Manufacturing of Candle

Implications of the
Mechanics of
Managerial Accounting

Prepared For: Prepared By: The Accountants

Arfin Rifat (Ani) Marcia Amin 1330257030
Lecturer MD. Rabbir Hossain Bhuyain 1411551630
Managerial Accounting (ACT333.1) MD. Rayhan Mia 1430156630
School of Business and Economics Samaun Sarwar Khan 1331050030
North South University Shahed Jaigirdar 1510641030
Letter of Transmittal
Date: July 3rd, 2017
Arfin Rifat
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
candles as North South University students in School of Business and Economics during the
Summer 2017 semester, for the assignment requested by your Managerial Accounting course.

We have tried to employ our best knowledge to prepare this report as meticulously as possible and
it sure has offered us the opportunity 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,
The Accountants
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

Arfin Rifat, Lecturer, SBE, North South University.

The report incorporates the manufacturing process of candles, and the profitability of the stated

operation. To comprehend the worthwhile of the business, 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.

Table of Contents
1. Introduction .......................................................................................................................................... 1
2. Industry Analysis.................................................................................................................................... 1
3. Manufacturing Process of Candle.......................................................................................................... 1
4. Maximum Production Rate.................................................................................................................... 2
5. Production Cost ..................................................................................................................................... 2
6. Support Cost and Selling Cost................................................................................................................ 3
7. Classification of Costs ............................................................................................................................ 4
8. Full Cost ................................................................................................................................................. 4
9. Simple Costing System (Unit Product Cost) ........................................................................................... 5
10. Cost Strategy ..................................................................................................................................... 5
11. Activity Based Costing System ........................................................................................................... 5
12. Product Line Profitability ................................................................................................................... 6
13. Pricing Strategy.................................................................................................................................. 7
14. Forecasting ........................................................................................................................................ 8
15. Budgeted Income Statement .......................................................................................................... 10
16. Budgeted Contribution Format Income Statement ......................................................................... 11
17. Break-Even Point ............................................................................................................................. 11
18. Margin of Safety .............................................................................................................................. 11
19. Operating Leverage ......................................................................................................................... 11
20. Sensitivity Analysis........................................................................................................................... 12
1. Introduction
As per the requirement of the course, for the given assignment we have decided to manufacture
decorative candles. The decision was based on the fact that retailing home-made candles will be a
profitable venture, since the business can be initiated with minimum overhead. The raw materials
required such as wax and oil are relatively cheap and widely available, which will contribute to a
healthy margin. Additionally, the candle making process is also facile and easy to master, that will
enable us to expand our business rapidly.
We have conducted a small-scale research to determine the demand for decorative candles, and
have originated that there is a growing demand for it. Our objective is to escalate the business’s
production by the upcoming holiday season to take advantage of the increasing demand during
that period.

2. Industry Analysis
Candle manufacturing can be classified as a component of handicraft industry, which is yet to
proper in Bangladesh. Since it is a home-based industry it requires minimum investment and has
high-employment potential. 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. At the initial stage of our employment we will be
competing with the downscale businesses, and hope to be a competing player in the handicraft
industry of Bangladesh in future.
Our will product will be competing with several online shops that sells candles such as- Milton
Candle, Alita Arts & Crafts, and Candle Artisan. Additionally, small-scale candle manufacturers
that supplies to gift shops (Purple Haze, 1 to 99, Hallmark, etcetera) in Dhaka will also be
considered as a major competitor.

3. Manufacturing Process of Candle

To manufacture candles, the required raw materials are- paraffin wax, wick, oil-based dyes, glass
and a double boiler.
The process involves:

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 i. Cutting the wax and placing the wax shavings in a bowl in boiling water. The wax should be
heated until it melts.
ii. Oil-based scents and colors will be added to the melted wax.
iii. With the help of a wooden stick, the wick will then be placed in the center of the candle.
iv. Later, the melted wax will be poured into the container.
v. The wax will then be left to cool until it solidifies, which will take approximately twelve hours.
vi. After the wax hardens completely, it can but shaped according to suitable design.

4. Maximum Production Rate

Our team consists of 5 participants, and we opted to allocate the task proportionately. The
following table displays the distribution based on per batch of production, since the product will
be produced in batches. Approximately 12 candles will be assembled per batch.
Responsible For Estimated Time (minutes/batch)
Labor 1 Shaving the wax and heating it 60
Labor 2 Stirring the mixture and adding scents and colors 60
Labor 3 Sticking the wick 5×12
Labor 4 Solidifying the wax 60
Labor 5 Shaping the candle 5×12
Total time required: 300
Therefore, we will devote nearly 5 hours in total to produce twelve candles per day. By working
twenty days per month, we will have the capacity to produce 240 units.

5. Production Cost
Direct material purchase

Direct materials Cost per unit Cost

Paraffin wax 33 9108
Wick 2.25 621
Dye 2.25 621
Glass 10 2760
Total 47.5 TK/unit 13110 TK

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 Direct Material (Monthly cost)
120𝑔𝑚×275𝑇𝐾 7920 TK
Paraffin Wax ×240
1000𝑔𝑚
4.5 𝑖𝑛𝑐ℎ×6𝑇𝐾 540 TK
Wick ×240
12 𝑖𝑛𝑐ℎ
15𝑔𝑚×150𝑇𝐾 540 TK
Dye ×240
1000𝑔𝑚

Glass 10×240 2400 TK

Total DM cost 11400 TK
Direct Labor (Monthly Cost)
Wage Rate 5×3000𝑇𝐾 15000TK
Total DL cost 15000 TK
Manufacturing Overhead
Indirect Material
Stove (Depreciation) 50TK
Double Boiler 800TK
Cutter 150 TK
Bowl (3 pieces) 150 TK
Utility Expense 1750 TK
Indirect Labor
Cleaning Labor 2000 TK
Rent Expense 5000TK
Total Manufacturing Overhead 9900 TK

6. Support Cost and Selling Cost

Support Cost:
Procurement Cost 600 TK
Home-based Call Centre Cost 800 TK
Total Support Cost 1400 TK/month
Selling Cost:
Marketing Cost 1000 TK
Distribution Cost 2500 TK
Total Selling Cost 3500 TK/month

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7. Classification of Costs
Direct Indirect Fixed Cost Variable
Cost Cost Cost
DIRECT MATERIAL
Paraffin Wax
Wick
Dye
Glass
DIRECT LABOR
MANUFACTURING OVERHEAD
Double boiler
Deprecation (stove)
Cutter
Bowl
Utility expense
Cleaning Labor
Rent expense
SUPPORT COST
Procurement
Home-based Call Centre
SELLING COST
Marketing
Distribution

Prime Cost Cost Per Unit Conversion Cost Cost Per Unit
Direct Material 47.5 TK Direct Labor 62.5 TK
Direct Labor Cost 62.5 TK MOH Cost 41.25 TK
Prime Cost Per Unit 113 TK Conversion Cost per unit 103.75 TK

8. Full Cost
Cost (per month)
Direct Material 11400 TK
Direct Labor 15000 TK
Manufacturing Overhead 9900 TK
Support Cost 1400 TK
Selling Cost 3500 TK

Full Cost 41200 TK

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9. Simple Costing System (Unit Product Cost)
26,400
Total Direct Cost per Unit: = 110 TK/unit
240
9900+1400+3500
Total Indirect Cost per Unit (labor hour as allocation base): = 12.33 TK/unit
1200

Unit product cost: 110+12.33= 122.33 TK/unit

10. Cost Strategy

The support cost of the operation is divided into two categories- Procurement Cost and Home-
based Call Centre Cost. The cost will be allocated to the operating department via direct method.
Direct Method
Support Departments Operating Departments
Procurement Home-based Manufacturing Selling Total
Call Centre
Budgeted 600 800 36300 3500 41200
Overhead Cost
Support Cost by (600) ____ 80%x600 20%x600
Procurement = 480 = 120
Support Cost by ____ (800) 50%x800 50%x800
Home-based Call = 400 = 400
Centre
Total 37180 4020 41200
cost(allocated)

11. Activity Based Costing System

Activity Total Budgeted Budgeted Cause Effect Relationship
Budgeted Quantity of Indirect Cost
Indirect Allocation
Cost Base
Cutting 150 TK 240 units 0.625 TK/unit Increases with unit
Utility 1750 TK 100 hours 17.5 TK/hr Increases with number of
hours worked

Cleaning 2000 TK 100 hours 20 TK/hr Increases with numbers of

Labor hours worked

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 Distribution 2500 240 unit 10.42 Tk/unit Number of unit produced.

Procurement 600 TK 80 orders 7.5 TK/order Increases with number of

orders
Home-based 800 TK 90 clients 8.89 TK/client Increases with number of
call center clients

Direct Costs
11400 47.5 TK/unit
Direct Material 240
15000 62.5TK/unit
Direct Labor 240

Total Direct Cost per unit 110 TK/unit

Indirect Costs
Cutting 0.625TK/unit
Utility 17.5TK/hr
Cleaning 20 TK/hr
Procurement 7.5TK/order
Distribution 10.42TK/unit
Home-based call center 8.89 TK/client
Total Indirect Cost per unit 64.94 TK/unit
Total Cost per Unit 174.94 TK/unit

12. Product Line Profitability

Simple Costing
Revenue 210𝑇𝐾×210𝑢𝑛𝑖𝑡 44100 TK
Direct Cost (26400 TK)
Indirect Cost (9900TK)
Profit 7800 TK

7800
Operating Profit Margin Ration= 44100 ×100 = 17.69%

6
ABC Costing
Revenue 44100 TK
Direct Cost
Direct Material (11400 TK)
Direct Labor (15,000 TK) 17700 TK
Indirect Cost
Cutting 150 TK
Utility 1750 TK
Cleaning 2000 TK
Procurement 600 TK
Home-based call center 800 TK
Distribution cost 2500 TK (7800 TK)
Profit 9900TK

9900
Operating Profit Margin Ratio= 44100 ×100 = 22.45%

In general, ABC costing system is a better approach, however, for our operation the results vary
insignificantly. Under Simple Costing method the Operating profit margin ratio is 17.69%,
whereas under ABC costing approach the ratio is 22.45%.

13. Pricing Strategy

We have established our pricing decision based on both Cost base & Market-based strategy, in
order to be a competing player in the market. By analyzing the price of our competitors, we have
set our price to be 210 TK per piece.

Cost Per Unit 174.94 TK/unit

Estimated Sales (unit) 210 units
Full Cost 41,200
Target Operating Income 2900 TK
Mark up percentage 7.04%
Price per unit 210

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14. Forecasting
We are estimating that the demand for our product will be 300 units, however, due to lack of
capacity 240 units will be produced. Of the production piece of 240 units, 30 units will be stored
as ending inventory.
Total Budgeted Production = 240 units
Budgeted Sales= 210 units
Target ending inventory= 30 units
No beginning inventory since it is a start-up business

Schedule 1: Sales Budget

Revenue= 210𝑇𝐾×210𝑢𝑛𝑖𝑡 = 44100𝑇𝐾

Schedule 2: Production Budget

Budgeted unit sales 210 units
(+) Ending Inventory 30 units
Total units to be produced 240 units

Schedule 3(A): Direct Material Usage Budget

Paraffin Wax Wick Dye Glass Total

Paraffin Wax 120𝑔×240
= 28800 g
Wick 4.5𝑖𝑛𝑐ℎ×240
= 1080 inch
Dye 15𝑔×240
= 3600 g
Glass 240
Units to be produced
Paraffin Wax 28.8×275
= 7920 TK
Wick 90𝑓𝑒𝑒𝑡 ×6
= 540 TK
Dye 3.6×150
= 540 TK
Glass 10×240 11400
= 2400 TK

8
Schedule 3(B): Direct Material Purchase Budget
Paraffin Wax Wick Dye Glass Total
Paraffin Wax 28.8 kg
Wick 90 feet
Dye 3.6kg
Glass 240
Total 28.8 kg 90 feet 3.6 kg 240
Ending 4.32 13.5 feet .54kg 36
Inventory

×275 ×6 ×150 ×10

Direct 9018 621 621 2760 13020
Material to
be purchased

Schedule 4: Direct Labor Cost Budget

Units DMLH DML Wage Rate Total Cost
240 2.083 500 30 15000

Schedule 5: Manufacturing Overhead Budget

Variable MOH
Double Boiler 800
Stove (Depreciation) 50
Cutter 150
Bowl 150
Utility 1750
Fixed MOH
Cleaning Labor 2000
Rent Expense 5000
Total 9900 TK

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Schedule 6: Target ending Inventory Budget (Finished goods)
Direct Material Ending Inventory Cost Per Unit Total
Paraffin Wax 30 33 990
Wick 30 2.25 67.5
Glass 30 10 300
Dye 30 2.25 67.5
Total 1425

Schedule 7: Cost of Goods Sold Budget

Beginning inventory 0
Cost of goods manufacture:
Direct material used (3A) 11400
Direct labor (4) 15000
Manufacturing overhead (5) 9900
Total cost of goods available for sale 36300
Target ending inventory (1425)
34875

15. Budgeted Income Statement

Revenue 44,100
(-) Cost of Goods Sold 34,875
Gross Profit 9,225
Operating Cost
Procurement Cost 600
Home-based call center 800
Marketing Cost 1000
Distribution Cost 2500 4,900
Operating Income 4,325

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16. Budgeted Contribution Format Income Statement
Total Per Unit
Sales 44100 210
(-) Variable Cost (9430) (38.6)
Contribution Margin 34670 171.4
(-) Fixed Cost (23150) (96.46)
Operating Income 11520 74.94

17. Break-Even Point

Unit Sales
23150+11520
Break-Even Units= = 202.3~203𝑢𝑛𝑖𝑡𝑠
171.4

Revenue
203unit×210𝑇𝐾 = 42630

18. Margin of Safety

Margin of Safety= Budgeted Sales – Break even revenue
44100 – 42630= 1470 TK
1470
Margin of Safety Percentage= 44100 ×100 = 3.33%

∴ Revenue would have to decrease by 3.33% to reach the break-even point. Even though the
margin of safety is low, we intend to strive by selling to mass market.

19. Operating Leverage

34670
Degree of Operating Leverage =
11520

= 3.01

When sales are 210 units, a 1% change in sales and contribution margin will result in 3.01% change
in operating income.

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20. Sensitivity Analysis
Unit Sold Change from Budgeted Operating
Master Budget Income
Master Budget 240 units ___ 4325 TK
Scenario 1 264 units 10% increase 4758 TK
Scenario 2 204 units 15% decrease 3676 TK

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