Manufacturing of the pen holder

Project Topic:
Implications of the mechanics of Managerial Accounting

North South University

COURSE: MANAGERIAL ACCOUNTING (ACT 333)

SEMESTER: SPRING 2018
SECTION: 2
SUBMITTED TO: AFRIN RIFAT (ANI)
PREPARED BY:

DATE OF SUBMISSION: 16 TH MARCH,2016

  

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Letter of Transmittal

Date: April 8th, 2018

Afrin Rifat (Ani)

Lecturer

School of Business and Economics

North South University

Dear Faculty,

Attached please find the report entitled “Implications of the mechanics of Managerial
Accounting.” This report explains in detail the how we conducted the research on manufacturing
“Pen Holder” as North South University students in School of Business and Economics during
the Spring 2018 semester, for the assignment requested by your Managerial Accounting course.

We have tried our best to show our best knowledge to prepare this report and it also helped us to
enhance our knowledge and accounting skills. We would much appreciate if you read our report.
If you have any further queries, we will always be available to provide further clarifications.

Sincerely,

Your students

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Abstract
This is a replication of academic acquaintances through real-world work knowledge and
involvement. The idea is to provide business students an orientation to a real-life business
situation in which we can observe and evaluate the use and applicability of the theoretical
concepts which were taught in the classrooms. This report was prepared under the supervision of
Afrin Rifat (Ani) Lecturer, SBE, North South University.

The report presents the manufacturing process of pen holder, and the profitability of the stated
operation. We have carried out several calculations that will help us to analyze the state of the
industry. Per unit product cost and other related supporting cost has been calculated to determine
the investment required for such business. Additionally, demand for the product has been
forecasted to ensure that it is a viable venture. The report is concluded with preparation and
calculation of several budgets and costs, that helped us to ascertain the break-even and sensitivity
analysis.

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Table of Contents
1. Introduction Page no 5
2. Industry Analysis Page no 5
3. Manufacturing Process of Pen Holder Page no 6
4. Maximum Production Rate Page no 6-7
5. Production Cost Page no 8-9
6. Support Cost and Selling Cost Page no 9
7. Classification of Costs Page no 10
8. Full Cost Page no 11
9. Simple Costing System (Unit Product Page no 11
Cost)
10. Cost Strategy Page no 12
11. Activity Based Costing System Page no 13
12. Product Line Profitability Page no 14
13. Pricing Strategy Page no 15
14. Forecasting Page no 15-18
15. Budgeted Income Statement Page no 19
16. Budgeted Contribution Format Page no 19
Income Statement
17. Break-Even Point Page no 19
18. Margin of Safety Page no 20
19. Operating Leverage Page no 20
20. Sensitivity Analysis Page no 20

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1. Introduction

As per the requirement of the course, for the given assignment we have decided to manufacture
pen holder. We decided to manufacture the pen holder based on the fact that retailing pen holder
will be a profitable business. The raw materials required to make pan holder are coloring foam,
glass pot, marker, glue which are not only available to find in the market but also are relatively
cheap, which will contribute to a healthy margin of profit. The making process of pen holder is
also not that much tough and cost friendly that will enable us to expand our business rapidly.

We have conducted a small-scale research to determine the demand for pen holder, and we have
originated that there are many office, organization, school, college, universities, company and
there will be the need of pen holder as the stationary of those institution as well as in the home
and there is a growing demand for it. Our target is to increase the business’s production and
capture the market as soon as possible. As our pen holder is different from existing pen holders
in the market by design and cost, we strongly believe that we can meet our destination.

2. Industry Analysis

Our pen holder manufacturing can be classified as a component of handicraft industry. Our
business requires minimum investment and minimum standard employee. Therefore, when
compared with the amount invested, the output is relatively high. The handicraft industry in
Bangladesh constitutes of a wide range of operation, starting from upscale businesses to
downscale businesses. As we are new in the market of our main competition will be with the
downscale businesses, and hope to be a successful competing player in the handicraft industry of
Bangladesh in future.

Our will product will be competing with several online shops because people are now engaging
with online shopping that sells mainly pen holders or sells pen holder as a side product.
Additionally, small-scale pen holder manufacturers.

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3. Manufacturing Process of Pen Holder

To manufacture pen holder, the required raw materials are- coloring foams (white, black, yellow,
silver and blue), glass pot, cutter, glue and glue gun.

The process involves:

Step 1: After gathering the materials firstly we need to cut the yellow color foam according to
the measurement of the glass pot.

Step 2: Secondly, need to attach the yellow color foam with the help of the glue gun.

Step 3: The next step is to cut the blue color foam according to the size and then attach it on the
yellow foam.

Step 4: Then we have to cut the white, black and silver color foam accordingly to make the left
parts of the pen holder.

Step 5: The second last step is to positioning those black, white, silver parts on the glass pot with
the help of the glue gun to make our almost product complete.

Step 6: The last step is to complete the product design with the marker and then It will be a
complete product.

4. Maximum Production Rate

We will engage 6 labor and they will do their job according to the instructions. The following
table displays the distribution of their work based on per unit of production. Approximately 20
pen holder will be in a day.

Responsible for Estimated Time (minutes/unit)

Labor 1: Will cut the yellow color foam

Labor 2: Will attach the yellow foam in the glass pot

Labor 3: Will cut and attach the blue foam

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Labor 4: Will cut the white, black and silver color foam

Labor 5: Will paste the white, black and silver color foam on the pot

Labor 6: Will finish the design with the marker

Total time required:

Therefore, we will spend total 8 hours to produce 20 units of pen holder per day. By working 25

days per month, we will have the capacity to produce 500 units. There will be 60 units ending

inventory and 440 units will be prepared for sell.

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5. Production cost:

Direct materials (monthly cost):

Direct Material Amount

15inch∗15 taka 3,750 taka

Yellow foam × 500 unit
30inch

7.5inch∗15 taka 1,875 taka

Blue foam × 500 unit
30inch
Glass pot (20 taka × 500 unit) 10,000 taka
Total direct materials cost 15,625 taka

Direct labor:
Labor Wage (6 labor × 1500 per labor)
9000 taka
Total DL cost 9,000 taka

Manufacturing Overhead Budget (MOH):

Variable manufacturing Cost (taka)

overhead
Other foam (White, Black, Ash) 500

Glue 300

Marker 200

Utility expense 1,000

Total Variable manufacturing 2,000

overhead

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 Fixed manufacturing over head Cost (taka)

Rent expense 5000

Cutter ‘s and glue gun depreciation 20

Indirect labor (cleaning cost) 1000

Total Fixed manufacturing over 6020

head

Total Manufacturing overhead cost = (2,000+6,020)

taka
= 8,020 taka

6. Support cost and selling cost:

Support cost Amount Selling cost Amount

Administration department cost 500 Marketing cost 500

Distribution cost 500
Production department cost 1,000
Total Selling cost 1,000
Total Support cost 1,500

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7. Classification of cost

Accounts Direct Indirect Fixed Variable

cost cost cost cost
Direct materials
Yellow foam Yes Yes
Blue foam Yes Yes
Glass pot Yes Yes
Direct labor Yes Yes
Manufacturing overhead
Other foam (White, Black, Ash) Yes Yes
Glue Yes Yes
Marker Yes Yes
Utility expense Yes Yes
Rent expense Yes Yes
Cutter’s and glue gun depreciation Yes Yes
Cleaning labor cost Yes Yes
Support cost
Administration department cost Yes Yes
Production department cost Yes Yes
Selling cost
Marketing cost Yes Yes
Distribution cost Yes Yes

Prime cost Cost per unit Conversion cost Cost per

Direct material 31.25 unit
Direct labor 18 Direct labor 18
Prime cost per unit 49.25 MOH cost 16.04
Conversion cost per unit 34.04

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8. Full cost:

Items Cost per month

Direct Material 15625
Direct Labor 9000
MOH 8020
Support cost 1500
Selling cost 1000
Total full cost 35145

9. Simple Costing System (Unit product cost)

15625+ 9000
Per unit direct cost ( ) = 49.25 Taka per unit
500 unit
8020+1500+1000
Per unit indirect cost ( ) = 8.77 Taka per unit
1200 hour
Per unit cost = 49.25+8.77 Taka
= 58.02 Taka

We allocate indirect cost as allocation base of Direct Manufacturing Labor Hour,

(6 labor × 8-hour work per day × 25 days) = 1200 hour per month

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 10. Cost strategy
We divided the support department cost into two categories, they are administration department
and production department. These support department cost will be allocated to the operating
department- manufacturing and selling departments

Administration to a) manufacturing 60%

b) Selling 40%

Production to a) manufacturing 70%

b) Selling 30%

Support department Operating department Total

Administration Production Manufacturing Selling
Budgeted cost 500 1000 32645 1000 35145
Allocation of (500) ------ 500×60%=300 500×40%=200
administration

Allocation of ------ (1000) 1000×70%=700 1000×30%=300

production

Cost after 0 0 33645 1500 35145

allocation

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11. Activity based costing system
Activity Cost driver Reasons behind the Budgeted Budgeted Budgeted
selection of the cost indirect allocation activity
driver cost base rates

Other foam Units to be Increase with the units 500 taka 500 units 1 taka
(White, Black, produced
Ash)
Glue Units to be Increase with the units 300 taka 500 units 0.6
produced taka/unit
Marker Units to be Increase with the units 200 taka 500 units 0.4
produced taka/unit
Utility expense working Increase with the 1,000 taka 200 hours 5
hours working hours taka/hour
Cutter’s and Units to be Increase with the units 20 taka 500 units 0.04
glue gun produced taka/unit
depreciation
Indirect labor Indirect Increase with the 1,000 taka 200 hours 5
labor hours indirect labor hour taka/hour
Rent expense Units to be Increase with the units 5000 taka 500 unit 10
produced taka/unit
Administration Working Increase with working 500 taka 100 hours 5
hours hour in Administration taka/hour
production Working Increase with working 1000 taka 200 hours 5
hours hour in production taka/hour
Marketing unit sells Increase with no of 500 taka 440 units 1.136
unit sells
Distribution unit sells Increase with no of 500 taka 440 units 1.136
unit sells
Total MOH & Support cost per unit
34.312 taka/unit

Per unit cost:

Items Cost per unit
Direct materials 31.25 per unit
Direct labors 18 taka
MOH and support cost 34.312 taka
Total 83.56 taka

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12. Product Line Profitability
A) Simple Costing System
Revenue 95 Taka

Direct cost per unit (49.25) Taka

Indirect cost (8.77) Taka

Total profit 36.98 Taka

36.98
Operating Profit Margin Ratio = × 100
95
=38.93%

B) Activity Based Costing

Revenue per unit 95 Taka System
Direct cost (49.25) Taka
Indirect cost (34.314) Taka
Total profit 11.436 Taka

11.436
Operating Profit Margin Ratio = × 100
95
=12.037%

The difference is because in simple costing system we used only one allocation base to allocate
all the indirect cost. Under ABC as we allocate the cost based on the activity used by each
product as a result we get more accurate result. Under Simple Costing method the Operating
profit margin ratio is 38.93%, whereas under ABC costing approach the ratio is 12.037%.

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13. Pricing Strategy
Cost per Unit 83.56 taka / unit
Estimated Sales (unit) 440 units
Selling price per unit 95 Taka
Full Cost 35145 Taka
Target Operating Income 6655 Taka
Mark up percentage 18.94%

We have select our pricing decision based on both Cost base & Market-based strategy. We
choose this pricing strategy so that we can be a competing player in the market. By analyzing all
the strength and weakness of our competitors, we have decided to set our selling price 95 TAKA
per unit. Though our competitor sold their product at a higher price around (100-110) TAKA per
unit and gave the same quality as we provide. But we decide to sell our product at a lower price
rather than our competitor so we can get extra benefits from our target customer as well as grab
more customers.

14. Forecasting
Schedule 1: Sales revenue budget
Product Units Selling price Revenue

Pen holder 440 95 41800

Schedule 2: Production budget

Pen holder
Budgeted sales in units 440
Add: ending inventory 60

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Units to be produce 500

Schedule 3(A): Direct material usage budget

Physical unit need

Yellow foam 15 inch × 500 unit 7500 inch

Blue foam 7.5 inch × 500 unit 3750 inch

Glass pot 1 piece × 500 unit 500 piece

Cost of direct material

Yellow foam 7500 inch × 0.5 taka per inch 3750 taka

Blue foam 3750 inch × 0.5 taka per inch 1875 taka

Glass pot 500 piece × 20 taka per piece 10000 taka

Total 15625 taka

Schedule 3(B): Direct material purchase budget

Yellow foam Blue foam Glass pot

Production needs 7500 inch 3750 inch 500 piece

Add: Ending inventory 1125 inch 562.5 inch 75 piece

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Need to be purchase 8625 inch 4312.5 inch 575 piece

Direct material purchase cost budget

Yellow foam 8625 inch × 0.5 taka per inch 4312.5 taka

Blue foam 4312.5 inch × 0.5 taka per inch 2156.25 taka

Glass pot 575 piece × 20 taka per piece 11500 taka

Total 17968.75 taka

Schedule 4: Direct labor cost budget

Unit DL hour per Total DL hour Wage rate per Total DL cost
unit DL hour
500 0.41666 1200 7.5 9000

Schedule 5: Manufacturing overhead budget (MOH)

Variable MOH 2000 taka
Fixed MOH 6020 taka
Total 8020 taka

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 Schedule 6: Target ending inventory budget
Direct material

Yellow foam 1125 inch × 0.5 taka per inch 562.5 taka

Blue foam 562.5 inch × 0.5 taka per inch 281.25 taka

Glass pot 75 piece × 20 taka per piece 1500 taka

Total 2343.75 taka

××Ending finished goods = 60 unit × 65.29 taka per unit = 3917.4 taka××

Schedule 7: Cost of goods sold budget

Accounts Taka Total
Beginning inventory 0

Add: Cost of goods manufacture

Direct material 15625

Direct labor 9000

Manufacturing overhead 8020 32645

Total cost of goods available for sell 32645

Less: ending finished goods inventory (3917.4)

Cost of goods sold 28727.6

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15. Budgeted income statement:
Revenue 41800
Less: Cost of goods sold (28727.6)
Gross profit 13072.4
Less: operating expense
Administration cost 500
Production cost 1000
Marketing cost 500
Distribution cost 500 (2500)
Net operating income 10572.4

16. Budgeted contribution format income statement:

Total Per unit

Sales revenue 41800 95
Less: variable cost (17270) (39.25)
Contribution margin 24530 55.75
Less: Fixed cost (15520) (35.27)
Operating income 9010 20.48

17. Break-even point:

15520
Unit sells = = 278.38 ≈ 279 units
55.75
Revenue = 279 unit × 95 Taka per unit = 26505

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18. Margin of safety:

Margin of safety = (41800-26505) Taka

= 15295 Taka

15295
Margin of safety % = × 100
41800
= 36.59 %

19. Operating leverage:

24530
Operating leverage =
9010

= 2.722 Times

20. Sensitivity analysis:

a) 10% increase in demand of product will result (2.722 * 10) = 27.22% increase in operating
income

b) 15% decrease in demand of product will result (2.722 * 15) = 40.83% decrease

in operating income.

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