A Report on

“Rahman Furniture: Traditional Cost System”

Submitted To:

Ms. Tahmina Ahmed

Assistant Professor
Department of Accounting and Information Systems
University of Dhaka

Submitted By:

Name ID No.
Md. Romjan Husain 11838064
Nushrat Jahan Sume 11838042
Afrin Zarin Rahman 11838045
Md. Rakibul Hassan 11838022

M.B.A 38th Batch

Department of Accounting and Information Systems
University of Dhaka

Date of Submission: 10th April, 2019.

 Acknowledgement

We would like to express my deepest gratitude to our teacher “Ms. Tahmina Ahmed”, Assistant
Professor of Department of Accounting and Information Systems, University of Dhaka for her
excellent guidance, caring, patience, supportive idea generation and inspiring us for the entire time
of preparing this report.

Finally we would like to thank our parents for their excellent support for the entire time of preparing
this paper. They had always supported us and encouraged with their best wishes.

We would never have been able to finish our paper without the support of the aforementioned
persons.

Name ID No.
Md. Romjan Husain 11838064
Nushrat Jahan Sume 11838042
Afrin Zarin Rahman 11838045
Md. Rakibul Hassan 11838022

Department of Accounting & Information Systems

University of Dhaka.
 Executive Summary
Furniture business is one the important business of our country. The market is also competitive and
the demand of modern furniture is also increasing. The test of people is developing with the
education rate. The Rahman Furniture will be providing everything for home furnishing as well as
for office decoration in the local market. The company will be unique in terms of its services,
sourcing, production process, people and products. The company will provide at reasonable cost
and ensuring an elegant life style. It will gain success from the very beginning of their operation
and will capable enough to hold the success year after year because it has a very strong financial
backup from Rahman Textiles Limited. They will also share their experience. From the feasibility
study of Rahman Furniture Limited it is clear that they will earn profit and the amount of profit
will be increased day by day. To start the business they have to take loan from the bank but within
time they will repay the loans. The project will be a profitable concern and will be able to meet all
of its long term and short-term obligations. So this project is financially feasible in all aspects. They
are strongly looking forward to utilize their opportunity, strengthen their strengths, removing
weakness and overcoming business threats. It would be easy to run the business in partnership
form, because of complementary skills of partners, larger pool of capital and single taxation facility.
It is quite apparent that the successful implementation of such a plan would have positive impact.
 Table of Contents

Chapter No. Content Page no.

Acknowledgement 01
Executive Summary 02

Table of Contents 03
Chapter One Introduction
1.1 Background of The study 04
1.2 Scope of the study 04
1.3 Objective of the study 04
1.4 Methodology 04
1.5 Limitation of the Study 05

Chapter two 2.1 Over view of the Organization 06-07

Chapter three 3.1 Traditional Cost System of Rahman 08-09

Furniture
Chapter Four 4.1 Recommendation 10

4.2 conclusion 11

Chapter Five 5.1 Reference 12

 Chapter 01
Introduction
1.1 Background of the study
This is about an office workstation manufacturing company ―Rahman Furniture, and their
business activities are recorded in the traditional cost system when allocating product costs. The
main purpose of this report to highlights the traditional cost system of Rahman Furniture.
Keywords: Traditional cost system, overhead allocation, product cost, product margin.
1.2 Scope of the study
In allocating costs to products, the traditional cost (accounting) system follows a simple
framework. Direct product costs, such as material and labor costs, are traced directly to products.
Indirect overhead costs are allocated to products based on overhead rate or multiple departmental
overhead rates. Selling, general, and administrative costs are classified as period expenses. While
the implementation of the traditional cost system is straightforward, the resulting cost allocation
is far from precise. For example, some period costs, such as shipping and sales commission, are
excluded from product costs despite the fact that they are consumed by products. Furthermore,
all manufacturing overhead costs, including facility cleaning crew and security guard salaries, are
allocated to products even though they are not traceable to products. At the same time, all non-
manufacturing costs—that is, those incurred outside of the manufacturing facilities—are
excluded from product costs, even though some are presumably caused by products.

1.3 Objective of the study

This case covers the topic of product cost allocation with a focus on the traditional costing method.
In this study, generally accustomed to solving numerical problems but lack conceptual
understandings of the theories behind the applications. This case is intended to help to gain a more
comprehensive understanding of the topic. Objectives include the following,

manufacturing overhead costs.

allocating overhead costs to products to the traditional cost system.
aditional cost system and presenting a
reconciliation of the total overhead costs.
To defining total product cost in the traditional cost system.
upon the traditional cost
systems.
To enhance understanding of the connection between traditional and external reporting under
GAAP.

1.4 Methodology:

For preparing this paper, I used both Secondary and Primary data.

Collection of Primary Data:

1. Many of the data and information were collected from my practical knowledge.
2. Collect data by overview the organization.
3. Interviewing staffs.
4. Direct communication with management.
Collection of Secondary Data:
1. Annual Reports.
2. Brochures, Manuals and Publication of the Organization.
3. Internet and websites.

1.5 Limitation of the Study:

While writing a research report, there are almost always some drawbacks. I particularly faced
some limitations in writing this report. Those are

activities are not observed.

activities of Rahman Furniture.

eld to retain the confidential.
other documents are failed to enclose with this
report.

Data are not available in a systematic way.

 Chapter 02
Over view of the Organization
 Rahman Furniture: (Traditional Cost System)
Rahman is well known for its high-quality, stylish and durable workstations, which has made it
one of the top products in the office workstation category.
The company is known for their standard office workstation that goes by the brand name “Classy,”
and it comes in standard sizes, which are all made out of high-quality wood materials. Additionally,
they also manufacture customizable office workstation models, which are usually requested by
large corporate clients who have various preferences such as shape, size, material, color, and
ergonomics.
Rahman prices their products at a 40% product margin. At this price, their products are one of the
cheapest on the market, despite the fact that they boast of a superior product quality than
competitors with similar, if not higher, prices. This had led the company owners to consider if the
company’s pricing is in line with the quality of both their product and service delivery.

In a recent meeting with company owners, Rahman was asked to evaluate the cost system of the
company. The owners questioned whether the current traditional cost system accurately measured
the product costs for both the standard and customized workstations.
As a new member of the company, Rahman has also had to spend time learning about the
company’s production process, in addition to the costs incurred at each stage of the production
process. Manufacturing is divided into two distinct production departments: the cutting department
and the assembly department.
The cutting process begins with material acquisition and handling. The purchasing team is
responsible for sourcing suppliers, negotiating, as well as finalizing contracts, tracking purchase
orders, and arranging deliveries. Once the raw materials arrive at a delivery point, shipments are
examined and transported to various cutting and assembly stations. Raw materials can range from
wood sourced from two major suppliers for the standard models, to metals, laminates, composites
and even glass sourced from 30 different supplier’s for the customized models. Other indirect
materials include screws, nuts, bolts, glue, leather and polish.
The cutting department ensures that the individual parts needed to form the workstations are cut
to the exact size necessary and measured individually. For the standard models, raw timber is first
treated then milled to preferred shape and dimension before provisions are made for fitting the
screws and nuts. This is followed by a coat of paint.
For customized models, the cutting process starts with the drawing of a pattern with the exact
dimension for each part by a team of engineers. A prototype for each part is cut to ensure a perfect
fit before the production run. The cutting process, using different types of wood materials, is
identical to the standard models. Metals are cut and welded into the appropriate shapes before
being smoothed and sprayed. In the case of glass, a tungsten glass cutter cuts the glass into the
required sizes before they are painted. Thus, there are significantly higher direct and indirect
material and labor costs for the customized models as opposed to the standard models.
In the cutting department, the individual materials that will finally make up the workstation are
made and designed as part of a collective process that ensures that the transportation and
installation of the workstations are easier and faster.
The assembly department completes the production process by individually installing the parts
with the aid of screws, bolts, adhesives, and welding as needed in order to assemble the
workstation. Engineers create a drawn-out plan for each model of the workstation. For customized
models, a prototype of the finished product is first sent to the customer for approval.
The assembly process is straightforward, and it could take anywhere from a few minutes to several
hours to assemble a standard or customized workstation depending on its size, complexity, and
build. Engineers may also be required to spend additional time training assembly workers on how
to assemble the customized models.
The production process, including all materials involved, must undergo and pass stringent material
quality control inspections. Plant supervisors and engineers inspect product samples (one product
for standard models and two for customized models) by putting them through various stress and
material testing to ensure that the workstation can withstand both structural and aesthetic limits,
which typically vary depending on the type of workstation produced.
 Chapter 03
Traditional Cost System of Rahman
Furniture
Under the current traditional cost system, manufacturing overhead costs are first allocated to the
cutting and assembly departments. Departmental overhead costs are then allocated to each product
by machine hours for the cutting department and by direct labor hours for the assembly department.
Manufacturing overhead costs of Rahman include depreciation of equipment and machines,
factory lease, utilities, salaries for cleaning crew, security guards, and other miscellaneous.

Exhibit 1. Departmental Manufacturing Overhead Cost

Cutting Department Assembly Department Total

Factory Building Lease $ 15,000 $ 7,500 $ 22,500
Factory Equipment $ 162,500 $ 75,000 $ 237,500
Depreciation
Factory Supplies & $ 30,000 $ 37,500 $ 67,500
Indirect Materials
Factory Utilities & Misc. $ 35,000 $ 16,300 $ 51,300
Indirect Labor Costs:
Buyer Salaries $ 3,750 $ 2,290 $ 6,040
Engineer Salaries $ 3,000 $ 4,500 $ 7,500
Mover Salaries $ 4,500 $ 7,000 $ 11,500
Supervisor Salaries $ 46,000 $ 35,000 $ 81,000
Other Indirect Labor $ 11,000 $ 4,000 $ 15,000
Salaries
Cleaning Crew Salaries $ 3,000 $ 3,000 $ 6,000
Security Guard Salaries $ 1,250 $ 1,250 $ 2,500

Total Departmental $ 315,000 $ 193,340 $ 508,340

Overhead

Machine Hours Direct Labor Hours

Standard Models 3600 MHs 12250 DLHs
Custom Models 3200 MHs 11250 DLHs
Total 6800 MHs 23500 DLHs
Exhibit 2. Revenue and Other Relevant Costs

Standard Models Customized

Models
Revenue $ 1,437,617 $ 1,309,687
Direct Costs
Direct Materials $ 325,000 $ 295,000
Direct Labor $ 270,000 $ 250,000
Relevant Selling & Ad. Exp:
Shipping $ 15,000 $ 7,000
Sales Commission $ 60,000 $ 48,000
Number of Units* 6000 4000

*Assume unit produced equals to units sold

Traditional Cost System to Allocate Costs by Department & Total Manufacturing Overhead
Allocated to the Standard Models and the Customized Models:
In general, the traditional cost system uses a plant-wide overhead rate or multiple departmental
overhead rates to assign manufacturing overhead to products. In the case of Rahman Furniture, a
departmental approach, which is more accurate than the plant-wide approach, was used. With
multiple overhead rates, the department approach is an improvement when compared to the plant-
wide approach because cost allocations are based on the most appropriate cost driver for each
department. For example, machine hours are used by the cutting department since all cutting work
is done by machines. In comparison, direct labor hours are used by the labor-intensive assembly
department to allocate manufacturing overhead costs.
The departmental overhead rate is $46.32 ($315,000divided by 6800 machine hours) for the cutting
department and $8.23 ($193,340 divided by 23500 direct labor hours) for the assembly department.
Using these overhead rates, manufacturing overhead costs are then allocated to the standard
models and the customized models as illustrated in Table 1. The total manufacturing overhead is
$535,097 for the standard models and $481,583 for the customized models. Students are instructed
to perform all mathematical calculations in class. Most students are able to correctly calculate the
manufacturing overhead costs for both models.

Table 1.Manufacturing Overhead Costs -Traditional Cost System

Cutting Calculation Assembly Department Calculation

Departmental Manufacturing
Overhead $315,000 $ 193,340
Cost Driver 6800 MHs 23500 DLHs
Departmental Overhead
Rate $ 46.32 $ 8.23
 Standard Models Customized Models
Machine Hours 3600MHs 3200MHs
Direct Labor Hours 12250DLH 11250DLH

Standard Models Customized Models

Cutting Department $ 166,752 (46.32x3,600) $ 148,224 (46.32x3,200)
Overhead
Assembly Department $ 100,818 (8.23x12,250) $ 92,588 (8.23x11,250)
Overhead

Total Manufacturing Overhead $ 267,570 $ 240,812

Table 4. Total Product Cost and Product Margin

Standard Models Traditional

Direct Materials $ 325,000
Direct Labor $ 270,000
Shipping N/A
Sales Commission N/A
Manufacturing Overhead $ 267,570
Non-Manufacturing N/A
Overhead
Total Product Cost $ 862,570
Revenue $ 1,437,617
Product Margin 40%

Customized Models Traditional

Direct Materials $ 295,000
Direct Labor $ 250,000
Shipping N/A
Sales Commission N/A
Manufacturing Overhead $ 240,812
Non-Manufacturing N/A
Overhead
Total Product Cost $ 785,812
Revenue $ 1,309,687
Product Margin 40%
 Chapter 04
Recommendation & conclution
 Recommendation
Vast Advertising:
As Furniture Industry is already stable and there are some giant competitors like Otobi, Hatil,
Partex, etc. So Rahman Furniture should introduce their brand through advertising and should
increase their advertisement and also increase their social activities gradually. So they have to
explore their name to the people that everyone can know about the organization.

Increase Number of outlet:

In this time there is so much competition between each other that a single step can change the all
direction. Today’s people are very much willing to go to the shop, which one is near to them. So
if the number of outlet will not increases than it can lose the customer.

Production in shifts:
They should manufacture the products in two or more shifts. So the assets will be utilized properly.
And it will make the company more profitable and make strong in competition.

Build a strong reliable relation:

From the beginning they should build a strong relation with the customers. So they have to give
after sale service and other facilities to the customer. So it can be a competitive advantage in near
future.

Introduce new cost system:

Rahman Furniture using the traditional cost system in their cost activity. Traditional costing add an
average overhead rate to the direct costs of manufacturing products and is best used when the overhead of
a company is low compared to the direct costs of production. Activity-based costing identifies all of the
specific overhead operations related to the manufacture of each product. So Rahman Furniture can use this
ABC cost system to measure the overhead cost of the product, where overhead cost identifies all of the
specific overhead operations related to the manufacture of each product. Not all products require the support
of all overhead costs, so it is not reasonable to apply the same overhead costs to all products.
 Conclusion

From the above study it reveals that the main sponsors of the company has expertise and long
outstanding knowledge in this sector. With the industrial expertise knowledge & background of
the sponsor, this business can be implemented successfully. After its completion, the project will
start earning currency and will contribute to the national economy building. Apart from this, the
project will create a huge number of employment opportunities directly and indirectly in the
country.
The products of this project will be procured locally. There is a huge demand of products of the
project in the local market & easy way to calculate the cost in traditional costing system. The
products can be easily saleable at a reasonable profit margin. From the financial evaluation, it
reveals that project will earn a good amount of net profit continuously. The project will be a
profitable concern and will be able to meet all of its long term and short-term obligations. So this
project is financially feasible in all aspects. Therefore, it is found that the project is financially
rewarding and socially acceptable as well.
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