Marginal, Absorption Costing Income

Statement
& Breakeven Analysis

Submitted To: Mr.Farukh Zaidi

Submitted By:Mustansar Hussain6478FMS/MBA/S14
Muhmmad Azeem :

6500-

FMS/MBA/S14
Program: MBA 1.5
Faculty of Management Sciencs

International Islamic University Islamabad

Contents
Acknowledgement
Company Introduction:

Page No
04
05

History

06

Vision:

07

Mission

07

Corporate Objectives

09

Management Hierarchy

10

Marginal costing

10

Absorption costing

12

Breakeven analysis

15

References

18

Acknowledgement
We would like to thanks Mr.Farukh Zaidifor being a wonderful teacher with a
difference. Also for his understanding individual students and motivating them to
achieve understanding of course we well thought fairly difficult to say the least.

Thank you sir, we apologize for any mistake in the following project. We have
given it our best shot.
In this project we are learning practically how deals with Marginal Absorption
costing systems and how to interpret in the organization. After doing this project
we are able to become understanding the contribution concept, product variable
cost in marginal and full production cost in absorption costing.
We are understand the importance of breakeven analysis because in industry we
should must seeking we are in profit or in loss and how covered it? These all

information knows with this analysis.

Company Introduction:
Sapphire Group
Sapphire Group is a Pakistani conglomerate company largely focused on textile
industry. Based in Lahore, it is a vertically integrated textile group, manufacturing
cotton yarn, fabric and garments. Its products are exported to over 35 destinations
around the globe. The Group employs more than 16,000.
In 2012, the Group had an turnover of over US $800 million with an asset base of
over US $500 million. It has the spinning capacity of 350,000 spindles with a
production capacity of 65,000 kg of yarn per month from 6/s to 120/s, Knits
dyeing and finishing and apparels unit has a capacity of knitting 500 tons of greige
fabric, 300 tons of dyed and finished fabric and producing 430,000 pcs of
garments per month.
The Group has also diversified into the power generation and dairy sectors.
Sapphire Electric Company is a 234 MW combined cycle plant in Muridke.
Sapphire Dairies Private Limited operates a large mechanized dairy farm based on
100 acres near Manga, Lahore with a herd size of 3000 and a target of 10,000
milking cows (300,000 liters per day) by 2020.

Head office:
7A-K Main Boulevard, Gulberg II,
Lahore,
Pakistan.
Phone(s):+92 42 111 000 100
Fax:+92 42 3575 8783
E-Mail:lahore.office@sapphire.com.pk
Registered office:
212, Cotton Exchange Building,
I.I. Chundrigar Road,
Karachi,
Pakistan.
Phone(s):+92 21 111 000 100
+92 21 3241 0930
Fax:+92 21 3241 6705
E-Mail:karachi.office@sapphire.com.pk

Factories:
S.I.T.E.
S.I.T.E.
Chunian,
Feroze
Bhopattian, Lahore

District

Kotri
Nooribad
Kasur
Watwan

History:
Sapphire Group is the culmination of over 30 years of domestic and international
wine industry experience. We bring a great understanding and proven record of
business success to the Chinese marketplace in all aspects of importing, exporting,
transportation and logistics.

The United States produces some of the world's finest wines. The Sapphire Group
is committed to bringing these wines to the Chinese market and providing
premium wines in bottle or bulk to the discriminating Chinese customer. We will
accomplish our goals with hard work, honesty, integrity and a long-term
commitment to Sapphire Group's much appreciated Chinese customers.

Vision:
A leading producer of textile products by producing the highest quality of
products and services to its customers.
To strive for excellence through commitment, integrity, honesty and team work.
Highly ethical company and be repeated corporate citizen to continue playing
due role in the social and environmental sectors of the company.
To develop and extremely motivated and professional trained work force, witch
would drive growth through innovation and renovation.

Mission:
Our mission is to be recognized as premier supplier to the markets we serve by
providing quality yarns, fabrics and other textile products to satisfy the needs of
our customers. Our mission will be accomplished through excellence in customer

service, sales and manufacturing supported by teamwork of all associates. We will

continue our tradition of honesty, fairness and integrity in relationship with our
customers, associates, shareholders, community and stakeholders.
Values:
People
Relationship
Integrity
Diversity
Environment

Corporate Objectives
1. Maximization of wealth of shareholders.
2. To increase market share
3. To achieve customer satisfaction.
4. Making arrangements towards achieving total quality standards.
5. To get growth through professional management.
6. To growth through professional up to minimum level.
7. To control the atmosphere by installation of lasted machinery.
8. To continue to improve/ surpass past achievement.
9. To lead the local manufactures.
10.To attain a good word of mouth and to make company image.
11.Stronger in the international market

Management Hierarchy in Sapphire Textile Mlls:

Chief Executive
Officer

Top Management

General
Manager

Middle Management
Manager

Senior
Officer

Deputy
Manager

Lower Level Management

Supervisor

Assistant
Manager

Officer

Helpers

Foreman

Operators

Marginal Costing:
The Marginal cost of an item is its variable cost. The marginal production cost is
an item is the sum of Direct Material cost + direct labor cost + Direct Expenses and
variable production overhead cost. So as the volume of production and sales
increases total variable cost rise proportionately.
Marginal costing is the Accounting system in which variable costs are charged to
cost units and fixed costs of the period are written off in full against the aggregate
contribution.
Note that variables costs are those which change as output changes- these are
treated under marginal costing as costs of the product. Fixed costs, in this system,
are treated as costs of the period.
The Contribution Concept:
The contribution concept is lies at the heart of marginal costing.
Contribution =Sales Price Variable Costs
Total Contribution= Contribution per unit* Sales Volume
Profit= Total Contribution Fixed Overheads

Marginal Costing Income Statement

Company Sapphire Textile Mills ltd
For the year ended, June 30,2014
Sales in Rupees
Sales
Less cost of sales

RS

RS
25,283,151,486

21,078,288,927

Opening Inventory
35,147,515
Variable
cost
of 407,848,384
production
Less Closing Inventory
(50,389,866)

(21,848,688,881)
3,812,256,527

Less
Administration
Expenses
Direct Remuneration
(21,050,000)
Salaries Expenses
Rent & Utilities

(96,459,538)
(12,968,436)

Printing & Stationary

Communications EXP

(2,203,042)
(4,134,870)

Traveling EXP
(28,575.150)
Repair & Maintenance (6,591.874)
EXP
Insurance Expenses
(2,651,880)

Legal Charges

(43,144,095)

Fee & subscription

Computer Expenses

(3,674,921)
(4,399,724)

Advertisement Expenses (172.100)

Security Expenses
(2,251,200)
Motor Vehicle Expenses
Depreciation Expenses

(10,309,237)
(14,853,410)

Other

(1,142,052)
(254,581,529)

Contribution
Less Fixed Cost

3,557,674,998
(2,394,441,259)

Profit / loss

1,163,233,739

Valuation of Inventory:
Opening and closing inventory are valued at marginal (variable) cost under
marginal costing.
The fixed costs actually incurred are deducted from contribution earned in order to
determine the profit for the period.
The closing inventory at under marginal costing is 50,389,866 at the end of
period.
NOTE:
If inventory level decrease, then marginal costing gives the higher profit.

Absorption Costing:
Absorption costing is the method of building up a full product cost which adds
direct costs and a proportion of production overhead costs by means of one or a
number of overhead absorption rates.

Absorption costing values inventory at the full production cost a unit of product.
Inventory level will therefore be different at the beginning and end of period under
marginal and absorption costing.
If inventory level is different then this will have an effect on profits reported in the
income statement in a period. Profits determined using marginal costing principles
will therefore be different to those using absorption costing principles.

Absorption Costing Income Statement

Company Sapphire Textile Mills ltd
For the year ended, June 30, 2014
Sales in Rupees

RS

Sales

RS
25,283,151,486

Less cost of sales

21,078,288,927

Opening Inventory

35,147,515

Variable
cost
of 407,848,384
production
Fixed overhead absorbed 2,394,316,259
Less Closing Inventory

(52,389,866)
1,315,160,536

Under / over absorption

(1,25000)

Gross Profit

1,315,035,536

Less Non-Production cost

Administration Expenses
Direct Re

(21,050,000)

Salaries Expenses

(96,459,538)

Rent & Utilities

(12,968,436)

Printing & Stationary

(2,203,042)

Communications EXP

(4,134,870)

Traveling EXP

(28,575.150)

Repair & Maintenance (6,591.874)

EXP
Insurance Expenses
(2,651,880)
Legal Charges

(43,144,095)

Fee & subscription

(3,674,921)

Computer Expenses

(4,399,724)

Advertisement Expenses

(172.100)

Security Expenses

(2,251,200)

Motor Vehicle Expenses

(10,309,237)

Depreciation Expenses

(14,853,410)

Other

(1,142,052)

(254,581,529)

Profit / Loss

1,060,454,007

Workings:
Overhead absorbed

2,394,316,259

Overhead incurred

2,394,441,259

Under- absorption on overheads

1, 25,000

Non- Production Costs

Administration Expenses 254,581,529
Note:
If inventory level increase absorption costing gives the higher profit.This is
because fixed overheads held in closing inventory are carried forward to the next
accounting period instead of being written off in the current accounting period.

Breakeven Analysis:
An analysis to determine the point at which revenue received equals the costs
associated with receiving the revenue. Break-even analysis calculates what is
known as a margin of safety, the amount that revenues exceed the break-even
point. This is the amount that revenues can fall while still staying above the breakeven point.
Breakeven Analysis or cost/ volume/profit analysis is the study of the
interrelationship between costs volume and profit at various levels of activity.
Break-even Point Equation Method
Break-even is the point of zero loss or profit. At break-even point, the revenues of
the business are equal its total costs and its contribution margin equals its total
fixed costs. Break-even point can be calculated by equation method, contribution
method or graphical method. The equation method is based on the cost-volumeprofit (CVP) formula:
px = vx + FC + Profit
Where,
p is the price per unit,
x is the number of units,
v is variable cost per unit and
FC is total fixed cost.

Contribution/ unit

= 3,557,674,998 / 45,000,000
= 79.05%

Breakeven point

=Fixed cost /Contribution per unit

=2,394,441,259/ 79.05
=30,309,383,.03

Break even Graph:

4,000,000,000
3,000,000,000
2,394,441,
25.96

1,000,000,000

1,000,000,000
2,000,000,000

2,394,44125.9
3,000,000,000
4,000,000,000

W
W
W
W
W
W
W
W
W

10,000,000

B.E.POI

20,000,000

30,000,000 B.P30,303,383.03

References:
Used Notes given by the instructor
https://www.google.co.in/#q=sapphire%20textile%20mills%20limited%20annual
%20report%202013
https://www.google.co.in/#q=sapphire+textile+mills+limited+finacial+data
https://www.google.co.in/#q=sapphire+textile+mills+limited+introduction
https://www.google.co.in/#q=sapphire+textile+mills+limited+introduction
https://www.google.co.in/#q=sapphire+textile+mills+ltd+products
https://www.google.co.in/#nfpr=1&q=sapphire+textile+mills+ltd+hirerachy