Determining the Production cost and

Cost Minimization

On
Muslim Sweets and Bakery

Managerial Accounting
Course Code: ACT202
Section: 16

Date of submission- 31/06/2020

 Assignment
On

Determining the Production cost and Cost Minimization

Course: ACT202
Section: 16

Submitted to:
Mr. Rezwanul Mumtahin Husain
Faculty Member
Department of Accounting and Finance
School of Business and Economics
North South University

Submitted by:
NAME ROLL ID
A.B.M. Foysal Hossain 1 1320664030
Farhadul Islam 13 1811438030
Md. Tanjim Ibne Hassan 14 1821025630
Shanjida Akter 16 1821350630
Eftakharul Haque Bappy 20 1821639630

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Contents

Executive summary.......................................................................................... 5
Product process and Details ............................................................................ 6
Cost of the product Per Unit ............................................................................ 7
Cost Identification ........................................................................................... 8
Product Cost .................................................................................................... 9
Total manufacturing overhead cost .............................................................. 10
Manufacturing Cost ....................................................................................... 11
Finding selling price ....................................................................................... 11
Cost Volume-Profit ........................................................................................ 13
Conclusion ..................................................................................................... 16
Reference ...................................................................................................... 17

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To
Rezwanul Mumtahin Husain (RMH1)
Lecturer,
Department of Accounting and Finance
School of Business and Economics
North South University, Bashundhara R/A
Dhaka, Bangladesh

Subject: Submission of a report on the topic “Determining the Production cost and Cost Minimization”
of Muslim Sweets and Bakery, Kallyanpur, Mirpur.

With due respect, we have generated a report for ACT202 (Managerial Accounting) course based on
secondary level of gathered information related to the product and collected data to find out different
cost in accounting principles. This report carries implementation of the insights and understanding
managerial activities and decision making based on the cost occurred in different process to finalize
production. It becomes a challenge to put our study material into real life business activities. We tried
the level best to get accurate information and cost data to put on the report.

We would like to thank you for unlimited support and to provide opportunity to analyse current
phenomena and enhance our knowledge and skills for the report.

Yours sincerely,
A.B.M. Foysal Hossain
Farhadul Islam
Md. Tanjim Ibne Hassan
Shanjida Akter
Eftakharul Haque Bappy

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 Executive summary

This report is done as a part of our study, which helped us to understand the costing of Muslim Sweets
and Bakery, Kallyanpur, Mirpur. The project is based on determining the cost of making Chocolate Cake.
In this report, we tried to find out the cost of making Chocolate Cake from buying the raw materials till
selling it to the customers. For determining the cost of the product, we looked for their product details
and then we determined the cost of raw materials, direct labour cost and MOH cost. At first, we found
out the cost of the Chocolate Cake by the summation of direct materials, direct labour and
manufacturing overhead. Then we understood that they follow process costing and absorption costing
as costing method. Then we determine the selling price. Then we calculated their profit margin by
deducting the cost from revenue. Later we deducted total variable cost from sales and then we found
the contribution margin which will cover our product fixed cost. After that, we calculated the break-even
point and break-even revenue which shows such a quantity in which there will be a bit of profit. Then
we calculated Degree of Operating Leverage. Lastly, we calculated per unit costs for Chocolate Cake
industry. Besides, we also have collected information from local manufacturer.

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Product process and Details:

Chocolate cakes are normally made by using Flour, eggs, sugar, salt, chocolates, essences. Local
manufactures produce this type of cakes in almost every cities and villages. And for making their
chocolate cakes perfect, they have to follow some recipe.
The process of making a perfect chocolate cake is given below.

Figure 1: Process Flow of Baking Cake

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Cost of the product Per Unit:
The following table shows some tentative different costs that will be incurred in the different stages of
the production process:

Direct Material:
Cost of direct materials needed per Unit BDT
Course Flour (19tk per kg, used 550g per unit) 10.45
Dozens of Eggs 80.08 take per dozen, use 1 egg per unit) 7.00
Salt (35tk per kg, used 15g per unit) 0.525
Vegetable oil (95tk per litter, used 0.050 litter per unit) 4.75
Sugar (73tk per kg, used 32g per unit) 2.3
Chocolate (use 1 unit for cake) 6.123
Powder milk (250tk per kg, used 38g per unit) 9.5 taka
Total direct material cost per unit 40.648

Direct Labor:
Cost of direct labor needed per Unit
Direct labor cost (13.60tk for each hour, 15minutes per unit) 3.40
Total 3.40

Manufacturing Overhead:
Cost of Manufacturing Overhead needed per Unit
Packaging 2.00
Depreciation Expenses 0.83
Utility expense 5
Supervisor Salary 4
rent 7.5
Total 19.33

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Cost Identification:

01. Procurement and Transportation cost: Manufacturers use human pull van to delivery their products
to the buyer. It costs around BDT 72000 on average yearly and around BDT 6000 per month.

02. Administrative expenses: To run the business, owner spend around BDT 108000 yearly and BDT
9000 per month.

03. Utility expenses: Gas connection charge, water supply and electricity cost around BDT120,000 yearly
and BDT 10000 per month.

04. Supervisor salary expense: It costs BDT 96,000 yearly and BDT 8,000 per month which is fixed.

05. Machinery Depreciation expense: At the beginning of their business, they have purchased some
quantity which around BDT 20000 yearly. So, per month it has BDT 1667.

06. Factory Rent: Yearly rent BDT 180,000 and monthly rent BDT 15,000.

07. Bakery manufacturer usually don’t advertise their product. However, they have BDT 48,000 have
spent in yearly and monthly BDT 4000.

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 Summary of Cost:
Direct Direct Manufacturing Period cost Fixed Variable
Material Labour overhead (per month) Cost Cost
Cost in BDT Cost Cost (monthly)
(Per Unit) (per unit)
Flour 10.45 10.45
Eggs 7 7
Salt 0.52 0.52
Vegetable oil 4.75 4.75
Chocolate 6.13 6.13
Sugar 2.3 2.3
Powder Milk 9.5 9.5
Delivery 6000 6000
Procurement
Advertising 4000 4000
cost
Administrative 9000 9000
salary
Direct Labour 3.40 3.40
Cost
Packaging cost 2.00 2.00
Per unit
Utility expense 10000 10000
Supervisor 8000 8000
Salary
Depreciation 1667 1667
Expenses
Factory Rent 15000 15000
Total 40.65 3.40 34,669 19,000 53,667 46.05

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Applied Manufacturing overhead cost:

Total fixed manufacturing overhead cost per month BDT 53,667

Total unit produced= 2000

Cost Per Total Unit Total Cost

unit
Variable Manufacturing
Overhead Cost
Packing 2.00 2000 4000

Total Variable BDT 4,000

Manufacturing overhead
cost
Fixed Manufacturing
Overhead Cost
Utility Expenses BDT 10,000
Supervisor Salary BDT 8,000
Depreciating Expense BDT 1667
Factory Rent Expense BDT 15,000
Total Fixed Manufacturing BDT 34,667
overhead cost
Total Estimated Overhead BDT 38,667
cost

Predetermined Overhead Rate = Estimated total MOH cost / Estimated Allocation base=BDT
38,667/68000DLH = BDT 5.69 / per DLH

NOTE: Allocation Base = Direct Labour Hour

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Finding selling price:

1. Process Costing:
Costing method is basically used determining in factory production where required raw materials
are manufactured to various products for market. This chocolate factory manufacturer record
manufacturing cost described method below:

Variable manufacturing overhead per unit= Direct Material (DM) + Direct Labour (DL)+ Variable
Manufacturing Overhead
= BDT (40.65+3.40+2.00)
= BDT 46.05

2. Absorption Costing:
Chocolate Cake manufacturer use absorption costing to get actual information and cost detail.
Here, we will be using absorption costing to allocate cost related to the production. It is used to
generate financial accounts.

(MOH=Manufacturing overhead*)

Fixed Manufacturing Overhead per unit = Fixed MOH / Units produced

= BDT 53,667 / 2,000units
= BDT 26.83 per unit

Manufacturing cost per unit = Direct Materials + Direct Labour + Variable MOH + Fixed MOH
= BDT 40.65+ BDT 3.40 + BDT 2.00 +BDT 26.83
= BDT 72.88

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Per unit selling price is considered based on the assessment below:

Unit of production 2000 pcs.

Variable cost (unit) 46.05 taka
Fixed Cost (Unit) 26.83 taka (BDT 53667/2000)
Total per unit costing 72.88 taka

 Sales executive offers around 60 take each unit of cake. The competitive advantage is to offering
good quality of product at lower price. They deliver to the seller in Kallyanpur Mirpur area.

 Chocolate cake manufacturer usually sell this cake from (80-100) taka
 Cost Volume-Profit

Income Statement
(Contribution Method)

Account detail Balance Ratio (%)

Sales (BDT 60 x 2000) 1,20,000 100
Variable expense BDT (46.05 x 13000) 92,100 77
Contribution Margin 27,900 23
Fixed expenses (37,500)
Net Operating Income 9,600

Contribution margin per unit = contribution /unit sell

= 27900/2000
=13.95 per unit

Break-even point in unit = Fixed expenses/unit CM

= 53667/13.95
= 3847 units

Break even in amount = Fixed expenses / CM ratio

= 53667/23%
= 2333

Our break-even point is 3847 units. This means after selling 3847 units or 2333 taka we will start making
profit.

Degree of operating leverage (DOL) = CM / net operating income

= 27900/9600
= 2.91

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Product Insight:

A. As while producing the chocolate cakes, various costs are incurred such as direct or indirect cost, but
as we are talking about the wastage in our production system, which means raw materials,
procurement, quality management system, packaging, we could not find any types of wastage.
Because the company is producing chocolate cakes. And in order to make a perfect chocolate cake,
they have to use standard raw materials, and it is not possible for them to decrease the volume of
our raw materials. That means, they cannot use less flour or eggs in the production process. So, we
can say that, there is no wastage in our entire production systems.

B. Manufacturer’s main focus is to maintain the quality of the chocolate cakes. So, there is no option
for them to reduce the production cost while maintaining the same quality as before. Because if they
want to do so, then they will have to use less priced Flour, milk, salt, oil and chocolates which will
reduce the quality of the chocolate cakes and it will be also unhygienic for our consumers.

C. There are 2 ways for increasing profit. Either you have to reduce the production cost, or you have to
increase the sales. As the manufacturers are not decreasing the quality of their chocolate cakes, so
the main focus will be to increase the sales. But they can reduce the supplier cost, location cost, and
MOH cost. If they can find some local suppliers, who will provide all the materials for less amount
than before, than it will be good for them. Cost also varies from location to location. If they can find
some location where they will be able to rent a factory with lower price. That will be helpful for
increasing the profit margin. They can easily increase their sales. As we previously said, they don’t
spend a lot of money in advertising their chocolate cakes, but if they want to increase profit, then
they can advertise the product. Again, they can use some new ingredients so that they can make new
flavor in chocolate cakes and that will catch attention of all classes of customers. And that’s how we
can increase our profit.

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Price Comparison

Price comparison has become a challenge because local big manufacturer companies offers flavoured cake
in different weight and price. Since, Muslim Sweets satisfies local demand and the price is comparably low.

Qty. Manufacturer Cake category Net Weight Price (BDT) Availability

1 Muslim Sweets Chocolate Bakery Cake 125g 60 Yes
4 Dan Cake Chocolate Muffin (15tk) (25*4)100g 60 Yes
4 Dan Cake Vanilla Layer (20tk) (25*4)100g 80 Yes
4 Fu Wang Choco Pie (25*4)100g 80 Yes

The overall comparison is based on cost. Here, Chocolate cake manufactured by Muslim Sweets sells 125
gram cake for 60tka where as other competitors sell cakes which is lowers than the quantity or higher than
the focused price.

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Conclusion

To conclude we can say that Muslim Sweets and Bakery is selling a total unit of 13000 chocolate cakes and
their net operating income is 31,367 Tk. Which means, they are getting 13.952 Tk profit from each unit. That
means their selling price is higher than their production costs. And their break-even point is 10,751 units.
And as they are selling 13000 units of chocolates that means they are gaining their profit after selling 10,751
units or 6521.7 Tk. This indicates that, the company is doing well. And the company also has some
advantages like, they are not wasting anything while producing the chocolate cakes and they can also
produce good quality product at a lower price, which will be very helpful for them in future to avoid
competitive advantages. And as the company is not spending more money in advertising, so this company
can easily increase their sales by advertising their products. So, they have to spend more money in
advertising.

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Reference

1. Retrieved from Muslim Sweets and Bakery: https://www.facebook.com/pages/category/Wholesale-

Bakery/Dhaka-muslim-sweets-and-bakery

2. (2018-2019). 15th edition by Garrison, Managerial Accounting (p. 743). Mc Graw Hill.

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