Cost Accounting

Final Project Submission

Ma’am Mehreen Furqan

Asma Fakhar
Jawad Ijaz
Mariam Ahmed
 Type of Business

Amigos Kitchenette is a small-scale restaurant located in Barkat Market, Lahore, Pakistan which
is catering to the middle-middle and upper-middle class. they have a diverse menu which
includes:
 Starters/appetizers
 Soups and salads
 Chinese
 Continental
 Thai
 Pizza
 Fast food
 Desserts
 Drinks
Hence, with these attributes, our chosen company, Amigos Kitchenette is a service business.

Cost System of the Business

Amigos Kitchenette uses a process costing system rather than a job order costing system. This is
because each of the dishes are standardized, with a specific quantity of what is to be served on
the plate. For example, a standardized portion of rice and gravy for Chinese. Although each
customer would be ordering the dish which best suits their preference, the dish itself which will
be ordered would be standardized as nothing unique or customized is being done.

The Three Basic Types of Costs

In any company or organization, there are three types of costs being incurred, namely:
1. The cost of direct material
2. The cost of direct labor
3. The cost of factory overheads
Without analyzing these costs, a company cannot function as it will have no check and balance
on its most relevant costs as these costs are directly associated with production, hence, affecting
sales and ultimately the profits that will be earned.
For our chosen company, Amigos Kitchenette, the cost of direct material, the cost of direct labor
and factory overheads include the following:

DIRECT MATERIAL DIRECT LABOR FACTORY OVERHEADS

Spices Cook Electricity
Oil Assistant Cook Rent
Cooking Utensils Telephone Bills
Chicken Advertising and Admin Fees
Vegetables Tax
Rice Waiters Salary
Other raw material Cashier
Internet Bill
Gas

Classification of Costs

The three basic types of costs identified above can further be classified as either fixed or variable
costs to further make our analysis easier.
FIXED COSTS VARIABLE COSTS
Cooking Utensils Spices
Rent Oil
Tax Chicken cost
Telephone Bill Vegetable cost
Internet Bill Rice cos
Electricity Cost of other raw materials
Gas
Advertising and Admin Fees
Cook and assistant cook salaries
Waiters and cashier salaries
 Order Point

The order point refers to the number of units that a company has “on hand” when placing an
order of replenishment with the supplier. When calculating the order point, three basic things
must be taken into consideration which are as follows:
 The usage
 The lead-time
 The safety-stock
For Amigos Kitchenette, the following data was available:

(Daily usage x Lead Time) + Safety Stock = Order Point

(100,000 x 5) + 165,000 = 665,000

Economic Order Quantity

Economic order quantity, referred to simply as EOQ, is the optimal quantity that is to be ordered
at a given time. The main benefit of calculating and knowing the economic order quantity is that
it minimizes the total costs and the carrying costs for any organization.
The following data for calculating the economic order quantity was available to us:

EOQ = 2CN
 K

EOQ = 2(40,000) (1,200,000)

30,000

EOQ = 1788.854

Inventory Management

Amigos Kitchenette does not use a just-in-time inventory cost system. The restaurant believes in
ordering daily or weekly as the need may be to cater to the demand. According to the sales and
the raw material that is being used, orders for supplies are placed. However, due to safety stock
being in place, just-in-time inventory is not practiced by Amigos Kitchenette.

Scrap, Spoiled and Defective Goods

Amigos Kitchenette does not have any spoiled food left at the end of the day. Through proper
planning, food is prepared according to the demand and primarily as customers walk-in and
order a particular dish. Also, the restaurant focuses strictly on a “no wastage” policy with
optimal utilization of resources and raw materials available.

Payroll and Labor

Amigos Kitchenette employs both skilled and un-skilled labor. The skilled labor consists of the
cook, the assistant cook and the cashier while the un-skilled staff consists of the waiters and the
dishwasher. The details of the payroll are illustrated as below:

MINIMUM WAGE RATES

COOK 20,000 TO 40,000
WAITER 15,000
CASHIER 20,000

PAYROLL BY AMIGOS KITCHENETTE

TYPE OF LABOR PAY CRITERIA
COOK 30,000 SALARIED
WAITER 1,500 HOURLY
CASHIER 2000 HOURLY
DISHWASHER 1,400 HOURLY
SALES AND ADMIN 25,000 SALARIED

Note: The hours being 10. Thus, for example, the waiter is paid 15,000 rupees based on a rate
of 1,500 for working 10 hours.

Taxes and Benefits to Labor

Amigos Kitchenette pays the set amount of GST of 17% which goes directly to the government.
All the payments made to the labor are not charged with tax as they do not fall in the tax bracket
given. Moreover, when looking at the incentives given to the labor, apart from the financial
benefits, they are given a meal two-times in a day. Apart from this, no other incentives are given
to the labor.

Distribution of Payroll and Taxes

 ESTIMATING THE BUDGET FOR 3 MONTHS

SALES BUDGET
MONTH Expected Sales Price Total
May 60,000 400 24,000,000
June 100,000 400 40,000,000
July 80,000 400 32,000,000
TOTAL 96,000,000

PRODUCTION May June July

BUDGET
Budgeted Sales 60,000 100,000 80,000
Ending Inventory 6000 10,000 8000
Total Units Needed 66,000 110,000 88,000
Beginning Inventory 45,000 6000 10,000
Units to Produce 21,000 104,000 78,000

MATERIALS May June July

BUDGET
Units to Produce 21,000 104,000 78,000
Unit Cost 3 3 3
Material Needed 105,000 520,000 234,000
Ending Inventory 2100 10,400 7800
Total Materials 107,100 530,400 241,800
Needed
Beginning Inventory 8000 2100 10,400
Material Purchases 99,100 528,300 231,400
DIRECT LABOR May June July
BUDGET
Units to Produce 21,000 104,000 78,000
Hours per Unit 0.10 0.10 0.10
Total Hours Needed 2100 10,400 7800
Wage Rate per 10 10 10
Hour
Direct Labor Cost 21,000 104,000 78,000

FACTORY OVERHEADS BUDGET

Indirect Materials 25,000
Indirect Labor 49,000
Depreciation of Building 10,000
Depreciation of Equipment 8000
Total Factory Overhead Cost 92,000

FACTORY May June July

OVERHEADS
PAYMENT
BUDGET
Units to Produce 21,000 104,000 78,000
Variable Overhead 0.33 0.33 0.33
Rate
Variable Overhead 6930 34,320 25,740
Cost
Fixed Overhead 33,000 33,000 33,000
Total 39,930 67,320 58,740

COST OF GOODS May June July

SOLD (SELLING
AND
ADMINISTRATIVE)
BUDGET
Budgeted Sales 60,000 100,000 80,000
Variable S&A per 0.33 0.33 0.33
 Unit
Variable S&A 19,800 33,000 26,400
Expense
Fixed S&A Expense 33,000 33,000 33,000
Total S&A Expense 52,800 66,000 59,400

BUDGETED INCOME STATEMENT

Beginning work in process 0
Materials 858,800
Labor 203,300
Factory Overheads 165,990
Ending work in process 0
Cost of goods manufactured 1,228,090
Beginning finished goods 8000
Ending finished goods 2000
Cost of goods sold 1,234,090

AMIGOS KITCHENETTE
BUDGETED INCOME STATEMENT
FOR 3 MONTHS ENDED JULY 31
Sales 2,000,000
Cost of goods sold 1,234,090
Gross margin 765,910
Selling and administrative expenses 178,200
Operating income 587,710

Cost Volume Profit and Break-Even Analysis

Sales Revenue (break-even) = Fixed manufacturing and administrative and selling costs +
variable manufacturing and administrative and selling costs
33,000 + 33,000 = 66,000 rupees

Break-even volume (rupees) = Total fixed costs / 1 – (variable costs/sales revenue)

33,000 / 1 – (33,000 / 66,000) = 66,000 rupees

Break-even volume (units) = Total fixed cost / unit contribution margin per unit
33,000 / 66 = 500 units

COMPUTING SALES TO ACHIEVE TARGET OPERATING INCOME

To achieve an income of 100,000 rupees, with fixed costs of 33,000 and variable costs per unit of
33 and the food being sold at a unit cost of 10
Fixed costs + Target income / Unit contribution
10 – 3 = 7
33,000 + 100,000 / 7 = 19,000 units

MARGIN OF SAFETY
Actual sales – break-even sales
100,000 – 19,000 = 81,000 units

Revenue
 TC
Profit
Costs FC
Loss

500 units (break-even)

Volume

APPLIED AND ACTUAL COSTS FOR THE YEAR

FLEXIBLE BUDGETING APPLIED AND ACTUAL COSTS

APPLIED ACTUAL VARIANCE
60,000 UNITS 60,000 UNITS
SALES @33/UNIT 1,980,000 1,800,000 180,000 U
DIRECT
MATERIALS:
RAW MATERIAL 900,000 300,000 600,000 F
@ 15/UNIT
DIRECT LABOR 600,000 900,000 300,000 U
@ 10/UNIT
FACTORY 1,980,000 342,500 1,637,500 F
OVERHEADS @
33/UNIT
CONTRIBUTION 5,460,000 3,342,500 2,117,500 U
MARGIN
FIXED FOH AND 344,190 367,500 23,310 U
S&A EXPENSE
OPERATING 5,115,810 2,975,000 2,140,810 U
INCOME