ILLUSTRATION 4.
ABC manufacturing co provides the following information for the month of October 2011
1st October 2011.
Raw materials 40,000
W.I.P 12,000
Finished goods 20,000
Stock on 31st October 2012
Raw materials 35,000
Work in progress 17,000
Finished goods 23,000
Purchases of raw materials 250,000
Factory wages 80,000
Salaries of supervisors 30,000
Factory rent 10,000
Factory power 5,000
Sundry factory expenses 15,000
Office salary 13,000
Sundry office expenses 7,000
Salesmen salary 18,000
Sundry selling expenses 6,000
Sales 500,000
Required;
- Prepare a production cost statement
-
Prepare a profit/loss statemen
I) COST STATEMENT FOR 30th SEPT 2012
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| Opening stock of (R.M) | 40,000 | |
| Add : purchases of (R.M) | 250,000 | |
| cost of R.M available for use | 290,000 | |
| less : Closing stock of (R.M) | 35,000 | |
| Cost of R.M used | 255,000 | |
| Add : Factory wages | 80,000 | |
| PRIME COST | 335,000 | |
| Add : Manufacturing overhead (M.O.H) | ||
| Supervisor’s salary | 30,000 | |
| Factory rent | 10,000 | |
| Factory power | 5,000 | |
| sundry factory expenses | 15,000 | 60,000 |
| 395,000 | ||
| Add: W.I.P(01.10.2011) | 12,000 | |
| 407,000 | ||
| Less: W.I.P(31.09.2012) | 17,000 | |
| PRODUCTION COST | 390,000 |
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II) PROFIT/LOSS STATEMENT FOR
30th SEPT 2012
| Sales | 500,000 | |
| Less: Cost of good sold | ||
| Opening stock of finished goods | 20,000 | |
| Add: Production cost | 390,000 | |
| 410,000 | ||
| Less: closing stock finished goods | 23,000 | 387,000 |
| Gross profit | 113,000 | |
| Less: Administration cost/expenses | ||
| Office salary | 13,000 | |
| Sundry office expenses | 7,000 | |
| Selling and nglish-swahili/distribution” target=”_blank”>distribution cost/expenses | ||
| Salesmen salary | 18,000 | |
| Sundry selling expenses | 6,000 | 44,000 |
| Net profit | 69,000 |
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BREAK EVEN POINT (B.E.P)
This is level of activity at which total sales revenue is equal to total cost (TR = TC). This means that profit = 0 which means there will be no profit and no loss.
ASSUMPTION OF B.E.P CHART
Selling price and variable cost per unit remain the same at various levels of output
- Fixed cost remain constant at all levels of activity within the given range
- It is possible to distinguish between the cost and sales of a single product only
- This chart shows the relationship between the cost and sales of a single product only
- The techniques of production remain unchanged.
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ILLUSTRATION
- You are required to prepare from the following information;
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- a break even chart
- contribution /sales graph or profit volume graph
-
show the margin of safety in this chart if actual level of output is 20’000 units
Selling price per unit is 100/=
Variable cost per unit is 50/=
Fixed cost is 600’000/=
BREAK EVEN CHART
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| LEVEL OF OUTPUT PER UNIT | FIXED COST | VARIABLE COST Tshs 50 per unit | T.COST | SALES Tshs 100 per unit | P & L |
| 5000 | 600,000 | 250,000 | 850,000 | 500,000 | -350,000 |
| 10,000 | 600,000 | 500,000 | 1,100,000 | 1,000,000 | -100,000 |
| 15,000 | 600,000 | 750,000 | 1,350,000 | 1,500,000 | 150,000 |
| 20,000 | 600,000 | 1,000,000 | 1,600,000 | 2,000,000 | 400,000 |
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MARGIN OF SAFETY
Margin = profit
-
Margin of safety ; This represents the difference between the actual level of activity and the breakeven level of activity e.g If 80% is actual level of activity and Break even is 30%, calculate marginal safety
=Margin of safety= Actual sales-BED sales
=Margin of safety = 80% – 30%
Margin of safety = 50%
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ANGLE OF INCIDENCE;
This shows at the breakeven point between the sales curve and total cost curve.
- This angle indicates the rate of increase in profit after the Breakeven point
- If this angle is wider, then profit will be increased at a higher rate after the breakeven point
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CALCULATION OF BREAK EVEN POINT
ILLUSTRATION 1
State the formula to calculate breakeven point in terms of unit to be produced and sold.
We are going to use the following abbreviations;
S.P = Selling price
C.P = Cost price
P = Profit
C.M = Contribution margin & contribution margin per unit = CM/U
S.P = C.P +P
C.P = F.C + V.C
Contribution margin = S.P – V.C
B.E.P In terms of unit produced = (F.C)/(Contribution margin per unit) =
B.E.P in terms of sales value= (F.C)/(CM/C) x (S.P)/U
Contribution margin per unit = (S.P)/U – (V.C)/U
Sometimes; variable cost = material + labour
Contribution margin ratio =(C.M)/(S.P) or (F.C)/(1-V.C/SP)
ILLUSTRATION 2
Star manufactures a product called plate, in his own factory. Fixed cost per month is 45’000, each unit of plate cost 8/= by way of material and 17/= by way of direct labor. The selling price per unit is 40/=. How many units must he manufactures and sale per month in order to Break even
SOLUTION;
GIVEN DATA
Fixed cost = 45’000
Selling price/unit = 40/=
Unit of plate by way of material = 8/=
Unit of plate by way of direct labor = 17/=
Contribution margin = selling price – variable cost
Variable cost = material + labor
Variable cost = 8 + 17
Variable cost = 25
Contribution margin = 40 – 25
15
=15
STATEMENT OF PROFIT / LOSS
Sales (3000 x 40/=) 120,000
Less; variable cost
Unit of plate by way of material ( 8 x 3000)= 24,000
Unit of plate by way of direct labor(17 x 3000)= 51,000
Fixed cost 45,000 (120,000)
B.E.P (Break Even Point) 0
The above presentation verify that sales of 120,000, profit will be ‘0’.
ILLUSTRATION 3
Basic facts as from the above problem assume that the company wishes to make a profit of 6000 per month. Calculate the number of units that she must produce and sale to attain this profit also calculate the amount of sales revenue that can generate this profit.
Solution;
(Fixed cost+desired profit)/(contribution margin unit)
Sales revenue = Quantity to be produced x SP/U
Let DM/U = 8
DL/U = 17
F.C = 45,000
Desired profit = 6000
Contribution margin = 15
SP/U = 40/=
Quantity to be produced = F.C + D.F/CM/U→(Fixed cost+Desired profit) ⁄ Contribution margin per unit
(45,000 + 6000)/ 15
(51,000/15) = 3400
Quantity to be produced = 3400
Sales revenue = Quantity to be produced x SP/U
= 3400 X 40
= 136,000
STATEMENT OF PROFIT/LOSS
| Sales | 136,000 | |
| less ; variable cost | ||
| unit of plate by way of material (8 x 3400) | 27,200 | |
| unit of plate by way of direct labour (17×3400) | 57,800 | |
| Fixed cost | 45,000 | -130,000 |
| PROFIT | 6,000 |
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ILLUSTRATION 4.
P.LTD manufactures a standard product called Pipi. The following is a summary of their cost incurred in 2008.
Fixed factory cost 24,000
Fixed administration cost 10,800
Direct labour 48,000
Depreciation of plant (variable cost) 8,000
In 2008, a total of 40’000 units of pipi were produced/ manufactured at a standard price of 5.20£ per unit.
The company has been approached by manufacturer/producer to supply annually 5000 units of pipi at 4.50£ per unit, At present the whole of P.LTD’s Plant capacity is being used, so to produce the additional 5000 units, the company will need to acquire plants at a cost of 20’000£ that will have a useful life of 10 years and no residual value. Additional production will also increase the factory cost by 5% and selling nglish-swahili/distribution” target=”_blank”>distribution cost by 10%.
Required:
Would you recommend that P.LTD should accept the order?
Solution:
STATEMENT OF PROFIT OR LOSS BEFORE ACCEPTING ORDER
| Sales (40’000 x 5.20) | 208,000 | |
| Less; variable cost | ||
| Material | 54,000 | |
| Direct labor | 4,000 | |
| Depreciation of plant | 8,000 | |
| FIXED COST | ||
| Fixed factory cost | 24,000 | |
| Fixed administration cost | 10,800 | |
| Fixed selling and nglish-swahili/distribution” target=”_blank”>distribution cost | 3,200 | (148,000) |
| PROFIT BEFORE ACCEPTING ORDER | 60,000 |
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STATEMENT OF PROFIT/LOSS AFTER ACCEPTING THE ORDER
| Sales revenue (40,000 x 5.2) | 208,000 | |
| (5000 x 4.5) | 22,500 | 230,500 |
| less ; TOTAL COST | ||
| Material (45,000 x 1.35) | 60750 | |
| Direct labour (45,000 x 1.2) | 54,000 | |
| Depreciation of plant ; old plant ; 8000 | ||
| new plant; 2000 | 10,000 | |
| Fixed factory cost (24,000 x 5% )+24,000 | 25,200 | |
| Fixed admin. Cost | 10,800 | |
| Fixed selling and nglish-swahili/distribution” target=”_blank”>distribution cost (32000 x 10%) | 3,200 | 163,950 |
| PROFIT MADE BY BOTH NEW AND OLD ORDER | 66,330 |
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Recommendations:
P Ltd should accept the order since it’s results to additional profit of Tshs. 6,550 (66,550-60,000)
WORKINGS
RAW MATERIALS
Material before order = 54,000
Units produced before order = 40,000
54,000/40,000 =1.35 units
= (Units produced before order + Additional units for order)
= (40,000 + 5000)
= 45,000
DIRECT LABOUR
Direct labor before order = 48,000
Units produced before order = 40,000
= 48,000/40,000 = 1.2 units
(Units produced before order + Additional units for order)
= 40,000 + 5,000
= 45,000