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Executive Summery

The report began with a brief overview of the purpose and reason behind preparing it. We
have chosen an organization submitted by you named Modern Dyeing and Screen
Printing Ltd for reporting purpose. The company is primarily driven with a view of
creating opportunities and pursuing market niches. The report mainly deals with
Application of Managerial Accounting. It covers almost all necessary information of the
respective topic.

We have selected some chapters of our Managerial accounting Textbook. And from the
selected chapters we have showed the application of such types of accounting methods in real
life situations and we have applied this by collecting the data from Modern Dyeing and
Screen Printing Ltd.

The introductory part ended with the scopes & confinements of the assigned subject. The next
segment of the report started with an elaborate overview and applications of managerial
accounting methods. We have shown cost concepts and cost behaviours in the organization.
We have also shown that how fixed, variable and mixed costs are allocated in the
organizations management. In cost-volume-profit analysis we have calculated their break-
even sales and also what could their targeted be evaluated. We have also proved that we use
contribution format income statement for getting tax exemption. By Activity based costing
method we have known that how we could make the cost pools. We have shown that how
they prepared different types of budgets like- sales budget, cash budget, direct material
budget, manufacturing overhead budget etc. For finding out the defaults they make flexible
performance report and operating performance measurement report by contrasting actual
results with the budgeted ones. At last we have shown the segmented report of Modern
Dyeing and Screen Printing Ltd by showing different segmented income statement.

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1.1. Origin of the Report

This report is prepared as an assignment for our Managerial Accounting (F-302) course.
While preparing the report, we gave our best effort to incorporate the theoretical aspect of the
subject while emphasizing on the practical implementation of the accounting methods that we
learned in our course.

1.2. Objective of the report

The Objective of our report are-

To fulfil the partial requirement of our course of Managerial Accounting.


To achieve the deep knowledge about internal accounting.
To implement the internal accounting methods to our assigned company Modern
Dyeing and Screen Printing Ltd

1.3. Methodology

We used the information that we collected from the financial reports of the company and also
from our textbook.

1.4. Limitations of the study

The limitations are-

Lack of experience
Lack of knowledge
Lack of information

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1.0 Cost Classification:
Manufacturing companies convert raw materials into a product. The company then sells that
product either to other companies or, less commonly, directly to individuals. Manufacturing
includes restaurants, movie studios, and other service-type companies as well as the more
obvious examples of manufacturing such as automobile and clothing production.
Merchandising companies, by contrast, buy finished products and resell the products to
customers. Valuing inventories and determining cost of goods sold is simple in a
merchandising company, but is difficult in a manufacturing company.

1. General cost classification:


Manufacturing costs:

These costs are incurred to make a product. Manufacturing costs are usually grouped into
three main categories: direct materials, direct labor, and manufacturing overhead.

a. Direct materials. Direct materials consist of those raw material inputs that become an
integral part of a finished product and can be easily traced into it. Examples include
the aircraft engines on a Boeing 777, the Intel processing chip in a personal computer,
and the blank video cassette in a pre-recorded video.
b. Direct Labor. Direct labor consists of that portion of labor cost that can be easily
traced to a product. Direct labor is sometimes referred to as touch labor since it
consists of the costs of workers who touch the product as it is being made.
c. Manufacturing Overhead. Manufacturing overhead consists of all manufacturing
costs other than direct materials and direct labor. These costs cannot be easily and
conveniently traced to products. Examples include supervisors, janitors, and factory
facility charges.
d. Prime versus Conversion Costs. Prime cost consists of direct materials plus direct
labor. Conversion cost consists of direct labor plus manufacturing overhead.

Non-manufacturing costs.

A manufacturing company incurs many other costs in addition to manufacturing costs. For
financial reporting purposes most of these other costs are typically classified as selling

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(marketing) costs and administrative costs. Marketing and administrative costs are incurred in
both manufacturing and merchandising firms.

a. Marketing Costs. These costs include the costs of making sales, taking customer orders,
and delivering the product to customers. These costs are also referred to as order-getting and
order-filling costs.
b. Administrative Costs. These costs include all executive, organizational, and clerical costs
that are not classified as production or marketing costs.

2. Cost classification as period or product cost:

a. Period Costs. Period costs are expensed in the time period in which they are incurred.
All selling and administrative costs are typically considered to be period costs. For
example, administrative salary costs are incurred when they are earned and not
necessarily when they are paid to employees.

b. Product Costs. Product costs are added to units of product (i.e., inventoried) as
they are incurred and are not treated as expenses until the units are sold. This can
result in a delay of one or more periods between the time in which the cost is incurred
and when it appears as an expense on the income statement. Product costs are also
known as inventorial costs.

3. Cost Classification for predicting Cost Behavior:

There are three main types of costs according to their behavior:

a. Fixed Costs:

Fixed costs are those which do not change with the level of activity within the relevant range.
These costs will incur even if no units are produced. For example rent expense, straight-line
depreciation expense, etc.

b. Variable Costs:

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Variable costs change in direct proportion to the level of production. This means that total
variable cost increase when more units are produced and decreases when less units are
produced. Although variable in total, these costs are constant per unit.

c. Mixed Costs:

Mixed costs or semi-variable costs have properties of both fixed and variable costs due to
presence of both variable and fixed components in them. An example of mixed cost is
telephone expense because it usually consists of a fixed component such as line rent and
fixed subscription charges as well as variable cost charged per minute cost. Another example
of mixed cost is delivery cost which has a fixed component of depreciation cost of trucks and
a variable component of fuel expense.

4. Cost Classification for Decision Making:

Every decision involves choosing from among at least two alternatives. Only those costs and
benefits that differ between alternatives are relevant in making the selection.

1. Differential Costs. A differential cost is a cost that differs between alternatives. The cost
may exist in only one of the alternatives or the total amount of the cost may differ between
the alternatives. In the latter case, the differential cost would be the difference between the
cost under one alternative and the cost under the other. Differential costs are also called
incremental costs.

2. Opportunity Costs. An opportunity cost is the potential benefit that is given up by


selecting one alternative over another. It is, however, a cost that must be considered in
decisions.

3. Sunk Cost. A sunk cost is a cost that has already been incurred and that cannot be changed
by any decision made now or in the future. Since sunk costs cannot be changed and therefore
cannot be differential costs, they should be ignored in decision making.

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1.2. Cost Behavior:
The idea of cost behavior is one of the most important concepts in managerial accounting.
Determining how a cost will behave is critical to planning, decision making and controlling.
Two types of costs are discussed in this post: variable costs and fixed costs. These types of
costs get their names because of how they behave when we look at the costs in total.

Variable Costs:

Variable costs are costs that increase incrementally as a driver increases. A driver is an
activity or event that causes a cost to increase. All variable costs must have a driver. Two of
the most common drivers used in managerial accounting are units and hours, but there are
lots of different drivers that could be used like customers or miles. If you can determine that a
cost is driven by a particular activity, you can use that driver to calculate a variable cost.

A variable cost must have a rate. The rate is expressed as a cost per unit of the driver. For
example, direct labor costs are expressed as dollars per direct labor hour. To calculate the
total variable cost, multiply the rate by the units of activity.

Total Variable Cost = Rate x Activity

In our planning and decision making calculations, we assume that the variable rate stays the
same. Only the driver increases or decreases. Because the rate stays the same, the cost will
increase by the amount of the rate for each additional unit of activity. All variable costs will
be zero if there is no activity.

Example: Direct material, direct labor, variable manufacturing overhead, and variable selling
costs.

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Fixed Costs:

Fixed costs are costs that do not change as activity levels increase. Fixed costs do not have a
driver. Most fixed costs are expressed in terms of time, like per month or per year. No matter
what happens during that time, the cost stays the same. If the company pays $12,000 per
month for rent, it does not matter if the company produces no units or is at maximum
capacity. The rent is the same.

Sometimes, fixed costs are expressed as per unit cost or a per hour cost for a certain level of
activity. These lead people to believe that these are actually variable costs. It is possible to
express a fixed cost on a per unit basis but remember that the total cost is not driven by that
activity. The total cost is still the same no matter how many units of activity occur.

Example: rent, insurance, advertising, depreciation etc are fixed costs.

1. The high-low method

The high-low method is a simple technique for computing the variable cost rate and the total
amount of fixed costs that are part of mixed cost. Mixed costs are costs that are partially
variable and partially fixed. Example: The cost of electricity used in a factory is likely to be a
mixed cost since some of the electricity will vary with the number of machine hours, while
some of the cost will not vary with machine hours. Perhaps this second part of the electricity
cost is associated with circulating and chilling the air in the factory and from the public utility
billing its large customers with a significant fixed monthly charge not directly tied to the
kilowatt hours of electricity used.

The high-low method uses two sets of numbers:

1) The total dollars of the mixed costs occurring at the highest volume of activity, and

2) The total dollars of the mixed costs occurring at the lowest volume of activity.

It is assumed that at both points of activity the total amount of fixed costs is the same.
Therefore, the change in the total costs is assumed to be the variable cost rate times the
change in the number of units of activity. Prior to using the high-low method, it is important
to plot or graph all of the data available to be certain that the two sets of numbers being used
are indeed representative.

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2. Scatter Graph Method
Scatter graph method is a graphical technique of separating fixed and variable components of
mixed cost by plotting activity level along x-axis and corresponding total cost (mixed cost)
along y-axis. A regression line is then drawn on the graph by visual inspection. The line thus
drawn is used to estimate the total fixed cost and variable cost per unit. The point where the
line intercepts y-axis is the estimated fixed cost and the slope of the line is the average
variable cost per unit. Since the visual inspection does not involve any mathematical testing
therefore this method should be applied with great care.

Procedure:

Step 1: Draw scatter graph

Plot the data on scatter graph. Plot activity level (i.e. number of units, labor hours etc.) along
x-axis and total mixed cost along y-axis.

Step 2: Draw regression line

Draw a regression line over the scatter graph by visual inspection and try to minimize the
total vertical distance between the line and all the points. Extend the line towards y-axis.

Step 3: Find total fixed cost

Total fixed is given by the y-intercept of the line. Y-intercept is the point at which the line
cuts y-axis.

Step 4: Find variable cost per unit

Variable cost per unit is equal to the slope of the line. Take two points (x1,y1) and (x2,y2) on
the line and calculate variable cost using the following formula:

Variable Cost per Unit = Slope of Regression Line

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1.3. CVP

Costvolumeprofit (CVP), in managerial economics, is a form of cost accounting. It is a


simplified model, useful for elementary instruction and for short-run decisions.

A critical part of CVP analysis is the point where total revenues equal total costs (both fixed
and variable costs). At this break-even point, a company will experience no income or loss.
This break-even point can be an initial examination that precedes more detailed CVP
analysis.

1.4. Assumptions of CVP analysis:

CVP analysis employs the same basic assumptions as in breakeven analysis. The assumptions
underlying CVP analysis are:

The behavior of both costs and revenues are linear throughout the relevant range of
activity. (This assumption precludes the concept of volume discounts on either purchased
materials or sales.)

Costs can be classified accurately as either fixed or variable.

Changes in activity are the only factors that affect costs.

All units produced are sold (there is no ending finished goods inventory).

When a company sells more than one type of product, the product mix (the ratio of
each product to total sales) will remain constant.

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1.5. Components:

The components of CVP analysis are:

Level or volume of activity

Unit selling prices

Variable cost per unit

Total fixed costs

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

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Contribution Margin Ratio (CM Ratio)
Contribution Margin Ratio is calculated by dividing contribution margin by total sales or unit
CM by price per unit.

BEP in Sales Units

We learned that, at break-even point, the CVP analysis equation is reduced to:

px = vx + FC

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.

Solving the above equation for x (i.e. Break-even sales units ):

Break-even Sales Units = x = FC ( p v )

Since unit contribution margin (Unit CM) is equal to unit sale price (p) less unit variable cost
(v), so,

Unit CM = p v

Therefore,

Break-even Sales Units = x = FC Unit CM

BEP in Sales Dollars

Break-even point in dollars can be calculated via:

Break-even Sales Dollars = Price per Unit Break-even Sales Units; or

Break-even Sales Dollars = FC CM Ratio

Example:

Calculate the break-even point in units and in sales dollars when sales price per unit is $35,
variable cost per unit is $28 and total fixed cost is $7,000.

Solution:

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Contribution Margin per Unit = ( $35 $28 ) = $7

Break-even Point in Units = $7,000 $7 = 1,000

Break-even Point in Sales Dollars = 1,000 $35 or $7,000 20% = $35,000Contribution


Margin

1.7. Targeted Profit Analysis:


Management desires to achieve a specific amount of profit at the end of a business period.
The net operating income or profit that management desires to achieve at the end of a
business period is called target profit. To get a target profit management needs to know the
business activities for that period.

1.8. Margin of Safety:


The margin of safety is the reduction in sales that can occur before the breakeven point of a business
is reached. This informs management of the risk of loss to which a business is subjected by changes in
sales. The concept is useful when a significant proportion of sales are at risk of decline or elimination,
as may be the case when a sales contract is coming to an end. A minimal margin of safety might
trigger action to reduce expenses. The opposite situation may also arise, where the margin of safety is
so large that a business is well-protected from sales variations.

To calculate the margin of safety, subtract the current breakeven point from sales, and divide by sales.
The formula is:

Current saleslevelBreakeven point


current sales level

The amount of this buffer is expressed as a percentage.

1.9. Operating Leverage:


Operating leverage measures a companys fixed costs as a percentage of its total costs. It is used to
evaluate the breakeven point of a business, as well as the likely profit levels on individual sales. The
following two scenarios describe an organization having high operating leverage and low operating
leverage.

For example, a software company has substantial fixed costs in the form of developer
salaries, but has almost no variable costs associated with each incremental software sale; this

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firm has high operating leverage. Conversely, a consulting firm bills its clients by the hour,
and incurs variable costs in the form of consultant wages. This firm has low operating
leverage.

To calculate operating leverage, divide an entitys contribution margin by its net operating
income. The contribution margin is sales minus variable expenses.

CM
Operating Leverage = Net operating income

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1.10.Variable Costing

1. Theoretical aspects:
1) Absorption costing: Absorption costing means that all of the manufacturing costs are
absorbed by the units produced. In other words, the cost of a finished unit in inventory will
include direct materials, direct labor, and both variable and fixed manufacturing overhead.

2) Variable costing: A variable costing is a cost that varies in relation to changes in the
volume of activity. The variable cost concept can be used to model the future financial
performance of a business, as well as to set minimum price points. The most common
variable costs are:- Direct materials, Commissions.

2. Reconciliation the differences in Net Operating Income under Variable


costing and Absorption costing:

Income reported under variable costing and absorption costing is different. It is only the
different value of inventory under the two costing income statements that changes the amount
of the net income. Except the value of inventory, we do not find any other differences. As the
size of inventory increases or decreases during the year, the reported income differs under
variable and absorption costing. This results from the fixed overheads that are included in the
inventory valuation under absorption costing but are expended immediately under variable
costing. Under absorption costing this period's factory overheads are postponed to the next
year whereas under variable costing it is expended during

Difference in net income= (Change in the size of inventory units) x (Difference in product
cost per unit)

The difference in net income is the same as the difference in the size of inventory value. So
with a change in the size of inventory, profits also change.

1.11. Advantage and Disadvantage in Absorption Costing System:


Advantages of Absorption Costing System

Following are the main advantages of absorption costing system:

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1. Absorption costing recognizes fixed costs in product cost. As it is suitable for determining
price of the product, the pricing based on absorption costing ensures that all costs are
covered.

2. Absorption costing will show correct profit calculation than variable costing in a situation
where production is done to have sales in future ( eg. seasonal production and seasonal sales).

3. Absorption costing conforms with accrual and matching accounting concepts which
requires matching costs with revenue for a particular accounting period.

Disadvantages of Absorption Costing System

1. Absorption costing is not useful for decision making. It considers fixed manufacturing
overhead as product cost which increase the cost of output. As a result, it does not help in
accepting specially offered price for the product. Various types of managerial problems
relating to decision making can be solved only with the help of variable costing system.

2. Absorption costing is not helpful in control of cost and planning and control functions. It is
not useful in fixing the responsibility for incurrence of costs. It is not practical to hold a
manager accountable for costs over which he/she has not control.

3. Some current product costs can be remove from the income statement by producing for
inventory. As such, managers who are evaluated on the basis of operating income can
temporarily improve profitability by increasing production.

1.12. Advantage and Disadvantage in Variable costing system:


Advantages

1. Variable costing provides a better understanding of the effect of fixed costs on the net profits
because total fixed cost for the period is shown on the income statement.
2. Various methods of controlling costs such as standard costing system and flexible budgets
have close relation with the variable costing system. Understanding variable costing system
makes the use of those methods easy.
3. Companies using variable costing system prepare income statement in contribution
margin format that provides necessary information for cost volume profit (CVP) analysis.

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This data cannot be directly obtained from a traditional income statement prepared under
absorption costing system.

Disadvantages

4. Financial statements prepared under variable costing method do not conform to generally
accepted accounting principles (GAAP). The auditors may refuse to accept them.
5. Tax laws of various countries require the use of absorption costing.
6. Variable costing does not assign fixed cost to units of products. So the production costs
cannot be truly matched with revenues.
Absorption costing is usually the base for evaluating top executives efficiency.

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1.14. Activity-based costing (ABC)
A technique for allocating costs to a product, service, customer, etc. The premise is that
activities cause an organization to incur costs. Once the costs of the activities have been
identified and each activity's cost has been determined, the cost of the activities is then
allocated to the product, service, customer, etc. that required the activity. This technique is
more logical for allocating overhead than simply allocating costs based on machine hours or
direct labor hours.

1.15. Advantages and Disadvantages Of Activity-Based Costing (ABC)

Advantages:
1. Product cost determination under activity-based costing is more accurate and reliable

because it focuses on the cause and effect linkage of costs and activities in the context of
producing goods.
2. Fixation of selling price for multi-products under activity-based costing is fair and correct
because overheads are allocated on the basis of relevant cost drivers.

3. Control of overheads consisting of fixed and variable becomes possible by controlling and
monitoring activities. Linkage between cost and activities are clearly identified in activity-
based costing and thus provides opportunities to control overhead costs.

4. Sufficient information can be obtained to make decisions about the profitability of different
product lines.

5. Fair allocation of overheads occupy a considerable portion in the total cost components.

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Disadvantages:
1. Substantial resources are required since the implementation of this methodology is
considered as a major project. This system seems to have been costly if being implemented
because there are numerous measures that need to be undertaken to ensure that the company
will be ripping the maximum benefit derived from its use.

2. The use of activity based costing produces product margins which are considered odd to
the numbers that is being produced by the traditional costing system.

3. The datas which are being gathered with the use of ABC could have been misinterpreted.
This problem would only be prevented to occur if the input of data or figures is being done
with precision and care. The datas are the one that serves as the basis for the decisions that is
to be done by the managers.

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1.16 . Budget
A budget is an itemized summary of future income and expenses for a given period. It
provides a model of the potential financial performance of a business, given that specific
strategies and plans are followed. It helps to identify wasteful expenditures and helps to
achieve financial goals by adapting quickly when financial situation changes.

1. Benefits of Budget
There are some benefits of budgeting which is very important for a business company. A
manager should follow budgeting for some distinct reasons.

Budgets provide a financial guideline

A budget can help an organization decipher how to get from here to there, while outlining the
resources required for the company. Furthermore, the budgeting process (i.e., allocating funds
to functions) can serve as a powerful planning tool for top management.

Budgets are profitable tool for revenue

By comparing an organizations performance to its budget, management can see if theyre on


track to meet goals and can take proper steps to increase revenue. Without a budget, its
nearly impossible to know if financial changes are needed in key areas of revenue.

Improves financial communication through internal controls

Budgeting helps to open communication between members of a family or partners in joint


business when they sit together to discuss financial issues through budgeting. Through
internal control over the members of the company, budgeting helps to make decisions
regarding areas where money has to be spent. All members thus gain control over finances.

1.17. Master Budget

A master budget is the central planning tool that consists a number of separate but
interdependent budgets that formally lay out companys activities as well as judge the
performance of its various responsibility centres. It is a set of interconnected budgets of sales,

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production costs, purchases, incomes, etc. and it also includes pro forma financial statements.
A budget is a plan of future financial transactions whereas a master budget serves as planning
and control tool to the management since they can plan the business activities during the
period on the basis of master budget. At the end of each period, actual results can be
compared with the master budget and necessary control actions can be taken. It is typically
presented in either a monthly or quarterly format, or usually covers a company's entire fiscal
year.

1.18. Components of Master Budget


Master budget has two major sections which are the operational budget and the financial
budget. They have following components:

Operational Budget

1. Sales Budget

2. Production Budget

3. Direct Material Purchases Budget

4. Direct Labour Budget

5. Overhead Budget

6. Selling and Administrative Expenses Budget

7. Cost of Goods Manufactured Budget

Financial Budget

1. Schedule of Expected Cash Receipts from Customers

2. Schedule of Expected Cash Payments to Suppliers

3. Cash Budget

4. Budgeted Income Statement

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5. Budgeted Balance Sheet

Sales Budget

Sales budget is the first and basic component of Master Budget. It shows the expected
number of sales units of a period and the expected price per unit. It also shows total sales
which are simply the product of expected sales units and expected price per unit.

The sales budget is prepared by multiplying the expected unit sales volume for each product
by its anticipated unit selling price. Each of the other budgets such as production budget,
direct material budget, direct labor budget, manufacturing overhead budget & Selling and
administration budget depends on the sales budget. It is derived from the sales forecast. It
represents managements best estimate of sales revenue for the budget period.

Production Budget

A production budget is a financial plan that lists the number of units to be manufactured
during a period. In other words, this is a report that estimates the number of units that a
company will produce from period to period. Managers use the production budget to estimate
how many units they will need to produce in future periods based on the future estimated
sales numbers.

The basic calculation used by the production budget is:

Budgeted unit sales

(+) Planned finished goods ending inventory balance


= Total production required

(-) Beginning finished goods inventory


= Products to be manufactured

Direct Materials Budget

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The direct materials budget calculates the materials that must be purchased within the time
period in order to fulfil the requirements of the production budget and to provide adequate
inventories.

The basic calculation used by the Direct Material budget is:

Raw materials required for production


(+) Planned ending inventory balance
= Total raw materials required

(-) Beginning raw materials inventory


= Raw materials to be purchased

Direct Labor Budget

The direct labour budget is used to calculate the number of labour hours that will be needed
to produce the units itemized in the production budget.

Following are the calculations involved in the direct labor budget:

Planned Production in units


() Direct Labour Hours Required per Unit
= Budgeted Direct Labour Hours Required
() Cost per Direct Labour Hours
= Budgeted Direct Labour Cost

Manufacturing Overhead Budget

The manufacturing overhead budget contains all manufacturing costs other than the costs of
direct materials and direct labour which are itemized separately in the direct materials budget
and the direct labour budget.

Ending Finished Goods Inventory Budget

After preparing sales budget, production budget, direct materials budget, direct labor budget,
and manufacturing overhead budget the management has all the data needed to calculate unit
product cost. This calculation is needed for two reasons: first, to determine cost of goods sold
on the budgeted income statement; and second, to know what amount to put on the balance
sheet inventory account for unsold units. The carrying cost of unsold units is calculated on

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the ending inventory finished goods budget. It calculates the cost of the finished goods
inventory at the end of each budget period. It also includes the unit quantity of finished goods
at the end of each budget period, but the real source of that information is the production
budget.

Selling and Administrative Expense Budget

Selling and administrative expense budget is a schedule of planned operating expenses other
than manufacturing costs. It is comprised of the budgets of all non-manufacturing
departments, such as the sales, marketing, accounting, engineering, and facilities
departments.

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1.19. Flexible Budget:
A flexible budget is an estimate of what revenues and cost should have been , given the
actual level of activity for the period. It adjusts or flexes for changes in the volume of
activity. Planning budget is valid for only a particular level of activity and it is inappropriate
for evaluating how the costs are controlled. So the flexible budget is prepared when the
activity level differs from the planned level of activity. Then the actual costs are compared to
what the costs should have been for the actual level of activity

1. Sample of a flexible budget:


The planning budget is prepared based on the estimated 1800 orders. But actually there were
1700 orders received. So the costs cannot be compared with each other. Because their activity
levels are different. So the flexible budget is prepared to find out what the revenue and costs
should have been at this level of activity.

Flight Cafe

Flexible Budget

For the Month Ended December 31

Particulars Planning Budget Flexible Budget


(1) (2)

Budgeted orders (q) 1800 1700


Revenue (16.5q) Tk 29,700 Tk 28050
Expenses:

Utilities(800+.2q) 11250 10625


Wages(10400) 10400 10400
Supplies (6.25q) 1160 1140
Rent 2200 2200
Miscellaneous (5000+.05q) 2040 1960

Total expenses 27050 26325


Net operating income 2650 1725

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2. Flexible Budget Activity Variances:
After preparing the flexible budget we compare it with the planning budget and find out the
activity variance.

Flight Cafe

Activity variance

For the Month Ended December 31

Particulars Planning Flexible Budget Activity Variance


Budget
Budgeted orders (q) 1800 1700
Revenue (16.5q) Tk 29,700 Tk 28050 Tk 1650U
Expenses:

Utilities(800+.2q) 11250 625F


Wages(10400) 10400 10625 0
Supplies (6.25q) 1160 10400 20F
Rent 2200 1140 0
Miscellaneous (5000+.05q) 2040 2200 80F
1960
Total expenses
27050 26325 725F
Net operating income 2650 1725 925U

Here are some discrepancies between the budgeted profit and actual profit as the actual level
of activity was less than expected. The planning budget shows what should have happened at
the budgeted level of activity whereas the flexible budget shows what should have happened
at the actual level of activity. Therefore, the differences between the planning budget and the
flexible budget show what should have happened solely because the actual level of activity
differed from what had been expected.

For example, the budget based on 1,800 orders show revenue of Tk 29700. The flexible
budget based on 1,700 orders shows revenue of 28050.Because the cafe had 100 order less
than anticipated in the budget, actual revenue should have been lower than budgeted revenue
by Tk 1650. This activity variance is shown on the report as unfavorable. Similarly, the
budget based on 1,000 orders shows utilities of Tk 11250. The flexible budget based on 1,100
orders shows utilities of 10625. Because the cafe had 100 orders less than anticipated in the

Page 33 of 108
budget, actual utilities should have been lower than budgeted costs by 60. The activity
variance for utilities is shown on the report as Tk 60F (favorable). Here other two costs are
also favourable as they are less than expected. But this cost reduction cannot cover the loss in
the revenue. So the net operating income is Tk 925 less than the budgeted. So it is
unfavorable. So we found the impact of the change in activity have on our revenues, costs,
and profit.

3. Flexible Budget Revenue and Spending Variance Variances:

Now will see how well we controlled our revenues, our costs, and our profit. So that we have
prepared revenue and spending variance. When we compare this flexible budget to actual
results, we compare what should have happened to what actually happened. Then we find
revenue and spending variance.

Here is the revenue and spending variance report.

Flight Cafe

Revenue and spending variance

For the Month Ended December 31

Particulars Flexible Budget Actual Revenue and


(2) results spending variance

Budgeted orders (q) 1700 1700


Revenue (16.5q) Tk 28050 Tk 27920 Tk 130U
Expenses:

Utilities(800+.2q) 10625 11110 485U


Wages(10400) 10400 10130 270F
Supplies (6.25q) 1140 1080 60F
Rent 2200 2200 0
Miscellaneous (5000+.05q) 1960 2240 280U

Total expenses 26325 26760 435U


Net operating income 1725 1160 565U

Page 34 of 108
Focusing first on revenue, the flexible budget indicates that, given the actual level of activity,
revenue should have been Tk28050. However, actual revenue totaled Tk 27920.
Consequently, revenue was Tk 130 less than it should have been, given the actual number of
orders for the month. This discrepancy is labeled as a Tk 130U (unfavorable) variance and is
called a revenue variance.

Focusing next on costs, the flexible budget indicates that utility costs should have been Tk
10625 for the 1,700 client-visits. However, the actual electricity cost was Tk11110. Because
the cost was Tk 285 less than we would have expected for the actual level of activity during
the period, it is labelled as a favorable variance, Tk285 F. This is an example of a spending
variance. Note that the overall net operating income variance is Tk 565 U (unfavorable). This
means that given the actual level of activity for the period, the net operating income was 565
U lower than it should have been. There are a number of reasons for this. The most prominent
is the unfavorable revenue variance of Tk 130. Next in line is the tk 285 unfavorable variance
for utilities. So we want to investigate it further.

4. Flexible budget performance report

Here we prepared a performance report that combines the activity variances with the revenue
and spending variances. The report brings together information from those two earlier tables
in a way that makes it easier to interpret what happened during the period. The format of this
report is a bit different from the format of the previous reports in that the variances appear
between the amounts being compared rather than after them. For example, the activity
variances appear between the planning budget amounts and the flexible budget amounts. In
the performance report, the activity variances appeared after the planning budget and the
flexible budget.

Here is the flexible budget performance report of Flight cafe.

Flight Cafe

Flexible Budget Performance Report

For the Month Ended December 31

Particulars Planning Activity Flexible Budget Revenue Actual


Budget Variance (2) and results

Page 35 of 108
spending
variance

Budgeted orders (q) 1800 1700 1700


Revenue (16.5q) Tk 29,700 Tk 1650U Tk 28050 Tk 130U Tk
27920
Expenses:

Utilities(800+.2q) 11250 625F 10625 485U 11110


Wages(10400) 10400 0 10400 270F 10130
Supplies (6.25q) 1160 20F 1140 60F 1080
Rent 2200 0 2200 0 2200
Miscellaneous 2040 80F 1960 280U 2240
(5000+.05q)
27050 725F 26325 435U 26760
Total expenses
Net operating income 2650 925U 1725 565U 1160

Note two numbers in particular in the performance reportthe activity variance for net
operating income of Tk925U (unfavorable) and the overall revenue and spending variance for
net operating income of Tk 565 U (unfavorable). It is worth repeating what those two
numbers mean. The Tk925U (unfavourable) activity variance occurred because actual activity
(1,700 orders) was less than the budgeted level of activity (1,800 Orders). The Tk 565
unfavorable overall revenue and spending variance occurred because the profit was not as
large as it should have been for the actual level of activity for the period. These two different
variances mean very different things and call for different types of actions. To generate a
favorable activity variance for net operating income, managers must take actions to increase
orders. To generate a favorable overall revenue and spending variance, managers must take
actions to protect selling prices, increase operating efficiency, and reduce the prices of inputs.
The performance report provides much more useful information to managers than the simple
comparison of budgeted to actual results. Here the effects of changes in activity were jumbled
together with the effects of how well prices were controlled and operations were managed.
The performance report clearly separates these effects, allowing managers to take a much
more focused approach in evaluating operations.

Some common Errors

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All costs are fixed

So far we tried to understand the difference between what was expected to happen
formalized by the planning budgetand what actually happened. To meet this need, we
developed a flexible budget that allowed us to isolate activity variances and revenue and
spending variances. But this approach is not always followed in practiceresulting in
misleading and difficult-to- interpret reports. The most common errors in preparing
performance reports are to implicitly assume that all costs are fixed or to implicitly assume
that all costs are variable. These erroneous assumptions lead to inaccurate standard and
incorrect variances. We have already discussed one of these errorsassuming that all costs
are fixed. This is the error that is made when static planning budget costs are compared to
actual costs without any adjustment for the actual level of activity. Such a comparison is
shown here:

Flight Cafe

Flexible Budget Performance Report

For the Month Ended December 31

Particulars Planning Budget Actual Variance


results
Budgeted orders (q) 1800 1700
Revenue (16.5q) Tk 29,700 Tk 27920 Tk. 1780U
Expenses:

Utilities(800+.2q) 11250 11110 140F


Wages(10400) 10400 10130 270F
Supplies (6.25q) 1160 1080 80F
Rent 2200 2200 0
Miscellaneous (5000+.05q) 2040 2240 200U
27050 26760 290F
Total expenses
Net operating income 2650 1160 1490U

Looking at that table, note that the budgeted cost of utilities of Tk 11250 is directly compared
to the actual cost of Tk. 11110, resulting in an favorable variance Tk 140. But this comparison
only makes sense if the cost of utilities is fixed. If it isnt fixed one would expect the cost to
go up because of the increase in activity over the budget. Comparing static planning budget

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costs to actual costs only makes sense if the cost is fixed. If the cost isnt fixed, it needs to be
adjusted for any change in activity that occurs during the period.

All costs are variable

The other common error when comparing budgets to actual results is to assume that all costs
are variable. A report that makes this error is given below.

Flight Cafe

Flexible Budget Performance Report

For the Month Ended December 31

Particulars Planning Budget Planning Actual Variance


Budget* results
(1700/1800
)
Budgeted orders (q) 1800 1700
Revenue (16.5q) Tk 29,700 Tk. 28050 Tk 27920 Tk 130U
Expenses:

Utilities(800+.2q) 11250 10625 11110 485U


Wages(10400) 10400 9822 10130 308U
Supplies (6.25q) 1160 1096 1080 16F
Rent 2200 2078 2200 122U
Miscellaneous (5000+.05q) 2040 1927 2240 313U
27050 25547 26760 1213U
Total expenses
Net operating income 2650 2503 1160 1343U

The variances in this report are computed by comparing actual results to the amounts in the
second column where all of the budget items have been adjusted by the percentage by which
activity increased. This is a perfectly valid adjustment to make if an item is strictly variable
like sales and supplies. It is not a valid adjustment if the item contains any fixed element. For
example, rent cannot be adjusted for the change in the activity level.

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Therefore, the amount shown in the second column of $31,350 is incorrect, which leads to
the erroneous favorable variance of Tk 2078. In fact, the actual rent paid was exactly equal to
the budgeted rent, so there should be no variance at all on a valid report.

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Page 40 of 108
Performance measures serve a critical role in attaining goals. A standard is a benchmark or
norm for measuring performance. Standards are found everywhere. Standards are widely
used in managerial accounting where they relate to the quantity and cost of inputs used in
manufacturing goods or providing services.

Quantity and price standards are set for each major input such as raw materials and labor
time. Quantity standards specify how much of an input should be used to make a product or
provide a service. Price standards specify how much should be paid for each unit of input.
Actual quantities and actual costs of inputs are compared to these standards. If either the
quantity or the cost of inputs departs significantly from the standards, managers investigate
the discrepancy to find the cause of the problem and eliminate it. This process is called
management by exception.

There is a basic approach to identifying and solving problems is the essence of the variance
analysis cycle. The cycle begins with the preparation of standard cost performance reports in
the accounting department. These reports highlight the variances, which are the difference
between actual results and should have occurred according to standards. The significant
variances are investigated to discover their root causes. The cycle begins with the preparation
of a new standard cost performance report for the latest period. The emphases should be on
highlighting the problems, finding their root causes and taking corrective action. The goal id
to improve operations.

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Identify Receive Take
Questions Explanation Corrective
Actions

Analyze Conduct Next


Variance Period's
Operations

Preapare Standard Begin


Cost Performance
Report

1.20. Who Uses Standard Costs?


Standard costs are mainly used by-

Manufacturing
Service
Non-Profit-Organizations

Manufacturing companies often have highly developed standard costing systems in which
standards for direct materials, direct labor and overhead are created for each product. A
standard cost card shows the standard quantities and costs of the inputs required to produce a
unit of a specific product.

A General Model for Variance Analysis


Price and Quantity Variance

A price variance is the difference between the actual price of an input and its standard price
multiplied by the actual input purchased.

A quantity Variance is the difference between how much of and input was actually used and
how much should have been used and is stated in dollar terms using the standard price of the
input.

Three things are important.

First, A price variance and a quantity variance can be computed for each of the three variable
cost elements- direct materials, direct labor and variable manufacturing overhead,

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Second, the price variance is computed in exactly the same way, regardless of whether one is
dealing with direct materials, direct labor or variable manufacturing overhead.

Third, the input is the actual quantity of direct materials, direct labor and variable
manufacturing overhead or used, the output is the good production of the period, expressed in
terms of the standard quantity allowed for the actual output.

Material Price Variance

Material Price Variance = (AQ X AP) - (AQ X SP)

Actual Actual Standard

Quantity Price Price

Material Quantity Variance

Material Quantity Variance = (AQ X SP) - (SQ X SP)

Actual Standard Standard Quantity

Quantity Price Allowed for Actual Output

Direct Labor Variance

Labor Rate Variance The price variance for direct labor is commonly called the
labor variance. This variance measures any deviation from standard in the average
hourly paid rate paid to direct labor workers.

Labor Rate Variance = (AH X AR) - (AH X SR)

Actual Actual Standard


Hours Rate Rate

Labor Efficiency Variance The labor efficiency variance attempts to measure the
productivity of direct labor.

Labor Efficiency Variance = (AH X SR) - (SH X SR)

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Actual Standard Standard Hours
Hours Rate Allowed for Atual Output

Variable Manufacturing Overhead Variance

Variable Overhead Rate Variance


Variable Overhead Rate Variance = (AH X AR) - (AH X SR

Actual Actual Standard


Hours Rate Rate

Variable Overhead Efficiency Variance

Variable Overhead Efficiency Variance = (AH X SR) - (SH X SR)

Actual Standard Standard Hours


Hours Rate Allowed for Atual Output

Standard costing and the related variances is a valuable management tool. If a variance arises,
management becomes aware that manufacturing costs have differed from the standard
(planned, expected) costs.

If actual costs are greater than standard costs the variance is unfavorable. An
unfavorable variance tells management that if everything else stays constant the
company's actual profit will be less than planned.
If actual costs are less than standard costs the variance is favorable. A favorable
variance tells management that if everything else stays constant the actual profit will
likely exceed the planned profit.

1.21. Advantages of Standard Costs


A standard costing is a rule of measurement established by authority, which provides a
yardstick for performance evaluation.
Standard costing system minimizes the wastage by detecting variance and suggesting
for corrective actions.

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Under the standard costing system, cost centers are established and responsibility is
assigned to the concerned departments and persons and thus it helps to increase the
effective delegation of authority.
A properly developed standard costing system with full participation and involvement
creates a positive, cost effective attitude through all levels of management.
The standard system encourages reappraisals of methods, materials and techniques
that help to reduce the unfavorable variances.
The standard costing system helps to draw management's attention towards those
items which are not proceeding according to plan.
Standard costing system makes the whole organization cost-conscious as it gives the
focus to the standard cost and variance analysis.
Standard costing system provides a basis for the incentive scheme to workers and
supervisors.
Standard costing system simplifies the cost control procedures.
Standard costing acts as an effective tool for business planning, budgeting, marginal
costing ,inventory valuation etc.

1.22. Disadvantages of Standard Costs

Standard costing system may be tedious, expensive and time consuming to install and
keep up to date.
The standard costing system controls the operating part of an organization only as it
ignores the other items like quality, lead-time, service,customer satisfaction and so on.
The standard costing system will become less useful in modern factories where the
just in time principles are adopted.
The standard costing system may not be applicable in case of small firms as it
requires high degree of skill.
The standard costing may not be very effective in those organizations where non-
standardized products are manufactured and services are rendered.

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Page 46 of 108
1.23. Decentralization:
In a decentralized organization, decision making authority is spread throughout the
organization rather than being confined to a few top executives. In strongly decentralized
organizations, the lowest-level managers are empowered to make as many decisions as
possible.

Advantages of Decentralization: The major advantages of decentralization include-

1. By delegating day to day problem solving to lower level managers, top management
can concentrate on bigger issues such as overall strategy.
2. Empowering lower level managers to make decisions put the decision making
authority in the hand of those who tend to have the most detailed and up to date

information about day to day operations.


3. By eliminating layers of decision making and approvals, organizations can respond
more quickly to customers and to change in the operating environment.
4. Granting decision making authority helps train lower level managers for higher level
positions.
5. Empowering lower level managers to make decisions can increase their motivation
and job satisfaction.

Disadvantages of Decentralization: The major disadvantages of decentralization include-

1. Lower level managers may make decisions without fully understanding the big
picture.
2. If lower level managers make their own decisions, coordination may be lacking.
3. Lower level managers may have objectives that clash with the objective of the whole
organization.
4. Spreading innovative ideas may be difficult in a decentralized organization.

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Responsibility Accounting:

Decentralized organizations need responsibility accounting system that link lower level
managers decision making authority with accountability for the outcomes with those
decisions. The term responsibility centre is used for any part of an organization whose
manager has control over and is accountable for cost, profit or investment. The three primary
types of responsibility centres are cost centres, profit centres and investment centres. Only the
manager of an investment centres has control over all the three element cost, revenue and
investments in operating assets.

Segment Report:

Effective decentralization needs segment reporting. A segment is a part or activity of an


organization about which managers would like cost, revenue or profit data. Cost, profits and
investment centres are segments as are sales territories, individual storesand service centres,
manufacturing plants, marketing departments, individual customers and product lines.
Segmented income statements are useful in analyzing the profitability of segments and in
measuring the performance of segment managers.

Segmented Income Statement:

To prepare a segmented income statement, variable expenses are deducted from sales to yield
the contribution margin for the segment. Contribution margin tells us what happens to profit
as volume changes-holding a segments capacity and fixed costs constant. The contribution
margin is especially useful in decisions involving temporary uses of capacity such as special
orders.

Traceable and Common Fixed Costs:

A traceable fixed cost of a segment is a fixed cost that is incurred because of the existence of
the segment-if the segment had never existed, the fixed cost would not have been incurred,
and if the segment were eliminated, the fixed cost would disappear.

A common fixed cost is a fixed cost that supports the operations of more than one segment,
but is not traceable in whole or in part to any one segment. Even if a segment were entirely
eliminated, there would be no change in a true common fixed cost.

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The general guideline is to treat as traceable costs only those costs that would disappear over
time if the segment itself disappeared. Any allocation of common costs to segment reduces
the value of the segment margin as a measure of long-run segment profitability and segment
performance.

Hindrance to Proper Cost Assignment:

Costs must be properly assigned to the segments. Unfortunately companies often make
mistakes when assigning costs to segments like-

1. Omission of costs
2. Failure to trace costs directly
3. Inappropriate allocation base
4. Arbitrarily dividing common costs among segments

1.24. Evaluating Investment Centers Performance:


Properly assigning costs to responsibility centers and constructing segmented income
statements are needed for evaluating cost and profit centers. But for evaluating investment
center performance there are two methods to follow. One is return on investment (ROI)
formula and another is residual income formula.

Net Operating Income


ROI = Average Operating Assets

Net operating income is the income before interest and taxes and is sometimes referred to as
EBIT that means earnings before interest and taxes. Operating assets include cash, accounting
receivable, inventory, plant and equipment and all other assets help for operating purposes.
And companies use the net book value (acquisition cost less accumulated depreciation) of
depreciable assets to calculate average operating assets.

Or, ROI = Margin Turnover

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Net Operatingcome
Where, Margin = Sales

Sales
And, Turnover = Average Operating Assets

Any increase of ROI must involve at least one of the following:

1. Increased sales
2. Reduced operating expenses
3. Reduced operating assets

Criticism of ROI:

Although ROI is widely used in evaluating performance, it is subject to the following


criticism-

1. Just telling managers to increase ROI may not be enough. And it is best used as a part
of a balanced scorecard.
2. Committed costs may be relevant in assessing the performance of the business
segment as an investment but they make it difficult to fairly assess the performance of
the manager.
3. A manager who is evaluated based on ROI may reject investment opportunities that
are profitable for the whole company but that would have a negative impact on the
managers performance evaluation.

Residual Income:

It is another approach to measuring an investment centers performance. Residual income is


the net operating income that an investment center earns above the minimum required return
on its operating assets. In equation form, residual income is calculated as follows-

Residual Income = Net operating income (Average operating assets Minimum required
rate of return).

Advantage and Disadvantage of Residual Income:

The residual income approach encourages managers to make investments that are profitable
for the entire company but that would be rejected by managers who are evaluated using the
ROI formula. Its major disadvantage is larger divisions often have more residual income than

Page 50 of 108
smaller divisions, not necessarily because they are better managed but simply they are
because they are bigger.

Page 51 of 108
Page 52 of 108
3.0. Company Overview

Modern Dyeing & Screen Printing Limited started commercial operation in 1987 with woven
dyeing, printing and finishing unit. Modern Dyeing & Screen Printing Limited is a Public
Limited Company. The Company is listed with the Dhaka Stock Exchange Limited.
Modern Dyeing & screen Printing Ltd.- a Public Limited Company , started commercial
operation in 1987 as a Dyeing , Printing and Finishing industry in textile sector with the
financial assistance of Bangladesh Shilpa Bank ( now Bangladesh Development Bank Ltd.)
and Investment Corporation of Bangladesh.

3.1. Corporate Operational Result

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3.2. Director's Report

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Page 55 of 108
Page 56 of 108
4.0. Application of Cost Concept on Modern Dyeing and Screen Printing
Modern Dyeing and Screen Printing

Schedule of Cost of Goods Manufactured

For the Year 2014-15 Ended December 31

Particulars Taka Taka

Direct materials:
Raw materials inventory Jan 1
Add: Purchases of raw materials 800000
Raw materials used in production
Deduct: Raw materials inventory, Dec 31 1000000
1800000
Raw materials used in production
650000
Direct labor

Manufacturing overhead 1150000

Total Manufacturing Overhead 67000

1817629
Add: Work in process inventory, Jan 1
3034629
Deduct: Work in process inventory, Dec 31
1100000

Cost of goods manufactured 4134629

900000

3234629

Page 57 of 108
Schedule of Cost of Goods Sold

particulars Taka

Finished goods inventory, Jan 1 700000

Add: Cost of goods manufactured 3234629

Goods available for sale 3934629

Deduct: Finished goods inventory, Dec 31 500000

Cost of Goods Sold 3434629

Modern Dyeing and Screen Printing

Income Statement

For the Year 2014-15 Ended December 31

Particulars Taka
Sales 14350000

Cost of Goods sold 3434629

Gross margin 10915371

Selling and Administrative expenses:


1540000
Selling expense
1979649
Administrative expense
7395722
Net operating income

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Page 59 of 108
4.1. Cost Behavior analysis on Modern Dyeing and Screen Printing Co

Scatter Graph

Example: Modern Dyeing and Screen Printing Co. decides to use scatter graph method to
split its factory overhead (FOH) into variable and fixed components. Following is the data
which is provided for the analysis.

Month Units Total Overhead

January 215000 226850


February 175000 197672
March 227000 241204
April 259000 282567
May 198000 208128
June 282000 298537
July 336000 349435
August 326000 338869
September 354000 377524
October 321000 345052
November 412000 494789
December 395000 436651

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Fixed Cost = y-intercept = 100000

Variable Cost per Unit = Slope of Regression Line

To calculate slop we will take two points on line: (0,100000) and (600000,700000)

Variable Cost per Unit = (700000 100000) (600000 0) = 1.00

Least-Squares Regression Method

It is a mathematical procedure for finding the best-fitting curve to a given set of points by
minimizing the sum of the squares of the offsets ("the residuals") of the points from the
curve. The sum of the squares of the offsets is used instead of the offset absolute values
because this allows the residuals to be treated as a continuous differentiable quantity.
However, because squares of the offsets are used, outlying points can have a disproportionate
effect on the fit, a property which may or may not be desirable depending on the problem at
hand.

Least-squares linear regression is a statistical technique that may be used to estimate the total
cost at the given level of activity (units, labor/machine hours etc.) based on past cost data. It
mathematically fits a straight cost line over a scatter-chart of a number of activity and total-
cost pairs in such a way that the sum of squares of the vertical distances between the scattered
points and the cost line is minimized. The term least-squares regression implies that the ideal
fitting of the regression line is achieved by minimizing the sum of squares of the distances
between the straight line and all the points on the graph.

Assuming that the cost varies along y-axis and activity levels along x-axis, the required cost
line may be represented in the form of following equation:

y = a + bx

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In the above equation, a is the y-intercept of the line and it equals the approximate fixed cost
at any level of activity. Whereas b is the slope of the line and it equals the average variable
cost per unit of activity.

High-Low and Quick & Dirty method.

High Low Method


From Modern Dyeing Co. we got the data of 2014. And from this we found out that their
Administrative and selling expenses to be 37,97,278.

Month Units Total Overhead

January 215000 226850


February 175000 197672
March 227000 241204
April 259000 282567
May 198000 208128
June 282000 298537
July 336000 349435
August 326000 338869
September 354000 377524
October 321000 345052
November 412000 494789
December 395000 436651

Units Total overhead


High activity level 412000 494789
Low activity level 175000 197672
Change 237000 297117

Variable cost element: = 1.12 per unit

Fixed cost element

Tk
Expenses at high activity level 494789
Less-variable cost element(412000*1.12) 461440
Total fixed cost 33349

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Page 63 of 108
4.3. Application of CVP concepts in Modern Dyeing

In 2015, Modern dying Limited companys contribution format income statement is given
below-

Total Per unit Percent of sales


Sale (3500000 units) 14350000 4.1 100%
Less- Variable expense, (7945000) 2.27 55.37%
Conribution Margin 6405000 1.83 44.63%
Less- Fixed expenses (870000)
Net Operating Income 5535000

Unit contribution Margin 1 . 83


1) CM ratio = Unit selling price = 4 .1 = 44.63%

Modern Dyeings CM ratio of 44.63% means that for each increase of taka in sells , total
contribution margin will increase by. 4463 taka.

Variable expense 2 . 27
2) Variable expense ratio = Selling price = 4 .1 = 55.37%

Modern Dyeings variable expense ratio of 55.37% means that for every increase in taka of
sales variable expense will be computed to .5537 taka.

3) The BEP is-

Profit = Unit CM Q Fixed expense

0 = 1.83 Q 870000

Q = 475409 units; or at 4.1 per unit 1949180

Here, by break even analysis, at sales of 475409 units, target profit will be zero.

4) If there targeted profit is 200,0000 they should sell

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Targeted profit = Unit CM Q Fixed expense

2000000 = 1.83 Q - 870000

Q = 1568306

After Break Even Point, by selling 1568306 profit will reach to 2000000.

5) Margin of safety in tk. = Total sales Break even sales

= 14350000 - 1949180

= 12400820

Margin of safety tk . 12400820


Margin of safety in percentage = Total sales = 14350000 =86.41%

Modern Dyeings margin of safety 12.5% means that at the current level of sales and with the
companys current prices and cost structure, a reduction in sales of 12.5% would result in just
breaking even.

ontribution margin 6405000


=
6) Degree of operating leverage = Net operating income 5535000 = 1.15 times

Because the degree of operating leverage for Modern Dyeing is 1.15, the companys net
operating income grows 1.15 times as fast as its sales.

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Multiproduct Break- Even Analysis of Modern Dyeing

Particulars Dyeing Screen Printing Total


Amount Percent Amount Percent Amount Percent
Sales 9955000 100% 4395000 100% 1435000 100%
Variable Expenses 5890000 29% 2370000 53% 0 82%
Contribution margin 4065000 71% 2025000 47% 8260000 18%
Fixed expenses 6090000
Net operating 870000
income 5220000

Expense . 870000
Computation of break-even Point: Overall CM ratio = 0 .18 =4833333

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4.4. Variable Costing Application on Modern Dyeing and Screen Printing

Modern Dyeing and Screen Printing information related to production

Particulars Per unit

Selling price per unit 50

Manufacturing costs:
15
Variable per unit produced: 8
Direct materials 4
20000000
Direct labor
6
Variable overhead 600000
Fixed per year
Selling and administrative costs:
Variable per unit sold
Fixed per year

Modern Dyeing and Screen Print

Per unit cost (Absorption costing)

Particulars Year 1 (Taka) Year 2 (Taka)


Direct material 15 15
Direct labor 8 8

Variable manufacturing overhear


4 4
Fixed manufacturing overhead: 13 17
Year 1:(10000000/800000)
40 44
Year 2(10000000/600000)

Absorption costing unit product cost

Modern Dyeing and Screen Print

Income Statement (Absorption costing)

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For the year ended 2014, Dec 31

Particulars Year 1 (Taka) Year 2


(Taka)
Sales (1500000*50) 75000000 75000000
Cost of goods sold
60000000 64000000
Year 1: (1500000*40)
Year 2: (1000000*44)+(500000*40)
Gross margin 15000000 11000000

Selling and administrative expense: 9600000 9600000

(1500000*6)+600000
5400000 1400000

Net operating income

Modern Dyeing and Screen Print

Per unit cost (Variable costing)

Particulars Year 1 (Taka) Year 2 (Taka)


Direct material 15 15
Direct labor 8 8
Variable manufacturing overhead 4 4
27 27

Variable costing unit product cost

Modern Dyeing and Screen Print

Income Statement (variable costing)

For the year ended 2014, Dec 31

Particulars Year 1 (Taka) Year 2 (Taka)

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Sales (1500000*50) 75000000 75000000
Variable expenses:
cost of goods sold (1500000*27) 40500000
40500000
Variable selling and administrative expenses
(1500000*6) 9000000 9000000

Contribution margin 25500000 25500000

Fixed expenses:
Fixed manufacturing overhead 10000000
10000000
Fixed selling and administrative expenses 600000
600000
Net operating income
14900000 14900000

Reconciliation of the Variable and Absorption costing net operating incomes follows:

Particulars Year 1 (Taka) Year 2 (taka)


Variable costing net operating income 14900000 14900000
Add: fixed manufacturing overhead costs deferred
6500000
in inventory under Absorption costing (500000*13)
Deduct: Fixed manufacturing overhead costs (6500000)
released From inventory under absorption costing

21400000 8400000
Absorption costing net operating income (loss)

Page 70 of 108
Page 71 of 108
Page 72 of 108
4.5. Activity Bases Costing Application on Modern Dyeing and Screen
Printing

Step 1 Define activity cost pools and activity measures

Activity cost polls at Modern Dyeing Co. Ltd.

1.Customer Orders Number of customer orders


2. Product Design Number of product designs

3.Order size Machine hours

4.Customer Relation Number of active customers

5.Others Not applicable

Step 2 Assign overhead cost to the activity cost pools

Annual overhead costs both manufacturing and non manufacturing at Modern Dyeing
Co. Ltd.

Particulars (Taka)

Product Department:
Indirect factory wages 1702156
Factory equipment depreciation 213756
Factory utilities 237467
Factory building rent 110200
Total 2263579
General Administrative Department:
Administrative wages and salaries 733536
Office equipment depreciation 461103
Administrative building lease 184024
Total 1378663
Marketing Department:
Marketing wages and salaries 53144

Page 73 of 108
Selling expenses 101892
Total 155036

Distribution of resource consumption across Activity cost pool

customer product order size customer


orders design relations
product
department
indirect factory 425539 25% 680862 40% 340431 20% 170216 10
wages
factory equipment 42751 20% 0% 12825400% 60% 0
depreciation
factory utilities 11873.35 5% 23746.7 10% 118733.5 50% 0
factory building 0% 0% 0% 0
rent
general
administrative
department
administrative 110030.4 15% 36676.8 5% 73353.6 10% 220060.8 30
wages
office depreciation 138330.9 30% 0% 0% 115275.8 25
administrative 0% 0% 0% 0
rent
marketing
department
marketing wages 11691.68 22% 4251.52 8% 0% 31886.4 60
selling expenses 10189.2 10% 0% 0% 71324.4 70
total cost 750406 745537 660772 608764

Step 3 Calculation of Activity rates

Here,

Total activity of Modern Dyeing Co. are:

Activity cost pools Total Activity


Customer Orders 11000 orders

Product Design 500 design

Page 74 of 108
Order size 50000 MHS

Customer Relation 1500 customers

The activity rates for the activity cost pools are-

Activity cost pools Total cost Total Activity Activity Rate


Customer Orders 750406 11000 orders 68

Product Design 745537 500 design 1491


Order size 660772 50000 MHS 13
Customer Relation 608764 1500 customers 406

Step 4 Assign overhead cost to cost objects

We consider 1 product of Modern Dyeing Co.

Here

Total activity of Modern Dyeing Co. are-

Activity cost pools Activity


Customer Orders 33200 orders
Product Design 2 designs
Order size 15000 MH

Assigning overhead cost to product (Modern Dyeing Co.)

Activity cost pools Activity Rate Activity ABC cost


Customer Orders 68 per order 33200 2257668
Product Design 1491 per design 2 2982
Order size 13 per MH 15000 195000

Step5 Preparing Management Report

Product margin (Modern Dyeing Co.)

Particulars Taka Taka

Page 75 of 108
Sales 14350000
Costs:
Direct material 120560
Direct labor 67000
Customer orders 5236000
Product design 268380
Order size 455000

Total cost 6146940

8203060

Product margin

Page 76 of 108
1st 2nd 3rd
Particulars 4th quarter Total
quarter quarter quarter
Budgeted sales (unit) 775000 600000 925000 800000 3100000

Selling price per unit X5 X5 X5 X5 X5

Total sales 3875000 3000000 4625000 4000000 15500000

4.5. Application of Profit Planning on Modern Dyeing and Screen Printing


1. Sales Budget: The sales budget of Modern Dyeing and Screen Printing is calculated below

Modern Dyeing and Screen Printing

Sales Budget

For the Year Ended December 31,2016

Particulars 1st quarter 2nd quarter 3rd quarter 4th quarter Total
Accounts receivable,
123000 123000
beginning balance
First-quarter sales 1162500 2712500 3875000

Second-quarter sales 900000 2100000 3000000

Third-quarter sales 1387500 3237500 4625000

Fourth-quarter sales 1200000 1200000

Total Cash Collections 1285500 3612500 3487500 4437500 9335500

Schedule of Expected Cash Collections

Page 77 of 108
At Modern Dyeing and Printing all sales are on credit. 70% of the sales are collected in the
quarter of sales, another 30% are collected in the second month following sales.

2. Production budget: The production budget of Modern Dyeing and Screen Printing is
calculated below

Modern Dyeing and Screen Printing

Production Budget

For the Year Ended 2015-16

Quarter Total 2016-17


Q1
Q1 Q2 Q3 Q4
Budgeted unit sales 775000 600000 925000 800000 3100000 700000
Add desired ending 120000 185000 160000 140000 140000
inventory
Total needs 895000 785000 1085000 940000 3240000
Less beginning 115000 120000 185000 160000 115000
inventory
Required production
(units) 780000 665000 900000 780000 3125000

Assumption: The finished goods inventory on hand at the end of each quarter will be
20% of the next quarter sales. The beginning finished goods inventory for the first
quarter is budgeted to be 115000 .

Page 78 of 108
3. Direct Material Budget: The Direct MaterialBudget of Modern Dyeing and Screen
Printing is calculated below

Modern Dyeing and Screen Printing

Direct Material Budget

For the Year Ended December 31,2016

Year-1 Year-2
Quarters Quarters
Particulars Total
Q1 Q2 Q3 Q4 Q1

Required Production 780000 665000 900000 780000 3125000 727000


Raw materials needed
X 2.25 X 2.25 X 2.25 X 2.25 X 2.25 X 2.25
per unit
Production needs 1755000 1496250 2025000 1755000 7031250 1635750
Add: desired ending
299250 405000 351000 327150 327150
inventory of materials
Total needs 2054250 1901250 2376000 2082150 7358400
Less: Beginning
171200 299250 405000 351000 171200
inventory of materials
Raw materials to be
1883050 1602000 1971000 7187200
purchased 1731150
Cost of raw materials
X 0.75 X 0.75 X 0.75 X 0.75 X 0.75
per unit
Cost of raw
materials to be 1412288 1201500 1478250 1298363 5390400
purchsed

Page 79 of 108
4. Direct Labor Budget: The Direct Labor Budget budget of Modern Dyeing and Screen
Printing is calculated below

Modern Dyeing and Screen Printing

Direct Labor Budget

For the Year Ended 2015-16

Quarter Total

Q1 Q2 Q3 Q4
Required production 780000 665000 900000 780000 3125000
Direct labor-hours per unit .15 .15 .15 .15 .15
Total direct labor-hour needed 117000 99750 135000 117000 468750
Direct labor cost per hour 22 22 22 22 22
Total direct labor cost 2574000 2194500 2970000 2574000 10312500

Each unit requires .15 direct labor hours, and direct labourers are paid TK 22 per hour.

5. Manufacturing Overhead Budget: The Manufacturing Overhead budget of Modern


Dyeing and Screen Printing is calculated below

Modern Dyeing and Screen Printing

Manufacturing Overhead Budget

For the Year Ended December 31,2016

Quarters Total
Particulars
Q1 Q2 Q3 Q4

Budgeted direct-labor hour 117000 99750 135000 117000 468750


Variable manufacturing
X 0.30 X 0.30 X 0.30 X 0.30 X 0.30
overhead rate
Variable manufacturing
35100 29925 40500 35100 140625
overhead

Page 80 of 108
Fixed manufacturing overhead 870000 870000 870000 870000 3480000

Total manufacturing overhead 905100 899925 910500 905100 3620625

Less: Depreciation 200000 200000 200000 200000 800000


Cash disbursement for
705100 699925 710500 705100 2820625
manufacturing overhead

6. Selling and Administrative Expense Budget: The Selling and Administrative overhead
budget of Modern Dyeing and Screen Printing is calculated below

Modern Dyeing and Screen Printing

Selling and Administrative overhead budget

For the Year Ended 2015-16

Quarter Total

Q1 Q2 Q3 Q4
Budgeted sales in unit 775000 600000 925000 800000 3100000
Variable selling and administrative .35 .35 .35 .35 .35
expense per unit
Variable selling and
administrative expense 271250 210000 323750 280000 1085000
Fixed Selling and administrative
expense
Advertising 120000 120000 120000 120000 480000
Staff salaries 300000 300000 300000 300000 1200000
Office rent 60000 60000 60000 60000 240000
Audit fee 62000 62000 62000 62000 248000
Insurance 145000 145000 145000 145000 580000
Depreciation 85000 85000 85000 85000 340000
Property taxes 48000 48000 48000 48000 192000
Total fixed Selling and 945000 945000 945000 945000 3780000
administrative expense
Total Selling and administrative 1216250 1155000 1268750 1225000 4865000
expense
Less Depreciation 85000 85000 85000 85000 340000
Cash disbursement for Selling
and administrative expense 1131250 1070000 1183750 1140000 4525000

Page 81 of 108
Cash Balance, Beginning 121773 134635 581210 1666210 121773
(+) Receipt
Collection from Customers 5285500 5612500 7487500 4437500 22823000

Total Cash Available 5407273 5747135 8058710 6103710 22944773

(-) Disbursement
Direct Material 1412288 1201500 1478250 1298363 5390400
Direct Labor 2574000 2194500 2970000 2574000 10312500
Manufacturing Overhead 705100 699925 710500 705100 2820625
Selling and Administrative 1131250 1070000 1183750 1140000 4525000
Equipment purchase 50000 50000
Dividends 10000 10000 20000

Total Disbursement
5822638 5165925 5727462 5717463 23118526
Excess ( Deficiency) of Cash
Available over Disbursement
- 415365 571210 1666210 376247 2198302
Financing:-
Borrowing 550000 550000
Repayment
Interest

Total Financing 550000 - - - -


Cash Balance, Ending 134635 581210 2341247 386247 386247

7 cash Budget : The cash budget of Modern Dyeing and Screen Printing is calculated below

Modern Dyeing and Screen Printing


Cash Budget

1st 2nd 3rd 4th Total

Page 82 of 108
8. Budgeted Income Statement: The Budgeted Income Statement of Modern Dyeing
and Screen Printing is calculated below

Modern Dyeing and Screen Printing

Budgeted Income Statement

For the Year Ended 2015-16


Particulars Tk
Sales 15500000
(-)Cost of Goods sold (707500)
Gross margin 8425000
Selling and administrative expense 4865000
Net operating income 3560000
Interest expense 13750
Net income 3546250

Page 83 of 108
9. Budgeted Balance Sheet: The Budgeted Balance Sheetof Modern Dyeing and
ScreenPrinting is calculated below

Modern Dyeing and Screen Printing

Budgeted Balance Sheet

For the Year Ended 2015-16

Particulars Taka
Assets
Advance payments 4696533
Account Receivables 9335500
Cash 1634552
Equipment Purchase 50000

Total Asset 15716585


Liability 13680000
Share Capital 1715154
Retained Earning 3546250
Net Income

Total Liability 15716585

Page 84 of 108
Page 85 of 108
4.6 Application of Flexible Budget on Modern Dyeing and Screen Printing

The flexible budget of Modern Dyeing and Screen Printing for the Year 2010-11 is calculated
below

Modern Dyeing & Screen Printing Ltd

Flexible Budget Performance Report

For the Year 2011 Ended June 30

Particulars Planning Activity Flexible Revenue and Actual


Budget Variance Budget Spending Results
(1) (2)-(1) (2) Variances
(3)-(2)

Unit sales(x) 3100000 3090000 3090000


Revenue (3.75x) 11625000 37500U 11587500 201096F 1358859
6
Expenses:

Salary and wages (1455000) 1455000 0 1455000 111074F 1343926


Electric expense(100000+.32x) 1100000 11200F 1088800 59284F 1029516
Machine maintenance(785000) 785000 0 785000 163253F 621747
Packing expense (.16x) 500000 5600F 494400 25600U 520000
Manufacturing expense (50000+ .
08x) 253000 800F 252200 12200F 240000
Depreciation (540542) 540542 0 540542 0 540542
Legal fee (80000) 80000 0 80000 0 80000
Audit fee (25000) 25000 0 25000 0 25000
Telephone Bill (1000+.006x) 19000 540U 19540 5160U 24700
Office rent(40000) 80000 0 80000 0 80000
Insurance (33000) 33000 0 33000 0 33000
Miscellaneous (5000+.05x) 200000 40500F 159500 26092U 185592

Total expenses 5070542 57560F 5012982 288959F 4724023

Net operating income 6554458 20060F 6574518 229055F 8864573

Page 86 of 108
Here the activity revenue variance is Tk 3750. It is due to reduction in the unit sales. It also
causes reduction in the cost also. The increased cost is telephone bill. It is so insignificant that
the managers donot need to concerned about it. Now overall activity variance is Tk 20060.
The overall spending variance is Tk 220295. Here some increase in the cost is covered by the
increase in the revenue. The packing and miscellaneous costs are quite large , so these cost
need to be investigated.

The flexible budget of Modern Dyeing and Screen Printing for the Year 2011-12 is calculated
below

Modern Dyeing & Screen Printing Ltd

Flexible Budget Performance Report

For the Year 2012 Ended June 30

Particulars Planning Activity Flexible Revenue and Actual


Budget Variance Budget Spending Results
(1) (2)-(1) (2) Variances
(3)-(2)

Unit sales(x) 3110000 3150000 3150000


Revenue (3.75x) 11662500 1500000F 11812500 187500F 1200000
0
Expenses:

Salary and wages (1455000) 1455000 0 1455000 82895U 1537895


Electric expense(100000+.32x) 1095200 12800U 1108000 99214F 1008786
Machine maintenance(785000) 785000 0 785000 0 785000
Packing expense (.16x) 497600 6400U 504000 1305F 502695
Manufacturing expense (50000+ .
08x) 298800 3200U 302000 3550 305550
Depreciation (540542) 540542 0 540542 0 540542
Legal fee (80000) 80000 0 80000 0 80000
Audit fee (25000) 25000 0 25000 0 25000
Telephone Bill (1000+.006x) 19660 240U 19900 370F 19530
Office rent(40000) 40000 0 40000 0 40000
Insurance (33000) 33000 0 33000 0 33000
Miscellaneous (5000+.05x) 160500 2000U 162500 8920F 153580

Total expenses 5030302 24640U 5059442 27864F 5031578

Page 87 of 108
Net operating income 6632198 295360F 6753058 215364F 6968422

In this year the actual unit sales is higher than the planned. this results in increase in the costs.
Here all the cost has increased. But these donot need require much importance. Because the
increase in the sales is so high that these cost become offset.

Though in the revenue and spending is positive there is a large increase in the salary and
wages that is amounted tk 82895 unfavorable. It is need to be contolled.

Page 88 of 108
The flexible budget of Modern Dyeing and Screen Printing for the Year 2011-12 is calculated
below
Modern Dyeing & Screen Printing Ltd

Flexible Budget Performance Report

For the Year 2013 Ended June 30

Particulars Planning Activity Flexible Revenue Actual


Budget Variance Budget and Results
(1) (2)-(1) (2) Spending
Variances
(3)-(2)

Unit sales(x) 3150000 3120000 3120000


Revenue (3.75x)
11812500 112500U 11700000 30000F 1200000
0
Expenses:

Salary and wages (1455000) 1455000 0 1455000 40000U 1495000


Electric expense(100000+.32x) 1108000 9600F 1098400 93000F 1005400
Machine maintenance(785000) 785000 0 785000 0 785000
Packing expense (.16x) 504000 4800F 499200 2053U 501253
Manufacturing expense (50000+ .
08x) 302000 2400F 299600 1650U 301250
Depreciation (540542) 540542 0 540542 0 540542
Legal fee (80000) 80000 0 80000 0 80000
Audit fee (25000) 25000 0 25000 0 25000
Telephone Bill (1000+.006x) 19900 180F 19720 6880U 26600
Office rent(40000) 40000 0 40000 0 40000
Insurance (33000) 33000 0 33000 0 33000
Miscellaneous (5000+.05x) 162500 1500F 161000 250U 161250
Total expenses 5059442 18480F 5036462 257833U 4994295

Net operating income 6753058 89520U 6663538 242167U 7005705

In this year the actual unit sales is lower than the estimated. It results in total activity variance
of Tk. 89520 unfavorable. This results from a large reduction in the activity level for which
the revenue drops dramatically.

Page 89 of 108
Here the change in the activity level results in the unfavorable revenue and spending
variance. here the salary contributes much. So we can say the company cannot control its
salary and wage expenses.

The flexible budget of Modern Dyeing and Screen Printing for the Year 2013-14 is calculated
below

Modern Dyeing & Screen Printing Ltd

Flexible Budget Performance Report

For the Year 2014 Ended June 30

Particulars Planning Activity Flexible Revenue and Actual


Budget Variance Budget Spending Results
(1) (2)-(1) (2) Variances
(3)-(2)

Unit sales(x) 3125000 3170000 3170000


Revenue (3.75x)
11718750 168750F 11887500 475500F 1236300
0
Expenses:

Salary and wages (1455000) 1455000 0 1455000 84956U 1539956


Electric expense(100000+.32x) 1100000 14400U 1114400 15969U 1130369
Machine maintenance(785000) 785000 0 785000 0 785000
Packing expense (.16x) 500000 7200U 507200 47580F 459620
Manufacturing expense (50000+ .
08x) 300000 3600U 303600 6044F 297556
Depreciation (540542) 540542 0 540542 0 540542
Legal fee (80000) 80000 0 80000 0 80000
Audit fee (25000) 25000 0 25000 0 25000
Telephone Bill (1000+.006x) 19750 270U 20020 1020F 19000
Office rent(40000) 40000 0 40000 0 40000
Insurance (33000) 33000 0 33000 0 33000
Miscellaneous (5000+.05x) 161250 2250U 163500 3450F 160050
Total expenses 5039542 18480
5067262 242831U 5110093
Net operating income 6679208 1143990F 7823198 232669F 7252907

Page 90 of 108
Here in the year 2013-14 the sales units is increased as a result the activity variance and the
revenue and spending variance are favorable But the salary expense and the electric expense
are not properly controlled. The company has some skilled employees whose salaries are
quite higher but the company cannot lay off them. But they can reduce their dependency on
the part

time high paid employees.

Modern Dyeing & Screen Printing Ltd

Flexible Budget Performance Report

For the Year 2015 Ended June 30

Particulars Planning Activity Flexible Revenue and Actual


Budget Variance Budget Spending Results
(1) (2)-(1) (2) Variances
(3)-(2)

Unit sales(x) 3380000 3500000 3500000


Revenue (3.75x)
12675000 450000F 13125000 790897F 11410932

Expenses:

Salary and wages (1455000) 1455000 0 1455000 204000U 1659000


Electric expense(100000+.32x) 1181600 38400U 1220000 120500U 1240500
Machine maintenance(785000) 785000 0 785000 0 785000
Packing expense (.16x) 540800 19200U 560000 133652U 6936528
Manufacturing expense (50000+ .
08x) 320400 40400F 280000 20500F 259500
Depreciation (540542) 540542 0 540542 0 540542
Legal fee (80000) 80000 0 80000 0 80000
Audit fee (25000) 25000 0 25000 0 25000
Telephone Bill (1000+.006x) 21280 720U 22000 3565U 25565
Office rent(40000) 40000 0 40000 0 40000
Insurance (33000) 33000 0 33000 0 33000
Miscellaneous (5000+.05x) 174000 6000U 180000 25600U 235600
Total expenses 5196622 23920U 5220542 697217U 5418235

Net operating income 7478378 426080F 7094458 93680F 1057676


5

Page 91 of 108
In this year there is a large increase in the activity results in the positive revenue and spending
variance though the total cost has increased .Here the increased costs that need to be
investigated are salaries , electricity and the miscellaneous expenses.

Page 92 of 108
Comparison of the activity variance and revenue and spending variance over time

Page 93 of 108
4.7. Application of Standard Cost and Operating Performance Measure
2010 - 2011

Price and Material Variance

AQ X AP AQ X SP SQ X SP

1250000 X 3.71 1250000 X 2.75 957000 X


2.75

= 4637500 = 3437500 = 2631750

Price Variance Material Variance

1200000 U 805750 U

Total Variance

2005750 U

Explanation: Many factors influence the prices paid for goods including how many units are
ordered, how the order is delivered the quantity of materials purchased. here larger amount is
purchased for this reason, it caused price variance.

Here, the material variance is caused by excessive material purchase than the standard price.
The purchasing department should be careful about the price and quantity.

Labor Rate and Efficiency Variance

AH X AR AH X SR SH X SR

311345 X 15 311345 X 13.5 3090000X.11


X13.5

= 4670175 = 4203157.5 = 4588650

Labor Rate Variance Efficiency Variance

467017.5 U 385493 F

Explanation: Labor rate variance can arise because of the way labor is used. Skilled workers
with high hourly rates pay may be given duties that require little skill and and call for lower
hourly rates of pay. This will result in unfavorable labor rate variance because the actual
hourly rate of pay will exceed the standard rate.
Page 94 of 108
Variable Manufacturing Rate Variance and Efficiency Variance

AH X AR AH X SR SH X SR

311345 X 4 311345 X 5.5


3090000X.11X5.5

= 1245380 =1712397.5 =1869450

Overhead Rate Variance Efficiency Variance

467017.5 F 1712397.5 F

2011 - 12

Price and Material Variance

AQ X AP AQ X SP SQ X SP

1392860 X 3.50 1392860 X 4 1257000 X


4

= 4875000 = 5571440 = 5028000

Price Variance Material Variance

696440 F 543440 U

Explanation: Here, the material variance is caused by excessive material purchase than the
standard price. The purchasing department should be careful about the price and quantity.

Labor Rate and Efficiency Variance

Page 95 of 108
AH X AR AH X SR SH X SR

361360 X 17 361360 X 16 3090000X.11 X16

= 6143120 = 5781760 = 5438400

Labor Rate Variance Efficiency Variance

361360 U 343360 U

Explanation: Labor rate variance can arise because of the way labor is used. Skilled workers
with high hourly rates pay may be given duties that require little skill and and call for lower
hourly rates of pay. This will result in unfavorable labor rate variance because the actual
hourly rate of pay will exceed the standard rate.

Efficiency variance is unfavorable because of poorly trainedor motivated workers, requiring


more labor time, faulty equipment, work interruptions, poor supervision of workers and
inaccurate rate standards.

Variable Manufacturing Rate Variance and Efficiency Variance

AH X AR AH X SR SH X SR

361360 X5 361360 X 6 3090000X.11X6

= 1806800 = 2168160 = 2039400

Overhead Rate Variance Efficiency Variance

361360 F 128760 U

Explanation: The efficiency level depends on how efficiently direct labor was used. Here the
labor efficiency variance is unfavorable for this reason the variable overhead efficiency is
unfavorable.

2012 - 13

Page 96 of 108
Price and Material Variance

AQ X AP AQ X SP SQ X SP

1552460 X 3.24 1552460 X 4 1257000 X


4

= 4875000 = 5571440 = 5028000

Price Variance 1306880 X 4

696440 F = 5227520

Quantity Variance

199520 U

Explanation: Here, the material variance is caused by excessive material purchase than the
standard price. The purchasing department should be careful about the price and quantity.

Labor Rate and Efficiency Variance

AH X AR AH X SR SH X SR

331500 X 19 331500 X 18 3090000X.11


X18

= 6298500 = 5967000 = 6118200

Labor Rate Variance Efficiency Variance

331500 U 151200 F

Explanation: Labor rate variance can arise because of the way labor is used. Skilled workers
with high hourly rates pay may be given duties that require little skill and and call for lower
hourly rates of pay. This will result in unfavorable labor rate variance because the actual
hourly rate of pay will exceed the standard rate.

Variable Manufacturing Rate Variance and Efficiency Variance

AH X AR AH X SR SH X SR

Page 97 of 108
331500 X4.45 331500 X 6
3090000X.11X6

= 1475175 = 1989000 = 2039400

Overhead Rate Variance Efficiency Variance

513825 F 50400 F

2013 - 14

Price and Material Variance

AQ X AP AQ X SP SQ X SP

1732640 X 3.75 1732640 X 4 1565700 X


4

= 6497400 = 6930560 = 6262800

Price Variance 1545370 X 4

433160 F = 6181480

Quantity Variance

81320 F
Labor Rate and Efficiency Variance

AH X AR AH X SR SH X SR

384765 X 19 356680 X 18 3090000X.11


X18

= 7310540 = 6420240 = 6118200

Labor Rate Variance Efficiency Variance

890300 U 302040 U

Explanation: Labor rate variance can arise because of the way labor is used. Skilled workers
with high hourly rates pay may be given duties that require little skill and and call for lower

Page 98 of 108
hourly rates of pay. This will result in unfavorable labor rate variance because the actual
hourly rate of pay will exceed the standard rate.

Efficiency variance is unfavorable because of poorly trainedor motivated workers, requiring


more labor time, faulty equipment, work interruptions, poor supervision of workers and
inaccurate rate standards.

Variable Manufacturing Rate Variance and Efficiency Variance

AH X AR AH X SR SH X SR

384765 X 5 331500 X 6.5


3090000X.11X6.5

= 1923825 = 2500973 = 2209350

Overhead Rate Variance Efficiency Variance

577148 F 291623 U

Explanation: The efficiency level depends on how efficiently direct labor was used. Here the
labor efficiency variance is unfavorable for this reason the variable overhead efficiency is
unfavorable.

2014-15

Page 99 of 108
Price and Material Variance

AQ X AP AQ X SP SQ X SP

1732640 X 4 1732640 X 3.80 1589770 X


4

= 6930560 = 6584032 = 6359080

Price Variance 1667370 X 4

346528 U = 6669480

Quantity Variance

310400 U

Explanation: Many factors influence the prices paid for goods including how many units are
ordered, how the order is delivered the quantity of materials purchased. here larger amount is
purchased for this reason, it caused price variance.

Here, the material variance is caused by excessive material purchase than the standard price.
The purchasing department should be careful about the price and quantity.

Labor Rate and Efficiency Variance

AH X AR AH X SR SH X SR

355765 X 20 355765 X 22
3090000X.11X22

= 7115300 = 7826830 = 7477800

Labor Rate Variance Efficiency Variance

711530 F 349030 U

Explanation: Efficiency variance is unfavorable because of poorly trainedor motivated


workers, requiring more labor time, faulty equipment, work interruptions, poor supervision of
workers and inaccurate rate standards.

Variable Manufacturing Rate Variance and Efficiency Variance

Page 100 of 108


AH X AR AH X SR SH X SR

397865 X 7 397865 X 6.5


3090000X.11X6.5

= 2785055 = 2586123 = 2209350

Overhead Rate Variance Efficiency Variance

198932 U 376773 U

Explanation: The efficiency level depends on how efficiently direct labor was used. Here the
labor efficiency variance is unfavorable for this reason the variable overhead efficiency is
unfavorable.

Page 101 of 108


4.8. Application of Segment Reporting, Decentralization on Modern Dyeing
and Screen Printing

The modern Dyeing company operate two divisional product line, one is Dyeing and another
is Screen Printing. In the business year 1015 the Screen Printing company cant make profit
but loss of 85000. So segmentation of product division is must to minimize the loss.

Particulars Total company Dyeing Screen Printing


Sales 14350000 9955000 4395000

Variable expenses:
Variable cost of goods sold: 7750000 5500000 2250000
Other variable expense 510000 390000 120000
Total variable expense 8260000 5890000 2370000

Contribution margin 6090000 4065000 2025000


Traceable fixed expense 4520000 2410000 2110000

Divisional segmented margin 1570000 1655000 (85000)


Common fixed expense not 900000
traceable to individual 670000

Segmented defined as product lines of the products


division
Particulars Screen printing general Customized
Sales 4395000 2900000 1495000
Variable expenses:
Variable cost of goods sold: 2250000 1220000 1030000
Other variable expense 120000 400000 800000
Total variable expense 2370000 1260000 1110000

Contribution margin 2025000


1712000 313000
Traceable fixed expense 2110000
1010000 1100000
(85000)
702000 (787000)

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From the segmentation of different Product line we see that the Customized division is not
profitable. So if the company invest in different product line rather then customized product
division the Screen Printing plan will be profitable.

Return on investment (ROI) and Residual income

1. Return on Investment (ROI) in 2015

Net Operating Income


Margin = Sales

1585845
= 14350000

= 0.110512

Sales
Turnover = Average Operating Assets

14350000
= 7500000

= 1.91

ROI = Margin Turnover

= 0.110512 1.91

= 0.21144

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2. Residual Income

Average operating assets BDT7500000

_________________________

Net operating income BDT1585845

Minimum required return on operating

asset 15% (assumed) BDT237876

_________________________

Residual income BDT 1347969

Sales of 2015 was 14350000. Operating income was 1585845. And operating assets were7500000 .
So ROI in 2015 was 21.144%. That is why we assumed that the company would make at least 15%
return on operating assets in 2016

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Page 105 of 108
Conclusion
Modern Dyeing and Screen Printing Ltd. is established from conventional method of by his
management policy and better effort of employees. We hope that it will expand its market
throughout the country by getting more profit. They are optimistic that they will be able to
acquire a leading position in Bangladesh within a very short time by providing better service
to the people. The organization is much more effective than others to identify the weakness it
carries and as well as to solve them very efficiently so that we can maximize our target.

In terms of Modern Dyeing, we tried our best to make an overview of the companys
managerial accounting basis. We operate and allocate information on cost concept, cost
methods, planning and flexible budget etc of Modern Dyeing.

We prepare all the managerial accounting statement. We believe that in future they will be
able to hold such apposition that they will dominate both in Bangladesh and global market
over other competitors.

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Reference-
Page 107 of 108
1) Managerial Accounting

Garrison/ Noreen/ Brewew

2) Annual Report of Modern Dyeing and Screen Printing Ltd.

3) Websites-
1. www.google.com
2. www.wikipedia.com
3. www.dsebd.org
4. https://en.wikipedia.org/wiki/Management_accounting
5. http://accountingexplained.com/managerial/cvp-analysis/
6. http://www.accountingcoach.com/activity-based-costing/explanation

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