Managerial Accounting Concepts to Product Costing Page 1

NORTH SOUTH UNIVERSITY

Submitted to: Nabila Nisha

Department of Accounting & Finance

Group Name: The Squad

Submitted by

Serial No: Name ID

1 Farhat Azra 1420459030

2 Abdulla Al Mamun 1420732030

3 Arif Hasan 1430140030

4 Md Maruf Chowdhury 1430415630

5 Afshaan Iftikhar Ali 1430562630

6 Sanjida Akter Happy 1430845030

7 S.M. Fahim Anjum 1510061030

Section: 02
Date of Submission: 2-04-2017

Managerial Accounting Concepts to Product Costing Page 2

Contents
1.Letter of Transmittal ................................................................................................................4
2.Abstract ...................................................................................................................................5
3.Introduction .............................................................................................................................6
4.Estimations ..............................................................................................................................8
4.1.Maximum production possible in a given month: ..............................................................8
4.2.Estimation of All Cost related to our Production: ..............................................................9
4.3.Cost Strategy of Allocating Support Costs: .......................................................................10
4.4.Analyzing the costs and their type ...................................................................................12
4.5.Prime Cost, Conversion Cost & Full Cost: .........................................................................13
4.6.Simple Costing System.....................................................................................................14
4.7.Activity-Based Costing System .........................................................................................15
4.8.Reasons behind Selecting our Cost Drivers ......................................................................17
4.9.Product-Line Profitability Report .....................................................................................17
5.Forecasts ................................................................................................................................19
5.1.Pricing Strategy: ..............................................................................................................19
5.2.Budget:............................................................................................................................20
6.Evaluations .............................................................................................................................26
6.1.Break-Even Point: ............................................................................................................26
6.2.Break-Even Revenue: .......................................................................................................26
6.3.Margin of Safety: .............................................................................................................26
6.4.Sensitivity Analysis ..........................................................................................................27

Managerial Accounting Concepts to Product Costing Page 3

 Letter of Transmittal
nd
2 April, 2017
Nabila Nisha
Senior Lecturer,
Dept. of Accounting & Finance (BBA)
North South University, Dhaka, Bangladesh
Subject: Submission of report on understanding of managerial accounting concepts to product
costing.
Dear Ma’am,

With great pleasure we are submitting the group project which helped us enhance our depth of
understanding of managerial accounting concepts to product costing. We significantly used our
theoretical knowledge to blend with the practical world in order to relate managerial
accounting to our existing practical environment. We used various types of costing techniques
including budgeted costing, future projection of different costing systems, price projections and
total budget of our manufactured product. You have always been very helpful throughout the
semester regarding the project work, which has helped us a lot to prepare our work. Without
your support, it would have been very difficult for us to carry out the project work.

We want to thank you for your support and we are very happy to get the opportunity to work
on this project. We hope that our unwanted errors will be taken with forgiveness.

Sincerely Yours-

Farhat Azra

Abdulla Al Mamun

Arif Hasan

Md Maruf Chowdhury

Afshaan Iftikhar Ali

Sanjida Akter Happy

S.M. Fahim Anjum

Managerial Accounting Concepts to Product Costing Page 4

 Abstract
The name of our company is Pack Off and we are making decorated "Pencil Carrier Kit" which
we call "SpongeBob Pencil Carrier Kit". In this project there are all the stages starting from
manufacturing of the Pencil Carrier Kit to setting the price of it. So first we have identified all
the materials that we are going to need to make the product. Then we anticipated our labor
cost, rent, and bills. We calculated our production cost, direct material cost and support cost as
well. We again calculated our prime and convention cost. Then we have mentioned all the cost
driver of those costs. After estimation and forecasting we reached to our final stage which is
evaluation. In this stage we found out the breakeven point in unit, breakeven point in revenue,
contribution margin in unit and in percentage. Then we have done a sensitivity analysis. To do
this analysis we were given three possible scenarios and we calculated all the new budgets for
the scenarios and we got to know the percentage changes either in positive way or negative
way in our operating income.

Managerial Accounting Concepts to Product Costing Page 5

 Introduction
The product that our company "Pack Off" has decided to manufacture is a combination of pen
holder and pencil bag. We are calling it "SpongeBob Pencil Carrier Kit". We have used wood
paper, fabric, foam sheet, cardboard tube, zipper colored paper, glue etc for the product. As
pen holders and pencil bags are both quite popular as individual products, we decided to
combine these two products and give it a whole new look. So customers can keep their pen,
pencil and other stationeries in the pen holder and they also can carry the pencil bag with
them. At the same time, it can be used for decorative purpose as it looks beautiful. Children
aged around 4-12 years really like this kind of decorative pencil carriers as it decorates their
desks as well as keep their desks manageable. The product is quite unique in the market.

Reason behind selecting the product

We have chosen this product for some specific reasons. One of the main reasons to select this
product is, the manufacturing cost for this product is really low and also, the manufacturing
process is simple. Nowadays people are more conscious about decorations and creativity, so
they want unique designs for their product even in a pencil holder or pencil bag. We have
noticed that, for this type product people specially children run to the foreign franchising
companies like Hallmark and Archie's. So, we thought it would be great if our customers are
able to get same quality country product which is of lower price than the competitors.

Industry Analysis
Our product belongs to the stationery stores and gift stores industry. This industry is considered
as one of the productive industries in the world as well as in Bangladesh. Our target customers
are students specially aged between 5-12.

Competitors
Our competitors in the industry could be Aarong, Archie's, Hallmark etc. We consider them as
strong competitors as they always provide their customers with unique design.

Managerial Accounting Concepts to Product Costing Page 6

Manufacturing Process
We have two parts in the manufacturing process of " SpongeBob Pencil Carrier Kit" as our
product is a combination of two products. We have estimated we, the 7 group members are 7
labors. In the first part we made the pen holder and in the second part we have made the
pencil bag. After finishing both parts, we have added them both by joining a box in which we
have kept the pencil bag. We were very careful about choosing the materials that the materials
do not let the cost of production go up.

Manufacturing process is given below-

1. At first we have cut the wood paper with the proper measurement with the anti-cutter
and scissors according to the design. We also cut the foam sheet to cover the wood
paper as it gives the holder a "SpongeBob" look.
2. After that we joined the wood papers together using hot glue gun and glue sticks and
we gave it a square shape and let it dry. Then we added the foam sheets. After that we
used black, blue and red marker to draw the face of "SpongeBob".
3. Then we followed the same steps to make a box for keeping the pencil bag. Then we
added the box to the pen holder with glue.
4. We cut a card board tube into a perfect shape. We cut fabric into a perfect shape.
5. We cut the tube in the middle and then added a zipper with glue.
6. In the last step we glued the fabric on the outer part of the tube.

Managerial Accounting Concepts to Product Costing Page 7

 Estimations
Maximum production possible in a given month:
Number of labors worked = 7 labors

Hours worked per labor each day = 10 hours/day

Number of days worked in a week by each labor = 5 days

Hours needed to make pencil carrier kit by each labor = 1 hour

· Total time needed to make a Pencil Carrier Kit by 7 labors = 1 hour × 7 labors

= 7 hours/Pencil Carrier Kit

· Number of working days in a month = 5 days× 4 weeks

= 20 days

· Total hours worked by 7 labors in a month = 10 hours ×20 days ×7 labors

= 1400 hours/month

· Number of Pencil Carrier Kits produced in a day = (10 hours × 7 labors)/7 hours per unit
= 10 pencil carrier kits
· Number of pencil carrier kits produced in a month = 10 pencil carrier kits × 20 days
= 200 pencil carrier kits/month

Managerial Accounting Concepts to Product Costing Page 8

Estimation of All Cost related to our Production:

1.1.Direct Materials Cost :

Input/Unit(In Input/Unit(I Cost/Input Total Per Unit Total
Details Number) n Unit) Unit(TK) Units Cost(Tk) Cost(TK)
113
Direct
Materials:
Wood Paper 18 Inches 5 90.00 10170
Foam Sheet 18 Inches 3 54.00 6102.00
Colored Paper 14 Inches 1 14.00 1582.00
Zipper 1 Piece 5 5.00 565.00
Cloth 12 Inches 2 24.00 2712.00
Card Board 1
Tube Piece 10 10.00 1130.00
Total Direct 22261.0
Material Cost 197.00 0

1.2.Direct Labor Cost:

Direct Number Total Total Total

Labor of Labors Hours/Unit Cost/Hour Cost/Unit(Tk) Units Hour(DLHs) Cost(Tk)
Factory
Labor 7 7 5 35 113 791 3955

1.3.Manufacturing Overhead Cost:

Manufacturing Overhead Cost/Input(Tk) Units Total Cost
Variable MOH: 113
Glue(Stick) 80 9040
Red Marker 1 113
Black Marker 1 113
Blue Marker 1 113
Total Variable MOH Cost 83 9379
Fixed MOH:
Rent 2000
Electricity 500
Total Fixed MOH Cost 2500
Total Manufacturing Overhead Cost 11879

Managerial Accounting Concepts to Product Costing Page 9

Total Production Cost=Direct Material Cost+ Direct Labor Cost+ MOH Cost

=22261tk+3955Tk+11879Tk

=38095Tk

Total Production Cost/Unit=38095Tk/113units=337Tk/Unit

1.4.Non-Manufacturing Overhead Cost:

Non-Manufacturing Overhead Total Cost(Tk)
Operating Costs:
Production 1200
Sales 800
Support Costs:
Telephone 500
Internet 900
Total Non-Manufacturing Cost 3400

Cost Strategy of Allocating Support Costs:

For our "pencil carrier kit" we use direct method among the three methods as our cost strategy
to allocate support costs.. Direct method allocates each support department’s costs to
operating departments only. The direct method is used because of its ease of use. The direct
allocation method is reasonably simple to use. There is no need to predict the usage of Support
department services by other support department.

1.5.
Details Support Operation
Telephone Internet Production Sales
Budgeted Overhead Costs Before any cost
500 900 1200 800
Allocations
Support work supplied by Telephone(budgeted
10% 40% 50%
headcount)
Support work supplied by Internet(budgeted
5% 45% 50%
headcount)

Managerial Accounting Concepts to Product Costing Page 10

As we are following a Direct Method, we are going to avoid any cost allocation from support
department to support department.

Allocation of Telephone Cost:

Production department=500×(40/90)

=222.22=222

Sales Department=500×(50/90)

=277.78=278

Allocation of Internet Cost:

Production Department=900×(45/95)=426.31=426

Sales Department=900×(50/95)=473.68=474

1.6.Direct Method:
Direct Method
Operating
Support Department
Department
Telephone Internet Production Sales
Budgeted Overhead Costs Before any cost
500 900
allocations
Allocation of Telephone cost(40/90;50/90) -500 222 278
Allocation of Internet cost(45/95;50/95) -900 426 474
Total Cost 0 0 648 752

Managerial Accounting Concepts to Product Costing Page 11

 Analyzing the costs and their type
We consider the product as our cost object.

1.7.Analyzing cost types:

Cost Details Cost type
Direct materials:
Wood Paper Direct; Variable
Foam Sheet Direct; Variable
Colored Paper Direct; Variable
Zipper Direct; Variable
Cloth Direct; Variable
Cardboard Tube Direct; Variable
Direct Labor:
Factory Labor Direct; Variable
Manufacturing Overhead
Glue(Stick) Indirect, Variable
Red Marker Indirect, Variable
Black Marker Indirect, Variable
Blue Marker Indirect, Variable
Rent Indirect, Fixed
Electricity Indirect, Fixed
Non-Manufacturing Overhead
Operating Costs:
Production Indirect; Variable
Sales Indirect; Variable
Supporting Costs:
Telephone Indirect; Fixed
Internet Indirect; Fixed

Managerial Accounting Concepts to Product Costing Page 12

 Prime Cost, Conversion Cost & Full Cost:
Prime cost: Prime cost is the summation of all direct costs (our direct costs are only direct
materials and direct manufacturing labor).
Conversion cost: All manufacturing cost other than direct material cost. It represents all
manufacturing cost incurred to convert direct materials into finished good.

Full cost: Includes all variable cost fixed cost needed to produce a product. It is used to
compute the total cost of a unit of product while considering all costs.

1.8.
Costs (TK)
Variable Costs:
Direct Material 22,261.00৳
Direct Labor 3,955.00৳
MOH( Variable) 9,379.00৳
Total Variable 35,595.00৳
Fixed Cost:
MOH( Fixed) 2,500.00৳
NON MOH 3,400.00৳
Total Fixed cost 5,900.00৳
MOH 11,879.00৳
Prime Cost 26,216.00৳
Conversion cost 15,834.00৳
Full Cost 41,495.00৳

v Prime cost = Direct material + Direct labor

= 26,216.00৳

v Conversion Cost = Direct labor + Manufacturing overhead

= 15,834.00৳

v Full cost = Variable cost + Fixed Cost

= 41,495.00৳

Managerial Accounting Concepts to Product Costing Page 13

 Simple Costing System

1.9.
Cost/unit Total cost
Cost Driver Input/unit Cost/input(TK) (TK) Unit (TK)
Direct
Materials
Wood
Paper(inch) 18 5.00৳ 90.00৳ 113 10,170.00৳
Foam
Sheet(inch) 18 3.00৳ 54.00৳ 113 6,102.00৳
Colored
Paper(inch) 14 1.00৳ 14.00৳ 113 1,582.00৳
Zipper(piece) 1 5.00৳ 5.00৳ 113 565.00৳
Cloth (inch) 12 2.00৳ 24.00৳ 113 2,712.00৳
Card board
tube(piece) 1 10.00৳ 10.00৳ 113 1,130.00৳ 22,261.00৳
Direct Labor
(hour) 7 5.00৳ 35.00৳ 113 3,955.00৳
MOH (DMLH) 7 15.02৳ 105.12৳ 113 11,879.00৳
Total cost 337.1239 38095.0007

MOH 11879
DMLH 791
Output 113
MOH Rate 15.0177
per output 105.1239

Total manufacturing overhead costs = Tk11879

Direct Labor hours = 791 DLHs

· Manufacturing overhead rate =Total Manufacturing Overhead/Direct Labor Hours

=Tk11879/791 DLHs

= 15.0177tk

Managerial Accounting Concepts to Product Costing Page 14

 Activity-Based Costing System
ABC system is a costing system in which each individual activity is identified as a cost object and
there is separate cost driver for each of the activity.

Following table shows all the indirect costs and cost drivers for each of them:

1.10.
Cost driver Allocation Base Cost/Input (TK) Input Total (TK)
Direct cost
Direct Material Unit produced 197.00৳ 113 22,261.00৳
Direct Labor Hour 5.00৳ 791 3,955.00৳
Total Direct cost 26,216.00৳
Indirect cost
Glue Stick Unit produced 80.00৳ 113 9,040.00৳
Red marker Unit produced 1.00৳ 113 113.00৳
Black marker Unit produced 1.00৳ 113 113.00৳
Blue marker Unit produced 1.00৳ 113 113.00৳
Rent Square feet 4.00৳ 500 2,000.00৳
Electricity DMLH 0.63৳ 791 500.00৳
Telephone Number of order 50.00৳ 10 500.00৳
Internet Number of unit sale 9.00৳ 100 900.00৳
Administrative cost Number of employees 500.00৳ 4 2,000.00৳
Total Cost 41,495.00৳

Cost Per Unit 367.21৳

1.11.
Direct Materials/unit input Cost/input Total
Wood Paper(inch) 18 5 90.00৳
Foam Sheet(inch) 18 3 54.00৳
Colored Paper(inch) 14 1 14.00৳
Zipper(piece) 1 5 5.00৳
Cloth (inch) 12 2 24.00৳
Card board tube(piece) 1 10 10.00৳
Total 197

Managerial Accounting Concepts to Product Costing Page 15

Calculation of overhead rate per unit:
Overhead rate for Glue Stick = Cost/( Number of Unit produced)

=9040tk/113

= 80tk

Overhead rate for Red marker =Cost/Number of Unit Produced

=113tk/113

=1.00tk

Overhead rate for Black marker =Cost/Number of Unit Produced

=113tk/113

=1.00tk

Overhead rate for Blue marker = Cost/Number of unit produced

= 113tk/113

= 1.00tk

Overhead rate for Rent =Cost/Square feet

=2000tk/500

= 4.00tk

Overhead rate for Electricity =Cost/DMLH

=500tk/791

=0.63tk

Overhead rate for Telephone =Telephone Bill/Number of Order

=500tk/10

= 50.00tk

Overhead rate for Internet =Internet Bill/Number of Unit sale

=900tk/100=9tk

Managerial Accounting Concepts to Product Costing Page 16

 Overhead rate for Administrative cost = Cost/Number of Employees

=2000Tk/4

= 500.00tk.

Reasons behind Selecting our Cost Drivers

Glue stick, red marker, black marker, blue marker we use the allocation base as total unit of
production because they are used only in production and as an indirect material. For rent, we
use allocation base as square feet because room is measured by square feet. In electricity, total
labor hour is used as allocation base because we don’t have any machine, so we use electricity
only for fan, light and glue gun. That’s why we use total labor hour. We will take order by
telephone. So, we use the number of order as allocation base for telephone cost. Internet is
used for uploading item and for promotion. We use the total unit of sold as allocation base for
Internet. Administrative cost which is combination of sales and production cost. We use
allocation base as the total number of employees who are working there.

Product-Line Profitability Report

1.12.Profitability test Under Simple cost

Simple Costing System
Unit
Variation Input Price/Input (TK) sold Total
Revenue 100 450.00৳ 45,000.00৳
Less:
Direct Materials 18 5.00৳ 90.00৳ 100 9,000.00৳
Foam Sheet(inch) 18 3.00৳ 54.00৳ 100 5,400.00৳
Colored Paper(inch) 14 1.00৳ 14.00৳ 100 1,400.00৳
Zipper(piece) 1 5.00৳ 5.00৳ 100 500.00৳
Cloth (inch) 12 2.00৳ 24.00৳ 100 2,400.00৳
Card board
tube(piece) 1 10.00৳ 10.00৳ 100 1,000.00৳ 19,700.00৳
Direct Labor (hour) 7 5.00৳ 35.00৳ 100 3,500.00৳

MOH (DMLH) 7 15.02৳ 105.12৳ 100 10,512.39৳

Total Profit 11287.61
Percentage of profit 25.08357778

Managerial Accounting Concepts to Product Costing Page 17

1.13.Profitability test Under Activity Based Costing System:
ABC Costing
Price/Input
Variation Allocation Base (TK) Unit sold/ Allocation Total

Revenue 450.00৳ 100 45,000.00৳

Less

Direct Material Unit produced 197.00৳ 100 19,700.00৳

Direct Labor Hour 5.00৳ 700 3,500.00৳

Total Direct cost 23,200.00৳

Indirect cost

Glue Stick Unit produced 80.00৳ 100 8,000.00৳

Red marker Unit produced 1.00৳ 100 100.00৳

Black marker Unit produced 1.00৳ 100 100.00৳

Blue marker Unit produced 1.00৳ 100 100.00৳

Rent Square feet 4.00৳ 500 2,000.00৳

Electricity DMLH 0.63৳ 700 442.48৳

Telephone Number of order 50.00৳ 10 500.00৳

Internet Number of unit sale 9.00৳ 100 900.00৳

Administrative cost Number of employees 500.00৳ 4 2,000.00৳

Total Profit 7657.52
Percentage of
profit 17.02

Managerial Accounting Concepts to Product Costing Page 18

 Forecasts

Pricing Strategy:
Our product is a pen/pencil carrier where people can put there stationeries. The demand of our
product is moderate but at times it fluctuates. We are introducing our product as a whole new
product. That's why we need to keep the costs in mind. We will be following cost based pricing
strategy and we will try to keep our prices lower. This will help us to attract customers as it is a
new and unique product.

2.1.Fixed Assets:
Fixed Asset No of Asset Cost/Asset(Tk.) Total Cost(Tk.)
Glue Gun 20 250 5000
Scissors 30 80 2400
Anti-cutter 30 70 2100
Total Cost of Fixed Assets 9500

We, 7 labors have invested 5980tk per person. In total our financial investment is
Tk.41,860.Considering the cost of fixed assets, our total initial investment is Tk.51,360.

Calculation:
Cost/unit = Tk.337

Estimated units to be sold = 200

Invested capital = 51,360Tk

Estimated Return on Investment = 44%

Estimated operating income = Tk51360*.44= Tk22598=Tk.22600(Rounded up)

The estimated income per unit = 22600/200 = Tk113

Estimated Price = 337Tk+113Tk= tk450

Mark up = 113/ 337= 34 %

Managerial Accounting Concepts to Product Costing Page 19

As we are in a less competitive market, we will also be needing to look into other competitor's
pricing. We don't see our competitors having the same product. But if we add their individual
pricing for pen holder and pencil bag, we can see:

Archie's 700tk
Hallmark 680tk
Arong 500tk

Analyzing the market, we can say our decision to follow "Cost Based Pricing Strategy" is a good
decision as we are earning a great revenue and our price is lower than ours competitor's so
people will be motivated to buy our products.

Budget:
The demand for our product is estimated to be 200 units, but as a result of less capacity and
less demand we are assuming we will be able to produce 113 units and will sell 100 units of
pencil carrier kit. We have assumed Ending Finished Goods Inventory to be 13% of Budgeted
Sales. We will be having no beginning inventory.

Total Estimated Production = 113 units

Total Budgeted Sales = 100 units

Target ending inventory = 100units*13%=13units

2.1: Revenue Budget

Revenue Budget
Units Selling price/unit Total
Pencil Carrier Kit 100 450 45000

Managerial Accounting Concepts to Product Costing Page 20

2.3: Production Budget
Production Budget
Total
Budgeted Sales Units 87
Add: Target Ending Inventory 11
Total Needs 98
Less: Beginning Inventory 0
Required Production 98

Managerial Accounting Concepts to Product Costing Page 21

 2.4.1.Direct Material Usage Budget:
Direct Material Usage Budget
Physical units : Wood Foam Colored Zipper Cloth Card Board Total
Paper Sheet Paper Tube
Wood Paper (18 2034
inches*113) inches
Foam Sheet (18 2034
inches*113) inches
Colored Paper (14 1582
inch*113) inches
Zipper (1 piece*113) 113
pieces
Cloth (12 inches*113) 1356
inches
Card Board Tube (1
tube*113) 113 tubes
Total Quantity to be 2034 2034 1582 113 1356
used inches inches inches pieces inches 113 tubes

2.4.2. Direct Material Usage Cost:

Cost
Wood Paper (2034
inches*5tk) 10170tk
Foam Sheet (2034
inches*3tk) 6102tk
Colored Paper
(1582*1tk) 1582tk
Zipper (113 Pieces*5tk) 565tk
Cloth (1356 inches*2tk) 2712tk
Card Board Tube (113
tubes*10tk) 1130tk
10170tk 6102tk 1582tk 565tk 2712tk 1130tk 22261tk

Managerial Accounting Concepts to Product Costing Page 22

 2.5.Direct Materials Purchase Budget
Direct Materials Purchase Budget
Physical units : Wood Foam Colored Zipper Cloth Card Board Total
Paper Sheet Paper Tube
Wood Paper (18
inches*113) 2034
Foam Sheet (18
inches*113) 2034
Colored Paper (14
inch*113) 1582
Zipper (1 piece*113) 113
Cloth (12 inches*113) 1356
Card Board Tube (1
tube*113) 113

Add : Ending
Inventory 265 265 205 15 176 15
Total Quantity to be
purchased 2299 2299 1787 128 1532 128
Cost/Unit(tk.) 5 3 1 5 2 10
Total Cost(tk.) 11495 6897 1787 640 3064 1280 25163

2.6.Direct Labor Cost Budget

Direct Labor Cost Budget
Units Produced Hours/unit total hours Rate/hour total
Pencil Carrier Kit 113 7 791 5 3955

2.7. Manufacturing Overhead Budget

Manufacturing Overhead Budget

Variable MOH:
Glue(Stick) 9040
Red Marker 113
Black Marker 113
Blue Marker 113
Total Variable MOH Cost 9379
Fixed MOH:
Rent 2000
Electricity 500
Total Fixed MOH Cost 2500
Total MOH Cost 11879

Managerial Accounting Concepts to Product Costing Page 23

2.8.Ending Inventory Budget:
Ending Inventory Budget
Direct Materials Units Cost(Tk) Total(Tk)
Wood Paper 265 5 1325
Foam Sheet 265 3 795
Colored Paper 205 1 205
Zipper 15 5 75
Cloth 176 2 352
Card Board Tube 15 10 150

Finished Goods
13 337.12 4382.56
Total cost of Ending Inventory 7284.56

2.9.Cost of Goods Sold Budget:

Cost of Goods sold Budget

No Beginning Inventory
COGM
Direct Materials used 25155
Direct Labor 3955
MOH 11879
40989

(Ending Inventory)
Finished Goods 4952

COGS 36037

Managerial Accounting Concepts to Product Costing Page 24

 2.10. 1.Budgeted Income Statement(Traditional Format)

Budgeted Income Statement(Traditional Format)

Total Unit
Revenue 45000 450

COGS 33712.44 337.1244

Gross Profit 11287.56 112.8756

Operating Expense
Administrative Cost 2000 20
Telephone 500 5
Internet 900 9
3400 34
Operating Income 7887.56 78.8756

2.10.2.Budgeted Income Statement(Contribution Format)

Budgeted Income Statement(Contribution Format)

Total unit
Revenue 45000 450

Variable cost 31500 315

Contribution Margin 13500 135

Fixed Cost 5220 52

Operating income 8280 83

Managerial Accounting Concepts to Product Costing Page 25

 Evaluations

Break-Even Point:
Break- even point is the point in which the company’s profit is zero. That is, the company is
neither making a loss nor a profit. By selling breakeven units the company’s revenue will equal
to its total variable and fixed costs. For a company to be profitable, the company needs to know
the break-even point. If the company does not find out the break-even point, the company will
not be able to understand the number of units to be produced and sold to make a profit.

Break Even point = Fixed Expenses ÷ Unit CM (sales per unit- Variable cost per unit)

= 5900 ÷ (450-315)

= 43.7 ≈ 43 (per unit)

Our company will need to sell 43 Pencil Carrier Kit per month to cover all the expenses.

Break-Even Revenue:
Break-even revenue refers to the sales in Dollars/Taka/Pound amount it must generate to cover
its costs. At that point, a company is neither making a profit nor a loss.

Break Even Revenue = Fixed Expenses ÷ CM ratio (CM/unit ÷ Sales/unit)

= 5900 ÷ (135 ÷ 450)

= 19666.67

We have found out, we need to earn TK 19666.67 as revenue to cover all the expenses.

Margin of Safety:
Margin of safety(TK) = Sales – Break even sales

= 45000- 19666.67

=18,450

Managerial Accounting Concepts to Product Costing Page 26

Margin of safety percentage = (Margin of safety TK ÷ Total sales in TK) x 100

= (18,450 ÷ 50,850) x 100=36.28%

Margin of safety is very important to know. It enables a company to know the risk of its
product. If a company has higher margin of safety, it will have lower risk. Our margin of safety
of TK 18,450 and margin of safety percentage is 36.28%. The percentage of the Company is not
that high but it is in a good position as for startup.

Sensitivity Analysis
We have done sensitivity analysis on three scenarios. In scenario 1 we have taken 13% increase
in the prices of all direct materials. In scenario 2 we have taken 13% decrease in the demand of
your product (i.e. budgeted sales units) and in scenario 3 we have taken 13% increase in the
demand of your product (i.e. budgeted sales units). With these changes in scenario we will be
able to find out the changes that will take place in the operating income.

3.1. Sensitivity Analysis

Key Assumptions
What-If Units Selling Direct Material Budgeted Operating Change From
Scenario Sold Price Cost/Unit Income Master Budget
Master
Budget 100 450 197 7888
Scenario 1 100 450 223 5563 29.48% Decrease
Scenario 2 87 450 197 2038 74.16% Decrease
Scenario 3 113 450 197 13738 74.16% Increase

From these three-scenarios analyses, we found out that in Secenario-1, 13% increase in price of
all material costs will lead to a decrease of 29.48% in operating income. In Scenario-2 ,13%
decrease in budgeted sales will lead to a decrease of 74.16% in operating income and in
scenario-3, 13% Increase in budgeted sales will lead to an increase in 74.16% operating income.

Managerial Accounting Concepts to Product Costing Page 27