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North south University

Course: Managerial Accounting (ACT- 333)


Project
Implication of the mechanics of
Managerial Accounting on a product
Product Name: Birds House

Submitted toAfrin Rifat (Ani)


Section 1

Submitted byGroup ABC

LETTEROFTRANSMITTAL
Date: 8th August, 2015
Afrin Rifat
Course Instructor, Introduction to Managerial Accounting
School of Business
North South University,
Bashundhara, Dhaka.

Subject: Seeking permission for submitting the Project report.

Dear Madam:
It is our pleasure to submit this report, which is a part of this course: ACT 333
(Managerial Accounting). While accomplishing this project we had to start a
manufacturing company from scratch and manufacture our selected product i.e. Birds
House. In doing so we had to set a price of our product, determine various costs, allocate
these costs and prepare budgeted financial statements. Moreover we had to conduct
detailed analysis e.g. margin of safety, break-even analysis and sensitivity analysis for
given situations. All these activities have corroborated our accounting concepts to a
significant extent. In our report we have included all relevant calculations and supporting
information. We sincerely hope that this report will fulfill the requirements suggested by
you for the course ACT 333.
Sincerely Yours

No
1
2
3
4

Name
Md.MirajHossen
Sakib Md. Shafiuddin
Tariqul Islam
Md. Al Mamun

ID
1210744030
1320413030
1320456030
1311210630

ABSTRACT
This report is aimed to exhibit major accounting practices used by a company for which
we had to open a new manufacturing company and manufacture our selected products. In
the Introduction of the report reasons behind selecting the product has been described.
The next section Birds House Industry Birds House about the competitors of the
company. This section is followed by Manufacturing Process which gives a precise
description of how our selected product i.e. Birds House has been manufactured. In the
next section, we have showed a calculation of maximum number of units that will be
produced in a month for which we have assumed that, we, the members of the group are
only available labors. Production cost of the product includes Direct Materials Cost,
Indirect Materials Direct Manufacturing Labor Cost, and Indirect Manufacturing
Overhead Cost. Based on all relevant and necessary calculations a per House production
cost of 373 TK has been calculated. The support cost to manufacture the product includes
administrative expenses and selling cost includes transportation, advertising and sales
commission. All the costs have been classified in several categories i.e. fixed and
variable, direct and indirect, prime and conversion cost. Each of month birds house
produce 500 house and capacity of the company produce almost 550 house. In the
following sections we have described the costing strategy and pricing strategy that we
have applied. While formulating pricing strategy we have also taken into account the
prices of the products of competing companies. As per project guideline, we have
prepared some forecasted statements i.e. forecasted sales budget, forecasted production
budget, Direct Materials usage budget, Direct Manufacturing Labor budget etc. in the
section entitled Forecasting. While forecasting these, we followed the strategy to keep
15% of the budgeted unit sales as finished goods inventory and 25% of the materials used
in production as ending inventory. Based on the forecasted statements we have prepared
budgeted income statement and budgeted contribution format income statement. This
section is followed by the calculation of Break-even point in both unit sales and in
revenue. Moreover with a view to get an idea about riskiness of the product we have
calculated margin of safety for our product. Based on all the previous calculations, degree
of operating leverage is also calculated. Finally a sensitivity analysis has been conducted
for two different situations i.e. 12% increase and 16% decrease in the demand of
theproduct.

Table of Contents
Serial No.

Content

Background

Industry (Handicraft)

Manufacturing process

Maximum capacity

Production cost
(direct material, direct manufacturing labor, manufacturing
overhead cost )
Selling and administrative cost

Page no.

10

Cost analysis
(fixed/variable, direct/indirect, prime/conversion)

11

Full cost

15

Simple costing system ( job costing )

15

10

Allocation of support cost

16

11

Activity-based costing system

18

12

Pricing strategy

19

13

Product line profitability

20

14

Budgets

21

15

Budgeted contribution format income statement

26

16

Budgeted income statement ( traditional format )

27

17

Break- even point

27

18

Margin of safety

28

19

Degree of operating leverage

28

20

Sensitivity analysis

29

1. Introduction
The product we have decided to manufacture is Birds House. It is basically made from
wood, board, grill, water pot, food pot etc. now a days, bird houses are becoming
interesting to a lot of people as they are more concern about expressing the hobbies. It is
basically considered as a product which is used to keep our birds. But bird house is not
only for birds to stay, it can be used as a show-piece too. Recently the popularity of using
of birds house has become more and more popular and people find it really interesting to
use something that they can make by their own. Though the house is made of wood,
board ,girl but it does not seem like that because the manufacturing process of the house
is quite tricky. The house looks like a beautiful house and the design of the house is quite
unique. Basically we have found the manufacturing process of the house from internet
and it's been same modify by all group members. We have uploaded the manufacturing
process in the internet and we found it quite enticing and that is why we chose to
manufacture the product.

Reasons behind selecting the product


The reason that we have chosen to manufacture the product is that it looks like beautiful
house and it is also a low price product , quite easy to manufacture. Nowadays people
more conscious about their hobby and happiness, so we do believe it would be a good
idea to choose birds house as our product. The market of souvenir is not that much
saturated in our country and most of the products available in the market are imported
from abroad. That is why we have decided to manufacture birds house as we can provide
people something through which they will be able to enjoy country made product. That is
why we have decided to manufacture such a product which can contribute to the society
as well as provide benefit to the company.

2. Industry Analysis
The product of ours belongs to the birds sale stores and gift shop industry. These two
industries are considered as one of the prolific industry in the world as well as in
Bangladesh. The demand for among people is quite high as these things are comparably
cheap to purchase as well as liked by all class of people who lives if birds. In terms of
there is no gender problem as most of the products in these two industries are made for
unisex. The products that belong to industries are gift shop, birds stores, furniture shop
etc . The market of showpiece items is still growing in Bangladesh and in the near
future there is a huge possibility that this market will be the next big thing in the country.

Competitors
The competitors that we have in the market are not in great numbers but not also in small
number either. The main competitor that we have is the Furniture and small birds stores .
This market is dominated by these few stores and they act as a dominant stores in the
industry. In every market there are storeitems which we also considered as our
competitors. Though the competition seems a bit tougher but we are quite hopeful about
the sustainability of our business. The reason of being optimistic about the product is
because it is being made by using eco-friendly materials and also the design of the
product is alluring. In order to compete with our competitors we will distribute our
products among local birds stores and furniture shop to compete with those branded shop
rather than taking risk of opening up a new store to run the business.

3. Manufacturing Process
We will have two portions in the manufacturing process. All the work will be done by one
person. In the first part we will make the roof and in the second part we will make the
walls of the bird house ready. After finishing both portions we will join them and make a
beautiful bird house . manufacturing process is given below
1. First we have to draw the roof top design in the board with a pencil . then we will
cut those boards using the saw according to the design.
2. After that we have to add the boards together by using pin and glue. We will use
hammer for joining the different parts. Our roof is ready
3. Now we have to make our bird house walls. For that we will first cut wood sticks
and then make a frame . we can use glue and pin to make our frame.
4. At this time we need to attach grills with the wooden frame.

5. After that we will join our roof and walls together using a hammer and pins. So
our basic bird house is completely made.
6. Now we have to add some value to our house. As it is a bird house we will add a
water pot for the birds to drink water and a food pot in order to feed them.
7. At last we can make our bird house more beautiful and glassy if we polish it with
a leaker burnish. this particular step is not compulsory but this step can be taken
as an option.

4. Maximum Productivity
According to the project rule we have to consider our group members as our labor. In our
group we have four members and each of them agreed to work eight hours per day. Also
the labors are willing to work extra two hours each day if they are being paid fifty percent
more than their original wage per hour. To make profit, we need to produce a good
amount of birds house and for that reason we agreed to the proposal. The number of days
the labors will work is twenty six days and every Friday will be a day off for them.
Below is the table that illustrates the maximum number of units we will be able to
produce.

Numbe
r of
labors
4

Total
working
hours for
each labor
per day

Total
working
hours by
all the
labor each
day

Number
of
working
days

Total
number of
working
hours
each
month

Number
of hours
to produce
each
house

10 hours

=10*4
=40

26

=26*40
=1040

Maximum
Number
of houses
can be
produce
each
month
=1040/2
=520

Calculationformaximumnumberofunits:
Number of Labors= 4
Total working hours for each labor per day= 10 hours (8 hours+2 hours)
Total working hours by all the labors per day= (10 Hours4)= 40 hours
Number of working day= 26 days
Total number of working hours each month=(26 Hours40)=1040 hours

Number of hours to produce each unit of product=2 hours ( Basically it takes two hours
to manufacture one product by each labor .
Maximum number of units can be produced each month= (1040 Hours2 Hours) =520
units

5. Production Cost
Determination
The production cost of our selected product i.e. birds house includes Direct Materials
cost, Direct Manufacturing Labor cost, and Manufacturing Overhead cost. We are
expecting to produce 500 units of products.

DirectMaterialCost:
Direct material

Units needed

Cost per unit of


direct material
50
Tk.25
Tk.15
Tk.5
Tk.5
Tk.15

1.Wood stick
1.5 piece
2. Board
4 square feet
3.Grill
4 piece
4.Water pot
1 piece
5.Food pot
1 piece
6.Tray
1 piece
Total
For producing 500 house of birds house in a month,
1)

wood Cost = (Tk.75/house 500house) = Tk.37500

2)

Cost for board = (Tk.100/house 500houses) = Tk.50,000

3)

girl cost = (Tk.60/house 500house) TK = Tk.30000

4)

water pot cost=(Tk.5/house*500 house) Tk.=2500

5)

tray cost=(Tk.15/house*500 house) Tk=7500

6)

food pot=( Tk.5/house*500 house) Tk=2500

Total cost per unit of


bird house
Tk.75
Tk.100
Tk.60
TK.5
Tk.5
TK.15
TK.260

TotalDirectMaterialCost:
=(37500+50000+30000+2500+7500+2500)
=130000tk

DirectManufacturingLabor(DML)Cost:
Direct manufacturing labor cost
Cost per direct labor hour
50 tk

Direct labor hour needed per


unit
2 hours

Total direct manufacturing


labor cost per unit
100 tk

Manufacturing overhead cost :


These are the costs that cannot be traced directly to a specific product. Manufacturing
overhead costs include indirect material, indirect manufacturing labor and all other
factory related costs we incur to produce our product. So manufacturing overhead costs
of our product is given belowCosts (monthly)
Indirect material :
1. Glue gum
2. Pin
3. Pencil
Indirect manufacturing labor :
1. supervisor
Other costs :
1. rent (factory)
2. utilities ( factory)
3. depreciation of hammer *
4. depreciation of saw *
.. Total manufacturing overhead cost

1000 tk
100 tk
40 tk
2500 tk
2500 tk
500 tk
100 tk
111 tk
6851 tk

* Though we dont need any heavy machinery for our production process, we will need
some small equipment in order to manufacture the goods such as hammer and saw. Since
we have only 4 labors available, thats why 4 hammer and saw will be required. We have
decided to purchase 4 hammer at the cost of 600 tk per hammer and 4 saw at the cost of
1000 tk per saw. we will use these guns for 3 years. However the cost of the depreciation
is allocated below in monthly basis

4 hammers x 600 tk = 3600 tk


monthly depreciation =3600/(3x12)
= 100 tk
4 saw x 1000 tk = 4000 tk
Monthly deprcialton = 4000/(3x12)
= 111 tk

6. Support Cost and Selling Cost


Determination
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 support and
selling costs
selling and administrative costs
1.
2.
3.
4.
5.
6.
7.
8.

Total

Rent (showroom)
Utilities (showroom)
Sales mans salary
Accountant
Convince
Logistic coordinator
Miscellaneous
Depreciation of office furniture *

.. total selling and administration cost


* For the purpose of running the business successfully, we will need some fixed assets
such as office furniture. We have decided that we will buy furniture at the total cost of
10000 and these assets will be consumed over 10 years. So monthly depreciation for
these furniture are calculated below
Monthly depreciation = 10000/(10x12)
= 83 tk

7. Cost Analysis

2500 tk
500 tk
2500 tk
3000 tk
1000 tk
1000 tk
500 tk
83 tk
1183 tk

In order to make our house, we have incurred a lot costs. These are different according to
the types. Some are fixed cost, some are variable. We have incurred some direct cost as
well as some indirect cost. However the costs of our product are analyzed and classified
below in different types

Fixed and variable costs


Fixed costs are those costs which are permanent for a certain period of time and do not
change with the volume. On the other hand, variable costs are the costs that varies when
activity or volume changes.

Total Costs
(monthly)

Costs per unit

Fixed costs
1. Supervisor
2. RentFactory
Showroom
3. UtilitiesFactory
Showroom
4. Depreciation of hammer
5. Depreciation of saw
6. Sales mans salary
7. Accountant
8. Convince
9. Logistic coordinator
10. Miscellaneous
11. Depreciation of office furniture

2500tk

2500tk
2500tk

5
5

500tk
500tk
100tk
111 tk
2500tk
3000tk
1000tk
1000tk
500tk
83tk

1
1
0.2
0.22
5
6
2
2
1
0.17

16794tk

34tk

.. total fixed costs

Cost per unit

Total cost

Variable cost
1. Wood stick

75

37500

100

50000

60

30000

4.Water pot

2500

5.Food pot

2500

15

7500

7. Direct manufacturing labor

100

50000

8.Pin

0.2

100

9. Pencil

0.08

40

10. Glue

1000

362

181140

2. Board
3. Grill

6.Tray

Total

* pin , pencil and glue are indirect material. So it is not possible to feasibly trace them to
the product. We cannot determine exactly how much glue or pin is used for production.
Thats why we have estimated an amount that will be needed per month. Since we can
produce maximum 500 units in a month, therefore we have determined these costs per
unit through dividing the costs by the units. The calculations are as followsGlue cost per unit = 1000/500 = 2
pencil cost per unit =40/500 = 0.08
pin cost per unit = 100/500 = 0.2

Direct and indirect costs


Direct cost is a cost that can be easily and conveniently traced to a specified cost objects.
On the other hand indirect costs are opposite. These costs are presented in a table belowCost per unit

Total cost

Direct cost
1. Wood stick

75

37500

100

50000

60

30000

4.Water pot

2500

5.Food pot

2500

15

7500

100

50000

1000

362

181000

2500tk

5
5

2500tk
2500tk

1
1
0.2
0.22
5
6
2
2
1
0.17
0.08

500tk
500tk
100tk
111 tk
2500tk
3000tk
1000tk
1000tk
500tk
83tk
40

2. Board
3. Grill

6.Tray
7. Direct manufacturing labor
8.Convince
Total
Indirect costs
1. Supervisor
2. RentFactory
Showroom
3. UtilitiesFactory
Showroom
4. Depreciation of hammer
5. Depreciation of saw
6. Sales mans salary
7. Accountant
8. Conveyance
9. Logistic coordinator
10. Miscellaneous
11. Depreciation of office furniture
12. Pencil

13. glue

2
0.2

1000
100

36tk

17934tk

.. total fixed costs

Prime /conversion costs


Prime Costs are all direct manufacturing cost which is the combination of direct material
and direct manufacturing labour costs. in contrast conversion costs are all manufacturing
costs other than direct material costs.Prime and conversion costs of our product are
Prime cost=(Direct manufacturing labor cost+ Direct material cost)
=Tk. (50000+130000)
= Tk. 180000
Conversion Cost==(Direct manufacturing labor cost+ Manufacturing overhead cost)
= Tk. (50000+6851)
=Tk. 56851

8. Full Cost Determination


Full cost is normally the sum of all variable and fixed costs in all business functions of
the value chain ( R&D, design, production, marketing, distribution, and customer
service). Determining full cost is very important because based on this cost, most of the
businesses set their product price. Full cost is calculated below

Full cost per unit = variable cost per unit + fixed cost per unit
= 362+34
= 396
Total full cost = total variable cost + total fixed cost

=181140+16794
=197934

9.

JOB COSTING SYSTEM

There are many different types of systems to determine the manufacturing cost of a
product. Among these systems, job costing system is the most common system. It is also
called simple costing system. For our product , unit manufacturing cost is calculated
under this simple costing system
Allocation Base
Our allocation base is Direct Labor Hour
Direct Labor Hour = per day 8 hour 4 person 26days
832 Direct Labor Hour
Manufacturing overhead cost 6851tk
Manufacturing overhead cost

manufacturing overhead cost


Direct Labor Hour

6851tk
832 hours

8.23 tk per hours


Product costs using the simple costing system
Per unit cost (taka)

Total cost (taka)

Direct material (260*500)

260 130000

Direct manufacturing labor(100*500)


Total Direct cost
Manufacturing Overhead(8.23tk*500)
Total cost

100
360
8.23
368

50000
180000
4115
184115

10.

ALLOCATION OF SUPPORT COST

we have determined that there will be 2 support departments in our business to assist
operation department. These departments are maintenance and procurement departments.
Moreover from the manufacturing process we can identify that we have 2 operation
departments. These are production and joining department( here roof will be made and
joined with the walls ). Here the cost of each department is shown underneath

1.
2.
3.
4.
5.
6.
7.
8.

Rent (showroom)
Utilities
Accountant
Miscellaneous
Convince
coordinator
Direct material *
Direct manufacturing
labor *
9. Manufacturing overhead
*

Support department
Maintenanc procurement
e
2500
500
3000
500
1000
1000

6500

Operation department
production
Joining

2000

80000
37500

50000
12500

5151
122651

1700
64200

.. total
We have 3 approaches to allocated the support cost to operating department. These are
direct, step-down and reciprocal method. But here we will use direct method because this
is easy to use.

Now the support costs will be allocated to the operation department

Cost incurred before


allocation
Allocation of Maintained cost
(6500*66 ,34 )
Allocation of Procurement
cost (2000*66%, 34%)
Total cost after allocation

Support department
Maintenanc procurement
e
6500
2000

Operation department
production joining

(6500)
(2000)
0

122651

64200

4290

2210

1320

680

128261

Production department : 122651/ (122651+64200) = 0.66 or 66%

67090

Total
195351

195351

Joining department : 64200/(122651+64200) = 0.34 or 34%

11.

ACTIVITY BASED COSTING SYSTEM

Activity based costing is another system of determining the unit manufacturing cost. But
this type of costing is not alike simple costing system. Here several activities are
established and there are several allocation rates. Here we have found 2 activities to
allocate all indirect costs. So the indirect costs under each activity is shown below
Identifying the indirect costs associated with each cost allocation base
Production
Salaries (supervisor,
accountant,
salesman)
Rent (factory and
showroom rent)
Utility
Depreciation
Miscellaneous
Logistic coordinator
.. total

Administration

Total

2500tk

5500tk

8000tk

2500

2500

5000

500
211

500
83
500

1000
183
500
1000
15683tk

1000
66711tk

9083tk

*production Cost will increase with the level of production. If we increase the production
level we will need more man power and space to support.
*The demand for administrative resources increases with direct manufacturing labor
hours.
Activity cost rates indirect cost pool
No.

Activity

Cost
Hierarchy
category

production

Administration

Output unit
level
Facility
sustaining

Product cost using activity based costing

Total
Budgeted
Allocation
Budgeted
Quantity
base
indirect
Cost
6711
500 units Number of
unit
9083
832hrs. Direct labor
hrs.

Budgeted
indirect
cost rate
(taka)
13.42
10.92

Per Unit(taka)

Total(taka)

Direct Costs
Direct material (260*500)

260

130000

Direct manufacturing labor(60*576)

100

50000

Total Direct cost


Indirect Costs of Activities
production (13.42*500)
Administration (10.92*2hrs*500)
Total

360

180000

13.42
21.84
395

6711

12.

10920

PRISING STRATEGY

Selecting a proper pricing strategy is very important. It helps a business to survive in the
market by providing accurate price based on the market perception, customer demand
and competitors etc. Out of two pricing approaches we have determined to use cost plus
pricing approach to calculate our product price. The reason behind choosing this strategy
is that our business is on handicraft goods. So we are staying in a perfectly competitive
market where we dont have much power to the choice of setting the price by ourselves.
But while pricing, we also have to be careful because too high price may reduce the
demand. However we have decided that the mark up rate of our product will be 25
percent of full cost. Here the price is determined by using this approach belowSelling price = full cost + mark up
= 396 + (396x0.25)
= 49

13.

PRODUCT LINE PROFITABILITY

Operating income product line profitability report under Simple Costing

Revenue (495*500)
(-)cost of goods manufactured (368*500)
Gross profit

Bird house
247500
184000
63500

197631

(-)Selling and administration


Total operating income

9500
54000

operating income
Profit margin ratio=
revenue
54000
= 247500
=.2182 or 21.82%
Operating income for product under ABC Costing
Revenue (495*500)
(-)cost of goods manufactured (395*500)
Total operating income

Profit margin ratio=

Royal Hand Fan


247500
197500
50000

operating income
revenue

247500

= 50000

=.2002 or 20.20%

14.

BUDGETS

the maximum number of units we can produce in a month is limited. So we cannot


supply more than the production even if the demand is more.
So we have predicted that the demand will be more or less same or close to our
production. Therefore we are expecting to sale approximately 500 units in every month.
Now based on the forecast, some important budgets are prepared below in the tables

Schedule 1: Revenue Budget


For the month ending august 31, 2015

Product

Units

Selling price

Total revenue

Bird house

500

495

247500

Schedule 1: Production budget


For the month ending august 31, 2015
Bird house
Budgeted sales in units
(+) desired ending inventory
( 500units x 10% )

500

.. Total requirement

550

50

(-) beginning inventory

.. total units to be produced

550

Schedule 3A:Direct material usage budget


For the year ending august 31, 2015
wood

board

grill

Water
pot

Food
pot

tray

1.5

825

2200

2200

550

550

550

50

25

15

15

41250

55000

33000

2750

2750

8250

total

Physical unit budget


Direct material
needed per unit
.. direct material to
be used in
production
(550x1.5,4,1)
Cost budget
Cost per unit of
direct material
.. cost of direct
material to be used

143000

in production

Schedule 3B:Direct material purchase budget


For the year ending august 31, 2015
wood

board

825

2200

grill

Water
pot

Food
pot

tray

total

Physical unit budget


direct material to be
used in production
(+) desired ending
inventory (20%)
Total requirement

165

990

(-) beginning
inventory

440

2640

2200

550

550

550

440

110

110

110

2640

660

660

660

990

2640

2640

660

660

660

50

25

15

15

49500

66000

39600

3300

3300

9900

.. direct material to
be purchased in unit
Cost budget
Cost per unit of
direct material
.. cost of direct
material to be
purchased

171600

Schedule 4: Direct manufacturing labor budget


For the year ending august 31, 2015
Product

Output units

Hour per unit

Total hour

Rate per hour

Total cost

Bird house

550

1100

50

55000

Schedule 5: Manufacturing overhead budget


For the year ending December 31, 2015
Total

Variable costs
1. Glue ( 550x2)
2. pin (550x0.2)
3. Pencil 550x0.08)

1100
110
44

.. total variable costs

1254

Fixed costs
1.
2.
3.
4.

Supervisor
Rent
Utilities
Depreciation of hammer and saw

2500
2500
500
211

.. total fixed costs

5711

.. total manufacturing overhead costs

6965

Bird house cost per unitDirect material


1.Wood
2.Board
3.Grill
4.Water pot
5. Food pot
6.Tray
Direct manufacturing labor
Manufacturing overhead
1. Pin
2. Pencil
3. Glue
4. Supervisor ( 2500/550)
5. Rent (2500/550)
6. Utilities (500/550)
7. Depreciation (211/550)
.. Unit manufacturing cost

75
100
60
5
5
15
100
0.2
0.08
2
4.55
4.55
0.91
0.38
__________
373

Schedule 6: Ending inventory budget


For the year ending December 31, 2015

Total
Direct material inventory
1. Wood 165*50
2. Board 440*25
3. Grill 440*15
4. Water pot 110*5
5. Food pot 110*5
6. tray 110*15
.. total direct material inventory

8250
11000
6600
550
550
1650
35200

Finished goods inventory


Bird house (50x373)

18650

.. total ending inventory

53850

Schedule 7: Cost of goods sold budget


For the year ending December 31, 2015
Total
0

Beginning inventory
(+) cost of goods manufactured
Direct material cost
Direct manufacturing labor cost
Manufacturing overhead cost

143000
55000
6965

.. total goods available for sale

204965

(-) ending finished goods inventory

(18650)

.. cost of goods sold

186315

Budgeted Contribution Format income statement


For the year ending December 31, 2015
Per unit

Total

495
(362)

247500
(181000)

133

66500

2500

5
5

2500
2500

1
1
0.42
5
6
2
2
1
0.17

500
500
211
2500
3000
1000
1000
500
83

Selling price (500 units)


(-) variable cost
.. contribution margin
(-) Fixed cost
1. Supervisor
2. RentFactory
Showroom
3. UtilitiesFactory
Showroom
4. Depreciation of hammer and saw
5. Sales mans salary
6. Accountant
7. Convince
8. Logistic coordinator
9. Miscellaneous
10. Depreciation of office furniture
.. total fixed costs

(33.59)
99.4

.. Net operating income

(16794)
49706

Budgeted income statement


For the year ending December 31, 2015

Revenue
(-) COGS

From schedule

Total

1
7

247500
(186315)

Gross profit
Operating costs
1. Rent (showroom)
2. Utilities (showroom)
3. Sales mans salary
4. Accountant
5. Convince
6. Logistic coordinator
7. Miscellaneous
8. Depreciation of office
furniture
.. total operating costs

61185
2500
500
2500
3000
1000
1000
500
(11083)
83

.. net operating income

50102

17. Break-even point


Break-even is very much important because through this analysis we can
determine how many units we have to sell to cover the cost and make profit. Here
the break-even point of our product both in units and in revenue is shown belowBreak-even point in units = total fixed costs/ contribution margin
= total fixed cost / (selling price per unit-variable cost
per unit)
= 16794 / 133
= 127 units we have t sell to meet the break-even point.
Break-even point in revenue = 127* 495
= 62865
MARGIN OF SAFETY
Margin of safety is an aspect of sensitivity analysis. It is the amount by which
budgeted revenues exceed breakeven revenues. The margin of safety answers the
what if question such as if budgeted revenues are above breakeven and drop,
how far can they fall below budget before the breakeven point is reached.
Margin of safety ( in revenues) = budgeted revenues breakeven revenues
= 247500 62865
= 184635
Margin of safety ( in units) = budgeted sales(units) breakeven sales(units)
= 500-127

= 373units
By observing the analysis, we have noticed that our business is safe by the
revenue of 62865 tk. So we will not incur any loss even if our sale falls by this
amount. But if the actual revenue falls more than the margin of safety, then we
will incur lose.
19. OPERATING LEVERAGE
It is a vital analysis that is needed in every organization. So the operating
leverage is calculated below
Operating leverage = contribution margin / operating income
= 66500/49706
= 1.34 times
The result indicates that, when sales are 500 units, a percentage change in sales
and contribution margin will result in 1.34 times that percentage change in
operating income.
20. SENSITIVITY ANALYSIS

Sensitivity analysis is a what if technique that managers use to examine how an


outcome will change if the original predicted data are not achieved or if an underlying
assumption changes.
For example if the demand of the product increases by 12%,. then the new increased sales
volume will be
( 500+500x12% ) = 560 units. So based on this new volume, we can find out our
profitability condition
Contribution format income statement
For the month ending May 31, 2015

Selling price (560 units)


(-) variable cost
.. contribution margin

Per unit

Total

495
(362)

277200
(202700)

133

74480

(-) Fixed cost


1. Supervisor
2. RentFactory
Showroom
3. UtilitiesFactory
Showroom
4. Depreciation of hammer and saw
5. Sales mans salary
6. Accountant
7. Convince
8. Logistic coordinator
9. Miscellaneous
10. Depreciation of office furniture
.. total fixed costs
.. Net operating income

4.5

2500

4.5
4.5

2500
2500

0.9
0.9
0.38
4.5
5.36
1.79
1.79
0.9
0.15

500
500
211
2500
3000
1000
1000
500
83

(30.17)
103

(16794)
57686

if the demand for our product decreases by 16%, then the new reduced sales volume will
be
( 500-500x16%) = 420 units. Now based on the new volume, operating profit or cost will
be

Contribution format income statement


For the month ending May 31, 2015

Selling price (420 units)


(-) variable cost
.. contribution margin

Per unit

Total

495
(362)

207900
(152040)

133

55860

(-) Fixed cost


1. Supervisor
2. RentFactory
Showroom
3. UtilitiesFactory
Showroom
4. Depreciation of hammer and saw
5. Sales mans salary
6. Accountant
7. Convince
8. Logistic coordinator
9. Miscellaneous
10. Depreciation of office furniture
.. total fixed costs
.. Net operating income

5.9

2500

5.9
5.9

2500
2500

1.19
1.19
0.5
5.9
5.21
2.38
2.38
1.19
0.19

500
500
211
2500
3000
1000
1000
500
83

(39.98)
93

(16794)
39066