2017

Project on pasta

“Determining Manufacturing Cost of a Pasta

business, and Performing CVP and Variance
Analysis”

Submitted to:
BushraFerdous Khan (BFK)

Department of Accounting & Finance

 SUBMITTED BY

Name ID
Md. Tanvir Haque 1520322031

Ridwanul Huq 1510489030

Mohoshour Rahman 1331315042

Md. Mazharul Alam 1511150030

Md. Arif Kamal 1430595030

Section:6

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April 20, 2017

Bushra Ferdous Khan

Lecturer

School of Business& Economics

North South University

Subject: Determining Manufacturing Cost of Pasta business, and Performing CVP and Variance
Analysis

Dear Madam,

We are submitting our Project entitled “Determining Manufacturing Cost of a Product, and
Performing CVP and Variance Analysis” of our Pasta shop named “Pasta House” as per your
instruction to fulfill the requirement of the Introduction to Managerial Accounting course.

We fixed Pasta as our product to present the report.

We are ensuring you the legitimacy of this report. We sincerely hope that this report will get
your approval. We are grateful to you for giving us the opportunity to work on this kind of
knowledgeable project.

Respectfully yours,

On behalf of all the team members

Ridwanul Huq

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Page | 3
Table of Contents
Acknowledgement ..................................................................................................................................... 5
EXECUTIVE SUMMERY .................................................................................................................................. 6
1.INTRODUCTION .......................................................................................................................................... 7
2. Production Process ................................................................................................................................... 8
3. Cost Identification for “Pasta” Business: .................................................................................................. 9
Cost for Per Unit Pasta House ................................................................................................................. 10
4. Pre-determined Overhead Rate for Applying Manufacturing Overhead: .............................................. 11
5. Calculating Manufacturing Cost per Unit:............................................................................................... 12
7. Cost-Volume-Profit (CVP) Analysis:......................................................................................................... 14
7.1 Contribution Margin per Unit: .......................................................................................................... 14
7.2 Break-Even point in unit: .................................................................................................................. 14
7.3 Break-Even revenue: ......................................................................................................................... 14
7.4 Degree of operating leverage: .......................................................................................................... 14
8. Variance Analysis .................................................................................................................................... 16
8.1 Direct Materials Variances ................................................................................................................ 16
8.2 Variable Manufacturing Overhead Variances: .................................................................................. 17
Conclusion ................................................................................................................................................... 18

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 Acknowledgement

First of all, all praise to almighty Allah, who has granted his kindness upon us by giving us the
wisdom and strength to carry out and finish this excellent report within deadline. We would like
to thank all our group members for their heart-felt contribution.

We sincerely show our gratitude to Bushra Ferdous Khan, honorable faculty of School Of
Business & Economics, North South University, for giving us the opportunity to work on this
kind of an educational project and submit the report on it. We also express our gratitude to
Bushra Ferdous Khan for her constant support and guidance throughout.

Finally, we are also expressing our sincere gratitude to some of our friends, who shared their
valuable ideas and thoughts with us to guide us in completing the report.

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 EXECUTIVE SUMMERY

We chose to open a business named ‘PASTA HOUSE’ in our project, which manufactures only
one product pasta. We collected information about its manufacturing process, the ingredients and
how it should be administered. After collecting information we have identified the cost, prepared
a projected manufacturing cost of our product, calculated the POHR, and performed a Cost-
Volume-Profit (CVP) analysis and analyzing of different types of variances.

Firstly, we have showed the cost identification of our business in this project. . In this part we
have showed the different kinds of costs that are incurred in our business. Costs were identified
as variable expenses or fixed expenses, and also the product we need to manufacture pasta is
direct material or manufacturing overhead.

In this project we have showed that the production cost per unit for our product is 173.4Tk. Our
total fixed cost was 68,000Tk in April.

Then we showed predetermined overhead rate of our business. Our total manufacturing overhead
was123,900Tk. Our allocation base is total unit. Total allocation base was 3500 units and we
have found a predetermined overhead rate of35.4.

We have determined the unit selling price of pasta 300Tk. We have tried to describe why we set
this price.

After that, we have showed the break-even point of our business both in unit and revenue and the
operating leverage. We have used a Cost-volume-profit graph to show the break-even analysis
clearly.

Finally, we have showed the variances for the Direct Materials and Variable Manufacturing
Overhead. We have discussed price and quantity variance of our business.

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1. INTRODUCTION
Pasta is typically a noodle made from unleavened dough of durum wheat flour mixed with water
or eggs and formed into sheets or various shapes, then cooked by boiling or baking.

Pasta was brought to Italy by Marco Polo via China. Polo ventured to China in the time of the
Yuan Dynasty (1271-1368) and the Chinese had been consuming noodles as early as 3000 B.C.
in the Qinghai province. Many thinkers think pasta may come from another origin.Marco Polo,
who introduced the pasta in Italy upon returning from one of his trips to China in 1271. On
chapter CLXXI from the “Books of the World’s Wonders”, Marco Polo makes a reference to the
pasta in China. In our opinion, the pasta dates much further back, back to ancient Etruscan
civilizations, which made pasta by grinding several cereals and grains and then mixed them with
water, a blend that was later on cooked producing tasty and nutritious food product. The origin of
the pasta word came from probably Greek word “pastos”.

We thought to call ourselves “Pasta House”. We are here to bring the pasta recipe in front of our
country. We can also be known as noodle folks. We bring lots of various kinds of pasta recipe
along with world-wide difference in tastes. We have researched our people, market place and
other sectors and we think we can make a revolutionary change in taste to those people who love
pasta. Like pizza, pasta these days have become more and more famous and lots of new recipe
are coming out as the days goes. We have already taken a short test on our countries other
franchise and we think we can do something worth bringing satisfactory to our pasta loving
peoples.

In our project, we briefly discussed about the store, its process, primary product, customers,
competitors and also the reason why we choose ‘Pasta House’.After that the Cost Identification
of the Business describes the production process and identifies the cost incurred in different
stages.

We also showed Pre-determined Overhead Rate for Applying Manufacturing Overhead and its
35.4Tk per unit for the month of April. After that we determining the Unit Selling Price and also
provide our justification behind setting the selling price of the Pasta.

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Then we have done the analysis of Cost-Volume-Profit (CVP) graph and also Calculate
contribution margin per unit, break-even point in unit, break-even revenue and degree of
operating leverage. Interpret all the values.

At the end, we resolution Variance Analysis that help to calculate direct materials variances and
manufacturing overhead variances. Then we observed that is explained briefly below at the
Variance Analysis portion.

“Pasta House” is located near North South University and IUB at Bashundhara R/A. The key
factors for success will be it’s his well-service and good taste.

2. Production Process
Our “Pasta House” is decorated to work a wide arrangement of pasta products for making Penne
Pasta with Shrimp in a large quantity. At the beginning pasta boiled salted water over high heat
and drains the pasta and set aside. Then heat the oil over medium-heat and consecutively adding
shrimp, garlic and other ingredients. After that adding white wine sauce and heavy cream until
the sauce thickens. Then add some Parmesan, cooked shrimp and pasta, and the remaining herbs.
Season, to taste, with salt and pepper and we can add any other cheese or sauce that consumer
want. Finally, transfer the pasta to a serving bowl and sprinkle with the remaining cheese and
serve immediately. The one unit of pasta cooks between 25 to 30 minutes. In our Pasta House,
kitchen equipmentis included in utilities expenses.

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3. Cost Identification for “Pasta” Business:
Cost Item Direct Manufacturing Period Fixed Variable
Materials Overhead Cost Cost Cost

Penne Pasta YES YES

Olive Oil YES YES
Shrimp YES YES
Tomato YES YES
White Wine YES YES
Clam Juice YES YES
Heavy Wiping YES YES
Cream
Parmesan Cheese YES YES
Garlic YES YES
Salt YES YES
Black Pepper YES YES
Basil Leaves YES YES
Parsley Leaves YES YES
Red Pepper YES YES
Tissue Paper YES YES
Packaging YES YES
Salary of Chef YES YES
Utilities YES YES
Salary of Waiter YES YES
Salary of Security YES YES
Guard
Rent YES YES
Depreciation cost YES YES

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Cost for Per Unit Pasta House below:

Cost Per Unit

Cost Item Price Raw Materials Cost Per Unit
Penne Pasta 150Tk= 1Pc 125gm 37.5Tk
Olive Oil 800Tk= 1Lit 25ml 20Tk
Shrimp 300Tk= kg 100gm 30Tk
Tomato 30Tk= 1kg 100gm 3Tk
White Wine Sauce 400Tk= 1 Bottle 50gm 20Tk
Clam Juice 100Tk= 1Lit 30ml 3Tk
Heavy Wiping 400Tk=1kg 25gm 10tk
Cream
Parmesan Cheese 500Tk=1kg 25gm 12.5Tk
Garlic 200Tk=1kg 20gm 4Tk
Salt 40Tk=1kg 10gm .4Tk
Black Pepper 200Tk=500gm 15gm 6Tk
Basil Leaves 250Tk=500gm 15gm 7.5Tk
Parsley Leaves 200Tk=500gm 15gm 6Tk
Red Pepper 150Tk=500gm 5gm 1.5TK
Tissue Paper 40Tk= 100pcs 10pcs 4Tk*
Packaging 4Tk=Per box 1 box 4Tk*
Salary of Chef 20,000Tk
Utilities Fixed=6,000Tk 2Tk
Variable 2Tk
Salary of Waiter 16,000Tk
Salary of Security 5,000TK
Guard
Rent 25,000Tk
Depreciation cost 2,000Tk

Note: We don’t have any direct labor cost.

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4. Pre-determined Overhead Rate for Applying
Manufacturing Overhead:

The predetermined overhead rate is computed before the period begins. The predetermined
overhead rate is then used to apply overhead cost to jobs throughout the periods. It is computed
at the beginning of each period by dividing the estimated manufacturing overhead cost by an
allocation base.

We assumed that our total allocation base in April is 3500 units, and our allocation for the
business is selling units. Manufacturing overhead is applied to units of product on the basis of
budgeted production units. The variable MOH is (Garlic+ salt+ black pepper+ basil leaves+
parsley leaves+ red pepper+ utilities) 4Tk + .4Tk + 6Tk + 7.5Tk+ 6Tk + 1.5Tk+2Tk = 27.4Tk.

Total Variable MOH Cost = 95,900Tk.

Fixed MOH Cost will be (Salary of Chef+ Utilities+ Depreciation on equipment) 20000Tk +
6,000Tk + 2,000Tk = 28,000Tk. Now, we are finding our POHR rate for April in the below:

Details April
Budgeted Production Unit 3,500
Variable MOH Rate 27.4TK
Total Variable MOH 95,900TK
Fixed MOH 28,000TK
Total MOH 123,900TK
Allocation Base( Total Sales) 3,500
POHR 35.4

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5. Calculating Manufacturing Cost per Unit:

Manufacturing cost is the cost which is incurred to produce a product. Manufacturing costs
typically consist of direct labor, direct material and applied manufacturing overhead cost. As we
have no direct labor hour our manufacturing cost per unit will be the added number of direct
materials and applied manufacturing cost.

Our direct materials per unit=(37.5Tk+ 20Tk+ 30TK+ 3Tk+ 20Tk+ 3Tk+ 10Tk+ 12.5Tk+ 2Tk)
or 138Tk and POHR rate is (POHR*unit sale) =35.4Tk. Our allocation base is in total unit sales
and we have no direct labor. Our manufacturing cost per unit is given below.

Item Taka

Direct Material 138Tk

Manufacturing Overhead (35.4*1) 35.4Tk

Total Manufacturing Cost 173.4Tk

Per unit Cost 173.4Tk

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6. Determining the Unit Selling Price:

The selling price for per unit pasta is 300 Taka. We have decided the selling price of our Pasta is
on the basis of different things.

Firstly, we have decided the selling price on the basis of cost for each unit of product. Our
manufacturing cost per unit is 173.4Tk in April. Considering all variable, fixed and period cost
we have decided to set the selling price’

Our Pasta is unique and its quality is better than any other competitors. We will operate our
business in Basundhara R/A. We have some competitors in this area. We will maintain the best
quality for Pasta. The price will be lower than our competitors.

Our target customers are students of IUB and North South University and the people who are
living at Bashundhara R/A. The lifestyle and economic condition of these specific customers are
well. So we have considered these things while determining the price of Pasta for each unit.

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7. Cost-Volume-Profit (CVP) Analysis:

7.1 Contribution Margin per Unit:

Sales – variable expenses = (300Tk-171.4Tk)

= 128.6Tk per unit

7.2 Break-Even point in unit:

Fixed cost/ CM per unit = (68,000Tk /128.6Tk)

= 529 units

7.3 Break-Even revenue:

BEP units* selling price = (529*3500)

= 158,700Tk

7.4 Degree of operating leverage:

CM/ Net operating income = (450,100Tk/382,100Tk)

= 1.18

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7.5 CVP graph analysis

BREK EVEN ANALYSIS

1400000

1200000

1000000
Axis Title

800000
sales
600000 fixed
total cost
400000

200000

0
0 500 1000 1500 2000 2500 3000 3500 4000 4500
Axis Title

In this CPV graph unit volume is represented on the horizontal (X) axis and the vertical (Y) axis
represents Taka. From this CVP graph, we can understand our break-even point. Our
contribution margin is 128.6Tk per unit. That means if we deduct the variable cost of each unit
from the selling price we will get 128.4.

Our break-even point in unit is 529 units. That means at the point of 529 units the total cost and
sales revenue is same. We have zero profit at this point. We also find that if we sell less than 529
units we have to suffer a loss. We have to sell a minimum of 356 units to cover up all our
expenses and avoid loss. The total sale in this break-even point is 158,700Tk. It means if we sale
529 units which is a break-even point in units we will earn revenue of 158,700Tk. However, if
we can sell more than 529 units or revenue of 158,700Tk then we will be able to achieve a
profit.We can see from the graph that if we sell more than 529 units our profit will always
increase steadily.

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The degree of operating leverage for our business is 1.18 means that net operating income grows
1.18 times as fast as sales. If sales increase by 10%, then we can expect the net operating income
will increase by 18%.

8. Variance Analysis

8.1 Direct Materials Variances

A variance that is computed by taking the difference between the actual price and the standard
price and multiplying the result by the actual quantity of the input. The standard price per unit
means the price that should be paid for each unit of direct materials. The actual price per unit is
what we actually pay.

Our standard quantity for per unit = .48kg

Standard price = 283.4Tk per kg

Actual quantity = .52 kg per unit

Actual price = 280Tk per kg

We had purchased 1820 kg at a rate of 280Tk per kg. The actual price of 280Tk per kg is 3.4Tk
less than the standard price of 283.4Tk per kg. As 1820kg were purchased, the total amount of
price variance is 6188Tk (3.4Tk*1820). The price variance is favorable because the actual
purchase price per unit is less than the standard purchase price per unit.

The actual amount of direct materials used in production was 1820kg. The standard amount for
the output was 1680kg. The actual amount of 1820kg is 140kg more than the standard amount of
1680kg. As the standard price is 283.4Tk per kg, the total amount of quantity variance is
39,676Tk

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(140kg*283.4Tk per kg). The quantity variance is unfavorable because the actual quantity for
production is more than the standard quantity of production.

We have a spending variance of 33,488Tk for Direct Materials which is unfavorable because we
have actually spent 33,488Tk more than the budget for the month.

8.2 Variable Manufacturing Overhead Variances:

The difference between the actual variable overhead cost incurred during a period and the
standard cost that should have been incurred based on the actual activity of the period is called
variable overhead rate variance. Variable overhead efficiency variance is the difference between
the actual level of activity and the standard activity, multiplied by the standard price.

Our standard quantity = 280kg

Standard rate = 317.5Tk per kg

Actual Hour = 300kg

Actual rate = 310Tk per kg

The actual amount of variable Manufacturing overhead used in production for the April was
300kg. The standard amount allowed for the actual output was 280kg. Therefore, we used of
20kg more than the standard allow. So we have an unfavorable efficiency variance of 6,350Tk
(20kg*317.5Tk). The efficiency variance is unfavorable to our company because the actual
quantities that were needed was less than the standard quantity.

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The actual price of per quantity was 310Tk per kg at the month of April. The actual price is
7.5Tk lessthan the standard price of 317.5Tk per kg. As 300kg were used, the total amount of
rate variance is 2250Tk (7.5Tk per kg*300kg). The price variance is favorable because the actual
price per kg is less than the standard price per kg.

We have a spending variance of 4100Tk for Variable Manufacturing Overhead which is

unfavorable because we have actually spent 4100Tk more than the budget for the month.

Conclusion
The primary product of Pasta House is Pasta. Basically the loyal customers of Pasta House are
the students of NSU, IUB and many schools which are situated in Bashundhara and the resident
of Bashundhara.

We have selected this business because there are many people who use to visit this area
regularly. They are our target customer. They can eat our pasta as lunch and also at afternoon or
evening as Tiffin. Resident of this area also comes to our shop often.

The quality of our Pasta will be better than anyone and the price is also not too high. We believe
that people will prefer our Pasta more than any of our competitors and that will help us to make a
good profit in our business.

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