bsrm

Chapter:1

Executive SummarySteel is a product of capital intensive and complex industry that requires national attention for its development. The demand of steel is a basically derived a demand, growth in the industry is dependent on the level of activity of the steel consuming industries specifically the construction, automotive, appliances and other consumer durables. The steel industry is in the threshold of a new era. The departure from a regime of control of free marker, from protection to completion, from public sector to private investment and from anInward marketing policy to a global vision has all placed. The industry in a course of development and that has been endless opportunities and also at the same time stiff challenges and a terrain of uncertainty to improve its strength and competitive edge to product good quality products at lower prices.Steel is crucial to the development of any modern economy and is considered to be the backbone of human civilization. The level of per capita consumption of steel is treated as an important index of the level of socio economic development and living standards of the people in any country. It is a product of a large and technologically complex industry having strong forward and backward linkages in terms of material flows and income generation. All major industrial economies are characterized by the existence of strong steelindustry and the growth of many of these economies have been largely shaped by the strength of their steel industries in their initial stages of development.

BSRM Steels ltd. is a part of BSRM group. The owner of BSRM group (Mr.

Akberali A. Africawala) introduced BSRM Steels ltd. BSEM Steels is a plant,

where producing plain bars. Plain bar is a most important raw material construction.

As we know that home is an essential need for every human and rod is essential for

every human and rod is essential for building home. BSRM steels want to achieve a

lucrative market. We think they can fulfill their target. They can take market by

overcome all barriers. Their main barrier is their competitors. They can overcome

tier weakness and handle their threat.

The purpose of this research is to find out the 4 p’s (product, place, price and

promotion) which make it totally exceptional from others. For this analysis, we had

to find target market, market segmentation, positioning and marketing mix, their

major competitors and so far.

In product they give so many services which give the satisfaction to their

customer and they have so many verities and don’t compromise in quality. They

take so many steps to set up right price for their product which don’t disturb their

customer and so many steps in promotion and place.

The basic finding from the analysis what we have got is, BSRM steels is the

market leader, they are very concern about their quality which we had said and they

have own brands and they are trying to make more new brands. They have already

covered most or segment of market. At last they always tried to keep their brand in

top of the mind or customers.

Introduction

BSRM Steels ltd. provides a valuable ingredient for construction. BSRM

(Bangladesh Steel Re-rolling Mills) group, the first company which set up four

manual rolling mills in 1952 in the country. They are the first of making plain bars

for construction.

In 1987 an automatic billet based rolling mill was installed with continuous

up gradation. It has a portfolio of business. Now they have an own billet making

plat, Meghna Engineering Works. The two highway bridges over the fivers Meghna

and gomuti, the Chittagong airport, the kafco fertilizer factory and so many high

prestigious projects were then built with BSRM bars.

BSRM Steels ltd. is a part of BSRM group. It is the first company of

producing brand product and TMT (Thermo Mechanical Tim) bar. It was certified

by ISO. It manufacturing factory is in Fouzderhat. The equipment of the mill is

from abroad. It has a good brand image. For that they are controlling leadership of

market.

BSRM Steels ltd. is also a public company registered with both the Dhaka

and Chittagong Stock Exchanges.

Billet which converts from scrap in their sisters concern Meghna

Engineering Works is the main raw materials. They have so many products but the

product which they have only is grade 500w. This is their brand product. They are

trying to produce more new brands for construction and they try to produce their

product keep the future environment position in mind.

Chapter: 2

Company Background

BSRM Steel ltd. is a company of BSRM groups. BSRM group was started its

work in 1952. At that time it was known by East Bengal Steels ltd. Mr. Akberali A.

Africawala was the founder and chairman of it and Mr. Alihussain Akberali is the

present chairman of it. They have portfolio of business. They have the business of

producing re-bars. There is some selected company’s name

BSRM Wires ltd.

BSRM Recycling ltd.

Meghna Engineering Works ltd. (MEW)

Karnaphuly Engineering Works ltd. (KEW)

Chittagong power company ltd. (CPCL)

Their target market is individual home builders, engineer and architecture.

When they come to the market they have no competitors but now they have so

many competitors but they are in top position in market fro their best quality. They

always try to fulfill their customers demand. At last there is question can rise to

everyone’s mind and that is `Do they export their product`. The answer is “No, they

don’t export their product to abroad”.

Mission Statement

They don’t define their mission statement to give it in market but they are

working on it. They use a slogan for their product “The next generation steel”.

Strategic Vision

BSRM steels have some strategic vision. They try to fill up their following

vision.

Be the most acceptable brand all over the country.

Keep the market leadership and raise their image to their customers.

Produce 100% having quality product.

Aware to innovate new product, which has a strong demand in market.

Market Segmentation

It means dividing the market based on different characteristics. Market

segmentation is very necessary for a company to start a business. Without market

segment most of the companies cannot adopt a profitable business. They divide the

market based on geographic and psychographic segment.

Geographic Segments

They deliver their product inside of Bangladesh such as Dhaka, Rajshahi etc.

Psychographic Segments

In this segment they maintain the social class such as Engineer, Architect,

individual homebuilders.

Target Marketing

All segments are not equally profitable. A company has to select one or two

profitable segments and BSRM steels segment all the individual builders.

PositioningMarket positioning means how a company wants to see their brand in the

mind of consumer. Because customer look the performance and results of a

company. There is positioning graph of BSRM Steels with their competitors.

Position Based on Price and Quality

From above the graph we can see that BSRM steel is fist in the position of

their consumer mind and same position is having in quality. KSRM is medium in

those two.

Position Based on Production Capacity and Time

According to this graph, BSRM steels factories production capacity is in

medium level and their time of producing product is in low side. That’s mean they

don’t need so much time to produce. Their production capacity is 30,000m. ton per

month.

Positioning of Price

We are sorry to say we couldn’t price positioning graph because the price

depends on international market.

Developing Marketing Mix

4’ps is the important part of any company to go in a perfect position. We

have done our work on these 4’ ps of BSRM Steel ltd.

Product1. Varity2. Quality3. Design4. Size5. Features6. Brand

Name7. Service8. Warranty

Price1. List Price2. Discount3. Allowance4. Payment

Period5. Credit

Term

Promotion1. Advertising2. Personal

Selling3. Sales

Promotion4. Public

Relation

Place1. Channel2. Coverage3. Assortment4. Location5. Inventory6. Transportation

MarketingMix

ProductProduct means the good and services combination the company offered to

target market attention, acquisition, use or consumption that might satisfy a

consumer want or need. Product is tangible thing.

Product Variety

BSRM Steel ltd. has different types of grade. These types of grade are

varieties by its used and strength. Because different types of grade and strength are

need for different construction.

Product Use Strength

Grade 500w Heavy Construction 72,500 psi

Grade - 60 Medium Construction 60,000 psi

Grade – 40 Normal Construction 40,000 psi

*psi (pound per square inches)

Quality

Quality is the main key to their success.

BSRM Steel produce 100% quality produce. In different grade 100% quality

is maintain by adding “Carbon”. Adding more “Carbon” the strength of Steel

is increase.

They maintain the international Standard. For better quality they test their

product on BUET.

Their product is certified by ISO 6935 and BUET.

Design

As we know there is no such design in steel. Although their finished good is

raw material for contraction work. So it is not necessary for design.

To identify BSRM bar logo is embossed on the rod surface with “DIA OF BARS

ROLLLED”.

Size

On international standard and Bangladesh Building code the length of steel is

11 – 13 meter. But BSRM Steel also supplies perfect 12 meter and different size on

consumer demand.

Feature

The bars have superior bend ability and can be safely bent without cracking.

All bar sizes are rolled to a very close tolerance (possible on a DANIEL

computerized rolling mill) so that customers get more meters of steel per ton

– more value for money without having to sacrifice structural integrity.

estimate savings: 0.5%

De-scaled bars have better bonding with concrete and less wastage at site.

estimated savings: 0.5%

Xtreme bars are safely wieldable under field conditions. Another 0.5% to

1.5% of steel is saved by avoiding large splices.

The bars are needle-straight, thanks to the Danieli QTB process- no need for

straightening on the construction site.

Brand Name

BSRM Steel ltd. has the most dominated name “Xtreme”. When people think

they need steel for construction they think about “BSRM Xtreme” for their Brand

Name. Because BSRM Xtreme is the first and only high strength bar in Bangladesh.

Grade 500w

Grade 60

Grade 40

Service

BSRM steel has an engineer group who give consumer opinion. They go

they construction site and provide consumer that which grade and how many steel

are need for construction.

To available their product they have 6 depots out of Chittagong division.

They have more than 80 dealers all over the Bangladesh and they going to

set up 4 own testing laboratory of any product for their consumer. And there are

some dealer names in next page.

Warranty

BSRM Steel give consumer warranty that there product is tested and proved

by BUET engineer and certified by ISO 6935. To satisfy consumer that their

product is good for construction, consumer in future can test this of other company

product in BSRM own test laboratory free of cost.

PriceThe second major marketing tool is pricing. Price is the amount of money

charged for product or service. When any one set a mission for establish a business

then first of all he has to thing about price. Because price is the major factor for

affecting buyer choice. Through price should be given based on product quality. If

the product quality is high then price will be high and if the quality is low then price

will be low.

List Price

If a company has selected its markets and positioning carefully then price

will be ease set. BSRM Steel decide that they want to achieve product quality

leadership in the market so far their best quality their price is high then their

competitor but at first they low price for entering the market and when they get

response from customers then gradually they increase their price. As all we know

that price is one of the most flexible elements of marketing mix, it can be change

quickly. BSRM Steel has standard price list but their price are vary according to

international market. Here some prices are:-

Price per Metric Ton including VAT & Loading Charges

SL#

Product Name Product Size Ex-Factory Chittagong

01 DEFORMED BARS Xtreme-500W

8 mm TK.43,000

DEFORMED BARS Xtreme-500W

28 mm to 32 mm

TK.43,500

02 DEFORMED BARS (GR-400) 8 mm TK 43,000

DEFORMED BARS (GR-300) 8 mm TK. 42,000

03 DEFORMED BARS (GR-75) 7 mm TK.47,000

DEFORMED BARS (GR-75) 5.7 mm TK. 49,000

DEFORMED BARS (GR-75) 4.5 mm TK.49,000 Last updated: August 29, 2009

Allowances

BSRM Steel is selling directly to their customers or dealer. The agreement of

dealer with BSRM is that if he increases sell then he will get allowance. The

percentage of allowance is not fixed; it depends on the salsas amount.

Payment Period

Payment is an option give by company for their customer advantage. But no

company gives long time payment period as it highly risky to them. They collect

their money by cash or check before delivery the product, and they give preferences

to receive cash.

Credit Terms

BSRM Steel believes non credit terms.

PlacePlace is one of the parts of marketing mix which includes company activities

that make the product available to target consumers. Company needs to have some

steps to do these activities perfectly. The steps are:

channels

coverage

assortments

locations

inventory

transportation

Channels

Every company has channels to sell products and stay connected with

consumers. BSRM Steels have two kinds of channels.

Always

In this chart factory sell their product to their selective dealers and those dealers sell

it to consumers. Most of the time they follow this line.

Sometimes

They have six own depots to sell their product which we can say as another channel

of them.

Coverage

We are showing their coverage in three ways. One is the coverage of their

dealers, second is depots and third one is market share coverage.

Depots

They have six depots. Those are in Rajshahi, Khulna, Bogra, Molovibazar

and Dhaka.

Market Share

The third one is about market share. They are not sure about their market

share. They are working on it, but their guess amount is above 25%.

Assortments

BSRM Steels produce their product keep all the sectors of Bangladesh in

mind. They divide their products based on grades and strength like grade 500w, 60

grades and 40 grades. These have different strength. Like for three stored building

grade 500w needs 500 tons where 60 grades need 700 tons and 40 grade needs 1000

tons.

Location

Head Office

Their head office is in 1173/1207, Ali Mansion, Sadarghat, Chittagong.

Factory

There manufacturing factory is in Fouzderhat industrial area, Chittagong.

Inventory

BSRM Steels is running their production around the year. So they need to have

some stock. They have three types of inventory and they are:

1. Raw-materials

2. Finished products

3. Machinery

Raw-materials

For their production they need so many raw-materials. The important one

without which the production can’t run is scarp of ships. They import their raw

materials from Australia, Canada, Russia, South Africa and some time from

Bangladesh Ship Braking Yard. Then they convert them into “Billet” in their sister

concern MEW that is Meghna Engineering Works ltd.

Machinery

They import their machinery from Italy.

Finished Products

Finished product means, product that comes finally form machine. After

finishing finished product they keep it for 1 or 2 days, because sometimes in case of

emergency customer wants a lot with in few days. Most of the time they don’t need

to keep finished product.

Transportation

Transportation is an important part of a company because good

transportation service raises company’s reputation. BSRM Steels have only one

way transportation and that is land. They use truck or lorry in land transportation

but they have no own transportation.

PromotionPromotion is one of the parts of marketing mix. Without promotion no

company can grow up. So promotion is one of the important parts that help to

increase the sell. As a promotion they are following some steps, such as –

Advertising

Every company needs to advertise their product to increase their sales.

BSRM Steel advertise their product in different way like –

Billboard: they use billboard in different location like rural or city areas to

know their product.

TV show: they also use T.V show to people.

Seminars: seminars can be another part to create awareness to consumers

about their product advertisement.

Newspaper: BSRM Steel keep touch their consumer with their product by

using newspaper.

Website: they have website that helps to know about their product. And the

website address is www.bsrm.com

Personal selling

To know about their product they use a group of people who provides

information to different company or customers. By personal selling they can know

about their customer’s needs and wants. For doing it, they can tell them about

different variety of rods. It helps to develop their production.

http://www.bsrm.com/

Sales Promotion

At present BSRM Steel objective is to increase their sales. Sales promotion

increases the volume of product. For their sales promotion they are using

advertising, seminar and giving different prizes to dealer.

Public Relation

To make strong relations company arrange seminars of campaigns with

customers. They entertain them also. It helps them to keep and increase their

customers. It can make a good relationship with them. They usually help some

mosque, charitable organization, orphanage etc for social purpose. Sometimes they

help some organization whose are like to arrange social or cultural function.

Besides, a good relationship it also helps them for a good identity.

Chapter: 3FINANCE DEPARTMENTThe finance function deals with the procurement of money at the time when it is needed and its effective utilization in the enterprise. Money is the lifeblood to purchase of any enterprise, as it is required to purchase machines and materials to pay wages and salaries to employee and to allow credit facilities to customers.The event of capital-intensive techniques has increased the importance of finance. The ambition plans of an industrial undertaking will remain mere dreams unless adequate finance is available to convert them into reality.Therefore it has become an important function of management to provide for adequate finance for the functioning of the enterprise.For companies, which carry on production and distribution on a large scale provision of adequate finance, is a very challenging task. It affects all the business decisions where money is involved, since the large commercial and industrial undertakings are set up in the form of companies, the problem of finance for modern business is for all practical purposes of the problem of corporate finance.

Functions:Purchase: Company fixes the target to the producer of Iron and Steel of how many tones of raw iron to be purchased, based upon that the finance manager has to plan to buy them.The payment has to be done before, in order to deliver the raw materials to the producer of Iron and Steel.The purchase of spares and accessories is done based on the orders placed by the concerned managers.

Stock Valuation: Valuation of the raw materials, spares, accessories are done on market value of the iron and steel in international trade.Financing: The producer of Iron and Steel is an agent for the financiers who are in the firm. The financiers fix the target amounts to be financed based on which the finance manager has to fix monthly target finance amounts, considering the sales forecast done by the Sales & Marketing department.

Objectives of financial department:-Since financing is one of the functional are of any business enterprises, the objective of financial management must be in tone with the over all objectives of the enterprise. The objectives of the finance department should be devised they contribute directly towards the achievement of overall organizational objectives.Ensuring regular and efficient supply of capital to the business.Ensuring a fair rate of return on capital to the supplier.Ensuring better utilization of capital by following the principles of liquidity, profitability and safety.Coordinating the activities of the finance department with those of other department. Of the enterprise.Manager of account’s and finance:-Finance and account manager is concerned with measurement ofIncome/expenditure for specific periods of time such as month and year (income/expenditure statement) financial reports at the end of the period. Financial manager is responsible for overall financial planning and for rising capacity he has following functions major activities are forecasting, fund Management and auditing capital budgeting.

Accounting officer:-

Accounting officer is concerned to give sufficient position of the business frequently to finance manager. It is concerned with determining relevant cost and performing other analysis like preparation of budgets and performance analysis based on budget.Policies:-Valuation of inventories like raw materials stores and spares are valued at weight age average method. Finished goods including traded goods are stated at cost/ net realizable value.Accountants are prepared on historical cost and on going concern basis the company has adopted accurate concept in preparation of financial statements.Fixed asses are stated at costless depreciation. Expenditures during construction period are debited to his capital work in progress and the same will be allocated.Depreciation of fixed assets is provided straight-line method at the rates and in the manner specified in schedule XIV ti tge companies’ act 1956 and the relevant accounting standards issued by the ICAI.Borrowing costs attribute to the acquisition and construction of assets are capitalized as part of such assets up to the date when such assets are ready for its intended use.Practices/procedureCompanies contribute to PF and super annual fund as per the rules of P.F. Act not excluding 12% of the basic salary. Gratuity will be limited to half a month’s salary for each completed year of service.The company has already implemented the code of corporate governance as required by the listing agreement introduced by securities exchange. The quarterly, half yearly and yearly financial results of the company are sent to stock exchange immediately after the board approves them.

Manufacturing costs:

Most manufacturing companies divide manufacturing cost into three broad categories. Direct material, Direct labor and Manufacturing overhead.

Direct material: Direct materials are those materials that become an integral part of the finished product and that can be physically and conveniently traced to it. For example: Panasonic use electric motor in it’s CD Players to make the CD spin.

Direct labor: The term direct labor is reserved for those labor costs that can be easily traced to individual product. Direct labor is sometime called touch labor, since direct labor workers typically touch the product while it is being made. For example the labor cost of machine operator.

Manufacturing overhead: Manufacturing overhead the third element of manufacturing cost, includes all cost of manufacturing except direct material and direct labor. So, we can say that all costs associated with operating the factory are included in the manufacturing overhead category. Such as indirect material, indirect labor, maintenance and repairs on production equipment etc.

Role in decision-making

Manufacturing cost is used to determine the inventory valuation on the balance sheet and cost of goods sold on the income statement of external financial reports.Assume that total manufacturing cost of one unit is 850 taka, where

Direct material: 400 tkDirect labor: 150 tkMOH: 300 tkTotal 850 tk

Now from this manufacturing cost the company can decide that how much they want to make profit and set a selling price based on that. Suppose they want to make 20% profit on manufacturing cost then their selling price will be 1020 tk.

But after setting selling price they see that one of their competitor sales their product at 950 tk. In this situation the company can justify the manufacturing cost that where the wrong is going on. If their material price is high then they can buy the raw material from other supplier at low cost to reduce the access cost. If their labor cost is high, then they can hire labor from other at low cost or can cut the number of employee to reduce the cost. By taking this corrective action the company can maintain the manufacturing cost to stay in the market.

Non-manufacturing costs:

Generally non-manufacturing costs are sub-classified into two categories, (1) Selling costs, (2) Administrative costs

Selling costs: Selling cost include all costs necessary to secure customer orders and get the finished product on service into the hand of the customer. This cost is also known as marketing cost. Example: Advertising, Shipping, Sales travel etc.

Administrative costs: It includes all executive, organizational and clerical costs associated with the general management of an organization rather than with manufacturing and selling. Example: Secretarial, compensation, public relation and other this types of costs


Non-manufacturing cost is playing a great role in decision-making. In income statement we deduct non-manufacturing cost or operating cost from gross margin to get net profit. Suppose we expect “X” amount of money as net profit. But if the net income falls below than our expectation, then we must reduce operating cost to gain more profit. We can give one example to clear this idea. Suppose our net income is less than our expectation. Now we have to reduce price. We can take advertising cost as a sample. In case of advertising our first motive is to identify our target consumer then we have to select the advertising media. Suppose we make one types of product and our target consumers are fishermen. In this case we must use radio as an advertising media rather than television and it will cost less. By this way we can save non-manufacturing cost. In this purpose we can also reduce the cost of shipping, sales travel, compensation, public relation cost, sales salary etc. to increase net profit.

Fixed costs:

A fixed cost is a cost that remains constant in total, regardless of changes in the level of activity. As the activity level rises and falls, the fixed cost remains constant in total amount unless influenced by some outside force, Such as price changes. There are two types of fixed cost.

(1) Committed fixed cost: Committed fixed costs relate to the investment in facilities, equipment and the basic organizational structure of a firm. Example: Rent.

(2) Discretionary fixed cost: Discretionary fixed cost usually arise from annual decisions by management to spend in certain fixed cost areas. Example: Advertising.


Cm per unit.Usually fixed cost is used to determine break-even point. The formula for break-even point is = fixed cost Suppose our fixed cost = $ 20,000 Selling price = $ 250 Variable cost = $ 150 (250 – 150)}Then break-even unit = {20,000 = 200 unitIn the break-even point there is no profit as well as no loss at all. We have calculated break-even point to determine the sales level and using this method we can also calculate the number of unit to gain our expected profit.Reduction of fixed cost is also very important to increase net income. If we reduce fixed cost per unit then it will contribute to net income. Suppose our production is not running in our full capacity level then we can increase production in order to reduce our fixed cost per unit. For example:Capacity: 400 UnitsProduction: 300 UnitsFixed cost: $20,000Variable cost: $150Selling price: $250

Current income statementSales = $75,000250)(300 (-) V. cost = $45,000150) (300 Cm $30,000(-) F. cost = $20,000Net income $10,000 Here we see that in the current situation we have a net income of $10,000. Now we get an offer from outside to deliver 100 extra units at $200. In this case our proposed net income as follows:

Proposed income statementSales = $95,000200)250) + (100(300 (-) V. cost = $60,000150) (400 Cm $35,000(-) F. cost = $20,000Net income $15,000 400) = $50.00, So here we see that how fixed cost plays effective role in decision-making. 300) = $66.67 to (20,000 In this case we will accept the proposal because our proposed net income is greater than the current net income. Though the proposed selling price is less than current one but we can generate more income because in this case fixed cost goes down from (20,000

Variable cost:

A variable cost is a cost that varies in total, in direct proportion to changes in the level of activity. The activity can be expressed in many ways, such as units produced, units sold, miles driven, lines of print and so forth. A good example of variable cost is direct material. It is important to note that when we speak of a cost as being variable, we mean the total cost rises and falls as the activity level rises and falls. There are two types of variable cost.

(1) True variable cost: Direct material is a true variable cost because the amount used during a period will vary in direct proportion to the level of production activity.

(2) Step-variable cost: A cost that is obtained only in large chunks and that increases or decreases only in response to fairly wide changes in the activity level is known as step-variable cost. Maintenance cost is an example of step-variable cost.


Variable cost plays a great role in decision-making we know that if we increase our production then our variable cost will also increase. So we have to concentrate on reduction of total cost and in this case we must consider fixed cost also. If we increase our production within our capacity, our unit cost of production will decrease. Because as production increase variable cost will also increase but fixed cost per unit will decrease.

Suppose, Variable cost = $1

Fixed cost = $10 Capacity = 20 unit

Production Variable cost Fixed cost Total cost unit per unit per unit per unit

5 1 2 3 10 1 1 2 15 1 .56 1.56

Here we see that as production increases total cost per unit decrease because fixed cost per unit continuously decreases. So, in case of reducing total cost we must increase the production level. And as we know variable cost is constant so we must try to reduce the total cost from other sector to generate more profit. Thus variable cost has a significant impact on selling price.

Variable cost is also used to calculate cm per unit, cm ratio, margin of safety, degree of operating leverage and other this types of important things.

Absorption costing:

A costing method that includes all manufacturing costs, direct materials, direct labor and both variable and fixed overhead as part of the cost of a finished unit of production.For example in this method the unit cost is as follows:

Unit cost Direct material: 03Direct labor: 02Variable MOH: 03Fixed MOH: 02 Total $ 10 per unitHere fixed and variable MOH both are considered.


Absorption costing is the generally accepted method for preparing mandatory external financial reports and income tax returns. Absorption costing treats fixed manufacturing overhead as a product cost. If fixed costs are treated as period costs and there is a low level of sales activity in a period then a low profit or a loss will be recorded. If there is a high level of sales activity there will be relatively high profit. Absorption costing creates a smoothing of these fluctuations by carrying the fixed costs forward until the goods are sold. Many firms use the Absorption approach exclusively because of its focus on full costing of units of product.

Variable costing:

In variable costing, only variable costs of production are allocated to products and the unsold stock is valued at variable cost of production. Fixed production costs are treated as a cost of the period in which they are incurred.For example in this method the unit cost is as follows:

Unit cost Direct material: 03Direct labor: 02Variable MOH: 03Total $ 08 per unit

Here fixed MOH is not considered.


Variable costing is used internally for planning purposes. Under Variable costing, only those production costs that vary with output are treated as product cost. This includes direct material, direct labor and variable overhead. Fixed manufacture overhead is treated as a period cost and charged off against revenue as it is incurred, the same as selling and administrative expenses. Under Variable costing, the profit for a period is not affected by changes in inventory. This cost is particularly important for company having cash flow problems. One thing is very important that when Variable costing is in use profits move in the same direction as sales. We can also take the data for CVP analysis directly from a contribution margin format income statement that are not available on a conventional income statement based on absorption costing. The Variable costing approaches are often indispensable in profit planning and decision-making.

Opportunity costs:

Opportunity cost is the potential benefit that is given up when one alternative is selected over another. For example: Suppose I worked in a company and it gives me 20,000 taka per month. But suddenly I leave that job and get admitted in North-South University for M.B.A. Then my salary 20,000 taka is my opportunity cost which I sacrificed for further education.


Opportunity cost is a very important item, which is playing an effective role in decision-making. By considering opportunity cost we can determine the real cost of production. We can give an example to clear this idea.

Let,Direct material : $3 (Avoidable)Direct Labor : $2 (Avoidable)Supervisor salary : $1 (Avoidable)Factory rent : $1 (Unavoidable)Depreciation : $2 (Unavoidable)Allocated general Expense : $3 (Unavoidable)Total cost per unit : $12

Avoidable cost : (3+2+1) = $6Unavoidable cost : (1+2+3) = $6

Here we see that if we make the material the cost of per unit will be $12. Now we get an offer from outside at $8 per unit. If we want to buy we have to consider some other things because there are some unavoidable cost that we can’t ignore. It will add to the buying cost. Now we see that if we buy it will costs (8+6) = $14 per unit. So we can easily determine that we will go for making not buying. In this case we have to consider opportunity cost. Suppose the room, where we will make our production, the rent of that room is $20,000 and we get an offer for 5,000 unit.

Make BuyUnit cost $12 $14For 5,000 unit $60,000 $70,000(+) Opportunity cost $20,000 ------Total cost $80,000 $70,000

Here we see that if we go for making it will cost more and if we buy raw material from outside we can generate $10,000 as a profit. So, in this case we will definitely go for buy not make.

Sunk costs:

A sunk cost is a cost that has already been incurred and that cannot be changed by any decision made now or in the future. So, they should be ignored when making decision. Example: Suppose we buy a machine costs 50,000 taka to produce one kind of goods. But now there is no longer demand of that product. So we buy another new machine costs 70,000 taka. Now there is no use of old machine and we have already incurred that cost. So, here 50,000 taka is sunk cost, which was paid for purchasing of old machine.


Sunk cost does not play any role in decision-making. On the other hand it plays a great role in decision -making. Usually we deduct the sunk cost from both keep old machine & purchase of new machine. By this way we can show the proper fixed cost. Suppose our sunk cost is $50,000 but the salvage value of that machine is $20,000. Now if we don’t consider the sunk cost then it will show us $20,000 income and if we consider sunk cost, ultimately it will show us 30,000 losses. Thus sunk cost plays an effective role to show proper income. Sunk cost is also playing a great role in another criteria. If we don’t deduct the sunk cost from fixed cost then our fixed cost will be greater and our unit cost will increase also. In this case we cannot compete with our competitors. So we must deduct sunk cost from our account.

Product costs:

Product costs include all the costs that are involved in acquiring or making a product. In the case of manufacturing goods these costs consist of direct material, direct labor and manufacturing overhead. Product costs are initially assigned to inventories. So, they are known as inventoriable costs.


If an organization want to minimize their inventory cost they can fallow just in time process. In this process the cost of inventory is less than the normal process. So, the product cost is minimized and it will help to generate more profit.

If an organization follows normal process for manufacturing goods, then they must reserve material for future and it will cost a lot. Such as rent for place, guard salary, maintenance cost. And it will reduce net income. So, they must follow just in time process to increase the net income.

Period costs:

Period costs are all the costs that are not incurred in product costs. These costs are expensed on the income statement in the period in which they are incurred, using the usual rules of accrual accounting. Period costs are not included as part of the cost of either purchase or manufactured goods. Example: Sales commission, Office rent.


Depending on period cost we can also take some corrective action. Normally sales commission, office rent and other these types of cost are included in period cost. Suppose our net income is lower than our expectation then we can increase our net income by reducing period cost. Let’s take office rent. If our office rent is high then we can reduce the rent by shifting office place. However for many decision-making purposes the period costs are seen as being non-controllable in the short-term, so that attention may focus on product cost.

Differential costs:

A difference in costs between any two alternatives is known as differential cost. A differential cost is also known as incremental cost. Technically an incremental cost should refer only to an increase in cost from one alternative to another. Decreases in cost should be referred to as decremental costs. So here we see that differential cost is broader term consist of both incremental cost & decremental cost.


Differential cost can be either fixed or variable. To illustrate assume that Keya cosmetics ltd. is thinking about changing it’s marketing method from distribution through retailer to distribution by door-to-door direct sale. Present cost and revenues are compared to projected costs and revenues in the following table:

Retailer Direct sale Differential cost Distribution Distribution and revenueRevenue $500,000 $600,000 $100,000Deduct =======================================Cost of good sold $150,000 $200,000 $50,000Advertising $50,000 $25,000 $(25,000)Commission - 0 - $20,000 $20,000Depreciation $25,000 $50,000 $25,000Other expenses $20,000 $20,000 -- 0 -- Total $245,000 $315,000 $70,000Net income $255,000 $285,000 $30,000 ======================================According to the analysis the differential revenue is $100,000 and the differential cost is $70,000 leaving a positive differential net income $30,000 under the proposed marketing plan.From the given table the company can easily decide that which marketing plan they should follow. As we see in the above analysis the net income under door-to-door is $30,000 higher than the previous one. And they can get it simply focusing on differential cost, revenue and net income. By this way differential cost helps in decision-making.

Standard costs:

Standard costs are target costs, which should be attained under specified operating conditions. They are expressed as a cost per unit. For example: Hospitals have standard cost (for food, laundry and other items) for each occupied bed per day, as well as standard time allowance for certain routine activities, such as laboratory test.


Standard cost is used to integrate costs in the planning and pricing and pricing structure of a business. Once the Standard cost has been decided, the actual cost may be compared with the standard. If it equals the standard then the actual outcome has matched expectations. If the actual cost is different from the standard cost allowed, then there will be variance to be investigated, whether it is favourable or unfavourable. When the actual cost is less than the standard cost then it is called favourable and when the actual cost is greater than the standard cost then it is called unfavourable. In case of favourable term management will accept the proposal and in case of unfavourable term, they will reject it. Direct cost & Indirect cost

Direct cost:

A direct cost is a cost that cannot be easily and conveniently traced to the particular cost object under consideration. The concept of direct cost extends beyond just direct material and direct labor. Example: Suppose woodland company is assigning costs to it’s various regional and national sales offices. Then the salary of the sales manager in its Bombay office would be a direct cost of that office.

Indirect cost:

An indirect cost is a cost that cannot be easily and conveniently traced to the particular cost object under consideration. For example: Igloo company makes varieties ice-cream. The factory manager’s salary would be an indirect cost of a particular variety such as igloo chocbar.


Direct cost includes direct material, direct labor; on the other hand indirect cost includes indirect material and indirect labor. They are playing a great role in decision-making, but not individually. They have a significant impact on manufacturing cost, because these costs are included in manufacturing cost. So ultimately they are playing role in setting selling price.

Mixed cost:

A mixed cost is one that contains both variable and fixed cost elements. Mixed costs are also known as semi-variable cost. Mixed cost is calculated by following equation.

bxY = a Here Y = Total costa = fixed costb = Variable costx = Total unit.

The fixed portion of a mixed cost represents the basic, minimum cost of just having a service ready and available for use. The variable portion represents the cost incurred for actual consumption of the service. The account analysis and the engineering approach is used to estimate the fixed and variable portion of a mixed cost.

For example: The cost of providing X-ray services to the to patients at the P>G hospital is a mixed cost. There are substantial fixed costs for equipment depreciation and for salaries for radiologists and technicians but there are also variable costs for X-ray film, power and supplies.


Mixed costs also have some role in decision-making because this cost is a combined form of fixed and variable cost. As we know fixed costs are constant but variable cost differs with the production level. So, by reducing the variable cost we can decrease total unit cost and it will help to increase net income.

Budget:Budget is that which is essentially a projected profit and loss statement. It shows

expected revenues (forecasted no of units sold and the average net price) and

expected cost (of production, distribution and marketing). The difference is the

projected profit. Once approved by higher management, the budget becomes the

basis for materials buying, production scheduling, personal planning and

marketing operations.

Items of budget May- Oct Nov-Jan Feb- April

Trade fair 680,000 tk 1,020,000tk 1,700,000tk

Gifts and promotion 472,800 tk 709,200tk 1,182,000tk

Seminar and meeting 46,400tk 69,600tk 116,000tk

Sponsorship 84,000tk 126,000tk 210,000tk

Advertising 6,220,000tk 9,330,000tk 15,550,000tk

Coupons 400,000tk 600,000tk 1,000,000tk

MEASUREMENT OF PERFORMANCE:

We can measure performance of an organization through financial ratios. These ratios are given below:

Solvency Ratios

Efficiency Ratios

Profitability Ratios

GROWTH MEASUREMENT:

Growth means development and maturity. On the other hand, growth is an increase in size, number, value or strength etc.

We can measure growth of an organization through profitability ratios. The profitability ratios are used to evaluate the firm’s profits with respect to a given level of sales, a certain level of assets or owner’s investment. These profitability ratios include the following:

Gross Profit Margin

Operating Profit Margin

Net Profit Margin

Earnings Per Share

Return on Total Assets

Return on Equity

SOLVENCY RATIOS

Liquidity refers to the solvency of the firm’s overall financial position-the ease with which it can pay its bills. The liquidity of a firm measures its ability to satisfy its short-term obligations. The three basic measures of liquidity are as follows:

Net Working Capital : Net working capital is used to measure the firm’s overall liquidity. It is expressed as follows:

Net Working Capital = Current Asset –Current Liabilities

Current Ratio : The current ratio measures the firm’s ability to meet its short-term obligations. It is expressed as follows:

Current RatioCurrent Ratio ==

Quick Ratio : The quick ratio is similar to the current ratio except that it excludes inventory, which is generally the least liquid current ratio. Generally low liquidity of inventory results from two primary factors: 1) Many types of inventory cannot be easily sold because they are partially completed items, special purpose items and the like; 2) Inventory is typically sold on credit. It is expressed as follows:

Quick ratio =

EFFICIENCY RATIOS

Activity Ratios are used to measures the speed with which various accounts are converted into sales or cash.

Inventory Turnover : Inventory Turnover measures the liquidity of a firm’s inventory. It is expressed as follows:

Inventory Turnover =

Debtors Collection Period : The Debtor Collection period is useful in evaluation of credit and collection policies. It is expressed as follows:

Debtors Collection Period =

Creditors Payment Period : The Average Payment Period measures the average amount of time needed to pay accounts payable. It is expressed as follows:

Creditors Payment Period =

Fixed asset Turnover : The Fixed asset Turnover measures the efficiency with which the company has been using its fixed Assets to generate sales. It is expressed as follows:

Fixed asset Turnover =

Total Asset Turnover : The Total Asset Turnover indicates the efficiency with which the firm uses all its assets to generate sales. It is expressed as follows:

Total Asset Turnover =

PROFITABILITY RATIOS

Measures of profitability relate the returns of the firm to its sales, assets, equality, or share value. These measures allow the analyst to evaluate the firm’s earning with respect to a given level of sales, a certain level of assets, the owner’s investment, or share value.

Gross Profit Margin : The Gross Profit Margin measures the percentage of each sales Dollar / Taka remaining after the firm paid for its goods. It is expressed as follows:

Gross Profit Margin =

Operating Profit Margin : The Operating Profit Margin measures the percentage of profit earned on each sales Dollar/Taka before interest and taxes. It is expressed as follows:

Operating Profit Margin =

Net Profit Margin : The Net Profit Margin measures the percentage of each sales Dollar / Taka remaining after all expenses, including taxes, have been deducted. It is expressed as follows:

Net Profit Margin =

Return On Total Assets (ROA) : The Return on Total Assets (ROA) measures the overall effectiveness of management in generating profits with its available assets. The ROA is called the Return on Investment. It is expressed as follows:

Return on Total Assets =

Return On Equity : The Return on Equity measures the return earned on the owners’ (both preferred and common stockholders’) investment in the firm. It is expressed as follows:

Return on Equity =

Earnings Per Share (EPS) : The Earnings per share represents the number of Dollars / Taka earned on behalf of each outstanding share of common stock. It is expressed as follows:

EPS =

ANALYZING DEBT RATIOS

Creditors claims must be satisfied before earning are distributed to the shareholders, so it is in the best interested of the present and prospective shareholders to pay close attention to the indebtedness of a corporation.

Debt Ratio : The Debt Ratio measures the proportion of total assets financed by the firm’s creditors. The higher this ratio, the financial leverage the firm the firm has. It is expressed as follows:

Debt Ratio =

Debt-To-Equity Ratio : The Debt-To-Equity Ratio indicates the relationship between the long-term funds provided by creditors and those provided by the firm’s owners. It is expressed as follows:

Debt-To-Equity Ratio =

Times Interest Earned Ratio : It measures the firm’s ability to make interest payments. It is expressed as follows:

Times Interest Earned Ratio =

Fixed Payment Coverage : The Fixed-Payment coverage Ratio measures the firm’s ability to meet all fixed payment obligations, such as loan interest and principal, lease payments, and preferred stock dividends. It is expressed as follows:

Fixed-Payment coverage Ratio =

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