Report on Management Accounting

7/21/2019 Report on Management Accounting

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1.0. Introduction

1.1. Origin of the Report

This report is prepared as a requirement of academic activities of the course ‘‘Management accounting’’

under the supervision of Mr. Mohammed Sawkat Hossain, Lecturer and course teacher, Department of inance ! "anking, #ahangirnagar $niversit%.

1.2. Objectives of the reportThe main idea of making this report is to find out the differences &etween the know'edge which can &e

o&tained from &ooks and at the same time rea' work p'ace imp'ication in the fie'd of management accounting.

So this report primari'% focuses on descriptive discussion on manageria' accounting theor% and its rea'imp'ementation. Therefore the report is aimed at covering those points carefu''% which a'read% came to

known &% ana'%(ing farms cost accounting report with theoretica' know'edge. )t is a'so focuses on various

aspect of using manageria' accounting know'edge in a compan%’s da% to da% work to find out rea' cost of production . However the research work fina''% produces a report which is an academic requirement. *'so, at

the same time the report wi'' generates usefu' &ui'ding &'ocks for further studies on this su&+ect that wi'' he'p

&oth %oung 'earner and the user of manageria' accounting at the same time.

1.3. Research Question & Scopes

The main research question of this report is

Ho the !anageria" concepts are used in #pe$ Spinning & %nitting i""s 'td(

To find out the answer of this question the factors that are inc'uded and ec'uded are given &e'ow-

Inc"uded are )

. Manageria' *ccounting and the "usiness /nvironment

0. 1osts Terms, 1oncepts and 1'assifications in Management *ccounting

2. #o&34rder 1osting of Management *ccounting

5. *na'%sis and $se of 1ost "ehavior in 1ost *ccounting

6. 1ost37o'ume38rofit 9e'ationships in Management *ccounting

*$c"uded are +. 8rocess 1osting of Management *ccounting

0. 7aria&'e 1osting of Management *ccounting

2. *ctivit% "ased 1osting of Management *ccounting

5. 8rofit 8'anning of Management *ccounting

6. 1apita' "udgeting Decision

:. 'ei&'e "udgets and 4verhead *na'%sis

;. 9e'evant 1ost for Decision Making

1.,. ethodo"og-

This is a descriptive report which secondar% data The secondar% data comes from the we&site of *pe and

annua' report of *pe Spinning ! <nitting Mi''s Limited. =e peop'e compute mathematica' concept throughusing various management accounting too's 'ike contri&ution margin statement, 178 ana'%sis, *&sorptionand 7aria&'e costing s%stem. 7arious pu&'ished &ooks and renowned management accounting we&sites he'ps

to great etent to comp'ete our research work.

1.. 'i!itations

There are some 'imitations in the comp'etion of the report. *s we sa% that, we do research through using the

secondar% data. This secondar% data are coming from the compan%’s we&site. *nd a'' information are notgiven in the we&site and internet. =e tr% to do the work with some primar% and interna' data. "ut the

compan%’s emp'o%ee and management committee was re'uctant to give an% information regarding this. The%

give on'% those information which are avai'a&'e in the we&site. ina''%, we wou'd 'ike to conc'ude the

fo''owing things as the 'imitations of making the report.



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. *ccess to information

0. *ccess to resources

2. Time management

5. /mp'o%ee’s re'uctance to give information

1./. e"i!itation

Though there is some 'imitations in the comp'etion of the report, we tr% to do the &est with the given

information given in the we&site and &ooks.

1.. Report revie

This report is &ased on two terms. irst'% we descri&e the short histor% of the compan%. Then we tr% to so've

the mathematica' pro&'em regarding management accounting with the given data of the compan%.

2.0 o!pan- previe 4#S5'6

2.1. other co!pan-)t is a &usiness enterprise of *pe teti'e comp'e. The *T1 > *pe Teti'e 1omp'e? is running under the management

of *pe Ho'dings Limited. There are a'so 2 running compan% under *T1. 1ompanies under *HL have &een supp'%ing

teti'es to severa' 'arge retai' chains in the /uropean $nion and north *merica for the 'ast 0@ %ears and en+o%

prominent status with them.

2.2. ate of estab"ish!ent*pe Spinning and <nitting Mi''s Limited >*S<ML? was incorporated in AA@ as a pu&'ic 'imited compan% and 'isted

with our nationa' stock echanges, which are Dhaka Stock /change, and 1hittagong Stock /change.

2.3. Head office

The head office of the compan% is situated at 9upa%an Bo'den *ge, 6 th ! :th 'oor AA, Bu'shan *venue,

Bu'shan, Dhaka300, "ang'adesh.

2.,. roducts

The compan% was initia''% formed for processing and eport of knit garments, however su&sequent'%, state of

the art p'ant and equipment was added for hand'ing a'' kinds of knitted fa&rics and now *S<ML is a 'eadingmanufacturer and eporter of a'' kinds of teti'es knitted garments. The products of this compan% is po'o

shirt, tee shirt, sweat shirt, f'eece shirt, +ogging pant for gents, 'adies, kids.

Jogging



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icture 17 roducts of #S5'

Source7 .ape$%nitting.co!

2.. Qua"it-

*'' the knitted fa&ric is su&+ected to @@C inspection in accordance with the compan%’s esta&'ished qua'it%

inspection standards, which are part of *S<ML’s )nterna' ua'it% Management S%stem. During the fa&ric

processing, the% work in comp'iance with internationa' standard and a'so fo''ow 4k4 Te E @@ Standard.

During stitching ! packing, *L >*ccepta&'e ua'it% Leve'? or )n3Line )nspecting as we'' as *L>*ccepta&'e ua'it% Leve'? or ina' )nspection is carried out. "esides that the% a'so comp'% with customers

supp'ied specifications reports.

2./. hi"osoph-

The compan% &e'ieve that on'% &% after providing our 1ustomers with the Services and 8roducts specified at

the requested time, and in the stated manner, the% can c'aim to &e a ua'it% 1onscious 1ompan%, and epecttheir 1ustomerFs continued patronage. Therefore, the% as a 1ompan% must at a'' times ensure that a'' 'a&or

participate in producing their products in accordance with their customerFs requirements. *pe has an

envia&'e reputation as an internationa' garment manufacturer and their reputation is &ased on a simp'e &utso'id phi'osoph% that runs through ever% phase of their &usiness.

ua'it% is ever%thing, and for that the% continue to maintain comp'iance standard for their consumer markets

in the /uropean $nion and Gorth *merica, and that has &een their phi'osoph%. To ensure qua'it% their own

ua'it% *ssurance Department 4Q#6, under the 'eadership of a high'% eperienced qua'it% manager and ateam of we''3trained qua'it% inspectors are operating the *D independent'% from the production team. The%

are su&mit their reports direct'% ! on'% to the upper ke% management persona'. The Q# works ver% hard to

ensure the desired qua'it% standards using the most sophisticated and modern 'a&orator% equipment. 1o'or

fastness, shrinkages are maintained to the wor'd standard.

2.. Research and eve"op!ent 4R&6

This compan% upho'd the demand for qua'it% and spend heavi'% on the most advanced production faci'ities as

we'' as constant'% upgrade &oth machineries and the technica' know'edge of our professiona' staff. To keep

pace of their competitive edge, we constant'% 'ook for wa%s to improve our efficienc% and tr% to offer our customers with &est possi&'e prices &% keeping our production costs 'ow &% emp'o%ing economies of sca'e.

Deve'opment of new products has &een one of the main o&+ectives, to provide our customers with an

incredi&'e amount of options to satisf% due to the ever3changing nature of the industries fashion demands.The products deve'oped with the he'p of our 9!D team are competitive and of internationa' standards.

2.8. apacit-

The company has won worldwide reputation for our high quality standards for ourmanufactured garments as well as unsurpassed management system. As were able to fulllthese requirements they had received several export trophies over the years. The factorymanufactures various styles of olo !hirts" Tee !hirts" and !weats !hirts and currently exportsaround 1.# million pieces of garments every month to $orth America" %urope and !outh %ast

Asia. The &nitting machines are of ' to 1( gauges for )at &nit and 1* to +* gauges for circular&nit. ,ost of the circular &nitting machines are imported from -ermany and !outh orea.



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2.9. ar%eting & erchandising

Marketing ! merchandising divisionFs main function is to introduce *S<ML to new &u%ers whenever the

opportunit% arises. Some of the other tasks maintained &% this department are to provide marketing samp'es,

ana'%(e prices and preserve regu'ar communication with eisting &u%ers a&out their requirements. The% a'so provide deve'opment samp'es ! prices for &oth o'd and prospective customers of *S<ML. The

merchandising team is a'so responsi&'e for a''ocating production &'ocks to eisting &u%ers and fo''ow up on

the fu'fi''ment of the a''ocated space. This team is a'so the intermediate &etween the &u%ers and the factor%

production team

2.10. roduction process f"o

The production process f'ow of is given &e'ow with the fo''owing diagram.

:igure 017 rocess f"o of #S5'



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Source7 .ape$%nitting.co!

2.11. Re"ated co!pan-



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The other re'ated compan% a'ong with *S<ML are *pe oods Limit >*L?, *pe Lingerie Limited >*LL?,

*pe arn D%eing Limited >*DL?, Mate "ang'adesh Limited > M"L?, *pe teti'e printing Mi''s. *'' thecompanies are reputed for their qua'it% product.

3.0. I!p"e!entation Of anage!ent #ccounting concepts

=e wou'd tr% to comp'ete research pro&'em through the tota' imp'ication of management accounting. or this

particu'ar purpose, we wou'd 'ike to ep'ain some of the topic then tr% to re'ate those ideas with the *S<ML.=e therefore, 'ike to show what we wi'' ep'ain throughout the report.

. 1osts terms, concepts and c'assifications

0. #o&3order costing2. 178 ana'%sis

5. *&sorption and varia&'e costing

Gow the imp'ementation of each topic is descri&ed &e'ow in the perspective of *S<ML.

5.@. 1ost terms, 1oncepts and 1'assifications

,.1. anage!ent #ccounting and :inancia" #ccountingThere are severa' differences &etween this two. Gow the differences are given through a diagram-

;ab"e ,.0. ifferences beteen financia" and !anage!ent accounting

/tems 0inancial Accounting ,anagement Accounting1.sers %xternal /nternal+. -AA /t is applicable in terms of 0A /t is not applicable in ,A.#.

2equirement

s

2eports and statements are a must in

0A

These are not mandatory

in ,A.

4. !ub3ect /t considers the whole organiation /t covers only production

unit'.

veriability

5s relevance

/t should be veriable and reliable /t must be relevant. /t

means that the cost

should have relevance.(. eriod /t focuses on the historical information /t focuses on future info.6

predictions7.

inventories

8Activities9

,erchandising 80inished -oods9

• :uy ;0-

• !ell ; 0-

/t focuses on

manufacturing

inventories.

• :uy ;2,82aw

materials9•

<onduct= >/ 8 >or&/n rocess9

• <omplete ; 0-

80inished -oods9*. <?-! 8/6!9 :eginning inventories

@@@

purchase

@@@

0- available for sale

@@@

= %nding

COGS

@@@

:eginning 0-

@@@

<?-,

@@@

0- available for sale

@@@

=ending

@@@

COGS



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@@@

B. :alance

!heet

<onsiders merchandising inventory <onsiders manufacturing

inventory1C. /ncome

!tatement

/t considers PURCHASE /t considers COGM

,.2. "assifications of osts

The cost can &e c'assified in man% different wa%s. The wa%s &% which cost can &e c'assified are given &e'ow -

. Gature of cost0. 1ost &% o&+ective

2. 1ost "ehavior

5. 1ost for decision making approach

,.2.1. <ature of ost

The nature of cost under management accounting is given through the fo''owing chart

Chart 02: Classifcation o cost in terms o Nature

Nature o cost

,anufacturing <ost 8roduct <ost9

,ar&eting6 selling expenseAdministrative cost

1. anufacturing ost7 1ost direct'% inter'inked on'% with the operation or manufacturing department. Mostmanufacturing companies divide manufacturing costs into three &road categories.

i. Direct 9aw Materia' >D9M?

ii. Direct La&or >DL?

iii. Manufacturing 4verHead >M4H?The description of each item and eamp'e is given &e'ow through the ta&'e.

;ab"e 027 escription and e$a!p"e of !anufacturing cost

Ite! <a!e Ite! description *$a!p"e in conte$t of

#S5'

Direct

raw

materia'

9aw materia' that are direct'% invo'ved

with the production process are ca''ed

direct raw materia'.

arn, d%es and chemica's

$on=manufacturing cost

,?DE2, EF



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Direct 'a&or The 'a&or that direct'% he'ps or inter'inked

with the production process are ca''ed

direct 'a&or.

=ages paid to the factor%

workers

Manufacturing

overhead

*dministrative cost inc'udes a'' eecutive,organi(ationa' and c'erica' costs associated

with the genera' management of an

organi(ation rather than withmanufacturing, marketing or se''ing.

arn, d%es and chemica's,

wages and charges, carriage,

e'ectricit% etc.

0. <on)!anufacturing cost7 Gon3manufacturing cost are those cost which are direct'% inter'inked withthe marketing and se''ing epense, administrative epense. This cost is c'assified into two categories-

i. Marketing and se''ing epense

ii. *dministrative epense

Gow the description of each item is given &e'ow through the ta&'e-

;ab"e 037 escription and e$a!p"e of non)!anufacturing cost

Ite! <a!e Ite! description *$a!p"e in conte$t of #S5'

Marketing and

se''ing epense

Marketing and se''ing cost inc'udes a''

costs necessar% to secure customer orders

and the finished product into the hands of

the customer. These cost are often ca''ed

order3getting and order3fi''ing costs.

*dvertising, shipping, sa'es

trave', sa'es commissions, sa'es

sa'aries and cost of goods

warehouses

*dministrative epense *dministrative cost inc'udes a'' eecutive,organi(ationa' and c'erica' costs

associated with the genera' managementof an organi(ation rather than with

manufacturing, marketing or se''ing.

sa'aries, uti'ities, rent etc.

,.2.2. ost =ehavior7

*ccording to cost &ehavior cost can &e c'assified into two categories. These are-. ied cost

0. 7aria&'e cost

;ab"e ,.1.7 :i$ed and variab"e cost in ter!s of #S5'



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Source7 #nnua" report of #S5' 2011)2012

,.2.3. ost "assification to cost objectives7

There are on'% two categories according to cost o&+ective.

. Direct cost

0. )ndirect cost

1. irect cost7 a direct cost is a cost that can &e easi'% and convenient'% traced to the particu'ar cost o&+ect

under consideration. )t inc'udes the cost of

i. Direct 9aw Materia'

ii. Direct La&or

2. Indirect ost7 an indirect cost is a cost that can not &e easi'% and convenient'% traced to the particu'ar cost

o&+ect under consideration. )t inc'udes the cost of

i. Manufacturing overhead

ii. Marketing and se''ing cost

iii. *dministrative cost

,.2.,. ost for decision !a%ing approach7

)n making decision there are three t%pes of approaches in accordance with costs. These are-

i. Differentia' cost and revenues

ii. 4pportunit% costiii. Sunk cost

Ite! <a!e escription *$a!p"e in ter!s of #S5'

ied cost * fied cost is a cost that

remains constant in tota'

regard'ess of changes in the

'eve' of activit%.

)nsurance, propert% taes, rent,

supervisor% sa'aries,

administrative sa'aries

7aria&'e cost * varia&'e cost is a cost that

varies in tota', in proportion to

changes in the 'eve' of

activit%.

arn, d%es and chemica's,

wages and charges, carriage,

e'ectricit% etc.



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i. ifferentia" cost and revenues7 )t is the dispersion &etween cost ! revenues. or instance,. or instance,

we assume that *S<ML have 0 have two &ranches in one cit%. The emp'o%ee of a compan% wi'' prefer thatwhich wi'' give him or her more &enefits in respect to cost.

ii. Opportunit- cost7 4pportunit% cost is a potentia' &enefits that is given up when one a'ternative is se'ectedover another.

or eamp'e- =hen *pe Ho'dings Limited wanted to invest more mone% on its other &usiness su&group ithas to spend 'ess mone% on *S<ML. "ecause it wants to earn more mone% through #S5'.

iii. Sun% cost7 * sunk cost is a cost that has a'read% &een incurred and that cannot &e changed &% an%

decision made now or in future.

or eamp'e, the annua' report of 0@@@ in 0@0 is a sunk cost. "ecause that report has no impact over

decision making process of *S<ML.

,.3. easuring ost Of >oods So"d

To measure cost of good so'd of a manufacturing compan% we have to figure out step process.

i. 9M

i. =)8ii. B



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;ab"e ,.2.7 easuring ost Of >oods So"d #S5' 42011)2012 and 2010)20116



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6.@ #o& 4rder and 8rocess 1osting S%stem-

The main purpose of manageria' costing s%stem is to provide cost data in order to he'p in p'anning,contro''ing, directing and making decision.

.1. osting rocess7 Two costing s%stems are common'% used in manufacturing and in man% service

companies.

1. rocess costing7 * process costing s%stem is used in situations where the compan% produces man%

units of a sing'e product for 'ong period.

/quation used to measure process costing s%stem-

unit product cost I tota' manufacturing costJtota' units produced

However, our se'ected compan% *S<ML uses process costing s%stem.

2.?ob Order osting7 * +o& order costing s%stem is used in situations where man% different

products are produced each period.)n this s%stem,cost are traced and a''ocated to +o&s and thanthe cost of +o&s

are divided &% the num&er of units in the +o& to arrive at an average cost per unit.

.2. Ra ateria" Re@uisition :or!

The materia's requisition is a detai'ed document that >? specifies the t%pe and the quantit% of materia's to &edrawn from store room and >0? identif% the +o& to which the cost of the materia's are to &e charged.

:igure .17 Ra ateria" Re@uisition for!

#o&.re.Go-.................... Date-..................

DivisionJunits-................

Description $nit 8er unit cost Tota' cost

.3. ?ob ost Sheet

* +o& cost sheet is a form prepared for each separate +o& that records the materia's and overhead cost chargedto the +o&.



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:igure .27 # ;-pica" ?ob ost Sheet

.,. #pp"ication Of anufacturing OverHead 4OH67

There are two steps of incorporating M4H in #o&3order costing process.

i. M4H "ase- To faci'itate the a''ocation of manufacturing overhead to each +o& predetermined

overhead rate is ca'cu'ated &efore the period &egins.84H9>8redetermined 4ver Head 9ate?I /stimated tota' M4H costJ /stimated tota' units.

ii. M4H *pp'ied- 84H9K*ctua' activit%

:igure .37 eter!ining the "eve" of OH app"iedr MOH

CrActual ,?D

GGG

:alance b6d

GGG

GGG

,?D applied

GGG

8?D2@Actual activity9H

GGG

GGG

:alance c6d

GGG

=hen M4H app'ied is actua' M4H This credit &a'ance is ca''ed M4H over app'ied and when

M4H app'ied N *ctua' M4H This de&it &a'ance is ca''ed M4H under app'ied.

AearcoBs !ethod7

i. *d+ustment with 14BS- )n this mehod the difference is ad+useted with 14BS.

ii. *d+ustment with 14BS, =)8, B >*d+usting 14BS, =)8 or B &% making it de&it or credit?



1 4

C

:igure .37 istribution of OH under !u"tip"e ite!Accounts !alance Pro"ortion istri#ution o

MOH $o%er or

un&er a""lie&'<?-! GGG GGI GG>/ GGG GGI GG0- GGG GGI GG

Total GGG GGGI GG

or M4H over app'ied the +ourna' entr% wi'' &eM4HOOOOOOO.. Dr. PPP

14BS OOOOOOOOOO. 1r. PPP

=)8 OOOOOOOOOO.. 1r. PPP

BOOOOOOOOOOO 1r. PPP

or M4H under app'ied the +ourna' entr% wi'' &e

14BS OOOOOOOOOO. Dr. PPP=)8 OOOOOOOOOO.. Dr. PPP

BOOOOOOOOOOO Dr. PPP

M4HOOOOOOO.. 1r. PPP

:.@ 1ost 7o'ume 8rofit >178? ana'%sis-

1ost3vo'ume3profit >178? ana'%sis he'ps managers understand the interre'ationships among cost, vo'ume,

and profit &% focusing their attention on the interactions among the prices of products, vo'ume of activit%, per

unit varia&'e costs, tota' fied costs, and mi of products so'd. )t is a vita' too' used in man% &usinessdecisions such as deciding what products to manufacture or se'', what pricing po'ic% to fo''ow, what

marketing strateg% to emp'o%, and what t%pe of productive faci'ities

/.1. =asics of ost vo"u!e rofit ana"-sis7

ontribution !argin7

1ontri&ution margin is the amount of remaining from sa'es revenue after varia&'e epenses have &een

deducted. 1ontri&ution margin is used first to cover fied epenses. *n% remaining contri&ution margincontri&utes to net operating income. )f the contri&ution margin is not sufficient to cover the fied epenses,

then a 'oss occurs for the period.

The 178 ana'%sis statement *S<ML is given &e'ow through the graph.

;ab"e /.17 D ana"-sis of #S5'

)tems 8er unit )n C *ctua'

>,55,6A,Q:Q units?

Sa'es ;6 @@C 0,60,55,5@,@@@

= 7aria&'e 1ost : A0C 0,20,5,:@,@@@

1ontri&ution margin 5 QC 0,@@0,Q@,@@@

3ied cost Q,25,6@,@@@ Get profit ,:Q,2@,@@@



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Source7 #nnua" report of #S5' 2011)2012

ontribution argin Ratio 4 ratio6 in ter!s of #S5'7

The contri&ution margin as a percentage of tota' sa'es is referred to as the contri&ution margin ratio.

The formu'a to ca'cu'ate his ratio is

178 ratio I >1ontri&ution MarginJSa'es? @@I >$nit contri&ution marginJunit se''ing

8rice? @@

I 5J;6 @@

I QC

Short cut approach to ca"cu"ate change in net inco!e b- ratio

or instance we can assume that the net income *S<ML is risen &% 6@,@@@@ taka. So the change wi'' &e 'ikethis.

1hange >increaseJdecrease? in sa'es I 6,@@,@@@

P 1hange in contri&ution margin ratio I QC1hange in 1ontri&ution margin I 5@@@@

/.2. =rea%)even #na"-sis

The 'eve' in which tota' revenue is equa' to tota' cost is &reak3even 'eve'. )t is a'so ca''ed no profit3 no 'oss

point. "reak even ana'%sis is one of the important part of 187 ana'%sis. )t is designed to answer the questions'ike how far sa'es cou'd drop &efore the compan% &egins to 'ose mone%.

"reak3even ana'%sis can &e approached in two wa%s /quation method

1ontri&ution margin method

/.2.1. *@uation !ethod

The equation method centers on the contri&ution approach to the income statement. The format of the income

statement can &e epressed in equation format as fo''ows-or computing &reak3even sa'es in units , we assume that &reak3even sa'es in units I , and the formu'a wi''

&e 'ike this-

Sa"es E Dariab"e e$penses F :i$ed e$penses F rofitsor #S5' the &reak3even sa'es in quantit% wi'' &e3

;6 I :R Q256@@@@R@

I Q256@@@@J5

I2@26;

or computing &reak3even sa'es in taka, we assume that &reak3even sa'es in takaI , we wi'' contri&utionmargin to compute this.

Sa"esE Dariab"e e$penses F :i$ed e$penses F rofits

or #S5' the &reak3even sa'es in taka wi'' &e-I .A0RQ256@@@@R@

@.Q I Q256@@@@ I Q256@@@@[email protected] I 00,A2,0,6@@

*t the &reak3even point, profits are (ero. Therefore, the &reak3even point can &e computed &% finding that point where sa'es +ust equa' the tota' of varia&'e epenses p'us fied epenses

/.2.2. ;he contribution !argin approach

The contri&ution method is actua''% a shortcut version of the equation method. This approach centers on the

idea that each unit so'd provides a certain amount of contri&ution margin that goes toward covering fied

costs. To find how man% units must &e so'd to &reak even, divide the tota' fied costs &% the unit contri&ution

margin. So the formu'a stands



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=rea%)even point in units so"dE :i$ed e$pensesG er nit contribution !argin

or *S<ML the &reakeven sa'e wi'' &eI ,Q2,56,@@@@J 5

I 2@26;

7ariation of this method uses the 1M ratio instead of the unit contri&ution margin. The resu't is the &reak3

even in tota' sa'es do''ars rather than in tota' units so'd. *nd this method is used particu'ar'% in thosesituations where the compan% has mu'tip'e product 'ines and wishes to compute a sing'e &reak3even point for

the compan% as a who'e. The formu'a is -

=rea%)even point in tota" sa"es do""arsE :i$ed e$pensesG ratio

or *S<ML the "reak3even sa'es in taka wi'' &eI Q,25,6@,@@@J .Q

I 00,A2,0,6@@

()*) Mar+in o Saet, The margin of safety is the excess of budgeted 8or actual9 sales over the brea&=even volume of sales. The margin of safety helps management assess how far above or below the brea&=evenpoint the company is currently operating. The formula to calculate the margin of safety isMar+in o Saet,- .otal sales / !rea1e%en sales0or ASM3 the margin of safety will be

H+'+444CCCC=++BB#11+'CC H ++B'11+7'CC

The margin of safety can also be expressed in percentage form. This percentage is obtained bydividing the margin of safety in dollar terms by total salesKMar+in o saet, "ercenta+e- $Mar+in o saet, in &ollars4 .otal sales' 5 600

,argin of safety in percentage H 8,argin of safety in dollars6 Total sales9 x 1CCH 8+'+444CCCC+'+444CCCC9 x 1CCHB1I()7) O"eratin+ 3e%era+e?perating leverage is a measure of how sensitive net operating income is to percentagechanges in sales. The degree of operating leverage is a measure" at any given level of sales" of how a percentage change in sales volume will aLect prots. /t is computed by dividingcontribution margin by net operating income.e+ree o o"eratin+ le%era+e - Contri#ution mar+in4Net o"eratin+ income

0or ASM3 the operating leverage will beH 0,@@0,Q@,@@@J,:Q,2@,@@@

I 0

;.@. *&sorption and 7aria&'e 1osting

or instance we assume that the fo''owing things are happened in #S5' for the convenience of so'ving themathematica' portion. =e consider fo''owing things were happened in #S5'.

;ab"e .1. #ssu!ed description of cost in #S5'

Description *mount

Sa'es >per unit? 6@

anufacturing cost7

7aria&'e cost per unit produced

D9M

DL

:



1 4

7aria&'e 4ver Head

ied cost per %ear

2

0@,@@@

Se""ing & #d!inistrative cost7

7aria&'e per unit so'd

ied per %ear

6

;@@@@

;ab"e .2 etai" of inventor-$nits ear ear 0

"eginning )nventor% @ 0,@@@

$nits 8roduced @,@@@ :,@@@

$nits so'd Q,@@@ Q,@@@

/nding inventor% 0,@@@ @

;ab"e .1. o!puting per unit product cost

Ite!s 1 2

D9M

DL : :7aria&'e M4H 2 2

ied M4H 0 0@

Tota' 32 ,0

;ab"e .3. Inco!e State!ent 4#bsorption costing s-ste!6

Ite!s ear 1 ear 2

Sa'es revenue 6@MQ@,@@@ 5@@,@@@ 6@MQ@,@@@ 5@@,@@@

314BS

"eginning inventor% @ >0@@@M#+9

:5,@@@

R 14BM

>20M1C"CCC9

3/nding

#+C"CCC

(4"CCC

06:,@@@

>5@M(CCC9H

+4C"CCC

2@5,@@@

Bross Margin 55,@@@ A:,@@@

>3? Se''ing and

admin cost

7aria&'e se''ing

admin cost

ied se''ing and

admin cost

5@,@@@

;@,@@@

@,@@@

5@,@@@

;@,@@@

@,@@@

Get margin 25,@@@ >5,@@@?



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Date post:	05-Mar-2016
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