Wooden Tissue Box

Submitted To:

Sheikh Mohammad Rabby (RBY)

Senior Lecturer

Dept. of Accounting & Finance North South University

Course: ACT 360

Section: 2

Submitted By: Group 5

Name Id
Arif Bin Hossain 1711230030
Kamrun Nahar Suchona 1420699030
Rais Uddin Khan Akash 1530107030
Mahadi Hasan 1712006630
Jannatul Ferdousy 1620186030
Table of Contents

Manufacturing Process ................................................................................................................................ 7

Estimations ................................................................................................................................................... 7
Maximum Monthly Production Units .......................................................................................................... 7
Direct Materials Cost................................................................................................................................ 7
Direct Labor Cost ...................................................................................................................................... 8
Manufacturing Overhead Cost................................................................................................................. 8
Support Cost ............................................................................................................................................. 8
Selling & Administration cost .................................................................................................................. 9
Fixed Cost: ................................................................................................................................................ 9
Variable Cost ............................................................................................................................................ 9
Support cost allocation: ............................................................................................................................. 11
Simple costing system: ............................................................................................................................... 11
Prime cost, Conversion cost & Full cost..................................................................................................... 12
Activity Based Costing ................................................................................................................................ 13
Cost drivers: ............................................................................................................................................ 13
Activity Rate: .......................................................................................................................................... 13
Support Cost: .......................................................................................................................................... 14
Production Cost: ..................................................................................................................................... 14
Product-line Profitability Reports .............................................................................................................. 15
Simple Cost System: ............................................................................................................................... 15
ABC System:............................................................................................................................................ 15
Forecast ...................................................................................................................................................... 16
Revenue budget ..................................................................................................................................... 16
Production Budget ................................................................................................................................. 16
Direct material usage Budget: ............................................................................................................... 16
Direct Labor Cost Budget: ...................................................................................................................... 19
Unit manufacturing cost of finished goods: .......................................................................................... 19
Ending Inventory: ................................................................................................................................... 20
Finished Goods: ...................................................................................................................................... 20
Cost of Goods Sold: ................................................................................................................................ 21
Income Statement .................................................................................................................................. 21
Pricing Strategy, Determining Price of product and Competitors Price ................................................... 22
Evaluations ................................................................................................................................................. 23
Break Even Point: ................................................................................................................................... 23
Break Even Sales ..................................................................................................................................... 23
Break Even Sales in Units ....................................................................................................................... 23
Margin of Safety (%) ............................................................................................................................... 23
Sensitivity Analysis: .................................................................................................................................... 23
12% Increase in Price of all Direct Materials: ............................................................................................ 23
10% Decrease in demand of product:........................................................................................................ 24
15% Increase in demand of product: ......................................................................................................... 24
Letter of Transmittal

6th January, 2020

To,

Sheikh Mohammad Rabby

Senior Lecturer,

Accounting & Finance Department,

North South University, Dhaka, Bangladesh

Subject: Submission of report on implications of the mechanics of managerial Accounting.

Dear Sir,

We are announcing a community project that has enabled us to appreciate the application of
cost accounting in actual situations. Along with multiple accounting procedures and
approximation, it also allows us to enhance our communication skills, team management skills
and interactive skills. To carry out the practical behavior of financial reporting, we have used our
theoretical expertise. We have presented some of costing strategies, including budget costing,
price forecasts, anticipation of potential developments in costing structures and our product's
overall budget.

We would like to express gratitude, and we are pleased to be doing this group assignment that
will be very useful to us in the future. We hope that, with grace, you will accept our accidental
errors.

Yours Sincerely,

Kamrun Nahar Suchona

Jannatul Ferdousy
Rais Uddin Khan Akash
Arif Bin Hossain
Mahadi Hasan
 Abstract

Our product is called "Wooden Tissue Box". There are several phases in this project, initially from

the production of the wooden tissue box to its sale price. To start with, all the resources required

to produce this product have been established. We expected our direct labor costs and overhead

of production. We have also estimated our cost of production, direct cost of materials and cost

of support. Our primary and convention costs were also estimated. We have also listed all the

price changes as well. We measured the break - even point in unit, breakeven point in income,

contribution margin in unit and also in percentage after obtaining the product cost. Afterwards,

we did a sensitivity study. We have generated two alternative outcomes to do this study and we

have estimated new budgets for the outcomes and we have calculated the percentage changes

in our operating income both negatively or positively.

 Manufacturing Process

The “Wooden Tissue Box” is a niche product. The supplies used to make the Wooden Tissue Box
are 15 pieces of mahogany wood blocks, 4 screws, 2 hinges and glue. We also used mini saw for
cutting the wood into the required shapes and sizes.

Step 1: Firstly, we made the frame work, here we need 10 pieces of mahogany wood blocks,
glued them to form an open wooden box by applying glue

Step 2: Then, for the top part of the wooden box, a single of wooden block is attached to the
frame by screws and hinges so that it can be opened to refill the tissue papers.

Step 3: In this step, we carefully cut out a hole on the top of the box through which tissue papers
will be pulled out.

Estimations

Maximum Monthly Production Units

The labor is dependent on the number of group members, so the total number of workers is 5.
As it is quite a niche product and the demand of product will be low, 5-part time labors are
enough for making the wooden tissue box.

Maximum working hour per month: 80 hours (5 hours/day, 4 days/week). Each wooden tissue
box requires 30 minutes to build. According to our estimation possible Monthly Production:
4800/30 = 160 units.

Costs related to product

Direct Materials Cost

Details Cost per unit [BDT] Amount (BDT)

 Mahagony Wood Block 6 960

Screws 12 1920

Hinges 30 4800

Glue 20 3200

Total 68 10880

Direct Labor Cost

Working
Details Hours/unit Rate/hour Cost/unit Total (BDT)
hours

5 labor 0.5 80 20 10 1600

Manufacturing Overhead Cost

Details Amount (BDT)

Rent 2500
Electricity 400
Utility 100
Quality Control 200
Total 3200

Support Cost

Details Amount (BDT)

 Internet Costs 500
Maintenance 500
Total 1000

Selling & Administration cost

Details Amount (BDT)

Salesman Salary 2000

Packaging & Marketing 2500
Total 4500

Fixed Cost:

Details Amount (BDT)

Rent 2500
Electricity 400
Salesman Salary 2000
Utility 100
Maintenance 200
Internet expenses 500
Total 5700

Variable Cost

Details Amount (BDT)

 Marketing & Packaging 2500
Direct Labor 1600
Mahagony Wood Block 960
Screws 1920
Hinges 4800
Glue 3200
Total 14980

Analyzing cost type

Cost Type

Marketing & Packaging Direct, Variable

Direct Labor Direct, Variable
Mahagony Wood Block Direct, Variable
Screws Direct, Variable
Hinges Direct, Variable
Glue Direct, Variable
Rent Indirect, Fixed
Electricity Direct, Fixed
Salesman Salary Indirect, Fixed
Utility Indirect, Fixed
Maintenance Indirect, Fixed
Quality Control Direct, Fixed
Internet Expenses Indirect, Fixed
Simple Costing:

Support cost allocation:

Supporting Department Operating Total

Department
Internet Maintenance Production
Budgeted overhead costs 500 500 1000
before any cost allocations
Allocation of IT (500) 500 500

Allocation of Maintenance (500) 500 500

Total budgeted overhead of 1000 1000
operating
department

Simple costing system:

Here, Allocation base is Direct Labor Hour, which is 100 hours

Indirect MOH rate = Estimated MOH cost/Estimated labor hours

= 3200/80 = 40 tk/hour

MOH allocated = Indirect MOH rate*Actual allocation base

= 40*80 = 3200 taka

Details BDT BDT

Direct Material 10880
Direct Labor 1600
Manufacturing OH 3200
 Cost of Goods Sold 15680
Support Cost 1000
TOTAL 16680

Production cost = BDT 16680

Production cost per unit = 16680/160 BDT

= BDT 104/unit

Prime cost, Conversion cost & Full cost

Prime Cost: Total direct material + Total direct labor

= 10880 + 1600 = 12480

Conversion cost: Total direct labor + total manufacturing overhead

= 1600 + 3200 = 4800

Total cost: Total variable cost + Total fixed cost

= 14980 + 5700 = 20680

Activity Based Costing

Cost drivers:

✓ Rent > square feet [rent increases by per square feet of space]
✓ Electricity > direct labor hour [electricity consumed by labor hours]
✓ Utility > production unit [utility consumption depends on production unit]
✓ Quality control > production unit [quality depends on how many units produced]
✓ Internet > square feet [internet depends on how much speed need for space]
✓ Maintenance > production unit [maintenance depends on production unit]
✓ Marketing and packaging> production unit [In this case marketing and packaging
depends on unit]

Activity Rate:

Rent = 2500/250 sq. feet = BDT 10/ sq. feet

Electricity = 400/80 = BDT 5/hour

Utility = 100/80 = BDT 1.25/hour

Quality control = 200/80 = BDT 2.5/hour

Internet = 500/250 = BDT 2/sq. feet

Maintenance = 200/80 = BDT 2.5/hour

Marketing and packaging = 2500/80 = BDT 31.25/hour

Manufacturing Overhead BDT

Rent (250*10) 2500
 Electricity (80*5) 400
Utility (80*1.25) 100
Quality Control (80*2.5) 200
Maintenance (80*2.5) 200
Internet (250*2) 500
TOTAL 1470

Support Cost:

Details BDT
Maintenance (80*2.5) 200
Internet (250*2) 500
TOTAL 700

Production Cost:

Details BDT BDT

Direct Material 10880
Direct Labor 1600
MOH 3200
Cost of goods sold 15680
Support Cost:
Maintenance 2500
Internet 500
Packaging & Marketing 2500
5500
Total 21180
Production cost = BDT 15680

Production cost per unit = 15680/160 = BDT 98/unit.

Product-line Profitability Reports

Assume selling price is BDT 360

Simple Cost System:

Details BDT
Sales (360*160) 57600
(-) Cost of goods sold 15680
Gross Profit 41920
(-) Support Cost 3000
Operating Profit 38920

Operating Profit Margin = 38920/57600 x 100 = 67.56%

ABC System:

Details BDT
Sales 57600
(-) Cost of goods sold 15680
Gross Profit 41920
(-) Support Cost 3000
(-) Marketing and Packaging 2500
Operating Profit 36420
Operating Profit Margin =36420/57600 x 100 = 63.23%

Although the Net Profit Margin is higher when Simple Costing is used, we will choose Activity
Based Costing. The reason is Simple costing uses a broad average to allocate cost to the
product. Under Activity Based Costing, the cost drivers are chosen carefully, and expand the
number of indirect costs that can be allocated to a certain product. We can get a more accurate
cost data by using Activity Based Costing.

Forecast

Revenue budget

Sales (units) Selling Price Total Revenue

Wooden Tissue Box 120 360 43200

Production Budget

Units
Budgeted sales 120 units
(+) Target ending finished goods (10%) 12 units
(-) Beginning finished goods -
Units of finished goods to be produced 145

Direct material usage Budget:

Direct materials requirement for per wooden tissue box and the unit price:

Details Required per unit Price per unit

Mahagony Wood Block 0.5 blocks 80
Screws 4 8
Hinges 2 10
 Glue 1 stick 10

Direct Materials Total

Mahagony Screws Hinges Glue
Wood Block
PHYSICAL UNITS
Mahagony Wood 60
Block (120/2)
Screws (120*4) 480
Hinges (120/30) 40
Glue (120/1) 120
Total DM to be 60 blocks 480 screws 40 Hinges 120 sticks 700
consumed
Cash Budget
DM Inventory 0 0 0 0
available for use
Mahagony Wood 360
Block (6*60)
Screws (8*480) 3840
Hinges (10*40) 400
Glue (10*120) 1200
 Total Dm to be 360 3840 400 1200 5800
consumed

Direct Total
Materials
Mahagony Wood Screws Hinges Glue
Block
PHYSICAL UNITS
Total Used in 60 blocks 480 screws 40 Hinges 120 sticks
production
Target Ending 6 48 4 12
Inventory (10%)
Required Units 80 640 320 160
(-) Beginning 0 0 0 0
Inventory
Total DM to be 60 blocks 480 screws 40 Hinges 120 sticks
consumed
Required Purchases 80 blocks 640 screws 320 160 sticks
hinges
Cash Budget
Mahagony Wood 6400
Block (80*80)
Screws (640*8) 5120
 Hinges (320*10) 3200
Glue (160*10) 1600
DM to be purchased 6400 5120 3200 1600 16320

Direct Labor Cost Budget:

Details No. of workers Total Hours/unit Total Labor Rate Total

units Hours
Labor 5 120 0.5 60 20 1200

Manufacturing overhead cost:

Variable MOH cost:

Utility = 120*1.25 = 150

Quality control = 120*2.5 = 300

Fixed MOH cost:

Rent = BDT 2500

Electricity = BDT 400

Total Manufacturing Overhead = BDT 3350

➢ Budgeted manufacturing overhead rate = 3350/80 = BDT 41.88/hour per direct labor
hour
➢ Manufacturing overhead cost per unit = 3350/120 = BDT 27.92 per unit

Unit manufacturing cost of finished goods:

Details BDT
Direct Materials 6
 Mahagony Wood Block 12
Screws 30
Hinges 20
Glue 68
136
Direct Labor 10
Manufacturing OH 27.92
TOTAL 173.92

Unit cost of Finished Goods = BDT 174/unit

Ending Inventory:

Units Cost per Unit Total

Mahagony Wood Block 6 80 480
Screws 48 8 384
Hinges 4 10 40
Glue 12 10 120
Total Ending DM 1024

Finished Goods:

Details Units Unit cost TOTAL

Ending Inventory of 12 98 1176
Finished Goods (10%)
Total Ending Inventory = 1024+1176 = BDT 2200

Cost of Goods Sold:

Details BDT BDT

Beginning Inventory: 0
DM 0
DL 0
MOH 0
Cost of goods manufactured (174*145) 25230
Cost of goods available for sales 25230
(-) Ending Inventory (1176)
COGS 24054

Cost of goods sold per unit = 24054/120 = BDT 200.45/unit

Income Statement

Traditional Format:

Details BDT (per unit) BDT

Sales 360 43200
(-) Cost of Goods Sold 200 24054
Gross Profit 160 19146
(-) Expenses
Selling & Administration 38 4500
Support Cost 8.3 1000
Net operating Income 114 13646
Contribution Margin Format:

Details BDT (per unit) BDT

Sales 360 43200
(-) Variable Cost 94 14980
Contribution Margin 266 28220
(-) Fixed Costs 48 5700
NET OPERATING INCOME 218 22520

Pricing Strategy, Determining Price of product and Competitors Price

Production cost per unit = 15680/160 = BDT 98/unit.

Estimated unit to be sold = 120

Mark up: 360%

Price: 98*3.6 = BDT 352 (Rounded to 360)

We set our selling price by following cost-based pricing strategy. There are several reasons
behind choosing it. Firstly the strategy will cover our all cost and ensure that a consistent rate
of return. Secondly it does not require further market research to come up with strategy. It is
also useful when we don’t have information about how much customers are willing to pay for
the product. We did some research and found the wooden tissue box sold in online
marketplace like bdstall, Daraz cost around 500-1500 tk which is way higher than the price we
are charging. So we hope to have significant success by marketing our products to people who
are looking wooden tissue box in affordable price.
Evaluations

Break Even Point:

Sales – Variable Expense-Fixed Expense = Target Profit

Let, Target profit= 0.

Target Sales = 43200

Variable Expense = 14980

Fixed Expense = 5700

So,

Sales = Variable Expense + Fixed Expense

Break Even Sales = BDT 20680

Break Even Sales in Units = 16360/360 = 58 units

Margin of Safety (%) = (43200 – 20680)/43200 = 52.1%

Sensitivity Analysis:

Degree of operating Leverage (DOL) = Contribution Margin / Net Operating Income

= 28220/22520 = 1.25 times

12% Increase in Price of all Direct Materials:

Details BDT
Sales 43200
 ()- 12% increase in COGS
Direct material (10880*1.12) 12185
Direct labor (1600*1.12) 1792
MOH (3200*1.12) 3584
GROSS PROFIT 25639
(-) Expenses 5500
NET OPERATING INCOME 20136

10% Decrease in demand of product:

% decrease in profit = %∆ in Sales *DOL = 10*1.25 = 12.5%

15% Increase in demand of product:

% increase in profit = %∆ in Sale *DOL = 15*1.25 = 18.75%