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1 Sweater
1 Sweater
Introduction:
Orpat Sweater Factory Ltd. is an export oriented sweater manufacturer and exporter in
Bangladesh. We mainly focus on exporting our manufactured goods but alongside we also
wholesale the product in the domestic market. The manufacturing process is mostly automated
with the help of high-tech machines. As a result, not much work-force (labor) is needed to
function the manufacturing. In addition to production process with utmost precision and flawless
finishing. We can also assure uninterrupted production and opportune supply of sweater as per
schedule of buyers. As a newbie in the industry, we manufacture only one kind of sweater. We
use process costing system. All cost incurred in each step are accumulated and applied to the
unit cost using POHR. The production process involves a 12-step process, where most of the
steps are completed using machines. Selling prices are also adjusted accordingly. So what we're
thriving and achieving is trying to establish Orpat Sweater Factory Ltd's bright image and
performance status and bring them into the daylight of organizational business to sustain in a
dynamic competitive atmosphere.
In this project, we will highlight how Orpat Sweater Factory manages its accounting system with
the implication of our knowledge from Managerial Accounting course. At first, we are going to
estimate all the materials and prices according to it. All the numbers and values included in here
are absolutely relevant to the present market condition. Then we will determine the Pre-
Determined Overhead Rate (POHR), Manufacturing Overhead (MOH), Manufacturing Cost,
Selling Price, Net Income and finally the Cost-Profit-Volume (CVP) analysis with a graph of Break-
Even analysis.
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2. Cost Identification for the Business:
Raw Material
collection
Folding and
Winding
Packaging
Final Quality
Knitting
Check
Ironing Linking
Washing Trimming
Mending
The raw materials, Acrylic thread, main label, size label, care label, sewing thread, are collected
from the suppliers. The carriage charges (freight in) are included in the raw materials cost. The
acrylic thread, main label, size label, care label are the direct materials and the sewing thread is
an indirect material (a part of manufacturing overhead) which will add up in the product cost.
The materials are then stored in the warehouse until further.
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Winding:
The acrylic thread is then taken out of the raw materials inventory. Next the thread is loaded up
in the winding machines to wound the thread into cones from hanks. The costs that incur in this
step are utility bills (electricity bills), depreciation of the machinery and fixed employees’ wages.
These contribute in the manufacturing overhead.
The cones are taken and distributed among the production floor. The cones are loaded in the
knitting machines to knit the thread into panels. The knitted panels are linked using linking
machines. After the knitting and linking, the sweaters are made. The same manufacturing
overheads are incurred here as the previous step.
Light Check:
At this stage, the sweaters are checked using light checking machines. It is a part of quality
control. An inspector is responsible for it. If any problem is found, immediately necessary steps
are taken. Depreciation of the machinery, utility costs and inspectors’ salaries are the expenses
here. All these are parts of manufacturing overhead, hence contribute to product cost.
In this process, loose threads are trimmed using trimmers. If any knitting defects are found in the
sweaters, they are mended using sewing threads and needles. Sewing threads are taken out here
from the indirect material inventory and identical overheads rise.
The sweaters are then sent to the washing department to complete the required wash. After the
wash, they are left for drying. The labels are attached to them using sewing machines. Following
the washing and labeling, the sweaters are sent for ironing. The sweaters are ironed using steam
iron. In these three steps, labels are taken out of the direct materials inventory. Along with the
electricity bill, water bills get added in the utility bills. Depreciation of the washing machines,
sewing machines and steam irons also add up.
Next the sweaters sent to the final quality checking department, where the final quality checking
inspector inspects them before handing them over to the packaging department. The inspectors’
salaries are the costs that are incurred here.
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Folding and Packaging:
The fully completed sweater are nicely folded and packaged and stored before shipping them to
the customers. Manufacturing overheads such as poly bags, cartons, gum tape, scotch tape and
employees’ wages are incurred here.
Other than the costs mentioned above, the fixed manufacturing overheads include Floor In-
charge’s salaries, Line supervisor’s salaries and Line chief’s salaries.
Product Cost
Direct Manufacturing
Cost Items Period Cost Fixed Cost Variable Cost
Material Overhead
10,000*$21=
Acrylic Thread $210,000 $210,000
lb/dozen
10,000*$.40=
Main Label $4,000
$4,000/dozen
10,000*$.15=
Care Label $1,500
$1,500/dozen
10,000*$.08=
Size Label $,800
$,800/dozen
10,000*$.15=
Sewing Thread $1,500
$1,500/dozen
10,000*$.65=
Poly Bag $6,500
$6,500/dozen
10,000*$.75=
Carton $7,500
$7,500/dozen
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Gum Tape & Scotch 10,000*$.07=
$,700
Tape $,700/dozen
Cost of Making
(overlock + lock+
Mending + light $150,000
10,000*$15=
check + wash +
quality check + iron + $150,000/dozen
packing)
Banking + Custom
$1.1475/order $1.1475
Clearance+Trasnposrt
Floor In-Charge’s
$222.22/month $222.22
Salary
Line Supervisor’s
$148.15/month $148.15
Salary
Depreciation of
$493.83/month $493.83
equipment
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3. Calculating Pre-Determined Overhead Rate for Applying Manufacturing
Overhead:
Pre-determined overhead rate (POHR) is used to apply manufacturing overhead (MOH) to
products and is computed at the beginning of each period by dividing the estimated
manufacturing overhead cost by an allocation base. Commonly used allocation bases are direct
labor dollars, direct labor hours, direct materials, and machine hours.
Since our business manufactures and sells only one kind of product, we are using the number of
units manufactured as the allocation base for calculating POHR. The estimated MOH that we
predict to incur are some Indirect Materials, Indirect Labor and other overhead costs. Indirect
Materials include: Sewing Thread, Poly Bag, Carton, and Gum Tape & Scotch Tape; Indirect Labor
includes the Cost of Making and other overheads include: Utility Bill, Factory Rent, Workers’
Wages, Floor In-Charge’s Salary, Line Supervisor’s Salary, Line Chief’s Salary, and Depreciation of
equipment.
We take these values from table 2 to calculate the total estimated MOH. The POHR will help us
calculate the applied MOH when we will calculate the unit product cost.
Calculation:
POHR =
=$ ,
,
.
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Manufacturing Cost per unit simply by adding Direct Material and Applied Manufacturing
Overhead required to produce a single product. The Applied Manufacturing Overhead is
computed by multiplying POHR with the Allocation base used. The Direct Materials include:
Acrylic Thread, Main Label, Care Label, and Size Label. We have already calculated POHR, our
allocation base is number of units produced and we are producing 10,000 dozen units or120000
units.
Now, we construct a table to compute the Manufacturing Cost per Unit of our product.
Tabulation:
(10,000*$21) + (10,000*$.40) +
10,000 dozen (10,000*$.15) + (10,000*$.08)
( $1.462*10,000*12)
sweaters
Total
Manufacturing $391,697.53
Cost
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5. Determining the Unit Selling Price:
Selling Price is the amount firms charge from customers after marking up the manufacturing
cost. How much a firm is going to mark up depends on what kind of product it is selling also
depends on the market condition. It may also vary from industry to industry.
The sweater industry being a competitive industry needs a deep analysis before setting up a
marked-up price. We should take into consideration the local as well as the world market before
setting a selling price.
Selling Price per unit is calculated by multiplying the Manufacturing cost per unit with the mark
up rate.
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6. Cost-Volume-Profit Analysis:
Cost-volume-profit (CVP) analysis is used to determine how changes in costs and volume affect a
company's operating income and net income. In performing this analysis, there are several
assumptions made, including:
CVP analysis requires that all the company's costs, including manufacturing, selling, and
administrative costs, be identified as variable or fixed.
Contribution Margin
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Contribution Margin Ratio:
= $15,600/$408,000
=0.0382 or 3.82%
Break-even point
The break‐even point represents the level of sales where net income equals zero. In other words,
the point where sales revenue equals total variable costs plus total fixed costs, and contribution
margin equals fixed costs. Using the previous information and given that the company has fixed
costs of $9,197.53 the break‐even income statement shows zero net income.
Net Income 0
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This income statement format is known as the contribution margin income statement and is
used for internal reporting only.
The $3.27 per unit or $392,400 of variable costs represent all variable costs including costs
classified as manufacturing costs, selling expenses, and administrative expenses. Similarly, the
fixed costs represent total manufacturing, selling, and administrative fixed costs.
The break‐even point in units of 70,750 is calculated by dividing fixed costs of $9197.53 by
contribution margin per unit of $0.13.
Break-Even Units:
= $9197.53/ ($3.40-$3.27)
= 70,750.23
≈ 70,750
The break‐even point in sales dollars of $240,773.03 is calculated by dividing total fixed costs of
$9197.53 by the contribution margin ratio of 3.82%
Break-Even Sales:
= $9197.53/ 0.0382
= $240,773.03
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Here in the diagram below we can see our break-even point in the yellow dot on the graph. On
the X axis we have our number of units and on the Y axis we have number of dollar sales. Our
break-even point where the profit or net income is equal to zero is 70,750 units and $240,773.03
sales.
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Degree of Operating Leverage:
The degree of operating leverage is a measure used to evaluate how a company's operating
income changes with respect to a percentage change in its sales. The degree of operating
leverage can also be calculated by subtracting variable costs from sales and dividing it by sales
minus variable costs and fixed costs.
= $15,600/ $6,402.47
= 2.43656
7. Conclusion:
In conclusion we find that by selling 120,000 units of pull-over sweater at the price of $3.40, The
Orpat Sweater factory is earning a profit of $6,402.47. Though it is a very less amount of profit, it
will be wise to continue the business as the degree of operating leverage is considerably low. So,
even if they incur loss, it will have a very less impact on the net income or loss.
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