Desk Water Cooler

ACT333 FINAL PROJECT

Cost Accounting
Prepared for:
Afrin Rifat [Ani]
Lecturer, Department of Accounting & Finance
School of Business & Economics
North South University

Prepared by:
ABC Group

1. Salman Kabir ID:

1510289630
2. Jahin Tasnim Arpita ID:
1511160030
3. Mahe Mehemood ID:
Shafil 1430342630
4.
5.
 Letter of Transmittal

8th December 2017

Afrin Rifat (ANi)
Lecturer, Department of Accounting and Finance
School of Business and Economics
North South University

Subject: Submission of the project report on 'Implications of the mechanics of Managerial

Accounting'

Dear Ma’am,
We are pleased to submit you the report on Desk Water Cooler as part of the ACT333 course
requirement. We have dedicated our best effort to achieve the objectives of the report and
hope that our endeavor will serve the purpose. The costing and pricing strategies required for
the manufacture of this product have been explained in the report.
We would like to take this opportunity to thank you for the guidance and support you have
provided us with during the course of this report. We request you to excuse us for any mistake
that may occur in the report despite our best effort. If you need any elaboration on any issue
we should be happy to oblige.
Thank you again for your support and patience.
Yours Sincerely,
Group: ABC
 1. Salman Kabir
2. Jahin Tasnim Arpita
3. Mahe Mehemood Shafil

Abstract

We, ABC, manufactured a desk water cooler. The manufacturing process for this product has
been elaborated in the report. A desk water cooler can be used to store water or any other
liquid so that you can drink directly from the cooler without having to move around. The report
also contains the maximum number of units that we can produce in a month along with the
direct, indirect, prime, conversion and full cost of the product. The cost allocation and product
line profitability under simple and activity based costing is shown in the report. Later the pricing
strategy and various budgets including the budgeted income statement in the traditional and
contribution format is shown in the report. Finally, the break-even, riskiness as well the
sensitivity analysis is shown to explain the impact of any change in product remand. The overall
report therefore portrays the manufacturing process, costing, pricing and budgeting of desk
water cooler in details.
 Table of Contents

Introduction 1
Industry 1
Competitors 1
Manufacturing Process 1
Estimations
Maximum Production 2
Breakdown, source citation and analysis of costs 3
Allocation of support cost 4
Prime Cost 4
Conversion Cost 4
Full Cost 4
Simple Costing 5
Activity Based Costing 5
Product – line Profitability under ABC and Simple Costing 7
Forecast
Pricing Strategy 7
Budgets
Revenue Budget 9
Production Budget 9
Direct Material Usage Budget 9
Direct Material Purchase Budget 10
Direct Labor Budget 10
 Manufacturing Overhead Budget 10
Ending Inventory Budget 11
Cost of Goods Sold Budget 11
Budgeted Income Statement – Traditional Format 11
– Contribution Format 12
– Contribution Format per Unit Basis 12
Evaluations
Break Even Analysis 13
Margin of Safety 13
Sensitivity Analysis 14
 Introduction
We as a team have chosen to make a basic water dispenser as our project. A water dispenser is
a product used to get drinking water from, as an alternative to a tap. It works by attaching a jar
of purified water to the top of the dispenser from which the water will fall.
The main reason we chose this project is due to the fact that the parts needed to make it are all
recycled; thus a ‘green’ product during the world’s most environmentally cautious period. To
add on, this water dispenser is not like your typical water dispenser because it is quite small in
size, which makes it portable and perfect for outings like picnics.

Industry
The water dispenser industry in Bangladesh is quite a competitive one since we need to either
filter our tap water or depend on water dispensers to drink safe, healthy water.
Our product will be sold online therefore it will be competing with similar small-scale, portable
water dispensers sold on sites such as Daraz.bd.

Competitors
Our competitors include the ‘Magic tap automatic drink dispenser’, ‘Water and beverage
dispenser’, ‘Electric jar water dispenser’ and ‘Manual drinking water pump dispenser’. (To
clarify, since our product does not have an added filter, it is not competing with companies
such as Pureit or AQUAPURE.)

Manufacturing process:
Steps :
1. Take a Pringles can and mark two parallel straight lines from the bottom of the can,
wide apart enough to fit a glass between them. Join the straight lines with a slightly
upward curved line.
2. Take the cap of the toothpaste tube and use it to trace a circle right above the curved
line. Make sure the circle is slightly bigger than the cap.
3. Cut along these lines you have drawn.

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 4. Take the toothpaste tube and cut it at about 1.5 inches from the mouth. Make four slits
on the remaining part of the tube to create a flower-like shape.
5. Insert the mouth of the toothpaste tube into the hole you cut out on the Pringles can.
Glue the flaps on the insides using a glue gun.
6. Take the cap of the Nutella Jar and, aligning with the center of the jar, mark a dot about
a centimeter from the circumference. Mark a second dot about an inch from the first
dot, still aligning with the center.
7. Fix the straw in the first hole and place the lid over the top opening of the Pringles can.
Direct the bendable part through the opening of the toothpaste tube (which is fitted
onto the Pringles can). Make sure to cut off excess parts of the straw on either end.
8. To make sure the product is leak proof, apply glue around the straw on the end where it
meets the lid and on the other end where it enters the toothpaste mouth. Also glue the
lid of the jar onto the top opening of the Pringles can.
9. Paint the Pringles can with two layers of acrylic white paint.
10. Lastly put on the toothpaste tube cap which will be used in adjusting the water flow.
Glue on the hand-drawn sign which specifies which way to turn the cap in order for
water to flow.

To use this, you need to fill the empty Nutella jar with water. Then turn the dispenser upside
down and twist it onto the water-filled jar, which you will then turn back to its first position.

Estimations
Maximum Production
Number of labors 5 labors
Number of hours needed for one product 3 hours
Total hours needed in a day (5 labors * 3 hours) 15 hours
Number of days worked in a month (4 weeks * 5 days) 20 days
Total hours worked in a month 300 hours
Maximum Production 100 units

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Breakdown, source citation and analysis of costs
Direct / Fixed /
Cost Unit Cost Source
Indirect Variable
Direct Materials
Jackers Container Tk. 120 per
Market Rate Direct Variable
container
Nutella Jar Tk. 270 per jar Market Rate Direct Variable
Toothpaste container Tk. 15 per piece Market Rate Direct Variable
Straw Tk. 12 per straw Market Rate Direct Variable
Paper Tk. 1 per paper Market Rate Direct Variable

Group member's
Direct Labor Tk. 26 per hour Direct Variable
demand

MOH
Glue Tk. 8 per stick Market rate Indirect Variable
Pencil Tk. 10 per piece Market rate Indirect Variable
Marker Tk. 50 per piece Market rate Indirect Variable
Tk. 180 per
Paint Market rate Indirect Variable
container
Eraser Tk. 5 per piece Market rate Indirect Variable
Rent (Tk. 4000/300 sq. Tk. 3200 per Prevailing rate in
Indirect Fixed
ft *300s sq.ft.*80%) month Bashundhara R/A
Utilities (Tk. 1000. Prevailing rate in
Tk. 800 per month Indirect Fixed
*80%) Bashundhara R/A

Support Cost
Rent (Tk. 4000/300 sq. Prevailing rate in
Tk. 800 per month Indirect Fixed
ft *300s sq.ft.*20%) Bashundhara R/A
Prevailing rate in
Utilities (Tk. 1000*20%) Tk. 200 per month Indirect Fixed
Bashundhara R/A
Internet Tk. 800 per month KS Networks. Ltd. Indirect Fixed
Tk. 1000 per
Maintenance Indirect Fixed
month Prevailing rate in
Bashundhara R/A
Selling Cost
Telephone bill Tk. 800 per month Market Rate Indirect Fixed
Analyzing
Marketing Tk. 800 per month Indirect Fixed
Bangladesh
Packaging cost Tk. 5 per unit Market Rate Indirect Variable

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Allocation of Support Cost
A start-up business like ours has low budgeted expenses for which the direct method seemed
like the most feasible method in order to allocate the support cost effectively. Administrative
services provide 10% of its services to maintenance and 90% to operating. On the other hand,
maintenance provides 20% of its services to administrative services and 80% to operating.

Administrative Maintenance Operating

Services (BDT) (BDT) (BDT)
1800 1000
Allocation of Administrative Services (0.9) (1800) 1800
Allocation of Maintenance (0.8) (1000) 1000
0 0 2800

Prime Cost
BDT
Direct Materials (120+270+15+12+1) *92 38,456
Direct Labor (26*300) 7,800
Total 46,256

Conversion Cost
BDT
Direct Labor 7,800
Manufacturing Overhead (92/4*8+5*(10+50+5)
+92/50*180+3200+800) 4,840.2
Total 12,640.2

Full Cost
BDT
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 Direct Materials 38,456
Direct Labor 7,800
MOH 4,840.5
Total 51,096.5

Simple Costing
BDT
MOH 4,840.5
Allocation base: Direct Labor Hours 300
Overhead Rate 16.135

Activity based Costing

The following table represents the computation of activity rates for each of the indirect rates
along with the cost driver and respective allocation bases:

Units of Activity rate

Cost
Indirect costs: Cost driver allocation (Cost/allocation base)
(BDT)
base
Square feet of
Rent (MOH) 3200 240 BDT 13.33/square feet
space
Rent (Support) Square feet of 800 60 BDT 13.33/square feet
space

Labor hours BDT 3.33/ labor hour

Utility (MOH) worked 800 240 worked
Labor hours BDT 3.33/ labor hour
Utility (Support) worked 200 60 worked

Maintenance Square feet of

(Support) space 1000 60 BDT 16.67/square feet

Internet Bill Number of units BDT 8.70/ water

(Support) produced 800 92 dispenser

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 Number of units BDT 9.13/ water
Indirect Materials produced 840.2 92 dispenser

In the table above, all the indirect costs incurred in the production of the Water dispenser has
been shown along with their respective cost drivers. For rent, square feet of space has been
selected as cost driver because rent is supposed to vary based on the square feet of space.
Usually, the bigger the space, the more rent is charged. Utility cost includes the cost of utilities
such as electricity, drinking water for the employees and so on. These costs usually incur while
the team is at work. This is why labor hours worked has been selected as a cost driver for utility.
Also, the same cost driver is selected for maintenance. Maintenance cost includes cleaning the
premises along with other costs related to keeping the place organized. This is most likely to
vary along with square feet of space since a bigger place is usually likely to incur greater
maintenance costs. Internet bill has been allocated using number of units since the water
dispensers are expected to be sold over the internet. So, using number of units as a cost driver
showing the internet bill per unit of water dispenser is most convenient. Lastly, the greater the
number of water dispensers produced, the more is the usage of indirect materials. So, showing
the activity rate for indirect materials using number of units produced is also the most
appropriate.

Costs Calculations Product unit cost (BDT)

Direct costs:
Direct material 120+270+15+12+1 418
Direct labor 26*3 78
Indirect costs:
Rent 13.33 *(300/100) 40
Utility 3.33*(300/92) 10.86
Maintenance 16.67*(300/100) 50
Internet Bill 8.70 8.70

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 Indirect materials 9.13 9.13
Total unit product cost 614.69

Product – line Profitability under ABC and Simple Costing

Details ABC (BDT) Simple costing (BDT)
Revenue (816*80) 65,280 65,280
(-) Direct costs:
Cost of goods sold
(43,095.92) (43,095.92)
(-) Indirect Costs: (3,640.2)
Rent (4000) -
Utility (1000) -
Maintenance (1000) -
Internet Bill (800) -
Indirect Materials (840.2) -
Operating income 14,543.88 18,543.88
% of profit margin 22.28% 28.41%

The profit margin under simple costing is higher than activity based costing by approximately
6.13%.

Forecasting
Pricing Strategy
It’s been expected that the sales of water dispensers will generate 20% return on investment
every month. Based on that, the required profit per unit has been computed. In the table

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below, it shows that a profit of Tk. 201 is required per product to earn an operating income
which ensures 20% return on invested capital.

Invested Capital BDT

Glue Gun (250*7) 1750
Scissors (80*7) 560
Anti-Cutter (50*7) 350

Computer 30000
Ruler (20*7) 140
Furniture (4000+ 6000+ 350*7) 12450
Multi-plug 190
Cash (2000*7) 35000
Total Invested capital 80440
Expected return on investment 20%
Target operating income (80,440*20%) 16088
Expected units sold 80
Operating income per unit (16088/80) 201
Unit product cost (maximum) 615
Selling price per unit (201+615) 816
Mark up% (201/615*100) 32.68%

We have chosen the cost-plus pricing strategy. As shown in the table, the cost price per water
dispenser is Tk.615 and a profit of Tk.201 is required. Therefore, the water dispensers will be
priced at Tk. 816 which is based on 32.68% mark up on cost.
The price set not only ensures satisfactory profit for the team but also is competitive if
compared to our competitors’ prices. Our competitors are charging around Tk. 1,000-1,100 for
water dispensers, both on the internet and physical shops. The price charged for our water
dispenser is below this range. We therefore believe that our pricing strategy is appropriate in a

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sense that it reaches our targeted rate of return on investment and also ensures
competitiveness in the market.

Budgets
Revenue Budget
Online water dispenser sellers sell around 3-4 water dispensers on an average each day, so it is
expected that each month there will be a demand of around 80 water dispensers.
Units Selling price/unit (BDT) Total (BDT)
Water dispenser 80 816 65,280

Production Budget
Target sales unit 80
(+) Target finished goods inventory (15% * 80) 12
Total needs 92
(-) Beginning inventory (0)
Required production 92

Direct Materials Usage Budget

Jackers Nutella Toothpaste Total
Straw Paper
Container Jar Tube (BDT)
Physical Unit
Jackers
92*1 92
Container
Nutella Jar 92*1 92
Toothpaste
92*1 92
Tube

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 Straw 92*1 92
Paper 92*1 92
92 92 92 92 92

Cost in BDT
Jackers
120*92 11,040
Container
Nutella Jar 270*92 24,840
Toothpaste
15*92 1,380
Tube
Straw 12*92 1,104
Paper 1*92 92
11,040 24,840 1,380 1,104 92 38,456

Direct Material Purchase Budget

Jackers Nutella Toothpaste Straw Total

Paper
Container Jar Tube (BDT)
Total Quantity 92 92 92 92 92
Add: Ending
14 14 14 14 14
Inventory
Total Purchase 106 106 106 106 106

Cost in BDT
Jackers
120*106 12,720
Container
Nutella Jar 270*106 28,620
Toothpaste
15*106 1,590
Tube
Straw 12*106 1,272
Paper 1*106 106
12,720 28,620 1,590 1,272 106 44,308

Direct Labor Budget

Unit Hour/Unit Total Hours Rate/Hour Total
(BDT)

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 Water Dispenser 92 3 276 26 7,176

Manufacturing Overhead Budget

BDT BDT
Fixed MOH
Rent 3200
Utilities 800
Total Fixed MOH 4000
Variable MOH
Glue 184
Pencil 50
Marker 250
Paint 331.2
Eraser 25
Total Variable MOH 840.2
Total MOH
4,840.2

Ending Inventory Budget

Input Rate/Input BDT
Direct Materials
Jacker’s Container 14 120 1,680
Nutella Jar 14 270 3,780
Toothpaste Tube 14 15 210
Straw 14 12 168
Paper 14 1 14
Finished goods 12 614.69 7,376.28
Total 13,228.28

Cost of Goods Sold Budget

BDT BDT

Budgeted finished goods inventory (no beginning 0

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 inventory)
(+) Cost of goods manufactured
Materials Usage 38,456
Direct Labor 7,176
MOH 4,840.2
Cost of goods manufactured 50,472.2
(-) Ending finished goods inventory (7,376.28)
Cost of goods sold 43,095.92

Budgeted Income Statement

Traditional Format
ABC
Budgeted Income Statement (Traditional Format)
For the year ended 30th August 2017
BDT BDT
Revenue 65,280
(-) Cost of goods sold (43,095.92)
Gross profit 22,184.08
(-) Operating expenses
Variable non-manufacturing expenses 690
Fixed non-manufacturing expenses 4400 (5090)
Operating income 17,094.08

Contribution Format
ABC
Budgeted Income Statement (Contribution Format)
For the year ended 30th August 2017
BDT BDT
Revenue 65,280
(-) Variable costs
Direct materials 38,456
Direct labor 7,176
Indirect materials 840.2
Packaging costs (5*92) 460 (46,932.2)

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 Contribution margin 18,347.8
(-) Fixed costs
Rent 4000
Utility 1000
Internet 800
Telephone 800
Maintenance 1000
Marketing 800 (8,400)
Operating income 9,947.80

Contribution Format per Unit

ABC
Budgeted Income Statement (Contribution Format per Unit)
For the year ended 30th August 2017
BDT
Revenue per unit 816
(-) Variable Cost per unit (46,932.20/92) (510)
Contribution margin per unit 306
(-) Fixed Cost per Unit (91)
(8,400/92) 215
Operating Income per Unit

Evaluations
Break Even Analysis
Contribution Margin = Revenue – Variable Cost
Contribution Margin = 65,280 – 46,932.20 = 18,347.80
Contribution Margin (units) = 18,347.80/80 = 229

Break – Even Point (units) = Fixed cost/CM (units) = 8400/229 = 36.68 ≈ 37 units.

Contribution Margin Ratio = (Total CM/ total sale) * 100

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 Contribution Margin Ratio = (18,347.80/65,280) *100 = 28.11

Break – Even Point (BDT) = Fixed cost/ Contribution Margin Ratio

Break – Even Point (BDT) = 8400/28.11 = 298.83 Taka/product

Margin of Safety
Margin of Safety (units) = Budgeted sales (units) - BEP sales (units) = 80-37 = 43 units
Margin of Safety (BDT) = Budgeted sales (BDT) - BEP sales (BDT) =65,280-(298.83*37) =
54,223.29 Taka

The above calculation shows that ABC will incur no loss if revenue is equal to or above BDT
54,223.29 and our MOS ratio is (MOS/Budgeted Sales= 54,223.29/65,280) equal to 83.06%. The
margin of safety ratio indicates that if revenue falls by more than 83.06%, we will incur loss.
However, our actual sale is around 2.2 (80/37) times of our break-even sales in units. As we
know, higher MOS reduces the risks, and since we are selling more than that of the break-even
units, we assume to be in a safe position.

Sensitivity Analysis

a) 10% increase in the demand of the product –

After increase, units to be sold = 80+ (80*10%)
= 88 units
So, after increase unit sales 88 units

Revenue (88*816) 71,808

Less: Variable cost (510*88) (44,880)
Contribution margin 26,928
Less: Fixed cost (8400)
Operating income 18,528

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b) 15% decrease in the demand of the product-
After decrease units to be sold= 80- (80*15%)
= 68 units

So, after decrease unit sales 68 units

Revenue (68*816) 55,488

Less: Variable cost (68*510) (34,680)
Contribution margin 20,808
Less: Fixed cost (8400)
Operating income 12,408

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