ACT202

(INTRODUCTION TO MANEGERIAL ACCOUNTING)

SECTION: 21
FALL 2019
TOPIC: COST AND VARIANCE ANALYSIS

SUBMITTED TO: SOHANUR RAHMAN (SOR)

LECTURER,
DEPARTMENT OF ACCOUNTING & FINANCE
NORTH SOUTH UNIVERSITY

Submitted by:
NAME ID
Tanzeem Mahamud 1831189030
Nuzhat Nuary Hossain 1831517030
Mohoshinur Rahman 1812095030

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 Letter of submission:

23rd December 2019.

Sohanur Rahman.
Lecturer,
Department of Accounting & Finance,
School of Business & Economics (SBE)
North south University.

Subject: Cost and Variance Analysis.

Dear Sir,
With all due respect, we are submitting our group assignment on the title “cost and variance
analysis on Nescafe coffee” that were given to us. We are enlightened to get the opportunity
to complete the entire assignment as per your instruction which gave us real life information
about the introduction to managerial accounting course and a wide variety of expenses. Our
report is based on the calculation of production cost and cost minimization of Nescafe
coffee.
We hope this report meets all your expectations and fulfill every criteria’s to get your
approved. It would be a great honor to us to answer any queries of you having regarding this
assignment work.

Yours obediently,
Nuzhat Nuary Hossain.
On behalf of our group.

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 Topics Page Number
Executive Summary 4

Introduction 5

Production Process 5

Analysis and findings 6

Costs: Variable and Fixed 7

Offered price and Competitor 7

Profit Margin 7

Income Statement 8

Break-even Analysis 9

Wastage and Possible Solutions 10

Conclusion 10

Appendix : Questionnaires 11

Reference 11

Table of Contents

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 Executive summary:

By the Will of Almighty Allah we are very delighted to be able to work on this assignment
that is about determining the cost minimization and production cost of a product. We
happens to choose the Nescafe’s coffee of north south university as our only product.

A coffee has been a must have drink to refresh students mind & give an enormous boost in
energy for since forever. Not only it provides energy boost, but also gives other important
health benefits such as lower the risk of liver cancer, type 2 diabetes, heart fail and many
more. That’s why we decided to go far this product.

This report is based on the interview with the salesman on Nescafe’s coffee booth to find the
production cost. The assignment is broken down into 3 main parts. To start with, we
provided the cost of a cup of coffee, where we provided the costing of per cup direct
materials, direct labor and manufacturing overhead separately. Secondly, based on all cost
per cup, we found out variable costs and fixed cost. Lastly, we have prepared profit margin
for a cup to analysis net operating income per month.

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 Introduction

To people, coffee is more than just a drink. The vibe it creates has a higher value than tea. Coffee
can be a helping hand to people who are always busy with late night jobs or for students who
spends sleepless night before an examination. Coffee gives a boost energy in people and also
offer important health benefit, as it contains many useful nutrients. Nescafe’s coffee is famous
worldwide and is also a popular drink among the students of all universities including North
South University.

Production process:

To produce the Nescafe coffee, direct materials are needed. Direct materials are the
ingredients needed during the making process of coffee. Nescafe 3 in 1 mixture and water are the
only direct materials.

Direct Labor are the workers who makes the coffee and has an effect on the cost of every cups
of coffee that are being made to serve.

Manufacturing Overhead are the indirect materials and labors that also plays role in making
the coffee. As a part of manufacturing overhead the indirect cost falls upon the coffee cups
needed to serve coffee, the electricity cost, the depreciation expense of the coffee machine in
making a cup of coffee and also the chairs the owner and labor uses to rest on.

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 Analysis and Findings

Cost of a cup of
Coffee
Direct material Total cost/tk Number of cups Cost per
(a) consumed in a cup/tk(a÷b)
month(b)
Nescafe 3 in 1 520x45packet 90x30 8.67
mixture =23400 =2700

Water per cup 120galloons@50tk 2700 2.22

= 6000
Direct labor
Labor cost per cup 10000 2700 3.70
Manufacturing
Overhead
Electricity Bill 300 2700 0.11

Depreciation on 54 2700 0.02

chair

Cost of a plastic 2700 2700 1.00

cup per cup
Machine 500 2700 0.185
depreciation per
cup
*Total product - - 15.905
cost per cup

*Total product cost = (8.67+2.22+3.70+1+0.185+0.11+0.02)

per cup = 15.905tk

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 Costs
 Variable Cost
Direct Materials = 2700cups x (8.67+2.22)
= 29403tk
Direct Labors = 10000tk

Manufacturing Overhead = 2700cups x (0.11+0.02+1.00+0.185)

= 3550.5tk

Total Variable Cost = (29403+3550.5+10000)

= 42953.5tk

 Fixed Cost
Rent = 6000tk

Offered Price And Competitor Price

The Nescafe coffee is offered for a price at 20tk per cup. It’s actually the standard price of coffee
available at anywhere in the stall or stores. But some stores offer the same coffee at same amount
at 30tk or even 50tk.But the coffee at 20tk is worth the price.

Profit margin

Sales revenue 20.00tk

(-) Cost 15.905tk
Profit margin 4.095tk

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 Contribution margin 11056.5
(2700×4.095)

Income Statement of November

Sales revenue 54000

(2700×20)
(-) Variable cost 42953.5
(2700×15.905)
Contribution margin 11056.5
(-) Fixed expense (6000tk)
______________________
Net operating income 5056.5tk

So, eventually by selling 2700 cups of coffee per month, the Nescafe’s generates net income of
5056.5tk.

Contribution margin ratio = contribution margin ÷ sales revenue

= 11056.5÷54000
= 0.205

As a matter of fact if the selling price increases by 1tk the contribution margin will increase
By 0.205tk.

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 Break-even Analysis

 Breakeven in units = Fixed Expenses ÷ Contribution margin

=6000÷4.095
=1466 cups

Nescafe have to sell 1466 cups of coffee per month to breakeven.

 Breakeven in sales=Fixed Expenses ÷ Contribution Margin Ratio

=6000÷0.205
=29322

The sales revenue needs to be 29322tk every month to cover fixed expenses or the
Breakeven.

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 Wastage and Possible Solutions

The wastage in the production can only occur if the coffee cups are wasted or given
away whoever asks for an extra cup in order to hold the hot coffee properly.
The production cost can be reduced by replacing coffee cups with glasses, which
will never reduce product quality anyway.

The coffee cups cost the owner 1tk each, which means he has to spend atleast 2700tk on coffee
cups at least to serve the coffee. If he replaces the coffee cups with glasses he would see a
Considerable increase in his net income.

He does not need to buy glasses for serving coffee. Those glasses can be reused over and
over again by washing them with detergents. Detergents would only cost him 200-300tk per
month. So if he serves coffee with glasses instead of cups, his income would increase by 2500tk
or more.

Conclusion

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Nescafe store sells many other drinks besides coffee such as Milk Tea Espresso Cappuccino etc.
But the regular coffee is the popular and most commonly sold since it is reasonable and worth
the price

Appendix:Questionnaires

1) At what price are you offering the regular coffee?

Ans: 20taka per cup.
2) How many cups of coffee do you sell in a month?
Ans : I sell 90 cups a day and 2700 per month.
3) How many packets of nescafe 3 in 1 are needed for a month?whats the cost of each
packets?
Ans : 45packets and each costed 520taka.
4) How many gallons of water do you need in a month and cost of each gallon?
Ans : 120 gallons of water and 50tk each gallon.
5) How much do you pay to your labor?
Ans : 10000taka.
6) What is the price of each coffee cup?
Ans : 1.00taka.
7) What is your monthly electricity bill?
Ans : 1500tk per month on average.
8) How much rent do you have to pay?
Ans : 6000taka.
9) What is the price of coffee machine? How many years can it be used effectively?
Ans : 30000taka & for 5years.

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 Reference

Garrison, Noreen, Brewer - Managerial Accounting - 15th Edition - McGraw Hill

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