LAHORE SCHOOL OF ECONOMICS

Abrisham by Gule-eSeemy
Cost Accounting Final Report
Ali Raza
Hira Masood
Marriam Najam
Muhammad Saad Saleem
Sarah Abbas
Seerat Mughal
Waleed Zafar

SECTION F
BBA IV
26/11/14

Contents
Introduction:............................................................................................................... 2
Product introduction:............................................................................................... 3
Cutting Unit:......................................................................................................... 3
Hand work unit:.................................................................................................... 3
Stitching unit:....................................................................................................... 4
Direct Material............................................................................................................ 4
Direct labor................................................................................................................. 5
Factory Overhead....................................................................................................... 5
Cost of Goods Sold Statement:...................................................................................6
Income Statement:..................................................................................................... 8
Direct Material Calculations:....................................................................................... 9
Economic Order Quantity:....................................................................................... 9
Direct Labor Calculation:.......................................................................................... 11
Daily Wage Rate Plan:........................................................................................... 11
Job Cost Sheets:.................................................................................................... 12
Factory Overhead Calculations:................................................................................14
Calculations of Predetermined Overhead Rates:...................................................14
Variances:.............................................................................................................. 15
Installed Capacity and Actual Production:..........................................................15
Reasons for Shortfall:......................................................................................... 18
Break-Even Analysis:................................................................................................ 19
Recommendations:................................................................................................... 21

Introduction:
Abrisham by Gul-e-Seemy is a designer boutique which started back in 2011. It started as a
hobby and soon turned into a small business as it started to grow rapidly . Started with
outsourcing everything at start Gul-e-seemy was a more of a hobby. Seemy the head designer
said she had done her master in textile designing 2 decades back but never really got the chance
to pursue her passion because of the life style she entered right after she completed her degree.
She added that things started to change a while back when she decided to change her passion for
making clothes into a small business.
Renting out a place she decided to make a warehouse where she would display clothes that she
got made from many different sources but soon saw that dependency on other supplier was
causing her a lot of issue. Taking a bold step the warehouse was turned into a multi-purpose unit
where in house manufacturing was set up to cater to the growing demand. This caused a lot of
problems at the start because the increased FOH for the new startup was something they didnt
speculate but later managed it pretty well.
Now the small boutique has its own hand work unit, stitching unit and dying unit. Seemy said
though the unit is still comparatively small they have a capacity of 180- 250 suits per month
depending on the designs as they make customized product. Every product is given immense
importance and made to custom fit the consumer. The business is steadily growing and see a lot
of potential in the future by expansion to a better and more spacious facility.

Product introduction:
Every product made goes through the same kind of process. The company is divided into three
basic units. The stitching unit, the cutting unit and the hand work unit.

Cutting Unit:
Every order coming into firstly goes to the cutting unit. Once a product design is finalized a size
chart with the design is send to the cutting unit where a cutting master goes through the process
of inspecting the fabric and then cutting in accordingly. The fabric can be In house or provided
by the customer depending on the design. Once the product is cut it is send to the stitching
department or send to the hand work unit according to the design. If any dying is needed the suit
is directly send to the pot dying before going to stitching or handwork unit.

Hand work unit:

Usually fancy dresses are send to this section for detailing the fabric with stones or other things.
This is all done with hand by workers who put the fabric on tables also known as Aday. This is
usually the bottle neck in the production as this takes a long time to complete. Two or more
people work on the same suit for a few days before it is complete to send to the stitching
department. The work force in this unit also varies according to monthly work load but usually 4
people work in this department on regular months where there isnt a spike in the demand.

Stitching unit:
Stitching unit comprises of a total of 8 stitching machines. Usually the unit runs on 4-5 machines
but labor force is increased in the wedding or eid season due to high demand. This unit is
dependent on the work provided by the hand work unit and the cutting department. The final
product is delivered out of this department and this stays the most profitable and most important
part of the whole unit.

Direct Material
The direct material part in this manufacturing unit includes all the fabrics that are used in making
the clothes like shamouse, grip, Bareeze silk, Pak shafoon clothe, pure chiffon, thread, beads, and
sarouski. All these are used in making the fabric.
The quantity purchased for shamouse is 50 yards and the cost at which it is bought is Rs. 120
per yard, which makes it a total of Rs.6000. The quantity purchased for grip is again 50 yards
and the cost is Rs.100 per yard which makes a total of Rs.5000. The quantity purchased for silk
is 80 yards and the cost is Rs.140 per yard making a total of Rs.11200. Quantity of Pak shafoon
purchased is 70 yards and the cost is Rs.130 per unit making a total of Rs.9100. Quantity
purchased for pure chiffon is 45 yards and the cost is Rs.325 making a total of Rs.14625.
Quantity of thread is 20 boxes and the cost is Rs.220 per box making a total of 4400 Rupees.

Direct labor
This part includes all the labor involved in making the clothes. It includes stitching person, adda
person, embroidery person, and the dyers cost. There are 4 stitching persons working and the
minimum shift for them daily is 9 hours and the hourly wage for them is Rs.100. There are 4
adda persons working and their minimum shift for the day is 8 hours and their hourly wage is 80
rupees making it a total of Rs.2560. There is only one embroidery person working whose
minimum shift is 4 hours a day and the hourly wage is Rs.125, making a total of Rs.500. There is
only one dyer working whose minimum shift is 8 hours and the wage is Rs.90 per hour making a
total of Rs.720. All in all, this department costs Rs.7380.

Factory Overhead
This part includes the rent of the place which is Rs.40,000. The electricity expense is Rs.30,000.
The wage of guard is Rs.18,000. The expense for sui gas is Rs.6,000. And the wage of Maid is
Rs.3,000 and other expenses are Rs.12,000 which makes a total of Rs 109,000.

Cost of Goods Sold Statement:

Abrisham
Cost of Goods Sold Statement
For the Month Ended October 31, 2014

Rupees

Rupees

Direct Materials
Beginning material inventory, October 1

3400

Purchases of materials:
Shamouse

6000

Grip

5000

Bareeze silk

11200

Pak shaffoon

9100

Pure Chiffon

14625

Dapka

3750

Thread

4400

Beeds

4000

Sarouski

10000
68,075

Materials available for use

71,475

Closing inventory, October 31

(5000)

Direct material consumed

66475

Direct labor:
Stitching person

3600

Adda person

2560

Embroidery person

500

Dyer

720
7380

Prime cost

73855

Factory Overhead:
Rent

40000

Electricity

30000

Gas

6000

Guard

18000

Maid

3000

Other factory expenses

12000

Total Factory Overheads

109,000

Total manufacturing cost

182855

Beginning WIP inventory, October 1

8000

Ending WIP inventory, October 31

(15000)

Cost of goods manufactured

175855

Beginning Finished goods inventory, October 1

7800

Cost of Goods available for sale

183655

Ending finished goods inventory, October 31

(18000)

Cost of Goods sold

164855

Income Statement:

Abrisham
Income Statement
For the month ended October 31,2014

Rupees
Sales

Rupees
356,600

Cost of Goods Sold

(164,855)

Gross Profit

191,745

Operating expenses:
Selling expenses:
Depreciation expense-machinery

5,000

Delivery expense

10,000

Misc. selling expenses

10,200

Total selling expense

Administrative expenses:

(25,200)

Office salaries expense

8,000

Rent expense

5,000

Total administrative expense

Total operating expenses

(13,000)
(38,200)

Income from operations

153,545

Interest Expense

30,000

Net Income

123,545

Direct Material Calculations:

Economic Order Quantity:
Required units (RU) = 250 units
Cost per unit (CO) = Rs. 500
Annual carrying cost (CC) = Rs. 75

Economic Order Quantity:

EOQ =

2(Required units)(Cost per unit)

(Annual carrying cost per unit)

2 (250) (500)
75

57.74 units

No. of orders placed annually:

= RU / EOQ
= 250/57.74
= 4.33

Annual ordering cost:

= (RU * CO) / EOQ
= (250 * 500) / 57.74
= 2164.88

Average no. of units at any point in time:

= EOQ / 2
= 57.74 / 2
= 28.87

Annual carrying cost:

= CC * (EOQ / 2)
= 75 * 28.87
= 2165.25

Direct Labor Calculation:

Daily Wage Rate Plan:

Departments

Hourly wages

Minimum shift daily

Daily rates

Stitcher

100

Rs. 900

Adday wala

80

Rs. 640

Embroidery wala

125

Rs. 500

Dyer/Purchaser

90

Rs.720

Job Cost Sheets:

Factory Overhead Calculations:

Calculations of Predetermined Overhead Rates:

Factory Overhead per Unit:

Estimated FOH
Estimated units of production

28,855

13.02/unit

22,150

Percentage of Overhead per direct material cost:

Estimated FOH
Estimated Material Cost

28,855

x 100

105,700

Percentage of Direct Labor Cost:

Estimated FOH
Estimated DL Cost

27.29%

28,855

x100

= 39%

73,800

Rate per Direct Labor Hour:

Estimated FOH
Estimated DL Hours

28,855

Rs. 480.90

60

Variances:

Installed Capacity and Actual Production:

The following calculations are based upon the departments present in the company.

Unit

For the Month

of October,
2014

Embroidery
100% plant capacity on 10 shifts per day for 270 Shifts

100

(October: 270 shifts for 27 days)

70
Pieces

Actual production on 6 shifts per day for 126 Shifts

(October: 126 shifts for 21 days)

Dyeing
100% plant capacity at 50 picks based on 3 shifts per day

215

for 81 shifts (October: 81 Shifts for 27 days)

225
Sq. Mt

Actual Production on 50 Picks based on 3 shifts per day for

60 Shifts (October : 60 Shifts for 20 days)
Stitching and Finishing
Production capacity for 8 shifts per day for 216 Shifts

310

(October: 216 shifts for 27 days)

361
Mt

Actual Production based on 5 shifts per day for 80 Shifts

(October : 80 shifts for 16 days)
Processing and Apparel
The plant capacity of these divisions are indeterminable due
to multi product plants involving varying processes of

------

Manufacturing and run length of order lots

The following are the variances calculated by departments:

Embroidery:
100 70 = 30 pieces (Unfavorable)
This is considered to be negative because the actual production that took place is less
than what was expected.
Dyeing:

215 225 = -10 Sq. Mtr (Favorable)

This is considered to be a positive thing for the company because it shows that the actual
production took place is greater than what was expected.
Stitching and Finishing:
310 361 = -51 Mtr (Favorable)
This is considered a positive thing for the company because it shows that the actual work
that took place is greater than the expectation level.
Processing and Apparel:
Not applicable due to variations.

Actual Direct Labor Hours worked during the month: 126 + 60 + 80 = 266
Based on the DL hour rate calculated i.e. Rs. 480.90
** 266 x 480.90 = Rs. 127,919.40
Actual

Budget

Applied

Total

Spending

Idle

Factory

Allowance

Factory

Overhead

Variance

Capacity

Overhead

(based on

Overhead

Variance

Capacity

Utilized)
Fixed :

Rs.

Rs.

127,919.40

(18,919.40)

Rs. 109,000

Rs. 61,000
Variable:
Rs.150,000
Total: Rs.
211,000

Favorable**

Variance

Rs. (102,000)

Rs. 83,080.60

Favorable

Unfavorable

The Spending variance refers to the difference between the actual factory overhead incurred and
the budget allowance estimated for the capacity utilized. The Actual activity was 266 direct labor
hours worked. The actual overhead i.e. Rs. 109,000 is less than the budget allowance i.e. Rs.
211,000, thus, the balance is favorable.
The idle capacity variance is referred to the difference between budget allowance and the applied
factory overhead. The actual activity was 266 direct labor hours. The budgeted allowance was
Rs. 211,000 and the applied FOH was Rs. 127,919.40. The difference came out to be
unfavorable.
Reasons for Shortfall:

Temporary closure due to load management by suppliers of gas and electricity and for

maintenance
Actual production is planned to meet the market demand
It is difficult to describe precisely the production capacity of products being
manufactured since it fluctuates widely depending upon various factors such as
simple/multi-function articles, small and large size articles, special articles and the pattern
of articles adopted

Break-Even Analysis:
Formula for calculating Break-Even:
Fixed costs include the following:

Rent of the premises

Security guard salary
Maid salary

All of the above have no link with the production process. These costs are incurred at any point
even if the production level is zero.
Fixed cost amounts:
Rs. 40,000 + Rs. 18000 + Rs. 3000 = Rs. 61,000

Contribution margin calculated by considering the sales amount and variable cost
Sales for the month of October till the date of data collection:

Lawn suit sales: Rs. 20,000

Formal suit sales: Rs. 35000
Sari one piece: Rs. 75000
Western gowns sales: Rs. 50,000
Other regular sales on specific orders: Rs. 100,000

Total sales: Rs. 280,000

Variable cost of making all these products:

Around Rs. 150,000. This includes all the costs incurred.

Contribution margin ratio:

=1 (V.C/SALES)
=1-(150,000/280,000)=0.46

Break even sales:

=61000/0.46
=Rs. 132,608

Break even in units:

=fixed cost/contribution per unit

Sales per unit and variable cost value is allotted on the manager perception on average

products
Contribution margin per unit:
=1400-420 =980
Break even in units
= 132,608/980 = Around 136 units

280000

T.R
240000
200000
160000
120000

T.C

80000
F.C
40000

50

100

150

200

Sales in units

Break even at Rs. 132608 and on 136 units

Total revenue: 1400*200 = Rs. 280,000

Recommendations:

Use advertisement to increase demand and start working on full capacity as now most of

the months the manufacturing unit isnt working on full capacity.

Maybe start a Pret / Ready to wear line for the boutique so productivity for the stitching

unit can increase by making more unit of the same design.

Starting a Pret wear/Ready to wear line might also help reach achieve the ideal capacity

for the company.

It might attract new customers as it would decrease the price range and attract more

masses.
Do not move to a bigger warehouse or production facility as it might increase the FOH
which isnt something the company should be looking to do at this point in time.