Prepare a report on the uses of cost volume profit analysis

Name: Bilal Ahmed Roll no: am552469 Course: business Managerial Accounting Level: m.com Assignment submitted to: Prof Shoaib Saleem Couse code: 8508

ALLAMA IQBAL OPEN UNIVERISITY

ACKNOWLEDGEMENT First of all we thank to ALLAH ALMIGHTY gave us this beautiful life and blessing us throughout the working on these papers or pages. We are indebted to our respected teacher whos in dispensable and intricate comments on various aspects conjoined with motivation made us come forth holding such as assignment.

INTRODUCTION CVP ANALYSIS

Cost Volume Profit Analysis: Cost-Volume-Profit (CVP) analysis is a managerial accounting technique that is concerned with the effect of sales volume and product costs on operating profit of a business. It deals with how operating profit is affected by changes in variable costs, fixed costs, selling price per unit and the sales mix of two or more different products. CVP analysis has following assumptions: All cost can be categorized as variable or fixed. Sales price per unit, variable cost per unit and total fixed cost are constant. All units produced are sold. Where the problem involves mixed costs, they must be split into their fixed and variable component by High-Low Method, Scatter Plot Method or Regression Method. CVP Analysis Formula:

The basic formula used in CVP Analysis is derived from profit equation: px = vx + FC + Profit In the above formula, P is price per unit; V is variable cost per unit; X are total number of units produced and sold; and FC is total fixed cost

Besides the above formula, CVP analysis also makes use of following concepts:

Contribution Margin (CM): Contribution Margin (CM) is equal to the difference between total sales (S) and total variable cost or, in other words, it is the amount by which sales exceed total variable costs (VC). In order to make profit the contribution margin of a business must exceed its total fixed costs. In short:

CM = S VC Unit Contribution Margin (Unit CM): Contribution Margin can also be calculated per unit which is called Unit Contribution Margin. It is the excess of sales price per unit (p) over variable cost per unit (v). Thus:

Unit CM = p v Contribution Margin Ratio (CM Ratio): Contribution Margin Ratio is calculated by dividing contribution margin by total sales or unit CM by price per unit.

INTRODUCTION OF MAHMOOD TEXTIE MILLs LIMITED

Due to the changing environment in the world that world is becoming a global village due to this competition is very intense in the world market and no country can complete in the world market or cannot make progress without the development of industry. Rapid progress can only be made with the development of industry. Since 1947 to up till now Pakistan has made progress in every industry especially in the textile industry.

Pakistan is an agricultural country so, the textile industry of Pakistan has supported the economy of Pakistan and Mahmood Textile Mill has its own contribution in this field. MTM is working under the Mahmood Group of industries and it was established in 1970. Since its establishment it is progressing gradually.

Three spinning units of Mahmood Textile Mills Ltd. Are situated at Multan road in Moza sunaki near Chinab River Muzaffar Garh. One spinning and weaving unit is situated at D.G.Khan road Muzaffar Garh. Now MTM have installed their own power plant having capacity of 9.2 MW with the investment of 66.806 Million. MTM is involved in the manufacturing of yarn and cloth. About 80-85% of the total production they are exporting. They have their own ginning factories and farms from which they best good quality of cotton and produce better quality products. Mahmood Cotton Ginning pressing and Oil Mill Ltd. Tate Pure. Masood Modal Ginning Factories Ltd. Rahim Yar Khan. Masood Modal Ginning Factory. Sadiqa Abad.

Masood Model Ginning Factory Ltd. Deharky. M/S Khawaja Muzaffar Mahmood Muhammad Masood Tate Pure. MTM consists of five units. Four units are meant for spinning and one is for weaving. Unit No.1 installed with 13872 spindles in q970-71 and the name of the brand, which produced by this unit, is engine brand. Unit No.2 established in 1984 with 12486 spindles. The name of the yarn brand is Zaitoon, which is producing in this unit. Third spinning unit installed with 15360 spindles in 1989-1990 having a brand name of palm. Fourth spinning unit established in 1992 with 20400 spindles. Brand name of the yarn producing in this unit is cotton king. During the November 1997 2592 spindles were dismented and now total no of spindles in four units is 59520.The Management make the expansion decision in 2000 to increase the spindles 5760, so total no of spindles in 2000 is 65280. They have won a special merit trophy for export performance in 1989-90, 1990-91, 1993-94, 1994-95, 1995-96 and 1996-97. Weaving unit established in 1991 and has 98 Sulzer Ruti shuttle less looms. And 5 Sulzer Ruti are established in 1998. So total No. Of Sulzer Ruti shuttle less looms is 103 in weaving unit. They are producing Grey cloth in this unit and exported to Japan, Taiwan, USA, Europe, Korea and Hong Kong.

VISION STATEMENT: To be recognized internationally and locally as dynamic, quality conscious and ever progressive Textile Product manufacturer in the Textile Industry of Pakistan MISSION STATEMENT: Mahmood Group is committed to: Be ethical in its practices. Excel through continuous improvement by adopting most modernized technology in production. Operate through professional Team work. Retain our position as leading and innovative in the Textile Industry. Achieve Excellence in the quality of our product. Be a part of country's economic development and social Prosperity.

Function and Responsibilities of the Department:

Financial Planning Fund Receiving. Making Capital Expenses Decision. Managing Cash. Managing Credit Activities. Making investment Decision. Tax Management. Making Financial Decision. Financial Analysis. Preparation of Semi Annual and Annual Financial Statement. Dealing with Financial A/C Activities. Dealing with Banks. Dealing with Purchase of Miscellaneous Items. Recording of Cash Transaction. Recording of Local and Export Sales. Record of Suppliers A/C. Preparation of Record for Auditing Purpose. Maintain Goods of A/C etc. Purchase of Miscellaneous Items.

ACCOUNTING SYSTEM: There is a centralized computer system in the MTM. All the accounting is done in the head office of different units. This process starts from the preparation of vouchers. These vouchers are:

Cash Vouchers: The cashier prepares cash vouchers which payment or receipt of cash is involved.

Bank Vouchers: At the time of issuing cheques these vouchers are prepared and after the payment bank A/C is credited and part is Dr. the cheque is signed by the chief accountant, finance controller and the director.

Sales Vouchers: At the time of export and local sale these voucher are prepared.

Bought Day Vouchers: These are prepared at the time of purchasing of goods.

Daybook or Journal Vouchers: These vouchers served daily for transferring account in which payments are not involved. After every transaction voucher is prepared and then send to the chief accountant with all supporting material and chief accountant checks these vouchers and send to the auditors for the internal auditing purpose and after this send to the director. If director has any inquiry then he can ask the relevant person. Then the recording of those transactions are made in the appropriate books of accounts.

These books are: Cash Book Day Book Bank Book Bought Day Book Sale Day Book

Cash Book: Cash payment receipt vouchers are entered in this book on daily basis. Cash closing balance is calculated daily and checked by auditors. Bank Book: This book is maintained to control all the bank accounts of the company. This book has different columns at the end of the month the total of these is posted in main ledger and the reconciliation is also made with the bank statement at the end of the month. Bought Day Book: This book is maintained for the purchase of goods for each unit separately. Posting to suppliers ledger is made from this book and the total of other purchases is posted in main ledger at the end of the month. Day Book: Journal vouchers are entered on the daily basis in this book and the auditors check the entries of postings. At the end of the month these are posted in the General ledger control account. Sales Day Book: This book is maintained for the sale bills and the posting is made to the customer ledger. This is posted to main ledger for control at the end of the month. Ledgers: After recording the information in these books of accounts then it is posted to appropriate ledger accounts. The recording and the posting checked by the auditors. Then trial balances are prepared and if these trial balances are tallied then the income statement/profit and Loss Accounts and Balance Sheets are prepared. Main Ledger or Control Ledger: From the main ledger/control ledger Balance Sheet is prepared. All the assets, liabilities, customers and suppliers record is maintained in this ledger. At the end of the month trial balance is prepared to check the accuracy of the account by seeing the Dr. & Cr. Balance of the Trial Balance. Profit & Loss Ledger: For each unit separate Profit & Loss ledger is prepared to check the profitability of each production unit. In this ledger all account regarding the income and expenses are recorded. These are: Sales account: Local & Export Sales.

Commission of Sales. Excise Duty on Yarn. Export Development Surcharge. Expenses Administration Expenses. Manufacturing Expenses. Selling Expenses. Charges Maintenance Charges. Misc. Charges. Customers Ledger: Posting in customer ledger is made from cashbook, daybook, and bank book and sales book to maintain the customers record. Customers balances are worked out prepare receivable and submitted to the directors. Suppliers Ledger: There are two types of supplier ledgers: This ledger is mean only for the purchasing of goods and the entries in this ledger is made from cashbook, daybook, and bankbook and bought book day book. Goods received are credited in account of suppliers and payment made is debited in account of supplies. If supplies are more than 25, 0000 than 3.5% income tax is deducted at the time of payment. Second type of ledger is maintained for which the company hires the services. Company deducts income tax form the professionals, contractors & commission agents at the following rates: Professional/Service renders Contractors Commission Agents 5.5% 3.5% 12%

Personal Ledger: This ledger is prepared to record all the data relating to the personal account of the companys employees. At the end of each month trial balances are prepared & see the employee personal data regarding the leaves, loans & advances etc.

WAGES AND PAYROLL SECTION: Payroll system deals with the expenses of the employee on work in an organization. Preparing a payroll requires collecting employee work hours, converting hours to gross earnings & computing allowances & deductions & then net pay. In addition to accounting activities a payroll system commonly performs activities that might be viewed as personal operations such as sick leaves & vacations etc. In MTM system is computerized a payroll management system. So all the data about the employees & their payrolls is recorded in the computer. Preparation of Salary Sheet: In MTM Muzaffar Garh workers perform their duties in three shifts which are called shift A, B, & C. Period of each shift is of eight hours. As there are three shifts so three salary sheets one for each shift are prepared. Salary sheets that are prepared in the head office are of the following types: Shift salary sheet: Officer staff salary sheet. Office staff salary sheet. General shift salary sheet. Timekeeper is responsible for the record of attendance & leave of all the workers. Time officer sent the Haazri register /attendance sheet with related information to the head office. From the first date to 10th date of the Month Salary sheets are prepared. Wages are calculated according to the category of worker & decided rates. In the wages sheet serial no., workman no., social security no., weekly rest, name of the worker, father name, date of first appointment, nature of work, rate of pay, monthly record of the daily attendance of each worker, sex, age no. Days the worker attended, allowances, gross wage payable, deduction & actual wage paid are mentioned.

Allowances: In MTM allowances are paid to worker for their contribution towards the organizations objectives. Following are the types of allowances that are given to the workers.

Cost of Living Allowance (C.L.A): Cost of living allowance is given to the workers according to the rules & regulations of the Govt. whenever Govt. increases the cost of living allowance this additional C.L.A. is also given to the workers. Cost of living allowance is provided according to the basic salary of the worker. Attendance Allowance: Attendance allowance is also given to the worker for their contribution to organization objective. Attendance allowance is given to the worker if he has worked full days of the month. If the worker does not work full days of the month then this allowance is not provided to the worker by the organization. House Rent: House rent is given to workers of this organization. 10% of the basic pay is given as a house rent to the employees of the organization. Dearness Allowance: To compensate the workers dearness allowance is given to the workers of MTM. Dearness allowance is calculated according to the formula i.e.

Dearness allowance = (wage earned +C.L.A.+40)18%+40

Where wage earned is calculated by dividing the basic pay by total days of the month & then multiplying by the no. Of days the worker attended in a month.

One Time Allowance: If an employee achieve production targets or show good efficiency he will be rewarded by one time allowance.

Badli Allowance: This Badli allowance is given if a subordinate works in place of his boss for some days when the boss is on leave. It is calculated as

Differ Salary

Badli Allowance =

No. Of days worked

The difference of salary is a gap between the salary of boss & subordinate.

Conveyance & Medical Allowance: This allowance is also given according to the basic pay. Indexation 18% of basic pays C.O.L.A.

Deductions: As there are some allowances with are given to the workers of the MTM to compensate them similarly there are some deductions from the wages of the workers. Fine Advances & Loan Rent

Fair Price Shop Income Tax One Time Deduction Fine: When worker misconduct during his jobs the labor officer or the assistant labor officer may fine him. Similarly when guilt is proved against the worker he may be fined. There is no limit of fine but it is according to the nature of the guilt & the capacity of the worker. Then this fine is deducted from the salary of the worker. Advances & Loan: There is a facility of advance for the worker of MTM. Due to an emergency or any other reason when an employee apply for the advance, then this advance is issued by the labor officer & it is deducted from the salary of the worker. Advance is given against the salary of the worker while, loan is given on the discretion of the management & return of the loan is made on monthly installment basis.

Income Tax: Income tax is deducted from the salary of the officer staff. Income tax is deducted according to the rule from those employees whose annual income is Rs.50, 000 or above, firstly it was Rs.40, 000. Fair Price Shop: There is a facility for the worker to buy the things on credit from the fair price shop. At the end of the month all these bills are deducted from the salary of the worker. Rent: A cot is provided to the workers of MTM for the purpose of rest & sleeping. There is a facility to pay the cost of the cot in four installments on monthly basis or a worker may pay the whole amount at once. One Time Deduction: Its opposite of the Badli allowance. If person is temporarily demoted then the difference of salary between the past & present job over the no. Of days worked is deducted.

Swot analysis:
Strength:
Your specialist marketing expertise. A new, innovative product or service Quality processes and procedures

Weakness:
Lack of marketing expertise Undifferentiated products and service (i.e. In relation to your competitors) Location of your business Poor quality goods or services

Opportunity:
A developing market such as the Internet. Mergers, joint ventures or strategic alliances Moving into new market segments that offer improved profits A new international market

Threat:
A new competitor in your home market Price wars with competitors A competitor has a new, innovative product or service

SUGGESTIONS & RECOMMENDATIONS

Company should try to control wastage of fabric. It reduces cost of production. Decisions making should be decentralized. Middle and lower level management should have participation in decision making.

Conclusion:
Masood Textile is a big name in knitted garments. Its working environment is simply the best in Faisalabad. The company has fully equipped cutting, stitching and packing units. Its quality assurance system is one of the best in Pakistan. Recently it wins Best supplier awards 2001-02 from JC Penny the World Wide stores chain. The companys infrastructure is good. Offices are fully furnished. The company is centrally air-conditioned. The company is working in Papers less environment. Computerized bar coding and back tracking system are there. Company has good warehousing capacity for fabrics and garments. Customer portfolio of the company is very broad. World leaders in Apparel are working with MTM. Company has no separate marketing department. CEO and Marketing Manager of the company perform marketing functions individually. Company is engaged in merchandising and its merchandising department is very efficient for taking orders and fulfilling them accordingly. Companys decision making is centralized. All major decisions are made by higher management and implemented by lower management. Now Company is giving preference to its personals separate personnel department is established and a ladies wing is also incorporated. Financially the company is performing well. Its sales are increasing and its profits are rapidly growing. Simply we can say that Masood Textile Apparel Division is performing well.