Managerial Accounting

Submitted To: Sir Nayyer zaidi

Submitted by:

Shahwer Pasha

Ayesha Khan

Ali Murtaza
Contents

Executive Summary........................................................................................................................4
Introduction....................................................................................................................................4
Nishat Linen (Private) Limited...................................................................................................5
Nishat Spinning (Private) Limited..............................................................................................5
Nishat Linen Trading LLC..........................................................................................................6
Nature of Business......................................................................................................................6
Spinning......................................................................................................................................6
Weaving......................................................................................................................................6
Processing...................................................................................................................................6
Nishat Linen...............................................................................................................................7
Benefits of cost accounting.............................................................................................................7
Cost Accumulation method used...................................................................................................10
Process Costing.........................................................................................................................10
Analysis of Income Statement......................................................................................................10
Analysis of Cost of Goods sold....................................................................................................12
Application of Activity Based Costing.........................................................................................13
Activity Based Costing.............................................................................................................13
Cost Driver:-.........................................................................................................................13
Cost Pools:-...........................................................................................................................13
Cost of sales..............................................................................................................................14
2016......................................................................................................................................14
2015......................................................................................................................................15
Calculations..........................................................................................................................16
Distribution costs......................................................................................................................17
ABC per unit based upon cost based upon CGS and distribution cost......................................18
2016......................................................................................................................................18
Breakeven analysis.......................................................................................................................19
VARIABLE COST...................................................................................................................19
FIXED COST...........................................................................................................................20
Contribution Margin.................................................................................................................21

1
Budgeting.....................................................................................................................................21
Sales Budget.............................................................................................................................22
Production Budget....................................................................................................................22
Direct Material budget..............................................................................................................23
Direct Labor Budget.................................................................................................................24
Manufacturing Overhead Budget..............................................................................................24
Selling and administration Budget............................................................................................25
Cash Receipts Budget...............................................................................................................25
Cash Disbursement Budget.......................................................................................................25
Cash Budget..............................................................................................................................26
ACTUAL......................................................................................................................................26
Sales Actual..............................................................................................................................26
Production Actual.....................................................................................................................27
Direct Material (Actual)............................................................................................................27
Direct Labor (Actual)................................................................................................................28
Overheads (Actual)...................................................................................................................28
Selling and Administration Expenses (Actual)..........................................................................29
Cash Receipts (Actual).............................................................................................................29
Cash Disbursement (Actual).....................................................................................................29
Cash Budget..............................................................................................................................30
BUDGETED FINANCIAL STATEMENTS.................................................................................30
Budgeted Cost of Goods Sold...................................................................................................30
Budgeted income Statement.....................................................................................................31
Budgeted Cash Flow statement.................................................................................................32
Balance sheet............................................................................................................................33
VARIANCE ANALYSIS..............................................................................................................34
Static Budget............................................................................................................................34
2015......................................................................................................................................34
2016......................................................................................................................................34
Flexible Budget.........................................................................................................................35
2014......................................................................................................................................35
2015......................................................................................................................................36
2016......................................................................................................................................37

2
PRICE AND EFFICIENCY VARIANCES...................................................................................37
CONCLUSION AND RECOMMENDATIONS...........................................................................41

3
Executive Summary
Nishat Mills Limited is one of the most modern and largest vertically integrated textiles
Company in Pakistan. The Company commenced its business as a partnership firm in
1951 and was incorporated as a private limited Company in 1959. Later it was listed on
the Karachi, Lahore and Islamabad Stock. In the report, we are going to focus on the
textile sector and analyze the costing methods the company uses, by obtaining
information from primary as well as secondary sources.

The purpose of this project is to attain the knowledge about how successful companies
like Nishat determine cost drivers and cost objects and how do they allocate costs
throughout the production process. This process then answers the questions as to how
companies get involved in cost reduction in order to increase the value of end product for
the customers. The report looks into detail of cost structure of Nishat textiles and analyses
the costs for its production facilities including spinning, weaving, printing, dyeing, home
textile and garment stitching facilities.

The result of the research shows that Nishat mills is using process costing system because
it produces in mass production the products that are identifiable. Furthermore the
company uses activity based costing system as opposed to the traditional one. It also
shows that the company is not just able to breakeven in this particular category but also
attain profits by reaching beyond breakeven point. Further for budgeting the sales,
production, Direct labor, Direct material, overheads and cash Budgets were examined and
budgeted income statement and balance sheet were established.

After carrying out the cost analysis we concluded that, material cost accounts for a
significant part of the total cost and therefore Nishat mills should concentrate on their
production and operations. Further in the report recommendations are given as to how the
production process can be improved by the company to avail advantages of the prevalent
marketing conditions.

4
Introduction
Nishat has grown from a cotton export house into the premier
b u s i n e s s group of Pakistan with 5 listed companies, concentrating on 4 core
business; Textiles, Cement, Banking and Power Generation. Today, Nishat is
considered to be at par with multinational operating locally in terms of its
quality products and management skills. The company is holding position in spinning,
weaving and dying units with the extraordinary production capacity. Nishat is running
different business with different famous products like Nishat Linen that has opened its
outlets in major cities of Pakistan.

The textile industry occupies a pivotal position in Pakistan’s economy, accounting for
7.7% of GDP with a significant potential for growth.

Company had adopted latest management information systems to access data that results
in producing timely results for different departments. According to financial ratio
analysis, company is enjoying good profits and is consistently running its operations with
critical country conditions. However owing to reduction of load shedding, company did
improve its operations and thus its cost management system.

Following are the key performance indicators:-

 Annual turnover of 108 million rupees

 Earn foreign exchange of US $ 344.744 million
 Pay taxes and levis of 1861.47 million rupees annually

Nishat Linen (Private) Limited

This is a wholly owned subsidiary of the company. The Principal objects of the company
are to operate retail outlets for sale of textile and other products and to sell the textile
products by processing the textile goods in outside manufacturing facilities. The
subsidiary started its operations in July 2011.

5
Nishat Spinning (Private) Limited
It is a wholly owned subsidiary of Nishat mills limited and thus is a private company
incorporated on February 2014 in Pakistan. The principal business of the company is to
manufacture and sell the textile products in the local market by processing the textile
goods in its own or outside manufacturing facility. The subsidiary will commence its
commercial production in the year 2014-2015.

Nishat Linen Trading LLC

This subsidiary is a limited company incorporated in Dubai, UAE. It is a wholly owned
subsidiary of the company. The subsidiary is principally engaged in the trading of textile,
blankets, towels, linens, ready-made garments, garments accessories and leather products
along with ancillaries thereto through retail outlets and warehouses across United Arab
Emirates. The subsidiary started its commercial operations In May 2011.

Nature of Business
Nishat mills focused on both the macro and micro level economic issues and therefore it
also recognized the business performance for the textile industry.

Spinning
Nishat mills operate with eight spinning units with entire machinery are from world
renowned manufacturers. All yarns made at Nishat are Ring Spun suitable for both
knitting and weaving. Besides that company operates with its own house state of the art
cotton and yarn testing laboratories. The Nishat Group is one the most trusted brands
owing to its high quality products based on the best raw materials due to efficient
production and other quality measures.

Weaving
Nishat Mills weaving division has 670 modern air jet projectile looms which produce
approximately 9 million meters of fabric per month and makes it the largest weaving
facility of Pakistan catering to home textile and apparel fabrics.

Processing
Nishat had the facility to produce custom-made machinery and has capacity of 90 million
meters of fabric per annum. Its processing includes, twills, drills canvas/poplins, fabrics
with minimum tensions and thus has all density weaves.

6
The standards are higher than ever, dedicated by fashion, efficient productivity and
further automation s engineered in the plant. To maintain quality and international
standards, an online Quality Control (QC) department has been setup. The QC
department is augmented by a fully equipped Laboratory, which the fabric process flow at
all levels.

Nishat Linen
Nishat Linen is a concern of Nishat Mills, the textile and home fashion retail chain that
has redefined the industry with acute attention paid to quality, design and affordability. It
prided itself on being the brand of preference for discerning customers which provides
them with unique and high quality products without compromising on the aesthetics and
price. Unsurpassed customer service, including tailor-made orders, ensures all of the
clientele remains loyal to the Nishat family.

From bed linen to kitchen coordinated, upholstery to apparel, Nishat Linen has become a
household name as a creator of stunning high quality designs at reasonable prices.

Benefits of cost accounting

1. Measurement and Improvement of Efficiency

2. Profitable and Unprofitable Activities
3. Information for Proper Planning
4. Control over Materials
5. Decision Regarding Machine vs. Labor
6. Guide in Reducing Prices
7. Expansion in Production

Cost accounting helps in achieving efficiency of its production systems by enabling

Nishat to be more productive thus to reduce unnecessary costs. By comparing different
costs at different point in time, Nishat helps it budget to be aligned with the cost structure
and thus to maintain it thoroughly. For instance Nishat’s last year material cost for one
bed sheet comes out to be 1020 rupees in spinning department. However for a similar bed
sheet the amount was 960 rupees in 2016 which indicates the improvement in the

7
efficiency level. Thus due to costs comparisons, wastage in use of materials or
inefficiency at the time of buying were reduced. Comparisons may also be made with
average figures for the whole industry and with ideal figures which may have been
determined before head. This comparison provides a clear signal to the management
about the going up or coming down of efficiency level and thus to take any action.

Secondly it helps the Nishat Mills to concentrate any of the unproductive and
unprofitable line to disregard or to discontinue by keeping only profitable and well-
structured departments. Pakistan's textile industry continues to suffer from a high cost of
doing business with country's textile exports decline due to cut-throat competition from
regional players, an overvalued Rupee, energy shortage, various taxes and surcharges,
and the slowdown in China and other markets. But by analyzing the cost effective and
profitable segments, Nishat Mills earns more than half of its revenues from exports and
single-handedly contributes around three percent to the textile exports of Pakistan. A
segment analysis reveals that the lawn's share of the firm's revenues, which is around 35
percent, comes from the Processing and home textile segment. In terms of gross profit,
however, it accounts for 56 percent (Starting FY16, the 'Processing and home textile'
segment is reported as two separate segments - 'Dyeing' and 'Home textile.') (Business
Recorder, 2016)

Another factor for cost accounting advantage is its relevance for providing information
which can be utilized in proper future planning. Detailed information for available
facilities about machine and labor capacity in Nishat mills was important to recognize the
upcoming demand which can only be done through proper costing system. For instance,
during the period, Nishat Mills' spinning segment took a huge hit, with volumes falling
by around 33 percent over 1QFY16. This was due to subdued demand in core markets. In
the weaving segment, exports decreased due to economic slowdown in Europe, especially
in the UK following Brexit. Nevertheless, volume sales were up by around seven percent
year-on-year. The company has started exporting polyester open-end fabric (used for sun
protection) and is also expecting growth in the abrasive fabric market going forward.
(Business Recorder, 2016) This positive effect was gauged through the costing systems
which provide proper information on timely basis.

8
Information about availability of stocks of various materials and stores must be
constantly available if there is a good system of Cost Accounting. This helps in two ways.
Firstly, production can be planned according to the availability of materials and fresh
stocks can be arranged in time when old stocks are exhausted. Secondly, loss due to
carelessness or pilferage or any other mischief will be known and, therefore, put down.
For instance, in the first quarter ended FY17, Nishat Mills has shown some improvement.
The company's sales declined by three percent year-on-year, but the bottom line exactly
doubled over last year. Gross and net margins have expanded nicely, as the company has
improved its profitability. As per the Director's Report, the main reason behind the
enhanced profitability was the achievement of production efficiencies and better
inventory management. Moreover, a higher other income and lower finance cost further
improved the bottom line.

Also the use cost accounting can also be observed for machine versus labor requirement.
For instance, Nishat mills is enhancing the segment's production capacity and will be
commissioning a new denim jeans facility soon I order to meet the increased demand of
the products and thus to meet in best nature which can enhanced the overall sales if the
company.

Talking about the price factor, Nishat’s real performance, however, came from the value-
added end. Home textile reported a 20 percent growth in volume sales, but margins were
suppressed. This was due to the sharp decline in the pound sterling and Euro after Brexit.
Garments also reported a healthy growth in volume of 27 percent year-on-year, with
much higher margins than before. This shows that cost accounting helps in the decision
of the prices which must be increased or decreased owing to the economic factor and the
informant provided by the accountants.

Lastly, Nishat Mills is focusing on the expansion of its operations as dedicated by the
positive indicator from cost accounting information. Therefore company has started the
new fiscal year on a high note. Although the company is still looking at a lower topline,
recent investments in capacity enhancement and production efficiencies have begun

9
paying off. Moreover, the restoration of zero-rating on textile exports might also help the
situation.

Cost Accumulation method used

Process Costing
Nishat textile uses process costing as a cost accumulation method for the production of its
bed set. This is because its products are mass produced in an automated and continuous
production process and it involves the production of small batches of identical low cost
items. Moreover for the cost accumulation purpose this method is used as costs cannot be
directly traced to each unit of product and therefore are accumulated by process.

Analysis of Income Statement

For the year 2014-2016, we can see that overall net income for Nishat Mills Limited over
a period of 3 years has been fluctuating, however, no drastic change was observed. If we
just look at the net income, one good sign that we can notice is that even though the net
income has been fluctuating but at least the company is earning profits and it is not
incurring a loss. Net income increased in 2014 from 9.24% to 9.97% and then decreased
the following year to 7.85%. Later, Nishat Mills Limited was able to increase its net
income in 2016 to 11.15%, however, a slight decrease to 10.13% was observed in 2014.

In order to identify the reasons for fluctuations, let us first analyze the production
efficiency of Nishat Mills Limited over a period of time. The production efficiency of
Nishat Mills Limited has been decreasing over a period of time. In 2014, it decreased
from 18.96% to 16.16% and then to 15.11% in 2015. The only exception is year 2016 in
which it increased a little, which is 17.25% but for only that year and then decreased
again to 14.44% in next year. Investor who has a limited knowledge about finance might
perceive declining gross profit as a bad sign. However, even though the percentage of
gross profit from total sales is decreasing over a period of time, at least gross profit is
positive and hence no losses are incurred which is a good sign. But gross profit should
increase over a period of time. The factor that directly affects gross profit is cost of sales.
In case of Nishat Mills Limited, generally speaking, cost of sales has been increasing

10
over a period of time. In 2014 it was 81.04% and in 2014 it was at 85.56%. Exception is
year 2016 in which company had lower cost of sales as compared to the previous years.

After the productive efficiency, let us now consider operating efficiency of Nishat Mills
Limited from 2014 to 2016. Operating efficiency depicts how well a company is
maintaining or controlling its operating expenses and earning other incomes to enhance
its operating profits. According to the common size income statement, no sharp increase
or decrease has been observed in their operating expenses. In 2014, the percentage of
operating expenses with respect to sales was 8.08% which fell to 6.75% in the next year.
In 2015, it again rose to 8.08% but then kept on declining in the next two years at around
7%. In other words, we can say that although the percentage has been fluctuating over a
period of time yet no significant change occurred. Furthermore, the fluctuations caused
were mainly due to the minimal fluctuations in distributive costs; in which the major
contributor was freight costs and fuel prices. The other income has been increasing over a
period of time. The major contributor was dividend income, interest income and capital
gains. So we can say that the operating efficiency of Nishat Mills Limited over these 5
years had minimal fluctuations merely because of its operating expenses since an overall
increasing trend of other income was observed.

The general trend of finance cost and taxes was decreasing over a period of time which is
a good sign. Furthermore, the percentage of finance cost with respect to sales decreased
from 3.57% in 2014 to 2.96% in 2014. This indicates that company has been spending
fewer amounts on making interest payments to an outside entity and this ultimately helps
in reducing their interest expense.

So, to conclude, we can say that the gross profit or production efficiency of Nishat Mills
Limited remained somewhat reasonable considering the fact that it was still getting
profits instead of incurring losses. The operating efficiency also remained somewhat
reasonable in these 5 years. However, the main reasons for the fluctuation in net income
are due to the increase in cost of sales, and fluctuations in operating expenses such as the
distribution costs. The factors that helped in keeping net income positive can be control in
operating expenses other than distribution cost, and a gradual increase in other income.

11
This also indicates that the company has been making more profits from their non-core
activities rather than from their core activities.

Analysis of Cost of Goods sold

Cost of sales sums up the cost that was attributed to the production of products or
services. This cost includes all the direct materials, direct labor, and other indirect costs
such as factory overheads. Over a period of these years, the internal main reason in the
increase in cost of sales is attributed to high salaries, wages, and other benefits provided
to the employees and high costs of their stores, spares and loose tools in short inventory.
Although the overall raw material consumption, which contributes major portion to cost
of sales slightly increased then declined over a period of time.

Furthermore, the main external or macro-economic reason was high prices of fuel and
power. Since Nishat Mills Limited is a manufacturing unit and is heavily dependent upon
fuel and power to run its operations, thus higher costs were incurred due to this.
However, the good sign is that its cost of sales has decreased from Rs. 45 billion in 2015
to Rs. 41 billion.

The main reason behind lowering of cost of sales in 2016 may be attributed to the fact
that fewer amounts was spent on new purchases and the beginning amount of raw
materials coupled with relatively small number of purchases made Nishat to meet its
demand. Overall, the cost of goods manufactured was Rs. 45 billion in the year 2015
which decreased to Rs. 41 billion. So, since 2014 it has been decreasing. Other than this,
the prices of fuel and gas were also somewhat in the favor of Nishat as a result of which
it was able to lower its cost of sales collectively. However, like that of last year, the
amount of salaries, wages and others increased from Rs 3 billion to Rs. 4 billion
approximately.

Hence we can say that the decrease in cost of sales is due to the lower amount of cost of
goods manufactured; because of lower amount of raw material purchased and hence
produced. The only factor that needs to be controlled is the overhead costs which include
indirect labor, materials and others which have been seen increasing during the period of
2014-2016.

12
 Application of Activity Based Costing
Activity Based Costing
ABC costing required the proper allocation for the overhead cost systems of all the
activities of the entire organization which then requires the proper allocation of the cost
with respect to the cost driver. An activity-based system (ABC) identifies individual
activities as fundamental cost objects. An activity is an event, task, or unit of work with
specific purpose—for example in case of Nishat Mills it Weaving, Spinning, Garments and
Home textile and printing. Once activities are determined, Costs are then assigned to the
activities and allocated to the individual products.

Cost Driver:-
The relevant cost drivers can be machine hours, labor hours.

Cost Pools:-
Cost of sales to bifurcate based upon four different segments Spinning, Weaving, Home
textile, Garments and printing. We have distributed these costs base upon revenue
contribution from each segment. The respective percentages in 2016 are Spinning 23%,
Weaving 24%, Home textile 15%, Garments 9% and Printing 28.8%, while percentages in
2015 includes as Spinning 24%, Weaving 24%, Home textile 16%, Garments 8.14% and
Printing 27.165%.

Rupees in 000 Spinning Spinning

Faisalabad 7,812,714 9,331,031

Feroze
Wattwan 3,434,222 3,202,458
Total 11,246,936 12,533,489
% of Revenue 23 24

Weaving Weaving

Bhikki 8,247,514 9,134,454

Lahore 3,205,304 3,335,981
Total 11,452,818 12,470,435
% of Revenue 24 24

Home textile Home

13
 textile

7,355,298 8,090,646
15.8019741
15.3237996 4
Total 7,355,313 8,090,662
% of Revenue 15 16

Garments Garments

I 4,032,632 4,169,766
II 69,982 –
Total 4,102,614 4,169,766
8.14403874
% of Revenue 9 8

Printing Printing

13,824,325 13,908,418
27.1647605
% of Revenue 28.8011697 9

Cost of sales

2016

Cost of
Sales
2016
Percentage
based upon 23% 24% 15% 9% 28.80%
Revenue count
Home
Spinning Weaving Garments Printing
Segments Textile
Raw Material
Consumed 38,191,759 8784104.57 9166022.2 5728763.85 3437258.31 10999226.6
Processing
Charges 373,687 85948.01 89684.88 56053.05 33631.83 107621.856

Store, Spares
and Loose parts
consumed 4,782,661 1100012.03 1147838.6 717399.15 430439.49 1377406.37

14
Packing
materials 1,092,136 251191.28 262112.64 163820.4 98292.24 314535.168
Repair and
Maintenance 514,326 118294.98 123438.24 77148.9 46289.34 148125.888
Fuel and Power 4,231,644 973278.12 1015594.6 634746.6 380847.96 1218713.47

Other factory
overheads 561,879 129232.17 134850.96 84281.85 50569.11 161821.152

TOTAL 49,748,092 11442061.2 11939542 7462213.8 4477328.28 14327450.5

WIP
Opening Stock 1,575,230 362302.9 378055.2 236284.5 141770.7 453666.24
Closing Stock -2,263,340 -520568.2 -543201.6 -339501 -203700.6 -651841.92
-688,110 -158265.3 -165146.4 -103216.5 -61929.9 -198175.68
Cost of goods
manufactured 49,059,982 11283795.9 11774396 7358997.3 4415398.38 14129274.8

Finished goods
Opening Stock 4,337,851 997705.73 1041084.2 650677.65 390406.59 1249301.09
-
Closing Stock -4,606,221 -1059430.8 -1105493 -690933.15 -414559.89 1326591.65
-268,370 -61725.1 -64408.8 -40255.5 -24153.3 -77290.56

Cost of goods
sold 49,328,352 11345521 11774396 7399252.8 4439551.68 14206565.4

2015

Cost of
Sales
2015
Percentage
based upon
24% 24% 16% 8% 27.16%
Revenue
count
Home
Spinning Weaving Garments Printing
Segments Textile
Raw Material 45,512,34 10922962.
Consumed 5 10,922,963 8 7281975.2 3,640,988 12362252.9
Processing 132282.432
Charges 486,977 116874.48 116874.48 77916.32 39639.9278 3

15
Store, Spares
and Loose
parts
consumed 4,963,994 1191358.56 1191358.56 794239.04 404069.1116 1348419.33
Packing 288672.371
materials 1,062,702 255048.48 255048.48 170032.32 86503.9428 3
Repair and
Maintenance 597,897 143495.28 143495.28 95663.52 48668.8158 162412.7411
Fuel and 1274919.3 1274919.3 432410.149 1442996.22
Power 5,312,164 6 6 849946.24 6 9

Other factory 151357.536

overheads 557,199 133727.76 133727.76 89151.84 45355.9986 4

58,493,27
TOTAL 8 14,038,387 14,038,387 9,358,924 4,697,636 15,888,394

WIP
Opening 546952.572
Stock 2,013,520 483244.8 483244.8 322163.2 163900.528 8
-
427895.477
Closing Stock -1,575,230 -378055.2 -378055.2 -252036.8 -128223.722 2
438,290 105189.6 105189.6 70126.4 35676.806 119057.0956
Cost of goods
manufacture 58,931,56
d 8 14,143,576 14,143,576 9,429,051 4,733,312 16,007,451

Finished
goods
Opening
Stock 4,022,360 965366.4 965366.4 643577.6 327420.104 1092633.87
- -
1041084.2 353101.071 -
Closing Stock -4,337,851 -1041084.2 4 -694056.16 4 1178333.846
-
-315,491 85699.9752
-75717.84 -75717.84 -50478.56 -25680.9674 4

Cost of goods 59,247,05

sold 9 14,219,294 14,219,294 9,479,529 4,758,993 16,093,151

16
Calculations
Assuming 60% of this cost is attributable to these four processes. PKR
(49328352000*60%) equals to almost 30 billion. These four business division have
production per unit or in Kg either if it is per piece in case of garments or in case of per
Kg Yarn is calculated by dividing cost of sales for each segment by total output in year.

Home
Total Spinning Weaving Garments Printing
Textile

Cost of goods 14206565.

sold 49,328,352 11345521 11774395.68 7399252.8 4439551.68 4
Output in pieces
and Kg 1,469,740 5,879,100 867500 1556430 2549860

If 60% of cost
is attributed to
these 4
segments
60%
Cost of goods 8523939.2
sold 29597011.2 6807312.58 7064637.408 4439551.68 2663731.008 3
Output in pieces
and Kg 1,469,740 5,879,100 867500 1556430 2549860
463.164408 120.1652873 511.7638824 171.1436433 334.29048

Home
Category Spinning Weaving Garments Printing
textile
512 per
Cost of Sales based 171 Per
463 per kg Yarn 120 Per meter square 334 per
units piece
meter piece

Distribution costs
Cost driver number of units produced in Spinning, Weaving, Home Textile, Garments and
printing. This assumption is also based upon respective revenue contribution percentages.

Distribution costs
Home
Spinning Weaving Garments Printing
Textile
2016 23% 24% 15% 9% 28.80%
Outward 1,072,349 246640.27 257363.76 160852.35 96511.41 308836.512

17
 Freight
Commission
496,604 114218.92 119184.96 74490.6 44694.36
for selling 143021.952
Fuel costs 117,457 27015.11 28189.68 17618.55 10571.13 33827.616
Travelling 116,022 26685.06 27845.28 17403.3 10441.98 33414.336
Vehicles 16,549 3806.27 3971.76 2482.35 1489.41 4766.112
Entertainment 12,088 2780.24 2901.12 1813.2 1087.92 3481.344
Electricity 60,087 13820.01 14420.88 9013.05 5407.83 17305.056
Printing 6,076 1397.48 1458.24 911.4 546.84 1749.888

Total in
1,897,232 436363.36 455,336 284584.8 170,751 546402.816
thousands
Units produced 1469740 5879100 867500 1556430 2549860
PU Dist. Cost 29.6898336 7.744989539 32.80516427 10.9706752 21.4287379

ABC per unit based upon cost based upon CGS and distribution cost

Cost per unit based upon CGS and directly attributable distribution cost per unit Piece and
per Kg is as follows.

Home
Category Spinning Weaving Garments Printing
Textile
511.763882 171.143643
Units Produced 463.1644084 120.165287 334.2904797
4 3
Per unit 32.8051642
29.68983358 7.74498954 10.9706752 21.42873789
Distribution cost 7

127.910276 544.569046 182.114318

Per unit cost
492.854242 9 7 5 355.7192176

The following table shows the calculation and determination of Activities and their
allocated weights along with the cost drivers, their respective costs and hours assigned.

2016

Indirect cost
Activities weights cost driver Cost Hours rate
Spinning 0.17 Machine 14,939,842,000 9,500,000 1572.614947

18
 hours
Machine
Weaving 0.70 hours 18,595,070,000 184408000 100.8365689
Garments 0.12 Labor Hour 4,102,614,000 13784956 297.6153134
Home textile 0.01 Labor Hour 7,355,298,000 13334000 551.619769
Total 100%
841028 8784

The above table represents the cost allocation on activity basis and for that the costs are
gauged from the balance sheets and specific weights are assigned based on the
importance of each activity with respect to the work. Costs drivers are selected based on
the information gathered from interviews and the indirect costs that cannot be directly
placed or allocated.

Breakeven analysis
Breakeven analysis is used to determine when Nishat will be able to cover all its
expenses and begin to make a profit in the years considered i-e 2015 and 2016.
Following are the lists of fixed costs and variable costs for these 3 years.

VARIABLE COST

(Rupees in thousands) Variable cost

COST OF SALES 2016 2015
Raw material consumed 24,639,552 27,136,867
Salaries, wages and other benefits 4,466,527 3,949,244
Processing charges 277,302 399,498
Stores, spare parts and loose tools consumed 4,523,950 4,381,843
Packing materials consumed 996,473 985,497
Total cost of sales 34,903,804 36,852,949

DISTRIBUTION COST
Salaries and other benefits 349,113 332,516
Outward freight and handling 926,083 1,067,949
Commission to selling agents 495,921 636,694
Travelling and conveyance 104,838 110,463
Vehicles’ running 7,065 6,255

19
Total Distribution Cost 1,883,020 2,153,877

ADMINISTRATIVE EXPENSES
Salaries and other benefits 767,824 758,953
Travelling and conveyance 29,934 30,732
Entertainment 24,807 27,453
Repair and maintenance 21,561 22,010
Vehicles’ running 41,857 49,451
Total Administration cost 885,983 888,599

Total Variable cost 37,672,807 39,895,425

FIXED COST

(Rupees in thousands) Fixed cost

COST OF SALES 2015 2014
Fuel and power 4,192,029 4,938,184
Repair and maintenance 304,105 340,236
Insurance 39,217 38,356
Other factory overheads 437,837 453,515
Depreciation 2,065,498 2,023,019
Total cost of sales 7,038,686 7,793,310

DISTRIBUTION COST
Insurance 20,092 20,937
Electricity, gas and water 553 4,498
Postage, telephone and fax 72,149 71,786
Advertisement 1,220 1,565
Miscellaneous 7,065 6255
Total Distribution Cost 101,079 105,041

ADMINISTRATIVE
EXPENSES

20
Rent, rates and taxes 4,512 5,247
Insurance 7,062 7,145
Printing, stationery and
20,606 19,863
periodicals
Electricity, gas and water 26,360 22,591
Postage, telephone and fax 7,487 7,259
Legal and professional 22,024 19,769
Fee and subscription 4,242 3,399
Depreciation 86,860 88,053
Miscellaneous 47,409 34,990
Total Administration cost 226,562 208,316

Total Fixed Cost 7,366,327 8,106,667

Contribution Margin

(Rupees in thousands) 2016 2015

Revenue 47,999,179 51,200,223
Variable Cost 37,672,807 39,895,425
Contribution Margin 10,326,372 11,304,798
Contribution margin Percentage 21.51 22.08
Fixed cost 7,366,327 8,106,667
Break Even Revenues 34240258.65 36715663.4

Budgeting

Budgeted sales for the next 4 years are:

2014 15,000,000

2015 12,034,500

2016 1,050,000

21
The Budgeted selling price for the next four years is: -

2014 3,255

2015 3,745

2016 5,400

Sales Budget

Sales Budget
2016 2015 2014

Budgeted sales in units 10,050,000 12,034,500 15,000,000

Selling price 5,400 3,745 3,255

45,069,202,50
Revenue generation 54,270,000,000 0 48,825,000,000

Production Budget

Production budget for 2017 has been made by keeping in mind the past trends. It has
been assumed that the same percentage decrease would be observed in year 2017 as
of year 2016. The values of opening and ending stock were available in the annual
report.

Production Budget
2016 2015 2014

Sales in units 10,050,000 12,034,500 15,000,000

Add desired ending
Inventory 1,800,044 2,045,000 2,500,000
Total needed Inventory

22
 11,850,044 14,079,500 17,500,000

Less beginning Inventory 2,045,000 2,500,000 2,550,000

Units to be produced 9,805,044 11,579,500 14,950,000

Direct Material budget

Direct material budget is made of materials directly involved in production of products.

This involves raw material, packaging material, store and spare tools. The calculation of
budget for 2017 is based on the figures calculated through past years’ trend.

Direct Material Budget

2016 2015 2014

Production in units 9,805,044 11,579,500 14,950,000

Materials per unit 3,000 2,850 2000

33,001,575,00
Production needs 29,415,132,000 0 29,900,000,000
Add: desired ending
inventory (
10% of the following years
inventory)
2,954,066,700 2,941,513,200 3,300,157,500

35,943,088,20
Total needed 32,369,198,700 0 33,200,157,500
Less: beginning Inventory (
Inventory forwarded from
2013)
2,941,513,200 3,300,157,500 3,541,600,500

32,642,930,70
Materials to be purchased 29,427,685,500 0 29,658,557,000

23
 Direct Labor Budget
Direct labor for 2017 is calculated by the estimates of past trends prevalent in the company.

Direct Labor Budget 2016 2015 2014

Production in units 9,805,044 11,579,500 14,950,000

Direct Labor Hours 0.00215 0.00215 0.00215

Labor hours required 21,081 24,896 32,143

Guaranteed labor hours 22000 22000 22000

labor hours paid 22,000 24,896 32,143

wage rate 19523 18746 200349
6,439,706,
total direct labor 429,509,339 466,698,241 853

Manufacturing Overhead Budget

This involves average of previous years and incorporating increase of 10% plus 5% for
real rate of inflation. The budgeted figure for 2016 involves directly attributable overheads,
fuel costs consumed in manufacturing and process charges.

Overhead Budget 2016 2015 2014

Indirect Labor 30,000,000 303,000,000 66,000,000

Indirect material 350,000,000 135,641,000 300,057,000

Insurance 30,000,000 1,233,000 25,022,000

Electricity, gas and
water 55,000,000 25,513,000 25,000,000
Postage, telephone and
fax 119,967,000 60,036,000 80,000,000

Advertisement 1,500,000 12,520,000 1,500,000

Miscellaneous

24
 75,000,000 404,474,000 45,550,000

Rent 135,041,000 3,000,000 7,777,000

Printing, stationery
and periodicals 27,957,000 15,606,000 20,333,000

824,465,000 961,023,000 571,239,000

Selling and administration Budget

Selling and administrative

Expense budget 2016 2015 2014

Sales in units 10,050,000 12,034,500 15,000,000

Variable S&A rate 2.65 2.47 2.22

variable expense 26,632,500 29,725,215 33,300,000

Fixed S&A 7,300,000 7,500,000 8,100,000

Total expense 33,932,500 37,225,215 41,400,000

less: non-cash expense
(depreciation etc) 21,310,000 13,100,000 9,418,000

cash Disbursements 12,622,500 24,125,215 31,982,000

Cash Receipts Budget

Cash Receipts Budget 2016 2015 2014

Cash Receipts 5,550,000,000 5,000,051,000 4,500,376,000
Accounts receivables 2,330,008,000 4,013,030,000 3,300,054,000
Cash collected (20% of previous
year) 802606000 660010800 667,181,200
Dividends received 4,000,000,000 3,300,006 2,550,333,000

Total cash collections 10,352,606,000 5,663,361,806 7,717,890,200

Cash Disbursement Budget

Cash Disbursement Budget 2016 2015 2014

Accounts Payables 10,555,000,000 11,000,000,00 15,500,024,000
25
 0
Cash paid (30% of previous
year) 3300000000 4650007200 3660008400
Total cash Disbursements 3300000000 4650007200 3660008400

Cash Budget

Cash Budget 2016 2015 2014

Beginning cash
balance 52,219,000 2,802,316,000 1,128,862,000
Add: Cash collections 10,352,606,000 5,663,361,806 7,717,890,200
Total Cash available 10,404,825,000 8,465,677,806 8,846,752,200
less: Disbursements
Materials 29,427,685,500 4,650,007,200 3,660,008,400
Direct labor 429,509,339 466,698,241 6,439,706,853
Manufacturing
overhead 824,465,000 961,023,000 571,239,000

Selling and admin 12,622,500 24,125,215 31,982,000

Equipment purchase 2,595,237 3,915,523,000 9,135,413,000

Dividends 1,573,781 1,400,449,000 1,400,445,000

Total Disbursements 30,698,451,357 11,417,825,656 21,238,794,253

Excess (deficiency) of
Cash available over
disbursements (20,293,626,357) (2,952,147,850) (12,392,042,053)

ACTUAL

Sales Actual

Sales Actual
2016 2015 2014

Sales in units 8,727,123 11377827.33 15555454.57

Selling price 5,500 4,500 3,500

26
Revenue generation 47,999,179,000 51,200,223,000 54,444,091,000

Production Actual

Calculation for
production
needs 2016 2015 2014
Total RM 30159975000 32504207000 35449027000
No. of units
produced 9,782,524 11,648,020 14,850,000
3083.046359 2790.534958 2387.139865

Production (Actual)
2016 2015 2014

Sales in units 8,727,123 11,377,827 15,555,455

Ending inventory 1,746,044 2,013,520 2,400,000

Total Inventory 10,473,167 13,391,347 17,955,455

Beginning inventory 2,013,520 2,400,000 2,325,087

Units produced 8,459,647 10,991,347 15,630,368

Direct Material (Actual)

Direct Material (Actual)
2016 2015 2014

Production in units 8,459,647 10,991,347 15,630,368

Materials per unit 3,081 2,722 2200

Production needs 26,064,173,807 29,918,447,441 34,386,808,657

Ending inventory 2,954,066,700 2,606,417,381 2,991,844,744

Total needed 29,018,240,507 32,524,864,822 37,378,653,401

27
Less: beginning Inventory 2,606,417,381 2,991,844,744 3,541,600,500

Materials to be purchased 26,411,823,127 29,533,020,078 33,837,052,901

Direct Labor (Actual)

Direct Labor (Actual) 2016 2015 2014

Production in units 8,459,647 10,991,347 15,630,368

Direct Labor Hours 0.00215 0.00215 0.00215

Labor hours 21,000 25,000 32,000

Guaranteed labor hours 22000 22000 22000

labor hours paid 22,000 25,000 32,000

wage rate 20000 18000 180000
5,760,000,
total direct labor 440,000,000 450,000,000 000

Overheads (Actual)

Overheads (Actual) 2016 2015 2014

Indirect Labor 35,584,000 303,612,000 66,516,000

Indirect material 359,256,000 327,641,000 313,357,000

Insurance 26,736,000 27,154,000 28,082,000

Electricity, gas and water 60,087,000 26,913,000 27,089,000

Postage, telephone and fax 120,130,000 79,636,000 79,045,000

Advertisement 2,028,000 1,220,000 1,565,000

Miscellaneous 56,053,000 54,474,000 41,245,000

Rent 124,541,000 4,512,000 5,247,000

Printing, stationery and
periodicals 27,957,000 20,606,000 19,863,000

812,372,000 845,768,000 582,009,000

28
Selling and Administration Expenses (Actual)

Selling and administrative

Expenses (Actual) 2016 2015 2014

Sales in units 8,727,123 11377827.33 15555454.57

Variable S&A rate 2.65 2.47 2.22

variable expense 23,126,877 28,103,234 34,533,109

Fixed S&A 7,300,000 7,500,000 8,100,000

Total expense 30,426,877 35,603,234 42,633,109

Less: non-cash expense
(depreciation etc.) 21,310,000 13,100,000 9,418,000

Cash Disbursements 9,116,877 22,503,234 33,215,109

Cash Receipts (Actual)

Cash Receipts (Actual) 2016 2015 2014

4,887,376,00
Cash Receipts 5,332,338,000 5,298,151,000 0
2,929,054,00
Accounts receivables 2,253,369,000 3,014,466,000 0

Cash collected (70% of previous 1,936,134,20

year) 2110126200 2050337800 0
2,947,848,00
Dividends received 3,700,227,000 2,947,006 0

9,771,358,20
Total cash collections 11,142,691,200 7,351,435,806 0

Cash Disbursement (Actual)

Cash Disbursement (Actual) 2016 2015 2014

29
Accounts Payables 10,475,657,000 11,524,143,000 14,468,124,000
Cash paid (30% of previous
year) 3457242900 4340437200 3581708400
Total cash Disbursements 3457242900 4340437200 3581708400

Cash Budget

Cash Budget 2016 2015 2014

Beginning cash balance 52,219,000 2,802,316,000 1,128,862,000

Add: Cash collections 11,142,691,200 7,351,435,806 9,771,358,200

Total Cash available 11,194,910,200 10,153,751,806 10,900,220,200

less: Disbursements

Materials 26,411,823,127 4,340,437,200 3,581,708,400

Direct labor 429,509,339 466,698,241 6,439,706,853

Manufacturing overhead 812,372,000 845,768,000 582,009,000

Selling and admin 9,116,877 22,503,234 33,215,109

Equipment purchase 2,595,237 3,915,523,000 9,135,413,000

Dividends 1,573,781 1,400,449,000 1,400,445,000

Total Disbursements 27,666,990,361 10,991,378,674 21,172,497,362

Excess (deficiency) of Cash
available over disbursements (16,472,080,161) (837,626,868) (10,272,277,162)

BUDGETED FINANCIAL STATEMENTS

Budgeted Cost of Goods Sold

Budgeted Cost of Goods Sold

Direct Material: 2016 2015 2014
Beginning material inventory 5936585000 7831707000 6504220000
2401547600 2524174500 3111587100
Add: Material Purchases 0 0 0
2995206100 3307345200 3762009100
Material Available for use 0 0 0
Deduct: Ending material inventory - - -

30
 5312509000 5936585000 7831707000
2463955200 2713686700 2978838400
Direct material use 0 0 0
466698240.
Direct labor 429509339 9 6439706853
Manufacturing overheads 824465000 961023000 571239000
2589352633 2856458824 3679932985
Total manufacturing costs 9 1 3
add: Beginning WIP inventory 1530684000 2013520000 1720313000
2742421033 3057810824 3851964285
Subtotal 9 1 3
- - -
Deduct: Ending WIP inventory 1746041000 1530684000 2013520000
2567816933 2904742424 3650612285
Cost of goods manufactured 9 1 3
Add: Beginning finished goods
inventory 2882924000 2907268000 2720906000
2856109333 3195469224 3922702885
Costs of Goods available for sale 9 1 3
Deduct: Ending finished goods - - -
inventory 2875186000 2882924000 2907268000
2568590733 2907176824 3631976085
Costs of Goods sold 9 1 3

Budgeted income Statement

2016 2015 2014

Revenue 54270000000 45069202500 48825000000
Cost of goods sold 25685907339 29071768241 36319760853
Gross margin 28584092661 15997434259 12505239147
Operating Expenses:
Selling & Admin
Expenses 33932500 37225215 41400000
Total operating
Expense 138554600 211702515 202388200
Interest Expense 104622100 174477300 160988200
EBT 28340915961 15611254444 12141862747
Tax 8502274788 4683376333 3642558824
Net Income 19838641173 10927878111 8499303923

31
Budgeted Cash Flow statement

Budgeted Cash Statement 2016 2015 2014

Cash flow from operating activities:
Cash receipts from customers 10352606000 5663361806 7717890200
Cash payments:
To suppliers of raw materials 3300000000 4650007200 3660008400
For direct labor 429509339 466698240.9 6439706853
For manufacturing-overhead
expenditures 824465000 961023000 571239000
For selling and administrative
expenditures 12622500 24125215 31982000
For interest 104622100 174477300 160988200
Total cash payments 4671218939 6276330956 10863924453
Net cash flow from operating
activities 5681387061 -612969149.9 -3146034253
Cash flow from investing activities:
Purchase of Equipment -2595237000 -3915523000 -9,135,413,000
Net cash used by investing activities -2595237000 -3915523000 -9,135,413,000
Cash flow from financing activities:
Payment of dividends 1573781 1400449000 1400445000
Principle of bank loan 1209108000 1769541000 5,839,202,000
Repayment of bank loan -196435200 -2364659000 -2,202,523,000
Net cash provided by financing
activities 1014246581 805331000 5037124000
Net increase in cash 4100396642 -3723161150 -7244323253
Balance in cash, beginning 52219000 2802316000 1128862000
Balance in cash, end 4152615642 -920845149.9 -6115461253

32
 Balance sheet

2016 2015 2014

Current assets:
Cash 20293626357 2952147850 12392042053
Account Receivables 2330008000 4013030000 3300054000
Raw materials inventory 5312509000 5936585000 7831707000
Work in process inventory 1746041000 1530684000 2013520000
Finished goods inventory 2875186000 2882924000 2907268000
Total Current Assets 32557370357 17315370850 28444591053

Property, plant &

equipment 24715095000 24357269000 22964388000

Total Assets 57272465357 41672639850 51408979053

Accounts Payable 14327689643 16970183150 16180196947

Common stock 3515999000 3515999000 3515999000
Retained Earnings 48639156000 22626824000 5073177000
Total Liabilities & Equities 57272465357 41672639850 51408979053

Static-Budget
Actual results variances Static Budget

Units sold 11,377,827 (656,673) U 12,034,500

Revenues 51200223000 6,131,020,500 F 45,069,202,500

Variable costs

Direct materials 29533020078 (3,109,910,622) F 32,642,930,700

Direct
manufacturing
labor 450000000 (16,698,241) F 466,698,241

33
 Variable
manufacturing
overhead 845768000 (115,255,000) F 961,023,000
Total variable
costs 30828788078 (3,241,863,863) F 34,070,651,941
Contribution
margin 20371434922 9,372,884,363 F 10,998,550,559

Fixed costs 7366327000 (133,673,000) F 7,500,000,000

Operating
income 13005107922 9,506,557,363 F 3,498,550,559

VARIANCE ANALYSIS

Static Budget

2015
Static-Budget
Actual results variances Static Budget

Units sold 11,377,827 (656,673) U 12,034,500

Revenues 51200223000 6,131,020,500 F 45,069,202,500

Variable costs

Direct materials 29533020078 (3,109,910,622) F 32,642,930,700

Direct
manufacturing
labor 450000000 (16,698,241) F 466,698,241
Variable
manufacturing
overhead 845768000 (115,255,000) F 961,023,000
Total variable
costs 30828788078 (3,241,863,863) F 34,070,651,941
Contribution
margin 20371434922 9,372,884,363 F 10,998,550,559

Fixed costs 7366327000 (133,673,000) F 7,500,000,000

Operating
income 13005107922 9,506,557,363 F 3,498,550,559

34
 2016
2016
Static-Budget
Actual results variances Static Budget

Units sold 8,727,123 (1,322,877) U 10,050,000

Revenues 47,999,179,000 (825,821,000) U 48,825,000,000

Variable
costs
Direct
materials 26,411,823,127 (3,015,862,373) F 29,427,685,500
Direct
manufacturing
labor 4,400,000,000 3,970,490,661 U 429,509,339
Variable
manufacturing
overhead 812,372,000 (12,093,000) F 824,465,000
Total variable
costs 31,624,195,127 942,535,288 U 30,681,659,839
Contribution
margin 16,374,983,873 (1,768,356,288) U 18,143,340,161

Fixed costs 8214593000 14,593,000 U 8,200,000,000

Operating
income 93475978055 83,532,637,894 F 9,943,340,161

Flexible Budget

2014

2014
Flexible
Actual Budget Flexible Sales Volume Static
Results Variances Budget Variances Budget

Units sold 15555454.57 0 15555454.57 555454.57 12034500

Revenues 54444091000 4666636376 F 49777454624 49777454624 45069202500

Variable costs
Direct Material 33837052901 2183052901 U 31654000000 31654000000 32642930700
Direct 5760000000 101000000 U 5659000000 5659000000 466698240.9
Manufacturing

35
Labor
Variable
Manufacturing
Overhead 582009000 1133000 U 580876000 580876000 961023000
Total Variable
Costs 40179061901 2285185901 U 37893876000 37893876000 34070651941

Contribution
Margin 14265029099 2381450475 F 11883578624 11883578624 10998550559
Fixed
Manufacturing
Costs 8106667000 54667000 U 8052000000 8052000000 7500000000

Operating Income 6158362099 2326783475 F 3831578624 3831578624 3498550559

2015

2015
Flexible Sales
Actual Budget Flexible Volume
Results Variances Budget Variances Static Budget

Units sold 11377827.33 0 11377827.33 11377827.33 12,034,500

5120022300 4778687480
Revenues 0 3413348200 F 0 47786874800 45,069,202,500

Variable costs
2953302007 2784299900
Direct Material 8 1690021078 U 0 27842999000 32,642,930,700
Direct
Manufacturing
Labor 450000000 -2000000 F 452000000 452000000 466,698,241
Variable
Manufacturing
Overhead 845768000 -2231000 F 847999000 847999000 961,023,000
Total Variable 3082878807 2914299800
Costs 8 1685790078 U 0 29142998000 34,070,651,941

Contribution 2037143492 1864387680

Margin 2 1727558122 F 0 18643876800 10,998,550,559
Fixed 7366327000 -33673000 F 7400000000 7400000000
Manufacturing 7,500,000,000

36
 Costs

Operating 1300510792
Income 2 1761231122 F 11243876800 11243876800 3,498,550,559

2016
2016
Flexible Sales
Actual Budget Flexible Volume Static
Results Variances Budget Variances Budget

Units sold 8727123.455 8727123.455 8727123.455 10050000

Revenues 47999179000 2618137036 F 45381041964 45381041964 48825000000

Variable costs
Direct
Material 26411823127 -299611873.3 F 26711435000 26711435000 29427685500
Direct
Manufacturin
g Labor 440000000 13656445 U 426343555 426343555 429509339
Variable
Manufacturin
g Overhead 812372000 2138567 U 810233433 810233433 824465000
Total Variable
Costs 27664195127 -283816861.3 F 27948011988 27948011988 30681659839

Contribution
Margin 20334983873 2901953898 F 17433029976 17433029976 18143340161
Fixed
Manufacturin
g Costs 8214593000 112271000 U 8102322000 8102322000 8200000000

Operating
Income 12120390873 2789682898 F 9330707976 9330707976 9943340161

PRICE AND EFFICIENCY VARIANCES

2014:

2014

37
Actual Price 3500
Budgeted Price 3255
Actual Quantity 15555454.57
15,000,0
Budgeted Quantity 00
Actual Purchased 33837052901
29,658,557,0
Budgeted Purchased 00
Actual Cost 48285728901
Budgeted Cost 36669502853
Actual wage rate 180000
Budgeted wage rate 200349
32,
Budgeted hours 143
Actual hours 32000

Justifications:

When it comes to material price variance, we can see that the actual price and quantity of
materials used were more than expected as a result they affected our net income
negatively and hence the outcome is unfavorable for us. The situation did not go as we
had hoped and assumed based on our secondary research. As far as its efficiency is

38
concerned, we can see that actual inputs were used more than the budgeted one which
means negative impact on our net income and hence the outcome is unfavorable when
compared to the budgeted one. Labor variance is favorable because the amount of actual
wage rate applied was lower than that expected according to the respective actual number
of hours. The efficiency is favorable too because the budgeted wage rate and hours were
amplified.

2015:

2015

Actual Price 4,500

Budgeted Price 3,745

Actual Quantity 11377827.33

Budgeted Quantity 12,034,500

29,533,020,0
Actual Purchased 78
Budgeted
Purchased 32,642,930,700
Actual Cost 38195115078
Budgeted Cost 34070651941
Actual wage rate 18000
Budgeted wage
rate 18746
24,
Budgeted hours 896

Actual hours 25,000

39
Materials price is again unfavorable as the amount of actual quantity and the actual prices
were higher than expected. We assumed that owing to the energy crisis and other
problems, production and prices would be lower but that did not happen. The efficiency
calculations came out to be favorable for us as the actual quantity of inputs used were
lower than expected with respect to the budgeted price. The labor variance and efficiency
are unfavorable owing to the mismatch between our macroeconomic assumptions and
reality.

2016:

2016

Actual Price 5,500

Budgeed Price 5,400

Actual Quantity 8727123.455

Budgeted Quantity 10,050,000

26,411,823,1
Actual Purchased 27

Budgeted Purchased 29,427,685,500

Actual Cost 35878788127
Budegeted Cost 30681659839

40
Actual wage rate 20000
Budgeted wage rate 19523
22,
Budgeted hours 000

Actual hours 22,000

As for material price variance in 2016, again we have observed an unfavorable outcome
owing to the mismatch between what we had assumed would occur and what had actually
occurred. However, the actual quantity of inputs used here were lesser than assumed and
the results came out to be favorable. As for labor variance, we can see that the expected
amount of wage rate was higher than the actual one as a result of which it had a positive
impact on our net income and hence it is considered to be favorable. The efficiency level
here is zero because both the actual and budgeted hours were same.

CONCLUSION AND RECOMMENDATIONS

After carrying out the calculations for Nishat mills, we can conclude that with time the
sales of the companies have decreased from 2014 to 2016. And therefore the need for
material and production decreased simultaneously. However over the 3 years we can see
that besides the fact that Nishat’s sales declined, its net income increased. This can be
specifically attributed to the addition in capacity they made which helped them improve
their efficiency and decrease direct costs related with production. Moreover, the figures
prove that company’s performance overall has increased besides decrease in sales as the

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company’s cash flows also support it. in years 2014 and 2016 the cash flows for the
company were lower than those obtained in previous two years. We can further conclude
from the cost calculations carried out that company was able to break even in all three
years. Overall the company has been seeing better results with years passing by, however
to improve their costing we have some recommendations for Nishat Mills which would
help them better manage their costs. The recommendations are as follows:

 The firm should use Invest in marketing and advertising activities so as to

increase the sales as they are decreasing over the years.
 Activity Based Costing should become an integral part of their costing systems as
this will help them keep a close check on the costs during each activity and will
allow them see which activity has the highest incurring cost so it can be reduced
by controlling costs of that particular activity .
 Also, the company should clearly determine all its cost drivers and cost pools in
order to manage its costs in a more better and efficient manner
 Flexible budgeting should be used in order to have a close watch on the excess or
shortage of inventory and then manage them according to market changes.
 Also, budgeting on monthly and weekly basis is very important as this will help
company to have an efficient supply chain management which would eventually
help Nishat Mills to reduce their cost


References

www.nishatmillsltd.com

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