This report summarizes a group project determining the production cost and cost minimization of Bismillah Tea. It includes an analysis of the highest selling product, milk tea. Direct material, labor, and manufacturing overhead costs are calculated to determine total product cost. A contribution format income statement and CVP analysis are presented. The analysis finds the break-even point is 69 cups of milk tea per day. Insights on wastage and cost reduction strategies are also provided.
Understanding the Pakistan Budgeting Process: Basics and Key Insights
Determining the Production Cost and Cost Minimization of Bismillah Tea
1. North South University
Spring 2020
ACT 202
Section: 17
Report on:
Determining the Production Cost and Cost Minimization of
Bismillah Tea
Prepared and Submitted by:
Sl. Name Id
1. Abu Horaira Kamal 1330504630
2. Redowan Ahmed Shawon 1430434030
3. Sadia Imran Meghla 1631168630
4. Maliha Haque 1721977630
5. Tasnia Tabassum Mim 1812847630
Submitted to:
Mr. Rezwanul Mumtahin Husain
Lecturer,
Department of Accounting &
Finance
Submitted on:
June 2, 2020
2. June 2, 2020
Mr. Rezwanul Mumtahin Husain,
Lecturer,
Department of Accounting & Finance
School of Business and Economics
North South University
Subject: Submission of the ACT 202 Project Report
Dear Sir,
We state that we would like to submit our report on Determining the Production Cost and
Cost Minimization of Bismillah Tea as per your instruction. We would be glad to revise any
of the section if necessary in future.
We therefore hope that you would be kind enough to accept this report.
Sincerely yours,
Abu Horaira Kamal Redowan Ahmed Shawon
Sadia Imran Meghla Maliha Haque
Tasnia Tabassum Mim
3. ACKNOWLEDGEMENT
We would like to express our humble thankfulness to Mr. Rezwanul Mumtahin Husain, our
course instructor as he has provided the group the precious opportunity to be a part of this
project of Determining the Production Cost and Cost Minimization of Bismillah Tea. This
project is found didactic. We hope that the lessons we have obtained from this will be useful
for our future profession. Moreover, while we were working on this, he has observed and
guided us closely throughout the period. He was always there for our any essential and
relevant support.
We wish to express our gratitude to Mr. Rafique, the proprietor of Bismillah Tea. He has
been the only the information sources for this project. He has provided all the required
information for this project. Without his favor and consent, this was not possible to collect
that information as well as accomplish this project. His lenient attitude has motivated us to
work even harder for this project.
Finally, we are grateful to all of the members of our group. They have been significantly
industrious and supportive. All of them have sufficient willing contribution in this project.
They not only have helped to complete the project in an efficient and effective way, but also
have taught team work to each other. The lessons got from this team work are expected to
help us in future.
4. EXECUTIVE SUMMARY
This report is prepared on determining the production cost and cost minimization of
Bismillah Tea. The product selected for this project is the milk tea, the highest seller product
of this partnership enterprise. This report includes the product detail and production process.
The production process is demonstrated in a flowchart. Then, the product cost of milk tea is
computed in some certain steps, such as, calculating direct material cost, direct labor cost,
and calculating manufacturing overhead cost. Utilizing the results of these calculations, the
total cost has been calculated. All of the costs are classified under their respective category in
the cost identification table as well. Next, the ‘price of the product and profit margin’ section
shows the per unit price of milk tea. Moreover, the profit margin is defined in this section. In
order to find the profit margin of Bismillah Tea, a contribution format income statement is
prepared here. By extracting the data from the income statement, CVP analysis of this tea
stall has been prepared. In this analysis, break-even units, break-even sales, margin of safety,
and degree of operating leverage (DOL) are analyzed with proper interpretations. Also, the
graphs are incorporated where required. After that, the insights about the wastage and cost
reduction opportunities are added in the report. At the beginning of this section, the wastages
of Bismillah Tea have been listed. Secondly, the opportunity of cost reduction without
compromising the quality is justified. Finally, the cost reduction strategies are elaborated.
5. TABLE OF CONTENTS
Sl. Name Page no.
1. Introduction 1
2. Product Details 1-2
3. Production Process 2
4. Determining Product Cost 3-5
Calculating Direct Material 3
Direct Labor 3
Calculating Manufacturing Overhead 3-4
Calculating Total Cost 4-5
Cost Identification 5
5. Price of Product and Profit Margin 6-7
Contribution Format Income Statement 6
6. CVP Analysis 7-11
Calculating Break-even Units 7
Calculating Break-even Sales 8
Graphical Presentation of CVP Analysis 8-9
Calculating Margin of Safety 10
Calculating Degree of Operating Leverage (DOL) 10-11
7. Insights 11-14
Wastage in Production 11-12
Reducing the Cost without Compromising the Quality 12
Recommended Cost Reduction Strategies 13-14
8. Conclusion 14-15
6. 1 | P a g e
INTRODUCTION
This project is about determining and minimizing the product cost. According to the
requirement, the business organization selected here is Bismillah Tea. Likewise, among the
products of Bismillah tea, only milk tea is picked.
Bismillah Tea is a typical tea stall established in 2017 in Ghatpar, near Basundhara
Residential Area. This is a family owned partnership business founded, owned and conducted
by two brothers. Although both of the owners work there they still have a staff for the
operational activities. In addition with a wide variety of products, it sells different types of tea
as well all day long. In fact, tea is their highest seller. This tea stall serves twelve different
types of tea. Among all the products of Bismillah Tea, this project has selected milk tea as the
topic. Ghatpar is usually crowded by the young people, especially, the students of nearby
North South University and Independent University Bangladesh. That is why; Bismillah Tea
everyday sells a massive number of cups of tea easily. This project report is mainly on
determining and minimizing the product cost of this milk tea. Moreover, this also
incorporates product details, price of the product, as well as profit margin. This is expected
that the findings of this report would help Bismillah Tea in future to operate the business
more efficiently.
PRODUCT DETAILS
As mentioned previously, the selected product for this project is Bismillah Tea’s milk tea.
According to Bismillah Tea, it is its most popular and highest selling product.
The tea being discussed is similar to the typical milk tea available in Dhaka commonly.
However, this tea is served with small amount of coffee beans added with it. This tea is made
of tea leaf, condensed milk, sugar, water, and coffee beans. As Mr. Rafique, the contact
person says, the coffee put into the milk tea makes the tea even tastier and unique. This is
7. 2 | P a g e
discussed in earlier section that the area Bismillah Tea located in a crowded place by young
people. So, Bismillah sells approximately five hundred cups of tea per day.
PRODUCTION PROCESS
According to Mr. Rafique, the one of the owners of Bismillah Tea, the ingredients are
purchased on a daily basis. By the early morning, either Mr. Rafique or his partner opens the
tea stall and starts producing milk tea. The production of this product seems interesting and
satisfying to witness.
At first, he boils 2 cattle of water. Then, he adds tea leaves in the water. Here, he puts around
50 grams of tea leaves. When any customer orders for milk tea, he pours the liquor into cups.
After that, he applies one spoon of sugar, one spoon of condensed milk, and a small bit of
coffee in each cup. Finally, he beat the solution with a tea spoon, mixes all the ingredients
very well and serves to the customers. At times, some customers have necessities for different
amount of ingredients. On the other hand, some customers are fond of different recipes of tea.
So, Mr. Rafique tries to serve them accordingly.
The steps of production procedure is listed in short in the following flowchart-
Production Process of Milk Tea
Water
Boil
Tea leaf Sugar Condensed
milk
Coffee
bean
Cup
HeatMix Pour Mix Beat Serve
Tea spoon
8. 3 | P a g e
DETERMINING PRODUCT COST
When we inquired Mr. Rafique about the cost he said he buys raw materials each day from
the closest grocery shop. A few times the cost fluctuates a little but he gave us summary
about his daily costing.
Calculating Direct Material (DL)
Material Price/Unit × Number of units = Total
Tea leaves 170tk/kg × 2 kg = 340 Tk
Condensed milk 50tk/can × 20 can = 1,000 Tk
Sugar 55tk/kg × 5 kg = 275 Tk
Coffee 170tk/bottle × 1 bottle = 170 Tk
Total Direct Material = 1,785 Tk
Direct Labor (DL)
According to the collected data, Bismillah tea pays 150 taka as wages to the employee every
day.
Calculating Manufacturing Overhead (MOH)
The monthly tea stall rent is 10,000tk
So daily rent =
10,000 Tk
30
= 333 Tk (Round figure)
Monthly electricity bill is 2000 taka though electricity bill varies month to month.
So daily expense as electricity bill =
2,000 Tk
30
= 67 Tk (Round figure)
9. 4 | P a g e
It needs 3 gas cylinders each month to boil the water. That cylinder’s price is 1000 taka.
Additionally, Bismillah Tea has to pay 60 more taka for delivery.
So, the monthly gas cost = (cylinder price × 3) + (delivery charge × 3)
= (1,000 Tk × 3) + (60 Tk × 3)
= 3,000 Tk + 180 Tk
= 3,180 Tk.
So daily gas cylinder price and delivery cost = Daily gas price + Daily delivery charge
=
3,000 Tk
+
180 Tk
30 30
= 100 Tk. + 6 Tk
= 106 Tk
To clean the shop and the surrounding, Bismillah Tea has to spend 1200 taka per month.
So, daily cleaning cost =
1,200 Tk
30
= 40 Tk.
Total MOH = (333 + 67 + 106 + 40) Tk.
= 440 Tk.
Calculating Total Cost
Total product cost per day = DM + DL + MOH
= (1,785 + 150 + 440) Tk.
= 2,375 Tk
Daily milk tea production = 500 cups
10. 5 | P a g e
Per unit cost =
Total cost
Number of units produced
=
2375 Tk
500
= 4.75 Tk per cup
Cost Identification
Bismillah Tea’s daily costs are calculated based on the monthly cost in the earlier section of
this report. Likewise, the daily costs are listed in a classified manner in the following table.
Variable
Costs
Fixed
Costs
Mixed
Costs
Period
Costs
Product Costs
Direct
Materials
Direct
Labor
Manufact
uring
Overhead
Tea leaves 340 Tk 340 Tk
Condensed
milk
1,000 Tk 1,000 Tk
Sugar 275 Tk 275 Tk
Coffee 170 Tk 170 Tk
Employee’s
wages
150 Tk 150 Tk
Stall rent 333 Tk 333 Tk
Electricity Bill 45 Tk 22 Tk 67 Tk 67 Tk
Gas cylinder
Cost
100 Tk 6 Tk 106 Tk
Cleaning
cost
40 Tk 40 Tk
Total 2,080 Tk 401 Tk 67 Tk 0 Tk 1,615 Tk 150 Tk 716 Tk
11. 6 | P a g e
PRICE OF PRODUCT AND PROFIT
MARGIN
According to the information collected, the price of the product is set 10 taka each cup. This
price is set through a casual market analysis and competitive analysis.
Contribution Format Income Statement
For the Day February 29, 2020
Total Per Unit Percentage
Sales (500×10) 5,000 Tk 10.00 Tk 100.00%
(-) variable Expense:
Direct Materials 1,615 Tk
Direct Labor 150 Tk
Coffee 170 Tk
Variable Electricity 45 Tk
Variable Gas Cylinder
Cost
100 Tk
(2,080) Tk 4.16 Tk 41.60%
Contribution Margin (CM) 2,920 Tk 5.84 Tk 58.40%
(-) Fixed Expense:
Stall Rent 333 Tk
Fixed Electricity 22 Tk
Fixed Gas Cylinder
Cost
6 Tk
Cleaning 40 Tk
(401) Tk
Net Operating Income 2,519 Tk
12. 7 | P a g e
Profit margin ratio =
Net operating income
Net sales
=
2,519
5,000
= 0.50
Profit Margin Percentage = 0.50 × 100
= 50 %
CVP ANALYSIS
Bismillah’r tea’s costs and incomes are defined earlier in this report. Based on those amounts,
this partnership business’s CVP analysis is demonstrated here. This analysis would measure
how much the changes in activity affect contribution margin and net operating income.
Calculating Break-even Units
Daily Break-even units =
Daily fixed expenses + Daily target profit
Daily Contribution Margin per unit
=
401 Tk + 0 Tk
5.84 Tk
= 68.66 cups
The calculation above shows that Bismillah Tea needs to sell at least 68.66 cups of tea.
However, this is not possible to sell 68.66 cups of milk tea. As a result, Bismillah Tea has to
sell at least 69 cups of milk tea a day.
13. 8 | P a g e
Calculating Break-even Sales
Daily Break-even sales =
Daily fixed expenses + Daily target profit
Daily Contribution Margin ratio
=
401 Tk + 0 Tk
58.4%
=
401 Tk + 0 Tk
0.584
= 686.64 Tk
Therefore, Bismillah Tea has to sell milk tea worth at least of 686.64 taka daily to reach the
break even.
Graphical Presentation of CVP Analysis
In the earlier section of this report, the fixed expenses, variable expenses, and total sales are
defined. According to those statements, the daily fixed expenses, variable expenses, and total
sales are respectively 401 taka, 2080 taka, and 5000 taka. Based on these amounts of daily
fixed expenses and daily variable expenses, daily total expenses are calculated below.
Daily Variable Expenses 2,080 Tk
(+) Daily Fixed Expenses 401 Tk
Total Daily Expenses 2,481 Tk
According to these amounts, the analysis is presented through the line chart below.
14. 9 | P a g e
In the diagram, this is visible that there are three separate lines, which denote fixed expenses,
total expenses, and total sales respectively. On the other hand, the chart has two axes, which
are number of units sold and another one is total sales respectively.
Here, the line of fixed expenses is at point 401 throughout the diagram and parallel to the
ground. This indicates that the amount of fixed expenses would be fixed at the point of 401
irrespective of the sales volume. Secondly, these are two more lines to express the total sales
and the total expenses. Although the total sales line starts from the point of 0, the total
expenses line starts from 401. This refers that even if the number of unit of sold is 0,
Bismillah Tea has to incur the cost of 401 taka per day. So, the daily total cost would never
be less than 401 taka. Thirdly, the total sales line and the total cost line intersected each other
at the point of (68.66, 686.64). This point is called the break-even point. At this point, the
profit of Bismillah Tea would be zero. Thus, if the number of units sold and total sales
respectively become less than 68.66 and 686.64, Bismillah Tea would be at loss. Finally, the
diagram shows that in a certain portion, the total expenses line lies above the total sales line.
In this portion, the distance between these two lines signifies the loss area. On the other hand,
in another portion, the total sales line is lying above total expenses. In this portion of the
chart, the space between these two lines refers the profit area.
0
1,000
2,000
3,000
4,000
5,000
6,000
0 100 200 300 400 500
TotalSalesTaka
Number of Units Sold
CVP Graph of Bilmillah Tea
Fixed Expenses
Total Expenses
Total Sales
Break-even point
Loss Area
Profit Area
15. 10 | P a g e
Calculating Margin of Safety
Margin of safety sales= Total sales – Break-even sales
= 5,000 Tk – 686.64 Tk
= 4,313.36 Tk
Margin of safety ratio =
Margin of safety × 100
Actual sales
=
4,313.36 Tk × 100
5,000 Tk
= 0.8628
= 86.28%
The calculations above interpret that Bismillah Tea sells 4314.36 more taka worth of milk tea
than break-even sales. It can also be stated that the actual sales amount is 86.28% higher than
the break-even sales amount.
Calculating Degree of Operating Leverage (DOL)
To measure the sensitivity of the net operating income to percentage change in sales, the
degree of operating leverage is calculated in the following.
686.64 4,313.36Total Sales
Margin of Safety
Break-even Sales Margin of Safety
86.28%13.72%
100.00%
16. 11 | P a g e
DOL =
Contribution Margin
Net Operating Income
=
2,920 Tk
2,519 Tk
= 1.16
The degree of operating leverage of Bismillah Tea is calculated 1.16. Thus, it can be stated
that the net operating income would change 1.16 percent for the change in each percent of
sales.
INSIGHTS
Since Bismillah Tea sells as much as 500 cups of milk tea every day, this can be addressed as
an active business enterprise. So, this is not badly affected by small wastages. The profit,
however, can be increased by controlling the wastage. Moreover, the production cost of milk
tea can be reduced in some more ways. All of ways of cost reduction are elaborated here.
Wastages in Production
In the production process of milk tea, Bismillah Tea passes through a few wastages. These
wastages are in the following-
Electricity Wastage:
Bismillah Tea possesses three electric appliances, such as, tungsten light, a fan, and a TV.
Among them, the light and TV are seen being used unnecessarily at times. Though the TV is
set basically to attract and serve the customer better, this remains on also when there is no
customer there. Again, the light is for using after evening or in the gloomy weather. Unlike,
sometimes this is also used during daytime and sunny days. Moreover, the tungsten bulb
consumes a lot of electricity. So, this seems wastage to use this type of bulbs.
17. 12 | P a g e
Extra Cleaning Cost:
Bismillah Tea incurs 1,200 taka a month on an average for cleaning purpose. In exchange of
this 1,200 taka, the cleaner has to clean the outlet and the surrounding area twice a day. This
requires to be cleaned twice a day only due to lack of maintenance. Thus, this is undoubtedly
wastage to this partnership enterprise.
Excessive Gas Cylinder Delivery Charge:
This is already mentioned gas cylinder refills are required frequently. These refilled cylinders
are delivered to Bismillah Tea by the vendor. For this delivery service, the vendor charges 60
taka each time. Since this is possible to reduce this cost, this is one of the wastages.
Gas Wastage:
During the off peak hours, there are no customer at Bismillah Tea. During these times, this
stall does not get order for tea. Still the burner remains open at times. As a result, gas burns
unnecessarily.
Too Much of People Involvement:
This tea stall is owned by two partners. The partners work in making and serving tea
themselves. In addition, to assist them in work, there is an employee hired as well. Unlike,
being such a small tea stall, making three people work simultaneously seems too much. As
Bismillah Tea has to pay certain amount of money as wages to that employee, this is wastage
of money.
Reducing the Cost without Compromising the Quality
Since Bismillah Tea is conducting the business successfully, the profit margin ratio is
satisfactory. A few wastages, however, exist in the business. Due to the wastages, this
enterprise often has to incur some unnecessary costs. If these wastages are properly managed,
this enterprise would be able to save significant amount of money. Again, this cost reduction
would not affect the product quality either. Thus, this can be stated that this is possible to
Bismillah Tea to reduce cost without compromising the quality.
18. 13 | P a g e
Recommended Cost Reduction Strategies
There are a few points where Bismillah Tea’s resources are being wasted. If the wastages are
controlled in an effective manner, this enterprise can reduce cost without compromising
product quality. The ways of these cost reduction are explained in this section.
Reducing Raw Material Cost:
To produce milk tea, Bismillah Tea requires some particular raw materials. These materials
are often purchase from a particular retail store. A long term relationship has already been
built between Bismillah Tea and that retail store. So, Bismillah Tea has no option for verify
the price of the raw material from the market. As a result, there is risk of higher raw material
cost than it is supposed to be. Also, all of the necessary items might not be available in that
store. Thus, there is risk that this tea stall can be out of raw material suddenly. Unlike,
Bismillah Tea is recommended to create and maintain relationship with multiple suppliers.
This is expected that in this way, Bismillah Tea can avail the raw materials at a competitive
price. This can reduce the raw material cost.
Saving Electricity Bill:
Firstly, Bismillah Tea uses a tungsten bulb. Tungsten bulbs are prone to consume more
electricity. In contrary, LED bulbs are more energy efficient. This type of bulbs, while giving
the same level of bringtness, are able to save approximately 75% to 80% electricity. (How
Energy-Efficient Light Bulbs Compare with Traditional Incandescents, 2020) So, Bismillah
Tea can use LED bulbs instead of tungsten. Secondly, the TV this stall possesses is basically
for attracting the customers and providing them a quality service. So, in order to save
electricity, the TV should be switched of when there is no customer there.
Controlling Cleaning Cost:
This stall required to be cleaned twice a day, which costs 1200 taka per month. At the stall,
there is no trash bean. So, the customers randomly dump their trashes here and there. As a
result, the place becomes dirtier fast. This is the reason it needs to be cleaned such frequently.
If Bismillah Tea keeps a trash bean at the stall, the customers can drop their trashes into it
19. 14 | P a g e
instead. It is assumed that using a trash bean in such way can keep the place neat and clean.
Therefore, cleaning once a day can be enough. This trick would save cleaning cost.
Reducing Gas Cylinder Delivery Cost:
Since Bismillah Tea needs to refill the gas cylinder frequently, it has to pay for the delivery
charge accordingly as well. If multiple cylinders are received in a single delivery, the delivery
charge per cylinder would be reduced. Thus, this is recommended to Bismillah Tea to take
multiple cylinders in each delivery instead of one.
Careful Use of Gas:
During the time when there is no customer at the stall, the gas burner should be turned off.
Moreover, the burner users should be more careful about the size of the flame. Bigger flam
than necessity wastes significant amount of gas. In this way, Bismillah Tea would be able to
save gas.
Eliminating Wages Expense:
As mentioned earlier, working three people simultaneously is not essential for Bismillah Tea.
Instead, only two owners are suggested to work here and eliminate the employee. This
elimination would reduce the wages cost.
CONCLUSION
Bismillah Tea is a profitable business located in Ghatpar, adjusent to Basundhara Residential
Area. Among all its products, milk tea is chosen for this project. It sells 500 cups of milk tea
for 10 taka each. This refers that the daily sales is 5,000 taka. The direct material, direct
labor, and manufacturing overhead costs of producing milk tea are shown in this report. The
direct material, direct labor, and manufacturing overhead costs are 1,615 taka, 150 taka, and
716 taka respectively in total. All of the costs of Bismillah Tea for producing the milk tea are
classified into five categories, such as, variable costs, fixed costs, mixed costs, period cost,
and product costs. These costs are 2,080 taka, 401 taka, 67 taka, 0 taka, 1,615 taka, 150 taka,
and 716 taka respectively. Considering all the costs and income, a contribution format
20. 15 | P a g e
income statement is prepared. According to the income statement, total, per unit, and in
percentage contribution margins are 2,920 taka, 5.84 taka, and 58.40% whereas the net
operating income is found 2,519 taka. Depending on this income statement, the CVP analysis
is demonstrated on the milk tea. Here, the break-even units, break-even sales, margin of
safety, and degree of leverage are computed. These are respectively 69 cups, 686.64 taka,
4,313.36 taka, and 1.16. These numbers are also expressed in percentages and with graphs.
After that, some insights about the business are incorporated, that consist of wastages in
production, reducing the cost without compromising the quality, and cost reduction strategies.
21. Reference
Energy.gov. 2020. How Energy-Efficient Light Bulbs Compare With Traditional
Incandescents. [online] Available at: <https://www.energy.gov/energysaver/save-electricity-
and-fuel/lighting-choices-save-you-money/how-energy-efficient-light> [Accessed 26 May
2020].
Tea stall Interview