LAHORE SCHOOL OF ECONOMICS

Sha Posh
Cost Accounting Final Report

Submitted By:
AmnaEjaz
Ashha Mirza
Bilawal Shahbaz Khan Niazi
Faisal Amjad Butt
Mohsin Riaz Sheikh
Zahra Javaid Mirza

SECTION A
BBA IV
Contents
Introduction: ................................................................................................................................................. 2

Product Introduction: ............................................................................................................................... 2

Cutting Unit: .......................................................................................................................................... 2
Hand work unit: .................................................................................................................................... 3
Stitching unit: ........................................................................................................................................ 3
Direct Material .............................................................................................................................................. 5

Direct labor ................................................................................................................................................... 5

Factory Overheads ........................................................................................................................................ 6

Cost of Goods Sold Statement: ..................................................................................................................... 6

Income Statement: ....................................................................................................................................... 8

Direct Material Calculations:....................................................................................................................... 10

Economic Order Quantity: ........................................................................................................................ 3

Direct Labor Calculation:............................................................................................................................. 10

Daily Wage Rate Plan: ............................................................................................................................. 10

Job Cost Sheets: ...................................................................................................................................... 11
Factory Overhead Calculations: .................................................................................................................. 13

Calculations of Predetermined Overhead Rates:.................................................................................... 13

Variances:................................................................................................................................................ 14
Reasons for Shortfall: .......................................................................................................................... 15
Break-Even Analysis: ................................................................................................................................... 15

Recommendations: ..................................................................................................................................... 18
Introduction:

Sha Posh, A well-known name in the business of Ladies Wear (Boutique). Sha Posh is a
manufacturer of Ladies Garments and have exclusive designing approach. Customer around the
world love to wear Sha Posh dresses because of high quality and attractive designs. Sha Posh has
eleven branches across the Pakistan. With their continuous improvement, Total Quality
Management and Customer Satisfaction, they are going to establish a wide network of value
added products and services. Upon the request of customers and queries, they would like to
introduce their dresses through online for those customers who want to have at their doorstep.

Now the boutique has its own hand work unit, stitching unit and dying unit. The owner said
though the unit is still comparatively small they have a capacity of 180- 250 suits per month
depending on the designs as they make customized product. Every product is given immense
importance and also have the facilty to make it custom fit for the consumers. The business is
steadily growing and sees a lot of potential in the future by expansion to a better and more
spacious facility.

Product Introduction:
Every product made goes through the same kind of process. The company is divided into three
basic units. The stitching unit, the cutting unit and the hand work unit.

Cutting Unit:
Every order coming into firstly goes to the cutting unit. Once a product design is finalized a size
chart with the design is send to the cutting unit where a cutting master goes through the process
of inspecting the fabric and then cutting in accordingly. The fabric can be In house or provided
by the customer depending on the design. Once the product is cut it is send to the stitching
department or send to the hand work unit according to the design. If any dying is needed the suit
is directly send to the pot dying before going to stitching or handwork unit.

Hand work unit:

Usually fancy dresses are sent to this section for detailing the fabric with stones or other things.
This is all done with hand by workers who put the fabric on tables also known as Adda (Stone
work). This is usually the bottle neck in the production as this takes a long time to complete.
Two or more people work on the same suit for a few days before it is complete to send to the
stitching department. The work force in this unit also varies according to monthly work load but
usually 4 people work in this department on regular months where there isnt a spike in the
demand.

Economic Order Quantity:

Number of units required (N)= 250 units

Cost of placing an order (C) = Rs. 500

Annual carrying cost (K) = Rs. 75

Economic Order Quantity:

EOQ = 2CN

= 2 (250) (500)

75
 = 57.74 units

No. of orders placed annually:

= N / EOQ

= 250/57.74

= 4.33

Annual ordering cost:

= (N * C) / EOQ

= (250 * 500) / 57.74

= 2164.88

Average no. of units at any point in time:

= EOQ / 2

= 57.74 / 2

= 28.87

Annual carrying cost:

= K * (EOQ / 2)

= 75 * 28.87
 = 2165.25

Stitching unit:
Stitching unit comprises of a total of 8 stitching machines. Usually the unit runs on 4-5 machines
but labor force is increased in the wedding or Eid season due to high demand. This unit is
dependent on the work provided by the hand work unit and the cutting department. The final
product is delivered out of this department and this stays the most profitable and most important
part of the whole unit.

Direct Material
The direct material part in this manufacturing unit includes all the fabrics that are used in making
the clothes like shamouse, grip, Bareeze silk, Pak chiffon cloth, pure chiffon, and sarouski. All
these are used in making the fabric.

The quantity purchased for shamouse is 50 yards and the cost at which it is bought is Rs. 120
per yard, which makes it a total of Rs.6000. The quantity purchased for grip is again 50 yards
and the cost is Rs.100 per yard which makes a total of Rs.5000. The quantity purchased for silk
is 80 yards and the cost is Rs.140 per yard making a total of Rs.11200. Quantity of Pak chiffon
purchased is 70 yards and the cost is Rs.130 per unit making a total of Rs.9100. Quantity
purchased for pure chiffon is 45 yards and the cost is Rs.325 making a total of Rs.14625.
Quantity of thread is 20 boxes and the cost is Rs.220 per box making a total of Rs.4400.

Direct labor
This part includes all the labor involved in making the clothes. It includes stitching person, adda
person, embroidery person, and the dyers cost. There are 4 stitching persons working and the
minimum shift for them daily is 9 hours and the hourly wage for them is Rs.100. There are 4
adda persons working and their minimum shift for the day is 8 hours and their hourly wage is 80
rupees making it a total of Rs.2560. There is only one embroidery person working whose
minimum shift is 4 hours a day and the hourly wage is Rs.125, making a total of Rs.500. There is
only one dyer working whose minimum shift is 8 hours and the wage is Rs.90 per hour making a
total of Rs.720. All in all, this department costs Rs.7380.

Factory Overheads
This part includes the rent of the place which is Rs.40,000. The electricity expense is Rs.30,000.
The wage of guard is Rs.18,000. The expense for sui gas is Rs.6,000. And the wage of Maid is
Rs.3,000 and other expenses are Rs.12,000 which makes a total of Rs 109,000.

Cost of Goods Sold Statement:

Sha Posh
Cost of Goods Sold Statement
For the Month Ended October 31, 2015

Rupees Rupees

Direct Materials

Beginning material inventory, October 1 3400

Purchases of materials:
Aluminum Foil 56,075
Plastic Inners 12,000
68,075
Materials available for use 71,475

Closing inventory, October 31 (5000)

Direct material consumed 66475

Direct labor:

Cutting person 3600

Punching person 2560

Molding person 500

Polishing Person 720

7380

Prime cost 73855

Factory Overheads:

Rent 40000

Electricity 30000

Gas 6000

Guard 18000

Servant 3000
Other factory expenses 12000

Total Factory Overheads 109,000

Total manufacturing cost 182855

Beginning WIP inventory, October 18000

Ending WIP inventory, October 31 (15000)

Cost of goods manufactured 175855

Beginning Finished goods inventory, October 17800

Cost of Goods available for sale 183655

Ending finished goods inventory, October 31 (18000)

Cost of Goods sold 164855

Income Statement:
Sha Posh
Income Statement
For the month ended October 31, 2015

Rupees Rupees
Sales 356,600
 Cost of Goods Sold (164,855)

Gross Profit 191,745

Operating expenses:

Selling expenses:

Depreciation expense-machinery 5,000

Delivery expense 10,000

Misc. selling expenses 10,200

Total selling expense (25,200)

Administrative expenses:

Office salaries expense 8,000

Rent expense 5,000

Total administrative expense (13,000)

Total operating expenses (38,200)

Income from operations 153,545

Interest Expense 30,000

Net Income 123,545

Direct Material Calculations:

Direct Labor Calculation:

Daily Wage Rate Plan:

Departments Hourly wages Minimum shift daily Daily rates

Cutting 100 9 Rs. 900

Punching 80 8 Rs. 640

Molding 125 4 Rs. 500

Polishing 90 8 Rs.720
Job Cost Sheets:
Factory Overhead Calculations:

Calculations of Predetermined Overhead Rates:

Factory Overhead per Unit:

Estimated FOH

Estimated units of production

= 28,855 = 13.02/unit

22,150

Percentage of Overhead per direct material cost:

Estimated FOH

Estimated Material Cost

= 28,855 x 100 = 27.29%

105,700

Percentage of Direct Labor Cost:

Estimated FOH
 Estimated DL Cost

= 28,855 x100 = 39%

73,800

Rate per Direct Labor Hour:

Estimated FOH

Estimated DL Hours

= 28,855 = Rs. 480.90

60

Variances:

Actual Direct Labor Hours worked during the month: 126 + 60 + 80 = 266

Based on the DL hour rate calculated i.e. Rs. 480.90

** 266 x 480.90 = Rs. 127,919.40

Actual Budget Applied Total Spending Idle

Factory Allowance Factory Overhead Variance Capacity
Overhead (based on Overheads Variance Variance
Capacity
Utilized)
Rs. 109,000 Fixed : Rs. Rs. Rs. (102,000) Rs. 83,080.60
Rs. 61,000 127,919.40 (18,919.40)
 Variable: Favorable** Favorable Unfavorable
Rs.150,000
Total: Rs.
211,000

The Spending variance refers to the difference between the actual factory overhead incurred and
the budget allowance estimated for the capacity utilized. The Actual activity was 266 direct labor
hours worked. The actual overhead i.e. Rs. 109,000 is less than the budget allowance i.e. Rs.
211,000, thus, the balance is favorable.

The idle capacity variance is referred to the difference between budget allowance and the applied
factory overhead. The actual activity was 266 direct labor hours. The budgeted allowance was
Rs. 211,000 and the applied FOH was Rs. 127,919.40. The difference came out to be
unfavorable.

Reasons for Shortfall:

Temporary closure due to load management by suppliers of gas and electricity and for
maintenance
Actual production is planned to meet the market demand
It is difficult to describe precisely the production capacity of products being
manufactured since it fluctuates widely depending upon various factors such as
simple/multi-function articles, small and large size articles, special articles and the
pattern of articles adopted

Break-Even Analysis:

Formula for calculating Break-Even:

Fixed costs include the following:

Rent of the premises

Security guard salary
Maid salary

All of the above have no link with the production process. These costs are incurred at any point
even if the production level is zero.

Fixed cost amounts:

Rs. 40,000+ Rs. 18000+ Rs. 3000= Rs. 61,000

Contribution margin calculated by considering the sales amount and variable cost

Sales for the month of October till the date of data collection:

Lawn suit sales:Rs. 20,000

Formal suit sales:Rs. 35000
Sari one piece:Rs. 75000
Western gowns sales:Rs. 50,000
Other regular sales on specific orders:Rs. 100,000

Total sales:Rs. 280,000

Variable cost of making all these products:

Around Rs. 150,000. This includes all the costs incurred.

Contribution margin ratio:

=1 (V.C/SALES)

=1-(150,000/280,000)=0.46
Break even sales:

=61000/0.46

=Rs. 132,608

Break even in units:

=fixed cost/contribution per unit

Sales per unit and variable cost value is allotted on the manager perception on average
products
Contribution margin per unit:
=1400-420=980

Break even in units

= 132,608/980 = Around 136 units

280000 T.R

240000 T.C

200000

160000

120000

80000 F.C

40000
 50 100 150 200

Sales in units

Break even at Rs. 132608 and on 136 units

Total revenue: 1400*200= Rs. 280,000

Recommendations:
Use advertisement to increase demand and start working on full capacity as now most of
the months the manufacturing unit isnt working on full capacity.
Do not move to a bigger warehouse or production facility as it might increase the FOH
which isnt something the company should be looking to do at this point in time.