Management

Accounting
MSL 707

Roll No.: 45

M. No: 9990367520
Ritwikrudra1997@gmail.com

Ritwik Rudra
2019 SMT 6677
Background:

Mr. Hardworker is a wholesale manufacturer of bedsheets, working in Delhi for the past 20 years. He
supplies the bedsheets to various retailers in Delhi, who do the packaging of the bedsheets and then
sell it to the end customers. In the past he has also started his own retailing shop, but that shop was
closed and packaging equipment sold at scrap value due to large losses and dispute with the
landlord, Mr. Wicked, after two years.

Mr. Hardworker is a very hard-working and responsible person. However, he does not have any
formal education. His staff members are also not well-educated.

For the past few years, Mr. Hardworker is earning some profits, but now he wants to expand in
retailing as well. But due to the fear of his past losses, this time he is prepared to consult a financial
expert.

Mr. Hardworker was contacted by NIVAH committee of Department of management studies, IIT
Delhi. NIVAH being the social sector arm of DMS-IIT Delhi, are willing to provide him with an MBA
student who has studied ‘Managerial Accounting’ under Prof. P. K. Jain. No fees will be charged as it
will be part of the Social Sector Activity [SSA] of the student. Student named Ritwik Rudra
volunteered for this task.

Data Collection:

Cost data provided by Mr.

Mehanati are segregated
into the fixed
cost, variable cost and
mixed cost categories.
Further, mixed costs
need to be segregated into
fixed and variable cost
elements as all

This paper is allowed to be used by Prof. P. K. Jain

major decision-making
analysis pre-suppose that
costs are either
fixed or variable. Method of
Least Square is considered
to be most
scientific method to
apportion mixed costs.
 FixFix
FixFix
Fixee
ee
ed cd c
d cd c
d cost: ost:
ost: ost:
ost: Cost of inputs which do
not change with change in

This paper is allowed to be used by Prof. P. K. Jain

level of activity within
relevant range for a given
budget period
i.e. these costs are fixed in
nature whether production
takes
place or not. Table-1 shows
fixed cost composition.
Table-1 : Fixed Cost
Composition
ParticularsParticulars
ParticularsParticulars
Particulars Fixed
costFixed cost
Fixed costFixed cost
Fixed cost
`
Cupola 5,00,000
Land 2,00,000

This paper is allowed to be used by Prof. P. K. Jain

Construction of Building
10,00,000
Heating Furnace Cost
3,00,000
Cost of DG Set 1,75,000
Cost of Power Connection
3,50,000
Salaries of Permanent Staff
Per Month 35,000
Annual Maintenance Cost
2,00,000
Minimum Monthly Electricity
Bill 3,000
Minimum Monthly
Telephone Bill 2,000
Cost of Patterns 3,00,000
Cost of Machine Block (Air
Compressor 13,25,000

This paper is allowed to be used by Prof. P. K. Jain

Sand Blasting, Lathe,
Grinding, Drilling etc.)
Total Yearly Depreciation of
Machine Block @ 15%
Other Costs which are Fixed
in nature 25,00,000
(Moulding Boxes, Crucibles
etc.)
Assume economic life of
plant is seven years as per
casting
industry is concerned.
Annual Fixed Cost=
(Cupola+ Land+
Construction of building +
Heating Furnace Cost+ DG
Set + cost of Power
Connection +

This paper is allowed to be used by Prof. P. K. Jain

Cost of Machine Block +
Cost of Patterns +
Others) /7 +
(Annual Maintenance Cost)+
(Salaries of Permanent Staff
Per
Month + Minimum Monthly
Electricity Bill + Minimum
Monthly
Telephone bill)* 12.
Annual Fixed Cost = `
16,30,000.
Yearly Depreciation = 0.15*
(Cupola + Heating Furnace
Cost +
DG Set + Cost of Patterns +
Cost of Machine Block +
Others)

This paper is allowed to be used by Prof. P. K. Jain

 = 0.15*51, 00,000
= ` 7, 65,000
 VV
VV
Variablariabl
ariablariabl
ariable Cost:e Cost:
e Cost:e Cost:
e Cost: Cost of inputs
assumed to vary in direct
proportion with change in
level of activity within
relevant range
for a given budget period.
Table-2 illustrates variable
cost
elements and procedure for
determining variable cost
per unit
Ritwik collected data, and segregated it into the fixed cost, variable cost and mixed cost categories.
Further, mixed costs need to be segregated into fixed and variable cost elements as all major

This paper is allowed to be used by Prof. P. K. Jain

decision-making analysis pre-suppose that costs are either fixed or variable. [Method of Least Square
is considered to be most scientific method to apportion mixed costs]

Fixed Cost: Cost of inputs which do not change with change in level of activity within relevant range
for a given budget period i.e. these costs are fixed in nature whether production takes place or not.
Table-1 shows fixed cost composition.

Table-1: Fixed Cost Composition

Particulars Fixed Costs [Rs.]

Packaging Machine 5,00,000

Rent Per Month 50,000
Salaries to Permanent Staff [6] Per Month 35,000 x 6
Annual Maintenance Cost 1,00,000
Minimum Monthly Electricity Bill 3,000
Minimum Monthly Telephone Bill 2,000
Furniture and Fittings 2,00,000
Yearly Depreciation on Packaging Machine @15%
Yearly Depreciation on Furniture and Fittings @10%

Assume economic life of packaging machine is 5 years.

Annual Fixed Cost= (Packaging Machine)/5 + (Annual Maintenance Cost) + (Salaries of Permanent
Staff Per Month + Minimum Monthly Electricity Bill + Minimum Monthly Telephone bill + Rent Per
Month)*12.

Annual Fixed Cost = Rs. 2,65,000

Yearly Depreciation = 0.15*(Packaging Machine Cost) + 0.10*(Furniture & Fittings Cost) =

0.15*5,00,000 + 0.10*2,00,000 = 95,000

Variable Cost: Cost of inputs assumed to vary in direct proportion with change in level of activity
within relevant range for a given budget period. Table-2 illustrates variable cost elements and
procedure for determining variable cost per unit.

Table-2: Variable Cost Composition

Particulars Fixed Costs [Rs.]

Direct Material Cost

Packaging Material @Rs. 50 per Kg 75,000
Dye 5,000
Paper @Rs. 5 per Kg 7,500
Less scrap @2% 1750
Total Direct Material Cost 85,750
Direct Labour Cost 50,000
Other Variable Overheads 5,000
Total Variable Cost (per month) 1,40,750
Number of Bedsheets Manufactured in 1 Month 20,000
Variable Cost Per Bedsheet 7.0375

This paper is allowed to be used by Prof. P. K. Jain

Mixed Cost: Cost of inputs which varies with change in level of activity but not in direct proportion.
For simplicity, we deduct total variable cost from total expenditure for a month to determine total
mixed cost. Table-3 shows mixed cost composition. Method of Least Square is explained below for
segregation of mixed cost into fixed and variable cost.

The basic straight-line regression equation is Y = a + bX

where Y = Total Mixed Cost; a = Fixed Cost element of Mixed Cost; b = Variable Cost Element of
Mixed Cost; X = Total units produced per month; n = No. of months

Two linear equation are ΣY = na + b ΣX ; ΣXY = a ΣX + b ΣX 2

Table-3: Mixed Cost Composition

Months Units Produced Total Mixed Cost XY X2

[X] in Rs. [Y]
April 20,000 3,00,000 6,00,00,00,000 40,00,00,000
May 22,000 3,20,000 7,04,00,00,000 48,40,00,000
June 17,000 2,70,000 4,59,00,00,000 28,90,00,000
July 24,000 3,40,000 8,16,00,00,000 57,60,00,000
August 18,000 2,80,000 5,04,00,00,000 32,40,00,000
September 19,000 2,90,000 5,51,00,00,000 36,10,00,000

Substituting the values from table of mixed cost gives

18,00,000 = 6a + 1,20,000b….………………………………………………………………………………………………………… (1)

36,34,00,00,000 = 1,20,000a + 2,43,40,00,000b……………………………………………………………………………. (2)

Solving equation 1 and 2 gives a = 1,00,000; b = 10

Fixed Cost is Rs. 1,00,000 per month and variable Cost is Rs.10 per unit produced. These two cost
elements are clubbed with fixed and variable components calculated earlier.

Total Annual Fixed Cost = 2,65,000 + 1,00,000*12 = Rs. 14,65,000

Total Variable Cost Per Bedsheet = 7 + 10 = Rs. 17

Break-Even Analysis:

Sales Price Per Unit = 200 (excluding 5% GST)

Contribution Margin Per Unit (CMPU) = Sales Price Per Unit -Variable Cost Per Unit= Rs. 183

Contribution to Volume (C/V) Ratio = CMPU / Sales Price Per Unit= 91.5%

Variable Cost to Volume (V/V) Ratio = 100% - C/V Ratio= 8.5%

BEP (in units) = Total Annual Fixed Cost / Contribution Margin Per Unit (CMPU)= 14,65,000/183=
8,006

This paper is allowed to be used by Prof. P. K. Jain

Break-Even Sales Revenue (BESR) = Total Annual Fixed Cost / (C/V Ratio) = 14,65,000/0.915= 16,
01,093

Cash Break-Even Point (in units) = (Total Annual Fixed Cost -Depreciation) / CMPU= (14,65,000–
95,000)/183= 7487

Cash Break-Even Sales Revenue (CBESR)= (Total Annual Fixed Cost - Depreciation) / C/V Ratio= Rs.
14,97,268

Margin of Safety (in units) = Actual Estimated Sales - BEP (in Units) = 20,000 – 8,006 = 11,994

Sales data are estimated based on past six months sales volume and firm orders which company
have received from its customers in near future.

Projected EBT or Margin of Safety (in Rs.) = 11,994*183 =` 21,94,902

Desired Sales Volume (in units) to earn EBT of Rs.10,00,000= (Total Annual Fixed Cost + Desired
EBT) / CMPU= (14,65,000 + 10,00,000) / 183 = 13,470

Desired Sales Volume (in units) to earn EBT of Rs. 20,00,000= (Total Annual Fixed Cost + Desired
EBT)/CMPU= (14,65,000 + 20,00,000) / 183 = 18,935

This paper is allowed to be used by Prof. P. K. Jain