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COST ACCOUNTING

FACTORY OVERHEAD VARIANCE ANALYSIS

Submitted To:

SIR HAMMAD

Submitted by:

Course Code # 5530

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ACKNOWLEDGEMENT

We are really humble persons and would unable to complete this

presentation without the help and grace of almighty Allah.

We would like to acknowledge the efforts of our parents they made for

our education and it is their continuous encouragement and support

that we are able to complete our presentation successfully.

We would like to acknowledge the efforts of our teacher Sir who

provides us the opportunity to explore the nuts and bolts of Business

Communications.

“Only that education deserves emphatically to be termed cultivation of

the mind which teaches young people how to begin to think”. (Mary

Wollstonecraft)

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EXECUTIVE SUMMARY

This project is related with standard cost and variances shown

by these cost and the organization we chose for this matter is Bata

shoe because it is also concern with manufacturing concern material,

labor and FOH. As there is actual and standard cost set by the

organization and these cost set by the organization and these cost

changes with time and does not remain same. As Bata shoe is one of

the larger manufacture of shoe in Pakistan and they provide and

produce shoe foe each type of person for earning more and more

customer. The cost of producing and product are changes with time

and it does not remain same and the variances shown in the cost.

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Table of Contents

Introduction .......................................................................................... 5

Factory Overhead Variance ................................................................ 5

Factory overhead variance formulas ................................................ 17

Introduction to Organization ............................................................ 18

Brief history of Organization ............................................................. 18

Significance of the issue ................................................................... 19

PRACTICAL STUDY ........................................................................... 21

SWOT Analysis ................................................................................... 24

Data Collection Methods .................................................................... 25

SUGGESTIONS / RECOMMENDATIONS ........................................... 26

CONCLUSION ........................................................................... 26

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INTRODUCTION TO TOPIC

Overhead variances analysis

FACTORY OVERHEAD VARIANCES:

Remember that manufacturing costs consist of direct material, direct labor, and

factory overhead. You have just seen how variances are computed for direct

material and direct labor. Similar variance analysis should be performed to

evaluate spending and utilization for factory overhead. But, overhead variances

are a bit more challenging to calculate and evaluate. As a result the techniques

for factory overhead evaluation vary considerably from company to company (and

textbook to textbook). If you progress to advanced managerial accounting

courses, you will likely learn about a variety of alternative techniques. For now,

let's focus on one comprehensive approach.

VARIABLE VERSUS FIXED OVERHEAD:

To begin, recall that overhead has both variable and fixed components (unlike

direct labor and direct material that are exclusively variable in nature). The

variable components may consist of items like indirect material, indirect labor, and

factory supplies. Fixed factory overhead might include rent, depreciation,

insurance, maintenance, and so forth. Because variable and fixed costs behave

in a completely different fashion, it stands to reason that proper evaluation of

variances between expected and actual overhead costs must take into account

the intrinsic cost behavior. As a result, variance analysis for overhead is split

between variances related to variable overhead and variances related to fixed

overhead.

VARIANCES RELATING TO VARIABLE FACTORY OVERHEAD:

The cost behavior for variable factory overhead is not unlike direct material and

direct labor, and the variance analysis is quite similar. The goal will be to account

for the total "actual" variable overhead by applying: (1) the "standard" amount to

work in process, and (2) the "difference" to appropriate variance accounts. This

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accounting objective is no different than observed for direct material and direct

labor!

On the left-hand side of the following graphic, notice that more is spent on actual

variable factory overhead than is applied based on standard rates. This scenario

produces unfavorable variances (also known as "underapplied overhead" since

not all that is spent is applied to production). The right-hand side is the opposite

scenario (favorable/overapplied overhead). Beneath the graphics are T-accounts

intending to illustrate the cost flow. As monies are spent on overhead (wages,

utilization of indirect materials, etc.), the cost (xxx) is transferred to the Factory

Overhead account. As production occurs, overhead is applied/transferred to Work

in Process (yyy). When more is spent than applied (as on the left scale), the

balance (zz) is transferred to variance accounts representing the unfavorable

outcome. When less is spent than applied (as on the right scale), the balance (zz)

represents the favorable overall variances.

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EXPLORING VARIABLE OVERHEAD VARIANCES:

A good manager will want to explore the nature of variances relating to variable

overhead. It is not sufficient to simply conclude that more or less was spent than

intended. As with direct material and direct labor, it is possible that the prices paid

for underlying components deviated from expectations (a variable overhead

spending variance). On the other hand, it is possible that the company's

productive efficiency drove the variances (a variable overhead efficiency

variance). Thus, the Total Variable Overhead Variance can be divided into a

Variable Overhead Spending Variance and a Variable Overhead Efficiency

Variance.

Before looking closer at these variances, it is first necessary to recall that

overhead is usually applied based on a predetermined rate, such as $X per direct

labor hour (you may find it helpful to review this concept from Chapter 19). This

means that the amount debited to work in process is driven by the overhead

application approach. This will become clearer with the following illustration.

AN ILLUSTRATION OF VARIABLE OVERHEAD VARIANCES: Let's return to the

illustration for Blue Rail. Variable factory overhead for August consisted primarily

of indirect materials (welding rods, grinding disks, paint, etc.), indirect labor

(inspector time, shop foreman, etc.), and other items. Extensive budgeting and

analysis had been performed, and it was estimated that variable factory overhead

should be applied at $10 per direct labor hour. During August, $105,000 was

actually spent on variable factory overhead items. The standard cost for August's

production was as follows:

The total variable overhead variance is unfavorable $3,000 ($102,000 -

$105,000). This may lead to the conclusion that performance is about on

track. But, a closer look reveals that overhead spending was quite favorable,

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while overhead efficiency was not so good. Remember that 12,500 hours were

actually worked. Since variable overhead is consumed at the presumed rate of

$10 per hour, this means that $125,000 of variable overhead (actual hours X

standard rate) was attributable to the output achieved. Comparing this figure

($125,000) to the standard cost ($102,000) reveals an unfavorable variable

overhead efficiency variance of $23,000. However, this inefficiency was

significantly offset by the $20,000 favorable variable overhead spending variance

($105,000 vs. $125,000). The following diagram may prove useful in helping you

sort out the variable overhead variances:

JOURNAL ENTRY FOR VARIABLE OVERHEAD

VARIANCES:

The following journal entry can be used to apply variable factory overhead to

production and record the related variances:

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8-31-XX Work in Process Inventory 102,000

Variable Overhead Efficiency

Variance

23,000

Variable OH Spending

Variance 20,000

Factory Overhead 105,000

To increase work in process for the

standard variable overhead, and

record the related efficiency and

spending variances

CAREFUL INTERPRETATION OF VARIABLE OVERHEAD

VARIANCES:

Material and labor variances are more easily interpreted than variable overhead

variances. The variable overhead efficiency variance can be somewhat confusing

because it may reflect efficiencies or inefficiencies experienced with the base used

to apply overhead, rather than overhead itself. For Blue Rail, remember that the

total number of hours was "run up" beyond plan because of inexperienced

labor. A good manager will want to keenly evaluate the cause and meaning of

variable overhead variances. In fact, the variances are likely only the point of

beginning for a proper evaluation. Remember that variable overhead is made up

of many components. For Blue Rail, it is conceivable that the inexperienced

welders used more welding rods, and the welds were likely sloppier requiring

more grinding to smooth out the joints. Further, it is likely that inspectors had to

spend more time checking work to make sure that the welds were strong. While

the overall variance calculations would provide signals about these issues, a

manager would actually need to drill down into each individual cost component

(perhaps calculating variances for each budgeted line item rather than just on an

overall basis) to truly find areas for business improvement.

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How important is control of overhead? A study of self-made 50-year old

millionaires revealed very little correlation between wealth and income, and a

strong correlation between wealth and life-long savings patterns. Although the

study is related to individuals, the message rings equally true for

business. Careful control of spending is essential to long-term value

building. Businesses vary considerably in their attitudes and discipline as it

relates to control of overhead. Some businesses are rather cavalier about

controlling things like light/electricity usage, control over low cost parts, efficiency

in shipping methods, etc. Others are rather fanatical about maintaining absolute

and stringent controls. For instance, one controller of a manufacturing plant was

frustrated with the number of screws that were dropped and left to be swept away

at the end of each business day. These were seemingly insignificant to the

employees. In frustration, the controller scattered a box of nickels onto the factory

floor -- by the end of the day none remained for the janitorial staff to sweep

away. A subsequent memo was issued reminding everyone that screws cost 5¢

each. The rather obvious point was to draw a comparison between the nickels

that everyone was eager to recover and the screws for which there was little

concern. To build a successful business, a good manager will keep a keen eye on

all overhead items, and control them with vigor. The variable overhead variances

are macro indicators of success in accomplishing this goal.

VARIANCES RELATING TO FIXED FACTORY OVERHEAD:

Frequently (but not always), actual fixed factory overhead will show little variation

from budget. This results because of the intrinsic nature of a fixed cost. For

instance, rent is usually subject to a lease agreement that is relatively

certain. Depreciation on factory equipment can be calculated in advance. The

costs of insurance policies are negotiated and tied to a contract. Even though

budget and actual numbers may differ little in the aggregate, the underlying fixed

overhead variances are nevertheless worthy of close inspection.

AN ILLUSTRATION OF FIXED OVERHEAD VARIANCES:

Let's take one final look at Blue Rail. Assume that the company budgeted total

fixed overhead at $72,000; only $70,000 was actually spent (seemingly a good

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outcome). Here our accounting objective will be to allocate the $70,000 actually

spent between work in process and variance accounts. The temptation would be

to book $72,000 into work in process and reflect a $2,000 offsetting favorable

variance -- but that would be the wrong approach!

Instead, the Work in Process account should reflect the standard fixed overhead

cost for the output actually produced. We get to this calculated value by

reconsidering the company's original assumptions about production. Assume that

Blue Rail had planned on producing 4,000 rail systems during the month;

remember that only 3,400 systems were actually produced -- output was

disappointing, perhaps due to the inexperienced labor pool. This means that the

planned fixed overhead was $18 per rail ($72,000/4,000 = $18). Because three

labor hours are needed per rail, the fixed overhead allocation rate is $6 per direct

labor hour ($18/3). Use this new information to consider the following illustration

for fixed factory overhead (remember from the earlier discussion that the standard

labor hours for the actual output were 10,200):

By reviewing this familiar looking illustration, you can see that $61,200 should be

allocated to work in process. This reflects the standard cost allocation of fixed

overhead that would be attributable to the production of 3,400 units (i.e., 10,200

hours should be used to produce 3,400 units). Notice that this differs from the

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budgeted amount of fixed overhead by $10,800, representing an unfavorable

Fixed Overhead Volume Variance. In other words, since production did not rise to

the anticipated level of 4,000 units, much of the fixed cost (that was in place to

support 4,000 units of output) was "wasted" or "under-utilized." Thus, the

measured volume variance is highly unfavorable. If more units had been

produced than originally anticipated, the fixed overhead volume variance would be

favorable (this would reflect total budgeted fixed overhead being spread over more

units than originally anticipated). For Blue Rail, the volume variance is offset by

the more easily understood favorable Fixed Overhead Spending Variance of

$2,000; $70,000 was spent versus the budgeted $72,000. Together, the two

variances combine to reveal a net $8,800 unfavorable Total Fixed Overhead

Variance.

JOURNAL ENTRY FOR FIXED

OVERHEAD VARIANCES:

The diagram at right illustrates the

flow of fixed costs into the Factory

Overhead account, and on to Work in

Process and the related

variances. Below is a compound

journal entry to apply fixed factory

overhead to production and record the

related variances:

8-31-XX Work in Process Inventory 61,200

Fixed Overhead Volume Variance 10,800

Fixed OH Spending

Variance 2,000

Factory Overhead 70,000

To increase work in process for the

standard fixed overhead, and

record the related volume and

spending variances

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RECAPPING STANDARDS AND VARIANCES:

The foregoing provided a painstakingly detailed account of the variances for Blue

Rail. Before moving on, it is best to put the entire subject in perspective. The goal

is to compare standard costs to actual costs. Blue Rail's work in process is

recorded at the standard costs found in the Blue circles (hint -- the work in process

inventory of blue rails is recorded at the amounts found in blue circles), while

actual costs are found in the red circles. These amounts are recapped in the table

below:

You will notice that the standard cost of $686,800 corresponds to the amounts

assigned to work in process inventory via the various journal entries, while the

total variances of $32,200 were charged/credited to specific variance

accounts. By so doing, the full $719,000 actually spent is fully accounted for in

the records of the Blue Rail.

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EXAMINING VARIANCES:

Not all variances need to be analyzed. One must consider the circumstances

under which the variances resulted and the materiality of amounts involved. One

should also understand that not all unfavorable variances are bad. For example,

buying raw materials of superior quality (at higher than anticipated prices) may be

offset by reduction in waste and spoilage. Likewise, favorable variances are not

always good. Blue Rail's very favorable labor rate variance resulted from using

inexperienced, less expensive labor. Was this the reason for the unfavorable

outcomes in efficiency and volume? Perhaps! The challenge for a good manager

is to take the variance information, examine the root causes, and take necessary

corrective measures to fine tune business operations.

In closing this discussion of standards and variances, be mindful that care should

be taken in examining variances. If the original standards are not accurate and

fair, the resulting variance signals will themselves can prove quite misleading.

BALANCED SCORECARD APPROACH TO PERFORMANCE

EVALUATION:

ALTERNATIVE PERFORMANCE EVALUATION TECHNIQUES:

Thus far, this chapter has focused on budgets, standards, and variances to

assess entity performance. However, other non-financial metrics should also be

employed in performance evaluation. This is sometimes referred to as

maintaining a balanced scorecard, meaning that performance assessment should

take a holistic approach. Long-term business success will not be achieved if the

focus is only on near-term financial outcomes. At the same time, financial goals

are not abandoned; the goal is to achieve balance.

With the balanced scorecard approach, an array of performance measurements

are developed. Each indicator should be congruent with the overall entity

objectives. Further, each measure should be easily determined and

understood. These measurements can relate to financial outcomes, customer

outcomes, or business process outcomes. Although a balanced scorecard

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approach may include target thresholds that should be met, the primary mantra is

on improvement. This means that all participants are continually striving to beat

pre-existing scores for each measure.

We saw how responsibility accounting concepts caused performance reports to be

prepared for different steps in the corporate ladder. This notion is equally

applicable to the balanced scorecard approach. The overall corporate entity may

have macro targets and measures. Similarly, sub-units will have their own unique

goals. A scorecard approach can even be pushed down to the individual

employee level. For instance, a retail store may require that tellers complete a

certain number of transactions per hour. This "quota" in essence would represent

a nonfinancial metric that can be scored for each employee.

THE BALANCED SCORECARD IN OPERATION:

We saw for Blue Rail Manufacturing a number of examples of financial goals that

could be included in a balanced scorecard assessment. Examples include the

standard cost for material, the standard labor hours per rail set, the expected

production level, and so forth. But, what would be some examples of customer

outcomes and business process outcomes?

Potential Customer Outcomes:

o Results of a customer satisfaction survey

o Product returns/warranty work rates

o The frequency that customers reorder (or do not reorder)

o Estimated market share

o New customers that are based on referrals of existing customers

o Frequency that customer bids lead to customer orders

o Customer complaint/compliment rates

o Price in comparison to competitors

Potential Business Process Outcomes

o Defect free units as a proportion of total production

o Frequency/size of product liability claims

o Time from order receipt to shipment

o Size of customer order backlogs

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o Lost production days due to out-of-stock raw materials or equipment

failure

o Employee turnover rate

o Employee morale survey results

o Employee accident rates/claims for workers' compensation

o Average experience level of employees

In reviewing this list of potential items for inclusion in a balanced scorecard

performance appraisal, you have probably thought of some additional items for

inclusion. The choice is up to management. The idea is to find those items that

drive business success in a way that is consistent with the corporate

philosophy. Perhaps Blue Rail has a goal of 100% customer satisfaction with

respect to quality, but knows that its price will be 20% higher than

competitors. Or, Blue Rail may have a goal of being the lowest cost provider and

will tolerate some degree of customer discord.

The metrics are intended to measure progress toward fulfillment of the corporate

objectives, and the managerial accountant is apt to be heavily involved in

gathering the necessary data for inclusion in the balanced scorecard performance

reports. These reports are often graphical in nature to facilitate easy use and

interpretation, with particular emphasis on timely identification of

trends. Sometimes, the metrics are prominently posted in the work place; perhaps

you have seen a sign at a construction site noting the number of consecutive

accident free work days. By prominent display of such data, employees are

constantly reminded of, and vigilant to meet, key performance goals.

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Factory Overhead Variances:

Factory overhead controllable variance formula:

(Actual factory overhead) – (Budgeted allowance based on standard hours

allowed*)

Factory overhead volume variance:

(Budgeted allowance based on standard hours allowed*) – (Factory overhead

applied or charged to production**)

Factory overhead spending variance:

(Actual factory overhead) – (Budgeted allowance based on actual hours

worked***)

Factory overhead idle capacity variance formula:

(Budgeted allowance based on actual hours worked***) – (Actual hours worked ×

Standard overhead rate)

Factory overhead efficiency variance formula:

(Actual hours worked × Standard overhead rate) – (Standard hours allowed for

expected output × Standard overhead rate)

Variable overhead efficiency variance formula:

(Actual hours worked × Standard variable overhead rate) – (Standard hours

allowed × Standard variable overhead rate)

Variable overhead efficiency variance formula:

(Actual hours worked × Fixed overhead rate) – (Standard hours allowed × Fixed

overhead rate)

Factory overhead yield variance formula:

(Standard hours allowed for expected output × Standard overhead rate) –

(Standard hours allowed for actual output × Standard overhead rate)

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INTRODUCTION TO ORGANIZATION:

Bata had traditionally targeted the lower middle and middle class

segments of the society and was now considering changes in its strategy to

be able to survive in the market. The MD of Bat a was considering the

efforts necessary to realign Bata Pakistan’s manufacturing, outsourcing,

distribution and brand strategy in the light of increased local competition

and Chinese imports.

BRIEF HISTORY OF THE COMPANY

The business that became the Bata Shoe Organization was

established on August 24, 1895 in Zlin, Czechoslovakia by Tomas Bata,

and included his brother Antonin and Sister Anna. Although this business

was new, the Bata name had been part of a tradition of shoemaking for

eight generations, spanning three hundred years.

It was one of the first modern day shoe ‘manufactures’ a team of

snitchers and shoemakers creating footwear not just for the local town, but

also for the distant retail merchants. This departure from the centuries old

tradition of the one man cobbler’s workshop was a brand new concept,

creating an entirely new industry.

The Bata enterprise revolutionized the treatment of employees and

labor conditions. Tomas consistently maintained a human focus, creating

opportunities fro development and advancement, and added compensation

for employees based on achievement.

In late 1985 Antonin was drafted into the army for compulsory military

service and lift family shoe business. Also that year, Anna left the company

to marry, leaving a young Tomas to build the business on his own.

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By 1905 Tomas had taken the new enterprise to 2200 pairs of shoes

per day, produced by 250 employees - utilizing resourceful imaginations,

skilled hands and modern machinery to keep up with demand. Under this

‘manufacturing’ system, productivity was greater then even before. Demand

grew rapidly in the early 1900’s despite material and manpower shortages,

cartel and the outbreak of World War 1, sales continued to increase,

reaching two million pairs per year by 1917.

As the enterprise prospered, so did the communities where it

operated, Tomas believed that a focus on people and public service was

critical for business success. The enterprise built housing, schools and a

hospital near the shoemaking plant in Zlin. It provided food and inexpensive

rent during very difficult times; when there was no help to be found. Bata

companies alter provided rail services, construction, insurance, publishing

and tannery in Zlin.

SINGNIFICANCE OF THE ISSUE

Material Cost Variance or Material Total Variance is the Variance in material

cost actually incurred on material and the material cost estimated on material.

Material Cost Variance can be derived as follows:

MCV = (Standard Quantity x Standard Rate) - (Actual Quantity x Actual

Rate)

Material Cost Variance can be sub-divided as follows:

1. Material Rate Variance or Material Price Variance is the variance in the

rate or price of material actually spent and the material rate/price estimate-

Material Rate Variance can be derived as follows:

MRV = Actual Quantity (Standard Price - Actual Price)

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2. Material Yield Variance: The difference between the actual output and the

standard expected output is the Material Yield Variance.

There are two methods of calculating Material Yield Variance. They are as

follows:

Input Method:

MYV = (Standard Input - Actual Input) x Average Cost / unit

Output Method:

MYV = (Actual Output - Standard Output) x Total Cost / unit

Labour and FOH calculated in same manner.

BREAK EVEN POINT

Break Even Point is the level of sales required to reach a position of no

profit, no loss. At Break Even Point, the contribution is just sufficient to cover

the fixed cost. The organization starts earning profit when the sales cross the

Break Even Point. Break Even Point can be calculated either in terms of units

or in terms of cash or in terms of capacity utilization It can be calculated as

follows:

BEP in units = Fixed Cost / Contribution per unit

BEP in cash = Fixed Cost / P.V. Ratio

BEP in terms of capacity utilization = BEP in units / Total capacity x 100

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PRACTICAL STUDY OF ORGANIZATION

BATA BUSINESS

Bata Shoe Organization companies are involved in every facet of the

business of shoes. Throughout the world, Bata companies service

customers from the store sales floor to the factory floor.

Retailing

Bata Shoe Organization companies have built successful retail store concepts

to satisfy changing consumer tastes and needs. Each store features

merchandise targeted to different lifestyles and people. The merchandise

ranges from footwear to clothing and goods complementing shoe

offerings. Sensitivity to and satisfaction of customer wants and needs has

allowed the Bata Shoe Organization (BSO) to become a world leader in

footwear.

Manufacturing

Tomas Bata's revolutionary business concept was to industrialize the

shoemaking process of that day. That type of thinking has been the driving

force behind the Bata Shoe Organization success. The Bata Shoe

Organization has been an innovator in the manufacturing of shoes over the

years. Bata personnel have made important advances in DVP (Direct

Vulcanization Process), PVC, athletic footwear production and slush-molded

footwear production.

Wholesaling

The Bata Shoe Organization [BSO] enjoys a unique position in the

wholesale marketplace Global economies of scale enable BSO plants to

offer quality products at local prices, with many operating at ISO standards.

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Bata Shoe Organization production facilities are world renowned for their

commitment to quality and customers, and have attracted production

contracts from many international footwear brands.

BATA PAKISTAN LIMITED

Bata Pakistan Ltd. was formed in Pakistan in 1952. It was a newly growing

concern all over the world but in Pakistan it established its feet with in very

short time. It was very tuff decision for the Bata International to start its

business in a country that was newly established. But Bata's decision was

quite right because there was not so tuff competition in Pakistan at that time

which helps them to make their foots more strong. Now Bata Pakistan is not

only providing the quality shoe with in Pakistan but is also exporting its major

portion of production all over the world. Within the country Bata is facing the

competition with Service industries ltd and other private companies.

According to a survey almost 89% of the market is "covered by the other

organizations and 6% by Service and 5% by the Bata Pakistan Ltd.

Bata Pakistan Ltd. is producing almost 13000 million pairs of shoes with in

year but in year 2001 produces 13891 million pairs of shoes which shows

the soundness of the organization and it strong footing in the Pakistan. Bata

is still improving its business and know a days it become the most favorite

footwear for people of Pakistan.

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EXAMPLE

The following data pertain to the first week of Bata Shoe in April.

Material

Actual purchases 1500 @ Rs. 3.80 per unit

Actual usage 13 50 units

Standard usage 1020 units @ Rs 4 per unit

Direct Labor

Actual hours 310 hrs @ Rs. l2.30 hr

Standard hrs 340 hrs @ l2 per hr

Compute

Material purchase price variance.

Labor rate variance.

Solution

MATERIAL PURCHASE PRICE VARIANCE

Actual x (standard - actual units)

1500 x (4-3.80)

1500x0.2 = 300 favorable

Labor Rate Variance

Actual labor cost.

310x12.30=3813

Standard labor hours

310x12 = 3729

Rs 93 favorable

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Factory overhead variance taken by

Bata shoes Annual Financial Report.

Cost of Sales 2010 2009

Raw material consumed 1,798,712 1,204,315

Salaries, wages and benefits 200,705 170,600

Fuel and power* 84,877 56,729

Stores and spares consumed* 6,588 4,840

Repairs and maintenance* 26,771 20,546

Insurance* 4,603 4,215

Depreciation* 11,613 11,602

2,133,869 1,472,847

Add: opening goods in process 41,249 59,962

2,175,118 1,532,809

Less: closing goods in process 91,989 37,708

Cost of goods manufactured 2,083,129 1,495,101

Add: opening stock of finished goods 1,035,130 891,349

Finished goods purchased 2,021,036 1,429,343

5,139,295 3,815,793

Less: closing stock of finished goods 1,523,853 1,062,278

3,615,442 2,753,515

Note:

*Here BATA shoes financial statement shows the total cost of goods

including (Direct Labor), (Direct Material) and (Factory Overhead)

separately. Therefore we assume the (fuel, power, stores, repairs,

insurance and depreciation) amount as Factory Overhead. Then the

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variance between 2010 and 2009 factory overhead is calculated

below:

Factory overhead 2009- 97,932

Factory overhead 2010- (less) 134,452

FOH cost increased by (36,520)

Analysis of increased FOH Cost

As we see that the foh cost of BATA shoes has increased by

Rs.36, 520 now we will figure this out that is the cost increase is

affective for BATA business or is this increase is showing the

weakness or loss to the company.

Sales

Net sales 2009- 4,733,331

Net sales 2010- (less) 6,118,643

Increase in sales (1,385,312)

Profit:

Profit after taxation 2009- 454,836

Profit after taxation 2010- (less) 683,983

(229,147)

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After analyzing the following figures we came to result that

hence the cost of FOH of BATA shoes is increased in 2010 but it

belongs to others aspects as high production, increased sales and the

company earns profit in 2010.

When a company does heavy production it got heavy sales and

heavy sales become a factor to earn heavy profits and when a

company produces more than it is obvious to increase in cost.

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SWOT ANALYSIS

Strengths

1. Brand Image

2. Reasonable quality at low or reasonable price

3. Diversity with ranges in running, training, court, basketball, football

and Outdoor

4. Footwear for the entire family

5. Financially Strong

6. Conveniently accessible outlets in various parts of the country

7. Targeting all income segments

8. Provide training for managers and employees

9. Nationwide retail network

Weaknesses

1. No continuity of leadership

2. In 2001, 5% decrease in net sales

3. No proper planning regarding Advertisement

4. No variety in Fashionable shoes

Opportunities

1. E-Commerce

2. Acquired, Partnership with small players

3. Entering new segments of Markets

4. Capturing Market where no other potential competitor exists

5. Innovative Products

6. New mediums for advertisements

Threats

1. Customer Dissatisfaction 2.Price wars with competitors

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2. Competitors

3. Political Instability

4. Economic Threat

5. Changing in consumer preferences

DATA COLLECTION METHOD

As this type of collected through books, internet and also through observation

we make on daily bases. This type of data is known as secondary as well as

primary data from which we make observation and making question from

people and also through survey and information available on books and

computer.

CONCLUSION

As from the all discussion regarding Bata shoe as it is the manufacturing

concern company and they bearing lots of cost and its may increase with time

because it is not possible that actual and standard cost remain same.

Variances create problem for the organization proper arrangement should be

made.

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RECOMMENDATION

Financial Position of the Bata Pakistan limited is very impressive only in few of

the department Bata is quite week. There is some of recommendations which

help the management to overcome these deficiencies

Bata Debt to Equity ratio is 3.51, which means almost 75 % are debts.

Due to high debts ratio financial charges are increasing and consuming

major portion of profit.

Management has to reduce its debts to reduce the financial charges.

Due to High debts ratio company will also find difficulties if they apply

for the loan. Because none of the financial institution will like to invest

money due to low equity ratio.

Company's current ratio is 1.17:1 but the favorable and most

acceptable is 2:1. So company should try to decrease its liabilities

mainly the accrued expenses payable or to increase its current assets

to be more positive.