A project on determining the cost of a product and

variance analysis.

ACT202: Introduction to Managerial Accounting

Section 16

Submitted to:

Sohanur Rahman
Lecturer
Department of Finance and Accounting
North South University

Submitted by

Dhruba Das
Sumaya
Ahmed
Chowdhury Md. Muin

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Contents Page

Letter of Submission 3
Executive Summary 4
Business Card 5
Product Details 6
Production Process 7
Cost of The Product 8
Variance Analysis 11
Price and profit Margin 13
Contribution Margin and Break-even Point 14
Reference 15

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Letter of Submission
19th April, 2019
Sohanur Rahman
Lecturer;
Department of Finance and Accounting
North South University;
Bashundhara, Dhaka-1229, Bangladesh.
Dear Sir,

Here is the project report that you asked us to submit which was regarding determining the cost
of a product and variance analysis.

This project report and the investigation behind it was prepared under your direct
supervision. We pledge that under no circumstance will any part of it be reproduced for
any reason, shared with anyone else, or uploaded to any Internet website without your
written consent. Furthermore, we pledge that this report has not been submitted to any
other faculty member of North South University.
First and foremost, we would like to thank Almighty for his blessings and guidance without
which we would not have been able to complete the project on time. We would also like to thank
our parents for always being there for us. For further assistance, we accessed the managerial
accounting book, lecture slides and most essentially lecture classes and also took an interview of
a coffee seller and came to understand many events in preparing this paper. Finally, special
thanks go to our teacher, Mr. Sohanur Rahman, who has guided us throughout the whole process
and without whom this would not have been possible. We are thankful to sir for giving us the
opportunity to work on this report, and for always being kind, cooperative and understanding in
all of our trying times.
Thank you, Sir.
Sincerely,

Name ID
Dhruba Das 1811744630
Sumaya Ahmed 1813033630
Chowdhury Md. Muin 1813251630

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Executive Summary

Cold coffee is a very popular drinks in Bangladesh. It is a refreshing drink for people of every

age all around the year, in summer time the demand is the highest. This project is all about Md.

Shopon Mia’s Cold Coffee, a cold coffee shop situated at the end of the bailey road beside

Viqarunnisa Noon school and Siddeshwari Girls School and college in Siddeshwari, Dhaka. We

have prepared a projected contribution format income statement for the month of March, 2019

and an analysis of variance in standard and actual costs during the month of March, 2019. The

company is expected to make a net operating income of BDT 48,101.60 with a contribution

margin of BDT 63,101.60 and a profit margin of 41.11%. An unfavorable price variance of BDT

4,134.00 in the cost of raw materials and a labor rate variance of BDT 306.00 in the labor

variance was observed for the month of March, 2019. In this project we have also included

details about the product, production process, and production cost.

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Business Card

5
Product Details
Product Name:
1. Chocolate Cold Coffee

Ingredients:
1. Milk
2. Sugar
3. Coffee Powder
4. Chocolate powder
5. Coffee Syrup
6. Coffee Mate
7. Ice
8. Disposable one-time cup
9. Tissue
10. Straw

Cost Per Coffee:

1. Chocolate Cold Coffee – BDT 35.12

Price per coffee:

1. Chocolate Cold Coffee – BDT 60

Shopon Mia serves a chill zestful cup of cold coffee which comes in one flavors. The number of
coffee is served according to the demand of the customer, no pre stored coffee is sold.

Target Customer:
The coffee is targeted to be sold mainly to the students of Viqarunnisa Noon school and
Siddeshwari Girls School and college. Also customers of any age who is looking for a refreshing
quencher in an unfavorable tiring weather or in an evening hangout.

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Production Process

Shopon Mia buys all the ingredients for the coffee production in bulk. Shopon Mia has to buy all
ingredients worth BDT 1,500 in total worth producing 65 Cups of coffee per day.

Shopon Mia manufactures each cup of coffee by blending milk with coffee powder and little
amount of coffee mate and then adds sugar to it. Then coffee syrup, coffee mate and chocolate
powder is added and mixed well with the milkshake. Then instantly served fresh with ice to
customers. Shopon Mia has his own coffee stall in bailey road.

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 Cost of the Product
 Computing the product cost of the two product line of the company:

Md. Shopon Mia’s Cold Coffee

For the end of month March
 Computing Direct Materials:

Direct Materials

Unit price
Average Cost Per Cost per
No. of Units (Per Unit)
No. of Month Product
Items Units Used Unit All
Days All Amounts All Amounts
(Per Day) Per Cup Amounts
Per Month are in BDT are in BDT
are in BDT

Plastic Cup 65 1 Cup 0.2 30 0.2

390.00
Bashundhara tissue
200 2 0.48 30 0.96
Napkin paper 2,880.00
paper
Straw 100 1 Straw 0.08 30 0.08
240.00
Coffee Powder 325 10 gm 0.14 30 1.4
1,365.00
Coffee Syrup 65 5 gm 0.52 30 2.6
1,014.00
Chocolate Powder 195 3 gm 2.52 30 7.56
14,742.00
Milk 5000 70 ml 0.07 30 4.55
9,750.00
Sugar 910 14 gm 0.06 30 0.84
1,638.00
Coffee mate 650 6 gm 0.6 30 3.6
11,700.00
Ice 130 2 cubes 0.05 30 0.09
179.40
Total 22.40
43,898.40

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  Computing Direct labor:
Md. Shopon Mia’s Cold Coffee
For the end of month of March

Direct Labor
No.
Unit price
of Average No. Cost Per Month Cost per Product
(Per Unit)
Items Units Unit of Days All Amounts are All Amounts are in
All
(Cup per Month in BDT BDT
Amounts
s
are in BDT
Per
Day)
Salary of
Worker 65 1 10,000.00 30 10,000.00 5.12
Total 10,000.00 5.12

 Computing Fixed Manufacturing Overhead:

Md. Shopon Mia’s Cold Coffee
For the end of month of March
Fixed Manufacturing Overhead
Unit price for
Cost Per Cost per
items Average No. of
Month Product
Items Cups Per Day (Per Day) Days
All Amounts All Amounts
All Amounts are Per Month
are in BDT are in BDT
in BDT
Rent to local authorities 65 30 3.8
250.00 7,500.00
Cart Expense 65 30 2.3
150.00 4,500.00
Miscellaneous 65 30 1.5
100.00 3,000.00
Total 15,000.00 7.6

 Computing the total Cost per Product:

Md. Shopon Mia’s Cold Coffee
For the end of month of March
Cost per Product
All Amounts are in BDT
Fixed Manufacturing
Item Direct Materials Direct Labor Total
Overhead
Regular Cold Coffee 22.4 5.12 7.6 35.12
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Here while computing cost per product firstly the direct material is computed, on an average the
total amount of chocolate cold coffee produced per day is 65 and the amount of total cup
produced per month is 1950 cups. In the direct material schedule the details for all the
ingredients, how much they are used for each cup, how much each unit costs are given in details
and after computing the direct materials, the total amount of direct material cost per month is
BDT 43,898.40 and the cost per product for direct materials is BDT 22.40. Then the direct labor
is computed, Shopon Mia has a labor for helping him in making and sell coffees. He pays the
labor BDT 10,000 per month which eventually adds a cost to each unit of product BDT 5.12.
Then the fixed manufacturing Overhead including a regular daily fixed fee to the local
authorities, cart expenses which includes electricity, maintenance of the cart and other
miscellaneous expenses sums up to BDT 500 per day and apparently adds a cost to each unit of
product BDT 7.6.
All the total cost of direct materials, direct labor and fixed manufacturing overhead sums up to
the actual cost of the product which is BDT 35.12.

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 Variance Analysis
 Computing Raw Material Variance:

Md. Shopon Mia’s Cold Coffee

Actual Quantity of Actual Quantity of Standard Quantity of

input at Actual Price input at Standard Price input at Standard Price
(Actual Quantity X Actual (Actual Quantity X Standard (Standard Quantity X Standard
Price) Price) Price)
All Amounts are in BDT All Amounts are in BDT All Amounts are in BDT
Actual Standard
Quantity Actual Price Actual Quantity Standard Price Quantity Standard Price
1950 35.12 1950 33 1950 33
68484 64350 64350

Price Variance Quantity Variance

BDT 4134 BDT 0
Unfavorable Favorable

In the month of March, the actual price of regular cold coffee is BDT 35.12 respectively whereas
the standard prices should have been BDT 33. The actual number of coffee production is same as
the standard number of coffee per month that is (65 cups of coffee per day x 30 days) or 1950
cups per month. After analyzing the price variance is BDT 4134 which is unfavorable and the
quantity variance is BDT 0 which is favorable.

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  Computing labor variance

Md. Shopon Mia’s Cold Coffee

Standard Hours of input at

Actual Hours of input at Actual Hours of input at
Standard Rate
Actual Rate Standard Rate
(Standard Hours X Standard
(Actual Hours X Actual Rate) (Actual Hours X Standard Rate)
Rate)
All Amounts are in BDT All Amounts are in BDT
All Amounts are in BDT
Actual Hours Actual Rate Actual Hours Standard Rate Standard Hours Standard Rate
300 5.12 300 4.1 300 4.1
1536 1230 1230

Labor rate Variance Labor efficiency Variance

BDT 306 BDT 0
Unfavorable Favorable

In the month of March, the actual hours of labor making chocolate cold coffee is BDT 5.12
whereas the standard prices should have been BDT 4.1. The actual number of coffee production
is same as the standard number of coffee per month that is (65 cups of coffee per day x 30 days)
or 1950 cups per month. After analyzing the labor rate variance is BDT 306 which is unfavorable
and the labor efficiency variance is BDT 0 which is favorable.

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Price and Profit Margin
 Price of the products:

Regular Cold Coffee BDT 60

 Computing Profit
margin Now computing net
income,
Md. Shopon Mia’s Cold Coffee
For the month ended of March,2019

Sales Revenue

Regular Cold Coffee BDT 117,000.00

Total Revenue 117,000.00

Less: Variable Cost

Materials 43,898.40

Direct Labor 10,000.00

Total Cost 53,898.40

Contribution Margin 63,101.60

Less: Fixed Cost
Fixed Manufacturing Overhead 15,000.00
Net Operating Income BDT 48,101.60

Therefore, Profit margin = (Net Operating Income/Sales) x100

= (BDT 48,101.60/ BDT 117,000.00) x 100
= 41.11%

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Contribution Margin and Breakeven Point
 Computing the net Operating Income

Md. Shopon Mia’s Cold Coffee

Total Per Unit CM Ratio

Total Sales Revenue BDT 117,000.00 60 100%
Less: Variable Cost of Goods Sold 53,898.40 27.64 46.060%
Contribution Margin 63,101.60 32.35 53.93%
Less: Fixed Manufacturing Overhead 15,000.00
Net Operating Income BDT 48,101.6

 Computing Break even in BDT sales (Equation

Method) Profit = CM ratio x Sales – Fixed Expenses
Or, BDT 0 = 53.93% x Sales – BDT 15,000.00
Or, Sales = BDT 27,814.00
 Computing Break even in unit sales (Formula Method)
Unit Sales to breakeven = Fixed expense/ CM per unit
Unit sales = BDT (15000/32.35)
Unit Sales = 464 cups of coffee.

Therefore, the contribution margin of the company is BDT 63,101.60.

The Break-even in BDT sales is BDT 27,814.00 and the break-even unit sales is 464 cups of
coffee per month.

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Reference
 Garrison, R.H., Noreen, E.W., & Brewer, P.C. (2015). Managerial Accounting (15th
ed.). New York, NY: McGraw-Hill Education.

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