Mr.

Chicken
Cost Accounting Final Project

Asfandyar Alizai
Muhammad Ali Amjad
Ahad Samad khan Vip
Ismail Shahzil
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Contents
Type of Organization...................................................................................................................................2
Production Process......................................................................................................................................3
Cost of direct Material:................................................................................................................................4
Cost of direct Labor:....................................................................................................................................4
FOH (Factory Over Head):..........................................................................................................................4
Variable and Fixed Costs:............................................................................................................................4
Order Point Calculation:..............................................................................................................................4
Inventory.....................................................................................................................................................6
Scrap, Spoiled and Defected Goods............................................................................................................6
Payroll Details.............................................................................................................................................7
Taxes...........................................................................................................................................................7
Taxes on salary......................................................................................................................................7
Income from property...........................................................................................................................8
Income from capital gains.....................................................................................................................8
Distribution of Payroll and Taxes................................................................................................................8
Production Budget.......................................................................................................................................9
Material Budgeting Information:.................................................................................................................9
Labor Budgeting Information:...................................................................................................................10
Factory Overhead Budgeting Information:................................................................................................10
Selling and Administrative Expenses Budgeting Information:..................................................................11
Income Statement (Budgeted)...................................................................................................................12
Calculations for the Cost of Goods Sold:...................................................................................................12
Per Unit Calculation for the following items:....................................................................................12
Material:...............................................................................................................................................12
Labor cost.............................................................................................................................................12
Total cost per unit................................................................................................................................13
Break-Even Analysis for the Production of Wings:...................................................................................13
Variance Calculations................................................................................................................................15
Recommendation.......................................................................................................................................16
Appendix...................................................................................................................................................16
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Introduction
Mr. Chicken is a private company which plays a main role of distribution and refining of chicken
with an objective of providing nutrition through its quality poultry products. Mr. Chicken was
establish during the year on 2013 by Mr. Ammar Sheikh and since then he is striving to provide
the poultry products of the highest quality. Mainly, they distribute different categories of
‘Chicken Cuts’. They ensure the highest quality through technology and innovative processes of
production. Their products range from burger patties, whole chicken and to nuggets. Over the
years they have been successful to establish the relations with few of the industry pioneers for
example on of their main customers in Pizza Hut, Jalal Sons, etc.

To make sure that their products are Halal their entire process is based on Islamic principles
starting from the slaughtering of chicken and other animals to get meat.

Type of Organization
Mr. Chicken is a profit seeking business so it would be correct to say that this is a commercial
organization. Apart from chicken products they also provide meat products (frozen) to Yum,
Gourmet, Pizza Hut and Jalal Sons.

Mr. Ammar describes their production as this “The process is Mr. Chicken basically receiving
living chickens and then sending it through an orderly manner to be refined, which involves the
chicken to first be slaughtered in a Halal manner under careful supervision, then to a plucking
machine where its feathers are removed, afterwards it is eviscerated and the waste products are
thrown away. When the chicken arrives at the cutting hall, it is deboned into shapes which the
customer order requires for example a whole chicken or Karahi cut for Gourmet, which serves
chicken Karahi. The order is prepared according to customer demand and also customization is
also on basis customer need and the organization’s ability.”

They have their retail outlet on Ferozpur road and their production plant is on Raiwind Road
Lahore.

To survive in a competitive market they follow low cost strategy. Their production is based on
demand from their long term customer and average sale from their retail outlet. Since, mainly
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they produce according to the demand from their customers we can say that they use Job Order
Costing System. They maintain inventory backup of 22% to deal with the fluctuating demand.
They have derived this figure from their past experience and historical data.

Production Process
Raw material (mainly birds) arrive at their control shed early in the morning between 4am- 6am.
To bring the body temperature of every bird at 64 degrees birds are taken to the temperature
control room. After counting and weighing the birds they are placed into the crates and rolled
down. In every crate there are around 174- 178 birds. Every bird have a benchmark weight of 1.7
kg to 1.9 kg. These birds are hung upside down on a moving fork trail in the production unit. On
average every hour around 2750- 3300 birds are processed.

To make sure that their product is halal proper “Zibah” is done by assigned Muslim butchers. To
soften their feathers birds placed on “scalder”. After this ‘Pucker’ is used to remove the skin and
their feathers. Further their necks are ripped off. Then their non-eatable and eatable parts are
separated in different crates. Red crate is used for non-eatable parts and green crate is used for
eatable parts. After this process all of the material is properly washed and dried. Then chicken is
placed in the chillers after removing the shanks. Here in the chillers temperature of the chicken is
brought to 3 degrees. While the birds are still in the chiller the birds are placed in the chlorine
mixed water for 44 minutes.

After all of the process explained the next step is to convert the material (birds) into the eatable
meat. There are 2 divisions of the meat and the process time for the divisions is 12 minutes. First
division is that it can be directly packed and second is further processing is done to turn the
product into chicken wings, tikka, drumsticks, etc. Further meat is passed through the tumbler to
mix the spices properly on every piece.

Lastly, meat is packed in the packing room. Packing room has 8 work stations and on every
table 11-13 people work. Then labelling and tagging is done. When labelling and tagging is done
meat is taken to the freezer which have a temperature of 3-6 degrees. Lastly, if the management
wants to hold the product for further storage then meat in the temperature of -20 to -30 degrees.
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Cost of direct Material:

The direct raw material is living chicken bird. There is high fluctuation of chicken birds
sometimes on weekly bases and sometimes on daily bases. Mr. Chicken’s cost of direct material
is highly depended on the demand from the customers.

Cost of direct Labor:

People who are involved directly in the production are paid regularly and the daily basis.

FOH (Factory Over Head):

These cost consists of transportation cost, utility bills, insurance expense, depreciation and lastly
packaging cost.

Variable and Fixed Costs:

Variable costs of the firm consists of fluctuation cost of the chicken and cost of variable labor.
Labor cost also change/fluctuate sometimes. They transport chicken birds from their own
control shed so transportation from the shed results the same cost as route is the same and same
vehicles are used every time so, this cost is considered fixed cost. Salaries to the managers, fuel
used for the power generators and 9 hours machine bill is considered fixed cost by the Mr.
Chicken management.

There is no formal method used to derive/estimate the variable and fixed cost.

Order Point Calculation:

It is inventory level which should trigger the new order to renew the inventory. Calculation of
this point when tell us that at what levels of the inventory new order should be made.

Daily rate of usage: 19360 units

Lead Time= 2days

Safety stock = 3575 units

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Calculation:

Order point = (lead-time* daily usage) +Safety stock

= (19360*2) +3575

= 42,295 Units

42,295 units is the point where they have to reorder the raw material.

 EOQ Calculation (Chicken Wings)

This calculation is made to derive the point where cost is at the lowest point to make an order or
where there is lowest ordering cost. Main goal is to derive the optimum point where direct
material cost is the lowest.

Calculation:

Required Units (N): 93500

Order placing cost(C): 2444

Carrying Cost-Annual (K): 22000

 EOQ= √ ¿ ¿
= 144.14 units
 Number of units ordered annually = N/EOQ

=93500/144.14

=649 orders

 Order cost (annually)

= (C * N) / EOQ
93500*2444/144.14 = Rs.1.585, 361
 Average number of units at any point in time:
=EOQ/2
144.14/2= 72.1 units
 Carrying cost ( annual)
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= K * (EOQ / 2)
=22000*(144.14/2)
=Rs.1585540 per year

Inventory
Mr. Chicken does not use just in time inventory system. They have space which can store the
inventory for 3 months and they have 25% of the stock always available for emergencies that
may result in shortages for material in the market.

Scrap, Spoiled and Defected Goods

Since, Mr. Chicken produces meat, it has many byproducts, known as scrap goods. In the
production process they don’t have much of spoiled and defective goods. Scrap goods at Mr.
Chicken includes feathers, leg bones, soup bones and blood. These scrap goods are sold to
several industrial units and it is recorded as their ‘Other income’ in the financial statements. An
18.7-2090 gram bird has 440 grams of scrap material including feathers, blood, intestine, head
and shanks. The scrap is sold to several companies that manufacture bird feed at RS 13.2 per kg.
Estimated number of birds used in October were 135300.

The value of scrap is as follows:

135300*440grams= 59532000

59532000/1000= 59532 kg

59532*12= 714384 (Scrap revenue)

Mr. Chicken recorded the entries as follows:

Cash…………………………………………………714,384
Scrap Revenue…………………………………..714,384
In case of any defective and spoiled goods, it is recorded as factory overheads and entry is
recorded as:
Spoiled goods inventory……………………………30,536
Work in Progress………………………………...30,536
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Payroll Details
Mr. Chicken records payroll as both skilled and unskilled workers. Employees at Mr. Chicken
work 8 hours a day and 6 days a week. Time varies for the employees working at the
manufacturing plant and at the outlets. They use hourly wage rate to pay their employees. Skilled
workers have more wage rate than the unskilled workers. Skilled workers mostly deal with the
machinery and quality assurance department of the company. All of the workers are trained
according to their jobs at Mr. Chicken. There are 6 electricians, who deal with the operations of
the machinery. The company also has 2 assistant doctors who are called up for emergency cases.
Unskilled workers at Mr. Chicken includes drivers, slaughters etc. Average wage of a skilled
worker is RS 880 per day and this amounts to RS 21,120 per month. Average wage of an
unskilled worker is RS 660 per day and this amounts to RS 15,840 per month. They currently
have total of 187 workers of which 165 are skilled and remaining 22 are unskilled workers, who
assist in the overall process. They have 6 drivers who take the finished goods to the outlets and
distribute to other cities as well. They also have 4 security guards, 6 sweepers, 4 workers who are
for miscellaneous works and the remaining 2 are office boys. The company is following the
wage rate law set by the Government of Pakistan, which has to be followed in all over Pakistan.
The minimum wage rate is in accordance with the laws made by the government which is PRs.
14,000 per month, the age bracket is 14-18 years.

Taxes
According to the manager Mr. Ammar Sheikh, Mr. Chicken pays large number of taxes. Most of
the taxes paid includes the income tax and the taxes paid on the salaries of employees which
comes under the heading of corporate tax. All of the taxes are paid in accordance with the
Companies Ordinance 1984.

Taxes on salary
Taxes are also levied on the salaries of the professionals such as factories managers and head
office managers etc. Taxes are paid according with the Income Tax Ordinance 2001. Mr.
Chicken is not responsible for taxes directly levied upon employees.
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Income from property

Mr. Chicken have their factory situated on Raiwind road and they own the property themselves.
The overall area is about 11 canals and property tax is levied accordingly.

Income from capital gains

Mr. Chicken is deciding to dispose a machine in January 2019, so they will have to pay the tax
on it.

Distribution of Payroll and Taxes

Daily Wage Rate Plan:

Type of Hours/da Wage rate/hour Total Number of Total wage paid

Labor y wage/day labor per day

Skilled 8 Rs. 110 880 165 145,200

Unskilled 8 Rs. 82.5 660 22 14,520

Total 16 192.5 1540 159,720 per day

The following is the Budget for the month of “December 2018”

The budget is of wings produced by Mr. Chicken, which are sold for RS 495 (12 pieces)

1-The estimated units sold of wings for per month is: 13530

2-Whereas the estimated unit price for wings is: 495

Total Sales Budget for the month of December:

Estimated Unit Sales x Estimated Unit Price

14,883 units x 495 price = RS. 7,367,085.

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Production Budget

INFORMATION December 2017

Units to be sold 14883
Desired ending inventory 2977
Total units needed 17860
-Beginning inventory -2640
Production units 15220

A total of 14,883 units need to be produced according to the budget. So in December these units
will be produced on the basis of projected sales.

Material Budgeting Information:

Data December 2018

Units of Production 15218.5
Requirement per pack of wings 6.6
Gross Material requirement 91311
+ Ending raw material 5953.2
Gross material needed 97264.2
-Beginning raw material 5190.9
Raw material to be purchased 92077.7

So the number of raw material to be purchased for the period of December is 92077.7 birds for
the production of 15218.5 birds.

Labor Budgeting Information:

Data December 2018

Amount to be produced 15218.5
Hours per unit 0.22143
Gross hours requirement 3063.5
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* Wage rate 106.755

Total labor cost 297312.4

Total labor cost of Rs 297312.4 is the requirement for the production of 15218.5 units of chicken
wings for the period of December.

Factory Overhead Budgeting Information:

Data December 2018

Amount to be produced 15218.5
Variable Factory OverHead Rate 12.1
Total Variable Factory OverHead 167403.5
Total Fixed Factory OverHead + 302500
Total manufacturing OverHead Cost = 470103.5

Total factory overhead expense is Rs. 470103.5 for the production of 15218.5 units of wings for
the month of December.

Selling and Administrative Expenses Budgeting Information:

Data December 2018

Quantity to be Sold 14883
Per unit Variable cost- Selling and 60.5
administrative expenses

Cost of Total Variable selling and 818565

administrative
Cost of Fixed Selling and administrative 344850
expenses
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Total cost of Selling and Administrative 1163415

expenses

Total cost of selling and administrative expenses are 1163415 for the selling of 14883 units of
wings for the month of December.

Mr. Chicken

Income Statement (Budgeted)

For the month ending 31st December, 2018

Sales revenue 7367085

14883*495
Cost of Goods Sold 997756.32
67.04 *14883
Total margin 6369328.68
Total cost of Selling and Admin expenses -1163415
Net Income 5205913.68

Calculations for the Cost of Goods Sold:

Per Unit Calculation for the following items:

Factory OverHead:

470103.5/297312.4

=1.58*106.755
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=168.6729 * 0.22143

=37.35

Material:

92077.7/15218.5

=6.05

Labor cost:

0.22143*106.755

=23.64

Total cost per unit

=67.04

Break-Even Analysis for the Production of Wings:

Costs = revenues

It is the case, in which the company is not in a loss.

Total Revenue, Variable Cost and Fixed Cost for,

Mr. Chicken are as followings:

1- Total Revenue=Rs. 223,245 per day

2- Variable Cost=Rs. 27,984.99 per day

3- Fixed Cost=Rs. 212,520 per day.

CALCULATIONS:

a- Contribution Margin Ratio:

= { 1- (Variable Cost/Sales)}

= {1- (27,984.99/223,245)}
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=0.875

b- Break-Even Sales:

= {Fixed Cost/Contribution Margin Ratio}

= {212,520/0.875}

= Rs. 242,880
c- Break-Even in units:
= Break-Even Sales/Contribution Margin per unit
= {242,880 / (495-60.687)}
= 559 units.

The graph above shows the cost volume analysis, and the break even units that are required for
Total revenue of chicken wings to be equal to total cost of chicken wings, for the month of
December. The total fixed cost for the company is PRs. 212,520. The total cost for the month of
December is PRs. 240504 which is calculated through adding the Fixed and variable cost for the
month. The total Revenue for the month is PRs 242,880. The breakeven point for the month
where the sales equal to the costs are 616 units. This shows that any sales less than 616 units of
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Chicken wings pack for the month of December will incur losses for the company and the sales
after the 616th unit will generate profits for the company.

Variance Calculations

Actual Budget Applied Overhead Spending Idle Capacity

Allowance FOH Variance Variance Variance

469903.5 5390000 391578 78325.5 69096.5 147422

FAVOURABL UNFAVOURABL
UNFAVOURABL E E
E
Variances

1-Factory Overhead per Unit:

Estimated FOH
Estimated units of production
= 469903.5 / 15218.5

= Rs. 30.8 per unit

2-Rate per Direct Labor Hour:

Estimated FOH
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Estimated DL Hours

469903.5

44880

=Rs. 10.4 per DLH

3-Applied and actual factory overheads:

Actual DLH worked: 316,800

Applied FOH = Actual DLH worked * Rate

= 37400*11.517

= Rs. 430735.8

Recommendations:

• Reduce process time from 12 minutes by eliminating two different processes: Plucking
and Scalding as it will not only increase the capacity but it will also help in reducing the
cost.

• Low price strategy worked initially but they might need to increase prices or reduced the
quantity of each pack to further capitalize on the market.

• They should follow a computerized inventory and accounting method rather than just
having a computerized setup for accounting.

Appendix
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All calculations in the schedule table for the budgets of December for Chicken Wings

Item (s) Prices and Units

Total eastimated sales for December 14883 Units
Chicken wings per pack of 12 pcs PRs. 495
Per unit, Labour hours 0.2214/ DLH

Stock:
Raw Materical – Opening 5191 units
Production – Opening raw material 2640 Units
Raw materials – Ending 5953 Units
Production – Ending Inventory 2977 Units
Quantity to be produced 15218 units
Per Pack of wings, chieken required 7 units
Rate of wage PRs. 106.75 ((110*165)+(82.5*22)/187)
FOH - Total Variable cost PRs. 12.1
FOH - Fixed Cost PRs. 302,500
Selling & Admin per unit cost PRs. 60.5
Fixed Admin & Selling per unit cost PRs 344,850
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Total Cost Schedule

Shed to plant, Fuel expenses (three trucks, four rounds Rs. 13,200
per day)
8 Hours per day, Machine bills Rs. 73,700
skilled + unskilled – Labour cost Rs. 18,150
((110*165)+(82.5*22))

Fuel Expenses for generator Rs. 44,000

Head office – Expenses Rs. 2,200 per day
Fixed cost – Total Rs. 212,520 per day

Type of products produced per Chicekn

Products produced per Chicken Price in Rs

Two leg piece 44
Two wings 33
Three gola kebab 33
Breast/Chest piece 99
Patty or xinger 66
Total Cost 275
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Average no of Sales per day schedule

Product (s) Daily Sales (average) Sales revenue (Rs)

Leg piece 390 390*374 = 145860
Wings 247 247*495 = 122265
Gola kebab 275 275*297 = 81675
Breast/Chest piece 462 462*218 = 100716
Patty or Xinger 451 451*495 = 223245
Rolls & Samosas 316 316*275 = 86900
Total 2141 PRs. 760661