Professional Documents
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Nishat FINAL Updated
Nishat FINAL Updated
Submitted by:
Shahwer Pasha
Ayesha Khan
Ali Murtaza
Contents
Executive Summary........................................................................................................................4
Introduction....................................................................................................................................4
Nishat Linen (Private) Limited...................................................................................................5
Nishat Spinning (Private) Limited..............................................................................................5
Nishat Linen Trading LLC..........................................................................................................6
Nature of Business......................................................................................................................6
Spinning......................................................................................................................................6
Weaving......................................................................................................................................6
Processing...................................................................................................................................6
Nishat Linen...............................................................................................................................7
Benefits of cost accounting.............................................................................................................7
Cost Accumulation method used...................................................................................................10
Process Costing.........................................................................................................................10
Analysis of Income Statement......................................................................................................10
Analysis of Cost of Goods sold....................................................................................................12
Application of Activity Based Costing.........................................................................................13
Activity Based Costing.............................................................................................................13
Cost Driver:-.........................................................................................................................13
Cost Pools:-...........................................................................................................................13
Cost of sales..............................................................................................................................14
2016......................................................................................................................................14
2015......................................................................................................................................15
Calculations..........................................................................................................................16
Distribution costs......................................................................................................................17
ABC per unit based upon cost based upon CGS and distribution cost......................................18
2016......................................................................................................................................18
Breakeven analysis.......................................................................................................................19
VARIABLE COST...................................................................................................................19
FIXED COST...........................................................................................................................20
Contribution Margin.................................................................................................................21
1
Budgeting.....................................................................................................................................21
Sales Budget.............................................................................................................................22
Production Budget....................................................................................................................22
Direct Material budget..............................................................................................................23
Direct Labor Budget.................................................................................................................24
Manufacturing Overhead Budget..............................................................................................24
Selling and administration Budget............................................................................................25
Cash Receipts Budget...............................................................................................................25
Cash Disbursement Budget.......................................................................................................25
Cash Budget..............................................................................................................................26
ACTUAL......................................................................................................................................26
Sales Actual..............................................................................................................................26
Production Actual.....................................................................................................................27
Direct Material (Actual)............................................................................................................27
Direct Labor (Actual)................................................................................................................28
Overheads (Actual)...................................................................................................................28
Selling and Administration Expenses (Actual)..........................................................................29
Cash Receipts (Actual).............................................................................................................29
Cash Disbursement (Actual).....................................................................................................29
Cash Budget..............................................................................................................................30
BUDGETED FINANCIAL STATEMENTS.................................................................................30
Budgeted Cost of Goods Sold...................................................................................................30
Budgeted income Statement.....................................................................................................31
Budgeted Cash Flow statement.................................................................................................32
Balance sheet............................................................................................................................33
VARIANCE ANALYSIS..............................................................................................................34
Static Budget............................................................................................................................34
2015......................................................................................................................................34
2016......................................................................................................................................34
Flexible Budget.........................................................................................................................35
2014......................................................................................................................................35
2015......................................................................................................................................36
2016......................................................................................................................................37
2
PRICE AND EFFICIENCY VARIANCES...................................................................................37
CONCLUSION AND RECOMMENDATIONS...........................................................................41
3
Executive Summary
Nishat Mills Limited is one of the most modern and largest vertically integrated textiles
Company in Pakistan. The Company commenced its business as a partnership firm in
1951 and was incorporated as a private limited Company in 1959. Later it was listed on
the Karachi, Lahore and Islamabad Stock. In the report, we are going to focus on the
textile sector and analyze the costing methods the company uses, by obtaining
information from primary as well as secondary sources.
The purpose of this project is to attain the knowledge about how successful companies
like Nishat determine cost drivers and cost objects and how do they allocate costs
throughout the production process. This process then answers the questions as to how
companies get involved in cost reduction in order to increase the value of end product for
the customers. The report looks into detail of cost structure of Nishat textiles and analyses
the costs for its production facilities including spinning, weaving, printing, dyeing, home
textile and garment stitching facilities.
The result of the research shows that Nishat mills is using process costing system because
it produces in mass production the products that are identifiable. Furthermore the
company uses activity based costing system as opposed to the traditional one. It also
shows that the company is not just able to breakeven in this particular category but also
attain profits by reaching beyond breakeven point. Further for budgeting the sales,
production, Direct labor, Direct material, overheads and cash Budgets were examined and
budgeted income statement and balance sheet were established.
After carrying out the cost analysis we concluded that, material cost accounts for a
significant part of the total cost and therefore Nishat mills should concentrate on their
production and operations. Further in the report recommendations are given as to how the
production process can be improved by the company to avail advantages of the prevalent
marketing conditions.
4
Introduction
Nishat has grown from a cotton export house into the premier
b u s i n e s s group of Pakistan with 5 listed companies, concentrating on 4 core
business; Textiles, Cement, Banking and Power Generation. Today, Nishat is
considered to be at par with multinational operating locally in terms of its
quality products and management skills. The company is holding position in spinning,
weaving and dying units with the extraordinary production capacity. Nishat is running
different business with different famous products like Nishat Linen that has opened its
outlets in major cities of Pakistan.
The textile industry occupies a pivotal position in Pakistan’s economy, accounting for
7.7% of GDP with a significant potential for growth.
Company had adopted latest management information systems to access data that results
in producing timely results for different departments. According to financial ratio
analysis, company is enjoying good profits and is consistently running its operations with
critical country conditions. However owing to reduction of load shedding, company did
improve its operations and thus its cost management system.
5
Nishat Spinning (Private) Limited
It is a wholly owned subsidiary of Nishat mills limited and thus is a private company
incorporated on February 2014 in Pakistan. The principal business of the company is to
manufacture and sell the textile products in the local market by processing the textile
goods in its own or outside manufacturing facility. The subsidiary will commence its
commercial production in the year 2014-2015.
Nature of Business
Nishat mills focused on both the macro and micro level economic issues and therefore it
also recognized the business performance for the textile industry.
Spinning
Nishat mills operate with eight spinning units with entire machinery are from world
renowned manufacturers. All yarns made at Nishat are Ring Spun suitable for both
knitting and weaving. Besides that company operates with its own house state of the art
cotton and yarn testing laboratories. The Nishat Group is one the most trusted brands
owing to its high quality products based on the best raw materials due to efficient
production and other quality measures.
Weaving
Nishat Mills weaving division has 670 modern air jet projectile looms which produce
approximately 9 million meters of fabric per month and makes it the largest weaving
facility of Pakistan catering to home textile and apparel fabrics.
Processing
Nishat had the facility to produce custom-made machinery and has capacity of 90 million
meters of fabric per annum. Its processing includes, twills, drills canvas/poplins, fabrics
with minimum tensions and thus has all density weaves.
6
The standards are higher than ever, dedicated by fashion, efficient productivity and
further automation s engineered in the plant. To maintain quality and international
standards, an online Quality Control (QC) department has been setup. The QC
department is augmented by a fully equipped Laboratory, which the fabric process flow at
all levels.
Nishat Linen
Nishat Linen is a concern of Nishat Mills, the textile and home fashion retail chain that
has redefined the industry with acute attention paid to quality, design and affordability. It
prided itself on being the brand of preference for discerning customers which provides
them with unique and high quality products without compromising on the aesthetics and
price. Unsurpassed customer service, including tailor-made orders, ensures all of the
clientele remains loyal to the Nishat family.
From bed linen to kitchen coordinated, upholstery to apparel, Nishat Linen has become a
household name as a creator of stunning high quality designs at reasonable prices.
7
efficiency level. Thus due to costs comparisons, wastage in use of materials or
inefficiency at the time of buying were reduced. Comparisons may also be made with
average figures for the whole industry and with ideal figures which may have been
determined before head. This comparison provides a clear signal to the management
about the going up or coming down of efficiency level and thus to take any action.
Secondly it helps the Nishat Mills to concentrate any of the unproductive and
unprofitable line to disregard or to discontinue by keeping only profitable and well-
structured departments. Pakistan's textile industry continues to suffer from a high cost of
doing business with country's textile exports decline due to cut-throat competition from
regional players, an overvalued Rupee, energy shortage, various taxes and surcharges,
and the slowdown in China and other markets. But by analyzing the cost effective and
profitable segments, Nishat Mills earns more than half of its revenues from exports and
single-handedly contributes around three percent to the textile exports of Pakistan. A
segment analysis reveals that the lawn's share of the firm's revenues, which is around 35
percent, comes from the Processing and home textile segment. In terms of gross profit,
however, it accounts for 56 percent (Starting FY16, the 'Processing and home textile'
segment is reported as two separate segments - 'Dyeing' and 'Home textile.') (Business
Recorder, 2016)
Another factor for cost accounting advantage is its relevance for providing information
which can be utilized in proper future planning. Detailed information for available
facilities about machine and labor capacity in Nishat mills was important to recognize the
upcoming demand which can only be done through proper costing system. For instance,
during the period, Nishat Mills' spinning segment took a huge hit, with volumes falling
by around 33 percent over 1QFY16. This was due to subdued demand in core markets. In
the weaving segment, exports decreased due to economic slowdown in Europe, especially
in the UK following Brexit. Nevertheless, volume sales were up by around seven percent
year-on-year. The company has started exporting polyester open-end fabric (used for sun
protection) and is also expecting growth in the abrasive fabric market going forward.
(Business Recorder, 2016) This positive effect was gauged through the costing systems
which provide proper information on timely basis.
8
Information about availability of stocks of various materials and stores must be
constantly available if there is a good system of Cost Accounting. This helps in two ways.
Firstly, production can be planned according to the availability of materials and fresh
stocks can be arranged in time when old stocks are exhausted. Secondly, loss due to
carelessness or pilferage or any other mischief will be known and, therefore, put down.
For instance, in the first quarter ended FY17, Nishat Mills has shown some improvement.
The company's sales declined by three percent year-on-year, but the bottom line exactly
doubled over last year. Gross and net margins have expanded nicely, as the company has
improved its profitability. As per the Director's Report, the main reason behind the
enhanced profitability was the achievement of production efficiencies and better
inventory management. Moreover, a higher other income and lower finance cost further
improved the bottom line.
Also the use cost accounting can also be observed for machine versus labor requirement.
For instance, Nishat mills is enhancing the segment's production capacity and will be
commissioning a new denim jeans facility soon I order to meet the increased demand of
the products and thus to meet in best nature which can enhanced the overall sales if the
company.
Talking about the price factor, Nishat’s real performance, however, came from the value-
added end. Home textile reported a 20 percent growth in volume sales, but margins were
suppressed. This was due to the sharp decline in the pound sterling and Euro after Brexit.
Garments also reported a healthy growth in volume of 27 percent year-on-year, with
much higher margins than before. This shows that cost accounting helps in the decision
of the prices which must be increased or decreased owing to the economic factor and the
informant provided by the accountants.
Lastly, Nishat Mills is focusing on the expansion of its operations as dedicated by the
positive indicator from cost accounting information. Therefore company has started the
new fiscal year on a high note. Although the company is still looking at a lower topline,
recent investments in capacity enhancement and production efficiencies have begun
9
paying off. Moreover, the restoration of zero-rating on textile exports might also help the
situation.
In order to identify the reasons for fluctuations, let us first analyze the production
efficiency of Nishat Mills Limited over a period of time. The production efficiency of
Nishat Mills Limited has been decreasing over a period of time. In 2014, it decreased
from 18.96% to 16.16% and then to 15.11% in 2015. The only exception is year 2016 in
which it increased a little, which is 17.25% but for only that year and then decreased
again to 14.44% in next year. Investor who has a limited knowledge about finance might
perceive declining gross profit as a bad sign. However, even though the percentage of
gross profit from total sales is decreasing over a period of time, at least gross profit is
positive and hence no losses are incurred which is a good sign. But gross profit should
increase over a period of time. The factor that directly affects gross profit is cost of sales.
In case of Nishat Mills Limited, generally speaking, cost of sales has been increasing
10
over a period of time. In 2014 it was 81.04% and in 2014 it was at 85.56%. Exception is
year 2016 in which company had lower cost of sales as compared to the previous years.
After the productive efficiency, let us now consider operating efficiency of Nishat Mills
Limited from 2014 to 2016. Operating efficiency depicts how well a company is
maintaining or controlling its operating expenses and earning other incomes to enhance
its operating profits. According to the common size income statement, no sharp increase
or decrease has been observed in their operating expenses. In 2014, the percentage of
operating expenses with respect to sales was 8.08% which fell to 6.75% in the next year.
In 2015, it again rose to 8.08% but then kept on declining in the next two years at around
7%. In other words, we can say that although the percentage has been fluctuating over a
period of time yet no significant change occurred. Furthermore, the fluctuations caused
were mainly due to the minimal fluctuations in distributive costs; in which the major
contributor was freight costs and fuel prices. The other income has been increasing over a
period of time. The major contributor was dividend income, interest income and capital
gains. So we can say that the operating efficiency of Nishat Mills Limited over these 5
years had minimal fluctuations merely because of its operating expenses since an overall
increasing trend of other income was observed.
The general trend of finance cost and taxes was decreasing over a period of time which is
a good sign. Furthermore, the percentage of finance cost with respect to sales decreased
from 3.57% in 2014 to 2.96% in 2014. This indicates that company has been spending
fewer amounts on making interest payments to an outside entity and this ultimately helps
in reducing their interest expense.
So, to conclude, we can say that the gross profit or production efficiency of Nishat Mills
Limited remained somewhat reasonable considering the fact that it was still getting
profits instead of incurring losses. The operating efficiency also remained somewhat
reasonable in these 5 years. However, the main reasons for the fluctuation in net income
are due to the increase in cost of sales, and fluctuations in operating expenses such as the
distribution costs. The factors that helped in keeping net income positive can be control in
operating expenses other than distribution cost, and a gradual increase in other income.
11
This also indicates that the company has been making more profits from their non-core
activities rather than from their core activities.
Furthermore, the main external or macro-economic reason was high prices of fuel and
power. Since Nishat Mills Limited is a manufacturing unit and is heavily dependent upon
fuel and power to run its operations, thus higher costs were incurred due to this.
However, the good sign is that its cost of sales has decreased from Rs. 45 billion in 2015
to Rs. 41 billion.
The main reason behind lowering of cost of sales in 2016 may be attributed to the fact
that fewer amounts was spent on new purchases and the beginning amount of raw
materials coupled with relatively small number of purchases made Nishat to meet its
demand. Overall, the cost of goods manufactured was Rs. 45 billion in the year 2015
which decreased to Rs. 41 billion. So, since 2014 it has been decreasing. Other than this,
the prices of fuel and gas were also somewhat in the favor of Nishat as a result of which
it was able to lower its cost of sales collectively. However, like that of last year, the
amount of salaries, wages and others increased from Rs 3 billion to Rs. 4 billion
approximately.
Hence we can say that the decrease in cost of sales is due to the lower amount of cost of
goods manufactured; because of lower amount of raw material purchased and hence
produced. The only factor that needs to be controlled is the overhead costs which include
indirect labor, materials and others which have been seen increasing during the period of
2014-2016.
12
Application of Activity Based Costing
Activity Based Costing
ABC costing required the proper allocation for the overhead cost systems of all the
activities of the entire organization which then requires the proper allocation of the cost
with respect to the cost driver. An activity-based system (ABC) identifies individual
activities as fundamental cost objects. An activity is an event, task, or unit of work with
specific purpose—for example in case of Nishat Mills it Weaving, Spinning, Garments and
Home textile and printing. Once activities are determined, Costs are then assigned to the
activities and allocated to the individual products.
Cost Driver:-
The relevant cost drivers can be machine hours, labor hours.
Cost Pools:-
Cost of sales to bifurcate based upon four different segments Spinning, Weaving, Home
textile, Garments and printing. We have distributed these costs base upon revenue
contribution from each segment. The respective percentages in 2016 are Spinning 23%,
Weaving 24%, Home textile 15%, Garments 9% and Printing 28.8%, while percentages in
2015 includes as Spinning 24%, Weaving 24%, Home textile 16%, Garments 8.14% and
Printing 27.165%.
Weaving Weaving
7,355,298 8,090,646
15.8019741
15.3237996 4
Total 7,355,313 8,090,662
% of Revenue 15 16
Garments Garments
I 4,032,632 4,169,766
II 69,982 –
Total 4,102,614 4,169,766
8.14403874
% of Revenue 9 8
Printing Printing
13,824,325 13,908,418
27.1647605
% of Revenue 28.8011697 9
Cost of sales
2016
Cost of
Sales
2016
Percentage
based upon 23% 24% 15% 9% 28.80%
Revenue count
Home
Spinning Weaving Garments Printing
Segments Textile
Raw Material
Consumed 38,191,759 8784104.57 9166022.2 5728763.85 3437258.31 10999226.6
Processing
Charges 373,687 85948.01 89684.88 56053.05 33631.83 107621.856
Store, Spares
and Loose parts
consumed 4,782,661 1100012.03 1147838.6 717399.15 430439.49 1377406.37
14
Packing
materials 1,092,136 251191.28 262112.64 163820.4 98292.24 314535.168
Repair and
Maintenance 514,326 118294.98 123438.24 77148.9 46289.34 148125.888
Fuel and Power 4,231,644 973278.12 1015594.6 634746.6 380847.96 1218713.47
Other factory
overheads 561,879 129232.17 134850.96 84281.85 50569.11 161821.152
WIP
Opening Stock 1,575,230 362302.9 378055.2 236284.5 141770.7 453666.24
Closing Stock -2,263,340 -520568.2 -543201.6 -339501 -203700.6 -651841.92
-688,110 -158265.3 -165146.4 -103216.5 -61929.9 -198175.68
Cost of goods
manufactured 49,059,982 11283795.9 11774396 7358997.3 4415398.38 14129274.8
Finished goods
Opening Stock 4,337,851 997705.73 1041084.2 650677.65 390406.59 1249301.09
-
Closing Stock -4,606,221 -1059430.8 -1105493 -690933.15 -414559.89 1326591.65
-268,370 -61725.1 -64408.8 -40255.5 -24153.3 -77290.56
Cost of goods
sold 49,328,352 11345521 11774396 7399252.8 4439551.68 14206565.4
2015
Cost of
Sales
2015
Percentage
based upon
24% 24% 16% 8% 27.16%
Revenue
count
Home
Spinning Weaving Garments Printing
Segments Textile
Raw Material 45,512,34 10922962.
Consumed 5 10,922,963 8 7281975.2 3,640,988 12362252.9
Processing 132282.432
Charges 486,977 116874.48 116874.48 77916.32 39639.9278 3
15
Store, Spares
and Loose
parts
consumed 4,963,994 1191358.56 1191358.56 794239.04 404069.1116 1348419.33
Packing 288672.371
materials 1,062,702 255048.48 255048.48 170032.32 86503.9428 3
Repair and
Maintenance 597,897 143495.28 143495.28 95663.52 48668.8158 162412.7411
Fuel and 1274919.3 1274919.3 432410.149 1442996.22
Power 5,312,164 6 6 849946.24 6 9
58,493,27
TOTAL 8 14,038,387 14,038,387 9,358,924 4,697,636 15,888,394
WIP
Opening 546952.572
Stock 2,013,520 483244.8 483244.8 322163.2 163900.528 8
-
427895.477
Closing Stock -1,575,230 -378055.2 -378055.2 -252036.8 -128223.722 2
438,290 105189.6 105189.6 70126.4 35676.806 119057.0956
Cost of goods
manufacture 58,931,56
d 8 14,143,576 14,143,576 9,429,051 4,733,312 16,007,451
Finished
goods
Opening
Stock 4,022,360 965366.4 965366.4 643577.6 327420.104 1092633.87
- -
1041084.2 353101.071 -
Closing Stock -4,337,851 -1041084.2 4 -694056.16 4 1178333.846
-
-315,491 85699.9752
-75717.84 -75717.84 -50478.56 -25680.9674 4
16
Calculations
Assuming 60% of this cost is attributable to these four processes. PKR
(49328352000*60%) equals to almost 30 billion. These four business division have
production per unit or in Kg either if it is per piece in case of garments or in case of per
Kg Yarn is calculated by dividing cost of sales for each segment by total output in year.
Home
Total Spinning Weaving Garments Printing
Textile
If 60% of cost
is attributed to
these 4
segments
60%
Cost of goods 8523939.2
sold 29597011.2 6807312.58 7064637.408 4439551.68 2663731.008 3
Output in pieces
and Kg 1,469,740 5,879,100 867500 1556430 2549860
463.164408 120.1652873 511.7638824 171.1436433 334.29048
Home
Category Spinning Weaving Garments Printing
textile
512 per
Cost of Sales based 171 Per
463 per kg Yarn 120 Per meter square 334 per
units piece
meter piece
Distribution costs
Cost driver number of units produced in Spinning, Weaving, Home Textile, Garments and
printing. This assumption is also based upon respective revenue contribution percentages.
Distribution costs
Home
Spinning Weaving Garments Printing
Textile
2016 23% 24% 15% 9% 28.80%
Outward 1,072,349 246640.27 257363.76 160852.35 96511.41 308836.512
17
Freight
Commission
496,604 114218.92 119184.96 74490.6 44694.36
for selling 143021.952
Fuel costs 117,457 27015.11 28189.68 17618.55 10571.13 33827.616
Travelling 116,022 26685.06 27845.28 17403.3 10441.98 33414.336
Vehicles 16,549 3806.27 3971.76 2482.35 1489.41 4766.112
Entertainment 12,088 2780.24 2901.12 1813.2 1087.92 3481.344
Electricity 60,087 13820.01 14420.88 9013.05 5407.83 17305.056
Printing 6,076 1397.48 1458.24 911.4 546.84 1749.888
Total in
1,897,232 436363.36 455,336 284584.8 170,751 546402.816
thousands
Units produced 1469740 5879100 867500 1556430 2549860
PU Dist. Cost 29.6898336 7.744989539 32.80516427 10.9706752 21.4287379
ABC per unit based upon cost based upon CGS and distribution cost
Cost per unit based upon CGS and directly attributable distribution cost per unit Piece and
per Kg is as follows.
Home
Category Spinning Weaving Garments Printing
Textile
511.763882 171.143643
Units Produced 463.1644084 120.165287 334.2904797
4 3
Per unit 32.8051642
29.68983358 7.74498954 10.9706752 21.42873789
Distribution cost 7
The following table shows the calculation and determination of Activities and their
allocated weights along with the cost drivers, their respective costs and hours assigned.
2016
Indirect cost
Activities weights cost driver Cost Hours rate
Spinning 0.17 Machine 14,939,842,000 9,500,000 1572.614947
18
hours
Machine
Weaving 0.70 hours 18,595,070,000 184408000 100.8365689
Garments 0.12 Labor Hour 4,102,614,000 13784956 297.6153134
Home textile 0.01 Labor Hour 7,355,298,000 13334000 551.619769
Total 100%
841028 8784
The above table represents the cost allocation on activity basis and for that the costs are
gauged from the balance sheets and specific weights are assigned based on the
importance of each activity with respect to the work. Costs drivers are selected based on
the information gathered from interviews and the indirect costs that cannot be directly
placed or allocated.
Breakeven analysis
Breakeven analysis is used to determine when Nishat will be able to cover all its
expenses and begin to make a profit in the years considered i-e 2015 and 2016.
Following are the lists of fixed costs and variable costs for these 3 years.
VARIABLE COST
DISTRIBUTION COST
Salaries and other benefits 349,113 332,516
Outward freight and handling 926,083 1,067,949
Commission to selling agents 495,921 636,694
Travelling and conveyance 104,838 110,463
Vehicles’ running 7,065 6,255
19
Total Distribution Cost 1,883,020 2,153,877
ADMINISTRATIVE EXPENSES
Salaries and other benefits 767,824 758,953
Travelling and conveyance 29,934 30,732
Entertainment 24,807 27,453
Repair and maintenance 21,561 22,010
Vehicles’ running 41,857 49,451
Total Administration cost 885,983 888,599
FIXED COST
DISTRIBUTION COST
Insurance 20,092 20,937
Electricity, gas and water 553 4,498
Postage, telephone and fax 72,149 71,786
Advertisement 1,220 1,565
Miscellaneous 7,065 6255
Total Distribution Cost 101,079 105,041
ADMINISTRATIVE
EXPENSES
20
Rent, rates and taxes 4,512 5,247
Insurance 7,062 7,145
Printing, stationery and
20,606 19,863
periodicals
Electricity, gas and water 26,360 22,591
Postage, telephone and fax 7,487 7,259
Legal and professional 22,024 19,769
Fee and subscription 4,242 3,399
Depreciation 86,860 88,053
Miscellaneous 47,409 34,990
Total Administration cost 226,562 208,316
Contribution Margin
Budgeting
2014 15,000,000
2015 12,034,500
2016 1,050,000
21
The Budgeted selling price for the next four years is: -
2014 3,255
2015 3,745
2016 5,400
Sales Budget
Sales Budget
2016 2015 2014
45,069,202,50
Revenue generation 54,270,000,000 0 48,825,000,000
Production Budget
Production budget for 2017 has been made by keeping in mind the past trends. It has
been assumed that the same percentage decrease would be observed in year 2017 as
of year 2016. The values of opening and ending stock were available in the annual
report.
Production Budget
2016 2015 2014
22
11,850,044 14,079,500 17,500,000
33,001,575,00
Production needs 29,415,132,000 0 29,900,000,000
Add: desired ending
inventory (
10% of the following years
inventory)
2,954,066,700 2,941,513,200 3,300,157,500
35,943,088,20
Total needed 32,369,198,700 0 33,200,157,500
Less: beginning Inventory (
Inventory forwarded from
2013)
2,941,513,200 3,300,157,500 3,541,600,500
32,642,930,70
Materials to be purchased 29,427,685,500 0 29,658,557,000
23
Direct Labor Budget
Direct labor for 2017 is calculated by the estimates of past trends prevalent in the company.
24
75,000,000 404,474,000 45,550,000
Cash Budget
ACTUAL
Sales Actual
Sales Actual
2016 2015 2014
26
Revenue generation 47,999,179,000 51,200,223,000 54,444,091,000
Production Actual
Calculation for
production
needs 2016 2015 2014
Total RM 30159975000 32504207000 35449027000
No. of units
produced 9,782,524 11,648,020 14,850,000
3083.046359 2790.534958 2387.139865
Production (Actual)
2016 2015 2014
27
Less: beginning Inventory 2,606,417,381 2,991,844,744 3,541,600,500
Overheads (Actual)
28
Selling and Administration Expenses (Actual)
9,771,358,20
Total cash collections 11,142,691,200 7,351,435,806 0
Cash Budget
30
5312509000 5936585000 7831707000
2463955200 2713686700 2978838400
Direct material use 0 0 0
466698240.
Direct labor 429509339 9 6439706853
Manufacturing overheads 824465000 961023000 571239000
2589352633 2856458824 3679932985
Total manufacturing costs 9 1 3
add: Beginning WIP inventory 1530684000 2013520000 1720313000
2742421033 3057810824 3851964285
Subtotal 9 1 3
- - -
Deduct: Ending WIP inventory 1746041000 1530684000 2013520000
2567816933 2904742424 3650612285
Cost of goods manufactured 9 1 3
Add: Beginning finished goods
inventory 2882924000 2907268000 2720906000
2856109333 3195469224 3922702885
Costs of Goods available for sale 9 1 3
Deduct: Ending finished goods - - -
inventory 2875186000 2882924000 2907268000
2568590733 2907176824 3631976085
Costs of Goods sold 9 1 3
31
Budgeted Cash Flow statement
32
Balance sheet
Static-Budget
Actual results variances Static Budget
33
Variable
manufacturing
overhead 845768000 (115,255,000) F 961,023,000
Total variable
costs 30828788078 (3,241,863,863) F 34,070,651,941
Contribution
margin 20371434922 9,372,884,363 F 10,998,550,559
VARIANCE ANALYSIS
Static Budget
2015
Static-Budget
Actual results variances Static Budget
34
2016
2016
Static-Budget
Actual results variances Static Budget
Flexible Budget
2014
2014
Flexible
Actual Budget Flexible Sales Volume Static
Results Variances Budget Variances Budget
Variable costs
Direct Material 33837052901 2183052901 U 31654000000 31654000000 32642930700
Direct 5760000000 101000000 U 5659000000 5659000000 466698240.9
Manufacturing
35
Labor
Variable
Manufacturing
Overhead 582009000 1133000 U 580876000 580876000 961023000
Total Variable
Costs 40179061901 2285185901 U 37893876000 37893876000 34070651941
Contribution
Margin 14265029099 2381450475 F 11883578624 11883578624 10998550559
Fixed
Manufacturing
Costs 8106667000 54667000 U 8052000000 8052000000 7500000000
2015
2015
Flexible Sales
Actual Budget Flexible Volume
Results Variances Budget Variances Static Budget
Variable costs
2953302007 2784299900
Direct Material 8 1690021078 U 0 27842999000 32,642,930,700
Direct
Manufacturing
Labor 450000000 -2000000 F 452000000 452000000 466,698,241
Variable
Manufacturing
Overhead 845768000 -2231000 F 847999000 847999000 961,023,000
Total Variable 3082878807 2914299800
Costs 8 1685790078 U 0 29142998000 34,070,651,941
36
Costs
Operating 1300510792
Income 2 1761231122 F 11243876800 11243876800 3,498,550,559
2016
2016
Flexible Sales
Actual Budget Flexible Volume Static
Results Variances Budget Variances Budget
Variable costs
Direct
Material 26411823127 -299611873.3 F 26711435000 26711435000 29427685500
Direct
Manufacturin
g Labor 440000000 13656445 U 426343555 426343555 429509339
Variable
Manufacturin
g Overhead 812372000 2138567 U 810233433 810233433 824465000
Total Variable
Costs 27664195127 -283816861.3 F 27948011988 27948011988 30681659839
Contribution
Margin 20334983873 2901953898 F 17433029976 17433029976 18143340161
Fixed
Manufacturin
g Costs 8214593000 112271000 U 8102322000 8102322000 8200000000
Operating
Income 12120390873 2789682898 F 9330707976 9330707976 9943340161
2014
37
Actual Price 3500
Budgeted Price 3255
Actual Quantity 15555454.57
15,000,0
Budgeted Quantity 00
Actual Purchased 33837052901
29,658,557,0
Budgeted Purchased 00
Actual Cost 48285728901
Budgeted Cost 36669502853
Actual wage rate 180000
Budgeted wage rate 200349
32,
Budgeted hours 143
Actual hours 32000
Justifications:
When it comes to material price variance, we can see that the actual price and quantity of
materials used were more than expected as a result they affected our net income
negatively and hence the outcome is unfavorable for us. The situation did not go as we
had hoped and assumed based on our secondary research. As far as its efficiency is
38
concerned, we can see that actual inputs were used more than the budgeted one which
means negative impact on our net income and hence the outcome is unfavorable when
compared to the budgeted one. Labor variance is favorable because the amount of actual
wage rate applied was lower than that expected according to the respective actual number
of hours. The efficiency is favorable too because the budgeted wage rate and hours were
amplified.
2015:
2015
39
Materials price is again unfavorable as the amount of actual quantity and the actual prices
were higher than expected. We assumed that owing to the energy crisis and other
problems, production and prices would be lower but that did not happen. The efficiency
calculations came out to be favorable for us as the actual quantity of inputs used were
lower than expected with respect to the budgeted price. The labor variance and efficiency
are unfavorable owing to the mismatch between our macroeconomic assumptions and
reality.
2016:
2016
40
Actual wage rate 20000
Budgeted wage rate 19523
22,
Budgeted hours 000
As for material price variance in 2016, again we have observed an unfavorable outcome
owing to the mismatch between what we had assumed would occur and what had actually
occurred. However, the actual quantity of inputs used here were lesser than assumed and
the results came out to be favorable. As for labor variance, we can see that the expected
amount of wage rate was higher than the actual one as a result of which it had a positive
impact on our net income and hence it is considered to be favorable. The efficiency level
here is zero because both the actual and budgeted hours were same.
41
company’s cash flows also support it. in years 2014 and 2016 the cash flows for the
company were lower than those obtained in previous two years. We can further conclude
from the cost calculations carried out that company was able to break even in all three
years. Overall the company has been seeing better results with years passing by, however
to improve their costing we have some recommendations for Nishat Mills which would
help them better manage their costs. The recommendations are as follows:
References
www.nishatmillsltd.com
42