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Evaluation
Coca Cola
Product
Figure 1
Submitted By
SherjiL Tahir
Table of Contents
Dedication
Introduction
Introduction of product
Element of Cost
Material
Labor
Hypothetical Data
Cost of Goods Sold St
Economic Order Quantity
Unit Cost
Inventory Management System
Reorder point
Max. level
Min. level
Danger level
Income Statement
Break-even Analysis
Break-even sales in Units
Break-even Sales in Rupees
Targeted Profit
Conclusion
DEDICATION
For that purpose, we are assigned to select a company and its one single
product, about which we will do cost analysis that will give brief description
about the total costs that takes place in producing that specific product of a
selected company. If there is inventory then what would be the best way to
control that inventory. Then we will have a look on the break even Analysis
with two methods.
Elements of Cost
Specific function (or a group of functions) which is considered a specific
entity for the purpose of estimating, controlling, and reporting costs.
Material
Labor
FOH
Material
In cost accounting, material is defined as the part of inventory. Basically,
material and raw material are used for same purpose. This is main part of
total cost of production. It can reduce or increase according to the fluctuation
in production. It can be direct or indirect Material.
Direct Material
Syrup
caps for the bottles
labels
other ingredients to manufacture
any packaging of the product
Indirect Material
Material (as tools, cleaning supplies, lubricating oil) used in
manufacturing process which does not become an integral part of the
product and the cost of which is not identifiable with or directly chargeable to
it as compare to direct material. Well in this case the product which I have
chosen is 500ml Coke bottle the indirect material would be as follows
Oil for the machines that are used to manufacture the bottles
Electricity
Property taxes
Advertising
Labor
The cost of labor is the sum of all wages paid to employees, as well as the
cost of employee benefits and payroll taxes paid by an employer. The
workforce required to convert material into finished product is called labor.
The cost of labor is broken into direct and indirect Labor.
Direct labor
Direct labor includes labor costs that can be easily traced to a
finished product. The
Employees associated with direct labor can be physically and directly
associated with converting raw materials into finished goods. For Coca-Cola,
direct labor costs would be.
Wages of workers, specifically for those who assemble, cut, mix, package, or other tasks
that directly contribute to producing the product.
Indirect Labor
Janitors
Inspectors or human resource departments.
Equipment depreciation
Rent
Insurance, building, utilities, and maintenance for the factory and
equipment.
It would also include the cost of shipping and handling related to the
movement of finished goods from manufacturing locations to sale
distribution centers.
Hypothetical Data for Coke 500ml Bottle
No Description Amount
1 Opening Stock 10,000
5 FOH 3,000
6 OP work in progress 40,000
Material
Add: OP Stock
10,000
Purchases
9,000
Less: Closing Stock
(8,000)
Material in Use
11,000
Direct Labor
1,000
Prime Cost
12,000
F.O.H
3,000
Total Factory overhead
15,000
Add: OP Work in Progress 40,000
Less: Closing work in Progress (20,000)
20,000
Cost of Goods to be Manufactured
35,000
Add: OP finished goods 50,000
Less: Closing Finished goods (35,000)
15,000
Cost of goods Sold
50,000
Unit Cost
A unit cost is the total expenditure incurred by a company to produce, store
and sell one unit of a particular product or service. Unit costs include all
fixed costs, or overhead costs, and all variable costs, or direct
material costs and direct labor costs, involved in production.
50 , 000
Unit Cost = 2, 000
EOQ= 4000000
2.5
Inventory optimization
Reorder point
The reorder point (ROP) is the level of inventory which triggers an action to
replenish that particular inventory stock. It is a minimum amount of an item
which a firm holds in stock, such that, when stock falls to this amount, the
item be reordered
= 2,000 x 6
=12000 units
Maximum level
= 12000 1800 x 6
= 12000 10800
= 1200 units.
Minimum Level
Minimum level or safety stock level is the level of inventory, below which the
stock of materials should not be fall. If the stock goes below minimum level,
there is a possibility that the production may be interrupted due to shortage
of materials.
Danger level
Danger level is a level of fixed usually below the minimum level. When the
stock reaches danger level, an urgent action for purchase is initiated.
= 1900 x 1
= 1900 units.
After the creation of CGS statement and calculation of EOQ, order level,
minimum level etc., now we need to calculate the profit earned by the
company through income statement. We will use the marginal costing
technique to calculate the profit earned by the company.
Description
Amount (Rs)
Sales 90,000
(50x1800)
Less: Variable Cost
Rent, rates, and taxes 7,000
Sales, promotion 2,000
Advertising 3,000
Technical Services 1,000
other Expense
500 (13,500)
Contribution Margin
76,500
Less: Op &admin. Expense
Rent, rates, and taxes 8,500
Product Transportation 9,000
Salaries, wages and Benefits 13,500
Inventory maintenance Expense 4,500
Research &
Development 3,000 (38,500)
Net. Profit
38000
Cost
As we know that Break Even = CM Per Unit
905.88
Break Even = units.
Tabular Form
Cost
We know that Break Even Sales = C
Ratio
S
=51333.33 Rs
Tabular Form
Now lets put some twist to our work of our project. Lets find the target profit
through all that process. To find the target profit of our company for any
specific period, we need to find targeted contribution margin and then we
need to find the amount of sales required to earn the target profit.
So, for that purpose lets assume company wants to earn a profit of 100,000
Rs. For that purpose we need to calculate the total CM and then we can find
sales which would be able to generate the targeted profit.
As we know that,
Contribution Margin Fixed Cost = Net. Profit
Or according to required condition, we can say that:
Now,
Targeted CM
Bes for target profit in units = CM Per Unit
1,38,500
= 42.5
= 3258.8 units
Tabular Form
Hence, its been proved that we need 3259 units to sell to earn the required
profitability which is 100,000.
Conclusion
In this project, I have learnt so many things that if we have entered into the
market with our brands than how many risks we will be facing along with
that we have come to know that how much investment do we need to start a
new business in the market. We also have calculated the minimum level,
maximum level, danger level, order level, reorder level, and unit costs which
helped us a lot to judge the company from different aspects. After having a
knowledge of cost evaluation of product, we also came to know that what
sales we should project in a certain era.
In this project, we have selected product Coke 500ml and then we have
evaluated the costs of it. We have calculated the Cost of Goods sold
statement to find the total cost incurred on production. Then we also found
the EOQ of manufacturing firm. Then we decided to find the most important
thing Break-even point of company which helped us knowing that if the
company will only be having sales of 45,294 then with the same cost then
there will be no profit for the company. On the other hand we also learnt how
to find the targeted profit which was 100,000 in a specific period then we
should do sale of at least 3259 units with same cost. That would help us to
earn profit of 100,000.