margin 38,500
Less: FC (38,500)
Net. Profit 0
Break-even Sales in Rupees

¿ Cost
We know that Break Even Sales = C
Ratio
S

To find C/S Ratio

C/S Ratio = 13,500/18,000
C/S Ratio = 0.75

Let’s Put the value now,

38,500
Break even sales = 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 38,500
Less: FC (38,500)
Net. Profit 0
Targeted Profit

Now let’s put some twist to our work of our project. Let’s 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 let’s 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 CM – Fixed Cost = Targeted Profit

Targeted CM – 38,500 = 100,000
Targeted CM = 100,000 + 38,500
Targeted CM = 1,38,500

Now,

Targeted CM
Bes for target profit in units = 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 138507.5
Less: FC (38,500)
Net. Profit 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.