Application of Managerial Accounting Concept of Product Costing

1. 1
Project On
Application of managerial accounting concepts to
product costing
Product : Sandal

2. 2
North South University
ACT-333
Section-5
Submitted To:
Sheikh Mohammad Rabby
Lecturer, Department of Accounting and Finance
School of Business and Economics,
North South University
Submitted By:
Name ID
WilliamBanarjee 142 0369 030
Nishat Tasnim Anika 123 1053 630
Tanjina Mozumdar 132 0135 030
Mariam Mozumdar 132 0136 030

3. 3
Rifat Islam 123 0564 030
Letter of Transmittal
Date: 12 th December, 2015
Sheikh Mohammad Rabby
Lecturer, North South University
Subject: Letter of Transmittal
Respected Sir,
It has been a great pleasure and at the same time a great opportunity to have completed this
course under your supervision. We have prepared this report in accordance with the
instructions provided by you. Thanks to you, we have learned how to apply our knowledge of
Managerial Accounting concepts we have learned from this course with practical situations.
You have given us the opportunity to produce a product from scratch and figure out the
costing of our product. It was quite interesting to work on this topic as we have learned a lot
of things after doing the whole report.
This report has provided us learning opportunities and we are truly thankful for that. We hope
we have done justice to this report and we apologize beforehand for any kind of silly mistakes
we have done in this report.
Regards,
William Banarjee
Nishat Tasnim Anika
Tanjina Mozumdar

4. 4
Mariam Mozumdar
Rifat Islam
Abstract
The main purpose of this project was to improve our understanding of ManagerialAccounting
and apply the concepts that we have learned so far, throughout the course and we tried our
level best to apply those concepts in our final report. At first, we have created our product
from a factory with essential materials and costs. Then we have analyzed the Product costing
of product (sandal). Besides that, we have also completed the manufacturing process,
maximum production unit along with all the relevant cost, cost strategy of our product.
Additionally, we have also done CVP analysis to contribute to our breakeven analysis, risk
analysis and sensitivity analysis. We have also prepared Income statement in both traditional
and contribution format and a product line profitability report for assisting internal decision
making.
We have completed this project on time and it was basically because of teamwork. We have
worked together and put in a lot of effort and in the end, we could finish making our product
and have completed the final report.

5. 5
Table of Content
Page no.
Introduction 1
Competitor Analysis 1
Manufacturing Process 1
Cost & Estimation 2
The Estimated Costs and Break Down of Each Cost 2-4
Cost & Classification 4-5
Simple Costing System 6
Cost Strategy 7
Activity Based Costing 8-10
Pricing Strategy 11
Master Budget 11-16
Breakeven Point 16
Breakeven Revenue 17
Margin of Safety 17
Summary of Sensitivity Analysis 18

6. 6
Introduction
Our product is Sandals. We have mainly focused on this product because this has good
demand in market which will always exist.
The nature of the business is manufacturing and wholesaling. We will rent a space of 1000 sft
and employ 5 labors for production. We are selecting Mirpur for production place. As cheap
labor is available there and rent cost is lower than other places of city. We hope that this will
alsolower the manufacturing cost and we willbe able to maintain good profit margin. We will
produce good quality product at reasonable price.
Hopefully our customers will be satisfied with the product and we will succeed at starting
level. And we will be able to expand our capacity in future.
Competitor Analysis
We have a lot of competitor in market. That’s why we are targeting to achieve the extra edge
of the competition by providing goods at reasonable price. Our quality of the product will act
as another advantage over our competitors.
Manufacturing Process
STEP 1. Cutting
At first we diligently check each piece of leather and mold it into shape, then proceed to cut.
In this step we cut leather through cutting machine.
STEP 2. Assembling
Next we take these cut pieces and take other necessary parts in assembly point. Here our
labor with the help of machine sew leather of outer part. Then put cork and shank which act
as cushioning material over plastic sole then sew it the fine outer leather part of sandal. This
is a process that greatly effects the outer appearance of our product.
STEP 3. Finishing & Inspection

7. 7
In this step edge of the sandal is made smooth by grinding machine. Then hot coating is
applied to the leather, ink is applied and polished. After this we decorated our product with
different materials and coatings. Finally sandal undergo a rigorous check.
Cost & Estimation
Cost For the Month of December
Estimated Maximum Possible production in a month:
1 2 3 4 5
Unit produced
per hour
No of
working
hours in a
day
No of Working days in a
month
No of
Labors
Total Maximum
Production Possible
(1*2*3*4)
4 units 8 hours 24 days 5 labors 3840 units
Here, we have assumed that, we will work 6 days in a week and 24 days in a month. In each
day we will work 8 hours and each can produce 4 units in an hour. We will have 5 labors for
production. Taking accounting these information we found that we will be able to produce
3840 units, which is our estimated maximum possible production in a month.
The Estimated Costs and Break Down of Each Cost
Estimated Costs Cost
Direct Material ৳ 518,400.00
Direct Labor ৳ 96,000.00
Indirect Material (stitches, adhesives etc.) ৳ 96,000.00
Depreciation on Machinery ৳ 10,000.00
Rent of factory & Utilities ৳ 35,000.00
Selling & Packaging Cost ৳ 35,000.00

8. 8
*We have estimated this cost from the information based on interview of a factory owner
and real world context.
Direct Material:
Cost Per Unit No of units Produced Total Cost
Leather 75 BDT 3840 units ৳ 288,000.00
Plastic Sole 60 BDT 3840 units ৳ 230,400.00
Total Direct Cost ৳ 518,400.00
We need leather and plastic sole as direct material. For making one unit we need 1.5 square
feet leather which cost us 75 BDT and we need 1 plastic sole which cost 60 BDT.
Direct Labor:
No of
Labor
allocated
No of hours
worked by each
labor in a
month
Total labor
hours Per hour labor cost Total
Cutting
Labor 2 labors 192 hours 384 hours 100 BDT ৳ 38,400.00
Assembly
Labor 2 labors 192 hours 384 hours 100 BDT ৳ 38,400.00
Finishing
and
Inspecting
Labor 1 labors 192 hours 192 hours 100 BDT ৳ 19,200.00
Total labor
hours 960 hours Total Labor Cost ৳ 96,000.00
For our production we are using 5 labor and assigning 2 labors in cutting dept. and in
assembling dept. and 1 labor on finishing and inspecting dept. For each hour each labor gets
100 BDT. In an hour they can produce 4 units and in one month they will produce 3839 units.
So for each unit we cost 25 BDT.
Labor cost per unit = total labor cost / total units produced

9. 9
= ৳ 96,000 / 3839 units
= ৳ 25.01
Manufacturing Overhead:
Indirect Material (stitches, adhesives
etc.) ৳ 96,000.00
Depreciation on Machinery ৳ 10,000.00
Rent of factory & Utilities ৳ 35,000.00
Selling & Packaging Cost ৳ 35,000.00
Total MOH ৳ 176,000.00
Total Manufacturing Overhead per Unit = ৳ 176,000.00 / 3839 units
= ৳ 45.85
Cost & Classification
Category
Product Cost Direct / Indirect Fixed / Variable
Leather Direct Material Variable
Plastic Sole Direct Material Variable
Labor (Cutting, Assembling, Finishing) Direct Labor Variable
Indirect Materials
Indirect Manufacturing
Overhead Variable
Depreciation on Machinery
Indirect Manufacturing
Overhead Fixed
Rent of Factory & Utility
Indirect Manufacturing
Overhead Fixed
Selling & Packaging Cost
Indirect Manufacturing
Overhead Variable

10. 10
Cost Analyzing
Direct Costs: These are the costs of our production costs which are directly related to
production. These include direct material cost (leather and plastic sole), direct labor cost.
Indirect cost: These are the cost which can’t be directly traced on product. These includes
indirect materials, depreciation on machinery, rent of factory & utility, selling & packaging
cost.
Variable Costs: These are the costs that change in proportion to the good or service that a
company produces. It means variable costs change with the level of output. For our
production we have considered that material cost, labor cost, indirect material cost, selling
and packaging as variable cost.
Fixed Costs: These costs are fixed for a certain range of capacity and do not vary with each
unit produced. In our production, depreciation on machinery and rent of factory & utility is
our fixed costs.
Variable Costs Total Per unit
Leather ৳ 288,000.00 ৳ 75.00
Plastic Sole ৳ 230,400.00 ৳ 60.00
Manufacturing Labor Cost ৳ 96,000.00 ৳ 25.00
Indirect Material (stitches, adhesives etc.) ৳ 96,000.00 ৳ 25.01
Selling & Packaging Cost ৳ 35,000.00 ৳ 9.12
Total Variable Cost ৳ 745,400.00 ৳ 194.17
Fixed Costs Total Per Unit
Depreciation on Machinery ৳ 10,000.00 ৳ 2.60
Rent of factory & Utilities ৳ 35,000.00 ৳ 9.12
Total ৳ 45,000.00 ৳ 11.72

11. 11
Simple Costing System
Total cost Per Unit Cost
Direct Material ৳ 518,400.00 ৳ 135.00
Direct Labor ৳ 96,000.00 ৳ 25.00
Total Direct Cost ৳ 614,400.00 ৳ 160.00
Total Indirect Cost ৳ 176,000.00
Indirect Cost Allocated to
Each Unit** ৳ 45.83
Total Cost ৳ 790,400.00 ৳ 205.83
*Total Indirect Cost = ৳ 176,000.00
Total Labor Hour = 960 hours
Indirect Cost per Labor Hour = ৳ 176,000.00 / 960 hours
= ৳ 183.33
Our allocation base will be direct manufacturing labor hours. Which we are applying on total
MOH.
**Indirect Cost Allocated to Each Unit of Production = (Indirect Cost per Labor Hour * Labor
hour needed for each unit)
Indirect Cost Allocated to Each Unit of Production = ৳ 183.33 * 0.25 hour
= ৳ 45.83

12. 12
Cost Strategy
The cost strategy we will use for allocating the costs is the direct method. Since we have only
One support department (finishing and inspecting dept.) for the production of the goods and
only two operating department (cutting dept. and assembling dept.) for our goods, we are
going to use the direct method to allocate the costs.
Prime Cost, Conversion Cost and Full Cost for one month:
Total Per Unit
Direct Material ৳ 518,400.00 ৳ 135.00
Direct Labor ৳ 96,000.00 ৳ 25.00
Direct Expenses ৳ - ৳ -
Prime Cost ৳ 614,400.00 ৳ 160.00
Direct Labor ৳ 96,000.00 ৳ 25.00
Manufacturing Overhead ৳ 176,000.00 ৳ 45.83
Conversion Cost ৳ 272,000.00 ৳ 70.33
Direct Material ৳ 518,400.00 ৳ 135.00
Direct Labor ৳ 96,000.00 ৳ 25.00
Manufacturing Overhead ৳ 176,000.00 ৳ 45.83
Full Cost ৳ 790,400.00 ৳ 205.83

13. 13
Activity Based Costing
Information:
Direct Material
৳
518,400.00
Direct Labor ৳ 96,000.00
Indirect Costs:
Indirect Materials
৳
96,000.00
Rent of Factory & Utility
৳
35,000.00
Depreciation on Machinery
৳
10,000.00
Selling & Packaging Cost
৳
35,000.00
Other Information:
Cutting Assembling
Finishing
&
Inspecting Total
Square Foot 400 sft 400 sft 200 sft 1000 sft
Percentage Used by each
department 10% 70% 20% 100%
No of Machine Hours 384 hours 384 hours 192 hours 960 hours
Labor Hours 384 hours 384 hours 192 hours 960 hours

14. 14
Calculation of ABC System:
Indirect Costs
Total
Budgeted
Cost Cost Driver
Indirect Materials ৳ 96,000.00
Percentage Used by each
department
Rent of Factory & Utility ৳ 35,000.00 Square Feet area
Depreciation on Machinery ৳ 10,000.00 No of Machine Hours
Selling & Packaging Cost ৳ 35,000.00 Labor Hours
*We are going to rent 1000 sft space for production.
Allocating Indirect Cost to the dept.:
Indirect Costs of Activities: Cutting Assembling
Finishing &
Inspecting Total
Indirect Materials ৳ 9,600.00 ৳ 67,200.00 ৳ 19,200.00 ৳ 96,000.00
Rent of Factory & Utility ৳ 14,000.00 ৳ 14,000.00 ৳ 7,000.00
৳
35,000.00
Depreciation on
Machinery ৳ 4,000.00 ৳ 4,000.00 ৳ 2,000.00
৳
10,000.00
Selling & Packaging Cost ৳ 14,000.00 ৳ 14,000.00 ৳ 70,000.00 ৳ 35,000.00
From the above cost allocation we can see that, we are allocating indirect costs on
department basis. And as we have one product, by allocating these cost our cost price isn’t
changing.So there willbe no change of profit between simple costing systemand ABC system.

15. 15
Reason Behind Selecting Cost Drivers:
Indirect Costs Cost Driver Reason Behind Selecting it
Indirect Materials
Percentage Used
by each
department
The cost of Indirect material will depend on the
percentage used of material.
Rent of Factory & Utility Square Feet area
We are selecting SQ feet to allocate the cost of
Rent and Utilities
Depreciation on
Machinery
No of Machine
Hours
As we are using machines in production process
and thus depreciation will be allocated by No of
machine hours
Selling & Packaging Cost Labor Hours
We are assuming that cost of selling and packaging
will be assigned by labor hours
Simple Costing System
Revenue ৳ 1,031,700.00
Less: Total Direct Cost ৳ 614,400.00
Less: Total Indirect Cost ৳ 176,000.00
Net Operating Income ৳ 241,300.00
Operating Income Percentage = ৳ 241,300.00 / ৳ 1,031,700.00
= 23.39 %
ABC System
Revenue ৳ 1,031,700.00
Less : Total Direct Cost ৳614,400.00
Less: Indirect Costs
Indirect Materials ৳ 96,000.00
Rent of Factory & Utility ৳ 35,000.00
Depreciation on Machinery ৳10,000.00
Selling & Packaging Cost ৳35,000.00
Net Operating Income ৳ 241,300.00

16. 16
Pricing Strategy
As we are producing the product at a lower price than our competitors, we are penetrating
the market with this strategy. Our products are made by skilled labors with the help of
machines. Although we are new to this market, we do not have the disadvantage of pricing
our products higher to meet the cost. We are selling our product at reasonable price because
we are able to produce at lower cost.
Forecast of Sales and Demand
December 2015
Budgeted Sales In Units 3490 Units
Demand for Product 3490 Units
Master Budget
Revenue Budget
For the Month Ending December 2015
Units Selling Price Total
Sandal 3490 Units ৳ 300.00 ৳ 1,047,000.00
৳ 1,047,000.00

17. 17
Production Budget
For the Month Ending December 2015
Dec-15
Budgeted
Sales 3490 Units
Add: Desired Ending Inventory 349 Units
Total Needs 3839 Units
Less: Beginning Inventory 0
Required Production 3839 Units
Direct Material Usage Budget
For the Month Ending December 2015
Physical Units Budget
Direct Material: Leather Plastic Sole
Leather (3839 units * 1,5 square feet) 5758.5 square feet
Plastic Sole ( 3839 units * 1 unit) 3839 units
Total Quantity of Direct Material to be
used 5758.5 s.f. 3839 units
Cost Budget
Direct Material: Leather Plastic Sole Total
Leather (5758.5 square feet * 50 BDT
) ৳ 287,925.00 ৳ 287,925.00
Plastic Sole ( 3839 units * 60 BDT) ৳ 230,340.00 ৳ 230,340.00
Total Direct Material to be used ৳ 287,925.00 ৳ 230,340.00 ৳ 518,265.00

18. 18
Direct Material Purchase Budget
For the Month Ending December 2015
Physical Unit Budget
Leather Plastic Sole
To be used in Production 5758.5 s.f. 3839 units
Add: Target Ending Inventory 890.5 s.f. 576 units
Total Requirement 6649 s.f. 4415 units
Less: Beginning Inventory 0 s.f 0 units
Purchase to be made 6649 s.f. 4415 units
Cost Budget
Leather Plastic Sole
Leather (6649 s.f. * 50 BDT per s.f.) ৳ 332,450.00
Plastic Sole (4415 units * 60 BDT per unit ) ৳ 264,900.00
Purchases ৳ 332,450.00 ৳ 264,900.00
Direct Manufacturing Labor Costs Budget
For the Month Ending December 2015
No of
Labor
allocated
No of hours
worked by each
labor in a
month
Total labor
hours
Per hour labor
cost Total
Cutting Labor 2 labors 192 hours 384 hours 100 BDT ৳ 38,400.00
Assembly
Labor 2 labors 192 hours 384 hours 100 BDT ৳ 38,400.00
Finished
Labor 1 labors 192 hours 192 hours 100 BDT ৳ 19,200.00

19. 19
Total labor
hours 960 hours
Total Labor
Cost ৳ 96,000.00
Manufacturing Overhead Cost Budget
For the Month Ending December 2015
Variable Cost:
Indirect Materials ৳ 96,000.00
Selling & Packaging Cost ৳ 35,000.00
Total Variable Cost ৳ 131,000.00
Fixed Cost:
Depreciation on Machinery ৳ 10,000.00
Rent of Factory & Utility ৳ 35,000.00
Total Fixed Cost ৳ 45,000.00
Total Manufacturing Overhead Cost ৳ 176,000.00
Ending Inventory Budget
For the Month Ending December 2015
Quantity Cost Per Unit Total
Direct Materials:
Leather 890.5 s.f. ৳ 50.00 ৳ 44,525.00
Plastic Sole 576 units ৳ 60.00 ৳ 34,560.00
Total Ending Direct Material ৳ 79,085.00
Finished Goods:
Sandel 349 Units ৳ 205.83 ৳ 71,834.67
Total Finished Goods Inventory ৳ 71,834.67
Total Ending Inventory ৳ 150,919.67

20. 20
Cost of Goods Sold Budget
For the Month Ending December 2015
Total
Beginning Finished Good Inventory 0
Direct Material Used ৳ 518,265.00
Direct Manufacturing Labor ৳ 96,000.00
Manufacturing Overhead ৳ 176,000.00
Cost of Goods Manufactured ৳ 790,265.00
Cost of Goods Sold available for Sale ৳ 790,265.00
Deduct: Ending Finished Good Inventory ৳ 71,834.67
Cost of Goods Sold ৳ 718,430.33
Budgeted Income Statement
For the Month Ending December 2015
Traditional Format:
Revenue ৳ 1,047,000.00
Cost of Goods Sold ৳ 718,430.33
Gross Margin ৳ 328,569.67
Operating Costs:
Indirect Materials ৳ 96,000.00
Selling & Packaging Cost ৳ 35,000.00
Depreciation on Machinery ৳ 10,000.00
Rent of Factory & Utility ৳ 35,000.00
৳ 176,000.00

21. 21
Operating
Income ৳ 152,569.67
Contribution Margin:
Total
Revenue ৳ 1,047,000.00
Less: Variable Costs
Indirect Materials ৳ 96,000.00
Cost of Goods Sold ৳ 718,430.33
Selling & Packaging Cost ৳ 35,000.00
Total Variable Cost ৳ 849,430.33
Contribution Margin ৳ 197,569.67
Less: Fixed Costs
Depreciation on Machinery ৳ 10,000.00
Rent of Factory & Utility ৳ 35,000.00
Total Fixed Cost ৳ 45,000.00
Net Operating Income ৳ 152,569.67
Breakeven Point
1 2 3
Fixed Cost *Contribution Margin per Unit *Breakeven Point (1/2)
৳ 45,000.00 ৳ 56.61 per Unit 795 units
* Contribution Margin per Unit = ৳ 197,569.67/ 3,490 units
= ৳ 56.61
*Breakeven Point = Fixed Cost / Contribution Margin per Unit

22. 22
= ৳ 45,000.00 / ৳ 56.61
= 794.91 units which is rounded to 795 units
Breakeven Revenue
1 2 3
Breakeven Point in units Selling Price per Units Breakeven Revenue (1*2)
795 units ৳ 300.00 ৳ 238,500.00
Margin of Safety
1 2 3
Budgeted Revenue Breakeven Revenue Margin of Safety in BDT (1-2)
৳ 1,047,000.00 ৳ 238,500.00 ৳ 808,500.00
1 2 3
Budgeted Sales Breakeven Sales Margin of Safety in Units(1-2)
3,490 units 795 units 2695 units
Margin of Safety in Percentage = Margin of Safety in BDT / Budgeted Revenue
= ৳ 808,500.00/ ৳ 1,047,000.00
= 77.22%

23. 23
Summary of Sensitivity Analysis
Unit Sold
Selling
Price
Direct
Material
Cost per
Unit
Budgeted
Operating
Income
Change if
Operating
income from
Master Budget
Master Budget
3439
units ৳300.00 ৳135.00 ৳ 152,569.67
Scenario 1
12% increase in price
of Direct Material
3439
units ৳300.00 ৳151.20 ৳ 96,031.67
decreased by
36.52%
Scenario 2
10% decrease in
Budgeted Sales
3141
units ৳300.00 ৳135.00 ৳ 119,704.34
decreased by
21.54%
Scenario 3
15% increase in
Budgeted Sales
4014
units ৳300.00 ৳135.00 ৳ 237,935.00
increased by
55.95%