Professional Documents
Culture Documents
Section: 2
Subject: Report on lamp manufacturing and its different managerial cost applications.
Submitted to:
Senior Lecturer,
Submitted by:
Date: 12.3.2016
Course Instructor,
Senior Lecturer,
Dear Mam,
We are really very pleased to submit our report containing the whole manufacturing and
costing approaches of our selected product ‘lamp’ which is an integral part of our Managerial
Accounting course. By doing this project we have gathered a lot of experiences and mostly we
have got an opportunity to explore how in real world product manufacturing is running and
how cost accounting is actually implementing in real world business practices. In our project we
have done production costs to period costs, shown Different job costing applications, set pricing
strategy for lamp, done forecasting of our sales and revenues by doing budget, conducted
Break-even analysis and Margin of Safety and applied Sensitivity Analysis or “What if”
technique to show what would be the resulting change if anyone of the element of our budget
would change.
Sincerely Yours,
The main aim of doing this project is to exhibit how the managerial accounting is used to in
each and every steps of the manufacturing process of a product and how it is continuing to use
others aspects of product costing approaches. By doing this project we have got a lot of
experiences how actually managers take decisions, how they select different costing systems
and based on which criteria they do cost accounting and all of this approaches give us a clear
idea and visualize how in real world managerial accounting is practiced and make us more
efficient in this field. Our project is started with the introduction of our selected product ‘lamp’
followed by in which industry lamp is fallen, then competitors profile, manufacturing processes
of lamp, then estimation of all costs related to our product such as direct materials, direct
labor, MOH, Period costs, support costs etc. After that, we have classified direct or indirect
costs followed by fixed or variable costs. Then, included simple costing system and discussed
our cost strategies of allocation of our support cost followed by determination of prime cost,
conversion cost and full cost of our product. After that, done activity based costing system by
choosing different allocation bases and then conducted comparison of product-line profitability
under simple costing and ABC. After that, we have done budget and prepared revenues budget,
direct material usage budget, direct material purchases budget, direct labor budget, MOH
budget, ending inventory budget, cost of goods sold budget, and prepared income statement
both in traditional format and contribution format. Then, we have discussed about our pricing
strategy and reason for choosing it and have done comparison of price of our lamp with our
competitors and appropriateness of our pricing strategy. After that, determined break-even
point, break even revenues, MOS and evaluated our riskiness of our lamp. Finally, we have
conducted different sensitivity analysis by selecting different criteria that has been assigned to
analyze.
Table of Content
The reason for selecting lamp is from the very beginning our honorable
course instructor has suggested us to select a product that’s production procedure is simple and
the elements of production are easily available. Therefore, we select to produce lamp and its
production procedure is simple and productions elements are easily available. Besides, we
consider the demand and uses of decorating tools are increasing day by day and as one of the
decorating tools, lamp is very popular in the market and expected to increase its demand day by
day. Moreover, as it is our start up business and as all of we are students, therefore, we have
constraints to raise capital, and from this perspective our selection of producing lamp is perfect
because it doesn’t need to much capital to manufacture lamps and we have carefully chosen our
materials that used in production and designed its production process in such a that is cost-
effective.
1
Overview of the Industry
Lamp basically falls under lighting industry. Lighting industry refers to an industry which is less
capital intensive and more labor intensive product that tends to target both consumers and
business users. At the same time, it also falls under decoration industry as the aim of decoration
industry is to décor home, businesses by using creative, appealing products and so nowadays,
lamp is widely used as a decoration tool along with lighting purposes. And, both of these sectors,
its demand, acceptance, and popularity are increasing day by day.
Now-a-days, manufacturing and delivering of lamp is very popular worldwide and can be
purchased from both shops physically or through on-line. As we will conduct our business
through online by using kaymu so our main competitors are other on-line lamp suppliers at the
same time suppliers those are supplying lamp both by using warehouses and on-line.
Our manufacturing process of lamp has been divided into two operating processes and these are
cutting followed by joining. All members have contributed equally to the production process and
it has been taken 2 hours to manufacture a lamp.
2
Materials used in productions:
The main material that has mostly used in our lamp is bamboo stick and its base and
infrastructure has made of bamboo sticks followed by LED lights, and adaptor (direct materials)
and glue, tape (indirect materials).
1. First at all, we have cut the bamboo sticks in small pieces then made it slender for giving its
proper shape.
2. As, we have planned to design our lamp in a triangular shape, So, again we have cut bamboo
sticks into smaller pieces for making triangles.
3. After cutting bamboo sticks, we have attached 3 bamboo pieces by using glue in triangular
shape.
4. Then, have given rest to attach those.
5. In the same procedures we have made 10 triangles.
6. After that, again attached all 10 triangles in a row by using glue.
7. Then, we have used a bamboo stick which is longer than other sticks and basically it is the base
to attach LED lights.
8. After that, to attach the LED light on the stick we have rolled tape containing both sided glue on
that stick and then rolling the LED lights on it.
9. Then, the stick has been attached at the initial point of triangles by using glue and it has covered
up to triangles end point.
10. Finally, we have attached an adaptor with that base stick by using tape and connect the adaptor
in the socket and allow our lamp to light.
By finishing all of these aforementioned steps successfully we have finally done with the production of
our lamp.
3
Estimations:
Maximum Capacity:
We have assumed that in our business, the work hour will start from
9am and it will end by 6pm. But between the work hours we have a one hour lunch break
starting from 1pm and end 2pm. So the actual working time in a day is 8 hours (9pm to 1pm is 4
hours and 2pm to 6pm is 4 hours). On an average, it takes 2 hours to manufacture one unit of
lamp and we gave only 5 labors available. Moreover we have decided that our work days will be
6 days in a week. So in a
Production Cost:
Product cost is accosted incurred by a business when manufacturing a
good or producing a service. Accurate production cost gives the clear picture of how to
better price the item or service. That’s why it is very important. Production cost includes
direct material, direct manufacturing labor and manufacturing overhead costs. So the
production cost per unit of our product is described below-
4
Direct Material Unit produced Cost per unit of direct Total cost per unit of
material lamp
Bamboo 4 feet/lamp 8tk/feet 32TK
Total= 262TK
Number of labor Cost per direct labor Direct labor hour per Total direct
hour unit manufacturing labor
cost per unit
5
Manufacturing Overhead Cost:
These are the costs that cannot be traced directly to a
specific product. Manufacturing overhead include indirect material, indirect
manufacturing labor, and all other factory related costs we incur to produce our
product. So manufacturing overhead of our lamp is given below-
Costs(monthly)
Indirect Material:
Glue 1500TK
Tape 200TK
Utilities 500TK
Rent 2000TK
Transportation 500TK
Communication 200TK
Total = 4900TK
6
Selling And Administrative Cost:
These are the selling and administrative costs incurred
to operate the business as well as to sell the product. Like all other companies, our
business has also some selling and administrative costs-
Commission* 7000TK
Communication 300TK
Total= 7300TK
*We sell our product through online. We sell our lamp through kaymu online shopping site. We
give them our product and they sell our product and they cut 5% commission for each unit of
product. As the selling price per unit of our lamp is 350tk then the commission of per product
is(350 x 5%)=17.5tk. We want to sell 400 units. So the total commission is (17.5 x 400)=7000tk.
Source of Information:
Our product is handmade lamp. For these reason our real world
competitors are Aarong, Anjons. They are also making these kinds of handmade lamp.
For estimation of each cost we have taken help from them. Since, they are most well
known and renowned manufacturing organization, we have taken help from them. We
have gone to their outlet and talked with their manager about their cost strategies. How
they allocate cost of each of their lamp. We have seen their lamp and the price of their
handmade lamps. We have considered all information from our competitors and we
have assumed our all costs and set price of our handmade lamp.
7
Cost Analysis:
In order to make our lamp, we have incurred a lot of costs. These are
different according to the types. Some are fixed costs, some are variable costs. We have
incurred some direct cost as well as some indirect cost. However the costs of our
product are analyzed and classification below in different types-
Total= 329.5~330TK
8
Fixed Costs Total Costs(monthly) Costs/unit
Direct cost is a cost that can be easily and conveniently traced to a specific cost objects. On the
other hand indirect cost cannot be easily and conveniently traced to a specified cost objects.
Assuming the product as the cost object all direct and indirect of our lamp are presented below
in the table-
Total= 329.5~330TK
9
Indirect Costs Total Costs(monthly) Costs/unit
10
Product cost using the simple costing system-
Lamp
Revenues 140000TK
Less: Direct cost
COGS
Beginning inventory 0
Add: Cost of goods manufactured
Direct material 117376TK
Direct labor 22400TK
Manufacturing overhead 4900TK
Cost of goods available for sale 144676TK
Less: Ending
inventory (48x322) 15456TK 129220TK
COGS 10780TK
Less: Indirect cost
Support cost:
Commission 7000TK
Communication 300TK 7300TK
Operating profit 3840TK
11
Allocation of Support Cost:
Support cost is the expenses incurred in activities not directly
associated with production, such as design, engineering, and procurement. We have only one
support department and operation department. Under support department we will allocate the
particular portion of communication cost to operational department. We will allocate our support
cost under direct method. We can’t use step-down method or reciprocal method because we have
only one support department.
Direct Method:
Support Department Operational Department
(Communication)
Cost 500
Allocation of (500) 200
communication cost
(500*40%)
0 200
Prime cost is the combination of a manufactured product's costs of direct materials and direct
labor. Prime cost refers to the costs. Conversion costs as the manufacturing or production costs
necessary to convert raw materials into products. Full Cost is all fixed and variable costs,
including manufacturing costs, are used to compute the total cost per unit. Full costing includes
these costs when computing the amount of money it takes to produce and distribute one unit
of output.
= 312
= 50 + 10
= 60
12
Full Cost= Variable Costs + Fixed Costs
= 330 + 12
= 342/unit
Tape: Tape’s allocation base is also Number of units produced. Because, it is also related to the
number of units produced.
Utilities: Its allocation base is direct labor hours as it is related to direct labor hours.
Rent: Its allocation base is floor space/sq. f. Since, rent is related to floor space.
Transportation: Its allocation base is number of delivery. Because, it’s related to number of
delivery made.
Communication: Its allocation base is number of calls. Since, it’s related to number of calls
made.
Commission: Its allocation base is number of units sold as it is related to number of units sold.
13
Cost of lamp/unit
MOH - - 10
322tk
14
Product Line Profitability Report:
ABC Costing
Details Lamp(taka)
Revenues 140000
(-)Indirect Costs
Glue(3.35*448) (1501)
Tape(.45*448) (202)
Utilities(.56*896) (502)
Rent(10*200) (2000)
Transportation(2*250) (500)
Communication(25*20) (500)
Commission(17.5*400) (7000)
Operating profits 3475tk
15
Forecasts:
Revenue Budget:
The amount of money allocated to the maintenance and growth of a
business. Revenue budgets help business save time and effort by the proper allocation of
resources. We need budgeted units to be sold and selling price per unit to make a revenue
budget. Our lamp’s revenue budget is:
Revenue Budget
Product Units Sold Selling Price/Unit Total
Production Budget:
Production budget is a financial plan for items that are in the process
of being manufactured. A typical production budget for a manufacturing business will contain an
estimate of the number of units that need to be produced in order to meet sales targets and
inventory requirements. We are said to keep 12% ending finished goods inventory.
Production Budget
Budgeted Units to be sold 400
(+) Targeted Ending Inventory 48
Total Needs 448
(-) Beginning Inventory 0
16
Direct Material Usage Budget:
It is a budget by which we can know how much quantity
of direct material we need to produce our required quantity of finished goods. Here we
calculate the quantity of direct material we will use and the cost of direct material we will
use.
Cost
Available from beginning inventory 0 0 0
To be purchased
Bamboo (1792ft* 8tk/ft) 14336
LED Light(448unit*80tk/unit) 35840
Adaptor(448units*150tk/unit) 67200
Cost of total units to be used 14336 35840 67200 117376
17
Direct Material Purchase Budget:
It is a kind of budget by which we can know the
quantity and cost of direct material we need to buy to produce our required finished
goods. Here we add the ending direct material inventory with material to be used and
deduct beginning inventory if we have from total material we need. In our production we
have no beginning inventory as we are running a startup business and we are said to keep
18% ending inventory of direct material.
18
Manufacturing overhead cost budget is a budget
which include all the indirect cost (variable and fixed) of a factory.
Direct Material
Glue(Approximately 15 lamp can be made by using 1 glue) 1500
Tape 200
Other Factory Cost
Utilities 500
Rent 2000
Transportation 500
Ending Inventory Budget:
This budget includes the quantity of direct material and
finished goods which will be available in the store of the company after the account
period has ended. We are said to keep 18% of ending direct material inventory and 12%
of ending finished goods inventory.
Ending Inventory
Units Cost/unit Total Cost
Direct Material
Bamboo(Units= ft) 323 8 2580
LED Light(Units=pc) 81 80 6451
Adaptor(units=pc) 81 150 12096
Finished Goods 48 322 15456
19
Workings for calculating ending inventory budget
Ending Inventory
Units Cost/unit Total Cost
Direct Material
Bamboo(Units= ft) 323 8 2580
LED Light(Units=pc) 81 80 6451
Adaptor(units=pc) 81 150 12096
Finished Goods 48 322 15456
Total Cost of ending Inventory 36584
Beginning inventory 0
(+) Cost of goods manufactured
Direct Materal 117376
Direct manufacturing labor 22400
MOH 4900 144676
144676
20
It is a kind of budget which includes a summary of a management's
performance as reflected in the profitability (or lack of it) of an organization over a certain
period. We are said to prepare a traditional formatted income statement and also contribution
formatted income statement.
a) Traditional Format:
Revenue 140000
(-)COGS 129220
Gross profit 10780
(-) Operating income
Transportaion (2times*100) 200
b) Contribution Format:
Revenue 140000
(-)COGS 129220
Gross profit
Pricing Strategy:
We have taken Cost-plus pricing strategy to set our lamp’s price. The reason for choosing this pricing
strategy is; cost plus pricing strategy is easy to use and can easily be calculated. Moreover, as it is our
start up business and we have capital constraints, therefore, it is not feasible for us to conduct market
research or set price like our competitors charge because they have already established in the market.
So, by using our judgment and considering other factors we have taken cost-plus pricing strategy to set
our lamp’s price.
Cost-Plus Pricing:
Mark -up % =_______Selling Price/unit – Cost/unit___* 100
21
Cost/unit
= 350-342 * 10
342
=2.34%
Selling price/unit = Cost/unit + (% mark-up)
=342 + (2.34% of 342)
=350
As our main competitors are Aarong, Anjan’s and other different lamp suppliers, we have seen
their products pricing both by using primary and secondary analysis. Our competitors lamp
pricing are starting from 400tk-500tk, and we have set our lamp’s price 350tk. Since, we are
new in the market and do not have any established brand name therefore, to make our lamp
popular in the market and to get quick response from customers we charge less than our
competitors. Moreover, if we would like to charge our lamp like how much our competitors
charge that might result in loss of sales and thus, we may incur operating loss as well.
Therefore, by considering all of the aforementioned factors we have decided to charge our
lamp at 350tk and it seems to us that our pricing strategy is appropriate for our start up
business.
Evaluation:
22
Break even quantity = Fixed Cost/Contribution Margin per Unit
= 5200/20
= 260 Units
Break Even Revenue = Break Even Quantity * Selling Price per Unit
= 91000 tk
Margin Of Safety:
= 140000 – 91000
= 49000
= (49000/140000) * 100
= 35%
23
Data For Break Even Calculation
Fixed Cost 5200
Variable Cost 132000
Contribution Margin 8000
Contribution Margin/Unit 20
Total revenue 140000
Risk assessment:
Sensitivity Analysis:
***End***
24