Managerial

Accounting
Department of (Act 202)
Accounting and Finance
Submit By: A report on:
Identifying Cost of
Name ID Far East IT Solution
Dipta Chowdhury 1811951630 limited For Making
Sanaf Ahmed 1811955630 Software and
Tareq Hossen 1811685030
Performing CVP
Farhat Maisha Roopkotha 1811583630
analysis
Jarin Tasnim 1811836630

Jannatul Sanzida Aurin 1813075630 Section: 14

Submit To:

Bushra Ferdous Khan

Lecturer, Department of Finance

and Accounting
 Far East IT Solution Limited

Identifying cost of Far East IT Solution Limited for

Making Software and Performing CVP Analysis

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Table of Contents
Executive Summary....................................................................................................................................... 4
1) Introduction .............................................................................................................................................. 5
2) Production Process ................................................................................................................................... 6
3) Cost Identification for the Business .......................................................................................................... 7
3.1 Direct Material Cost: ............................................................................................................................... 7
3.2 Direct Labor cost ..................................................................................................................................... 8
3.3 Manufacturing Overhead Cost................................................................................................................ 8
3.4 Non-Manufacturing Overhead Cost:....................................................................................................... 9
4) Calculating Manufacturing Cost per Unit ............................................................................................... 10
5) Determining the unit selling price .......................................................................................................... 11
6) Cost- Volume- Profit (CVP) Analysis........................................................................................................ 11
....................................................................................................................... Error! Bookmark not defined.
7) Conclusion .............................................................................................................................................. 13
8) Reference ................................................................................................................................................ 15

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 Executive Summary
Our report is about “Far East IT Solution Limited”. Their work is to provide IT service to their
customers like making software and web development. We collected information about their
service process, ingredients and administration. Then we identified their Direct Material Cost,
Estimated Manufacturing Overhead Cost, Period Cost, Variable Cost and Fixed Cost
(Manufacturing cost and non- manufacturing cost). In the manufacturing overhead cost we have
included manufacturing fixed cost only.And in the non- manufacturing overhead cost/ period
cost we also have included only fixed cost, because they don’t have any variable manufacture
and non- manufacture overhead cost. Then we showed per unit product cost for every sector in
this report where we have included direct material, direct labor, fixed expense and variable
expense. Then we showd per unit selling price which is 345227 Taka. In the last segment of our
report we showed their Cost-Volume-Profit (CVP) analysis. In this analysis we illustrated
Contribution Margin, Break-Even Point in Units, Break-Even-Point of Sales in taka, Degree of
Operating Leverage. Then in the last stage we showed the Break-even point analysis graph.

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 1) Introduction
Far East IT Solution Limited is an information technology service provider based company in
Bangladesh. The company was established on 2nd November, 2017. Their office is situated in
Uttara, Dhaka. As we are in the 21st century, IT has a huge impact in our daily life. In this case,
the contribution of this company towards our nation is significant. Their future motive is to provide
service globally. Their work is to provide different kinds of IT service to their customers like web
design, visual design, game design, different kinds of software and system modeling, mobile
application development, game development etc. These applications or software are of different
kinds which include games, business apps and other genre of apps and software which can be
helpful to a person in his daily life. They do well structured system and software modeling. They
also make and develop well design website for both well-known and start up business institutions.

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 2) Production Process
Far East IT Solution Limited manufactures product by following this process-

Idea Architect The

Research
Generation Product

Business
Launching Testing Planning And
Development

Research: Far East IT Solution Ltd. researches what type of software/applications/games market
needs.

Idea Generation: According to their research result they proceed with a set of ideas and combine
them with their employees’ ideas which they get through brainstorming session. Good ideas are
being voted and finally they come to a conclusion by selecting the best one with the highest number
of votes.

Architect the Product: Then they design the structure of the software/game/application they are
making.

Business planning And Development: They plan about where they should invest. How they can
make more profit with less cost and finally develop their software.

Testing: Then they test the software one more time. If they find any problem they will fix it again.

Launching: Finally, they launch their software/game/application in the market.

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 3) Cost Identification for the Business
Far East IT Solution Limited has decided to make approximately 5 units of software per month.
They need various kinds of materials to make a software. These materials are direct and indirect
materials for software. They do not have any direct labor because Bangladesh labors get monthly
salaries which are fixed. For this reason, it will be added in manufacturing overhead cost. This is
how they identify the cost of their software:

10 units of software is the Relevant Range of their manufacturing Business:

Cost Item Direct Manufacturing Variable Fixed Period Cost

Materials Overhead(MOH) Expense Expense

Domain √ √
Hosting √ √
Labor of designer √ √
Labor of Content √ √
Writer
Labor of Marketing √ √
Team

Labor of Project √ √
Manager
Labor Research and √ √
Development Team
Office Rent √ √
Utility √ √
Guard Salary √ √
Advertising Cost √ √
Internet Bill √ √
Selling and √ √ √
administrative cost
Depreciation on √ √
Equipment

3.1 Direct Material Cost:

Direct Material Cost (Per unit Cost)

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 No. Items Name Price(BDT)

1 Domain 2000

2 Hosting 800

3.2 Direct Labor cost

As Bangladeshi workers get their salary monthly and there has no per unit basis salary, that’s
why IT Solution Limited give salaries to their employees. They are considered as indirect labor
which is the part of our fixed manufacturing overhead.

3.3 Manufacturing Overhead Cost

Fixed Manufacturing Overhead (per Month)

Items Name Price(BDT)

No
1 Labor of designer 20000
2 Labor of Content writer 15000
3 Labor of Public Relation 40000
Officers
4 Labor of Project Manager 25000
5 Labor of Research And 50000
Development team
6 Office Rent 20000
7 Utility 100000
8 Guard Salary 10000
9 Depreciation on equipment* 2951
10 Internet Bill 5000

*Depreciation Calculation:

Their equipment price is total 180000 taka. They have 6 computers, 1 Printer and 4 table-chair and
price of these are consequently 165000 Taka, 5000 Taka and 10000 taka.

And these equipment is for 5 years. So total month =5*12=60 month

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Depreciation on computer = Total price of computers /Total month= 165000taka/60Month = 2750
Taka.

Depreciation on printer = Total price of printer/ Total Month = 5000taka/60 Month = 84 taka

Depreciation on table- Chair = Total cost of Table-chair/ Total Month = 10000taka/60 Month=
117 Taka

Total Depreciation on equipment’s = 2750+ 84+ 117 = 2951

3.4 Non-Manufacturing Overhead Cost:

Fixed Non-Manufacturing Costs/Period Cost

No Items Name Price(BDT)

1 Advertisement Cost* 28276
2 Selling and Administrative Cost 15000

*Advertising Cost: Advertising cost of Far East IT Solution Ltd. includes digital media cost for
brand promotion and project promotion and boosting. As this company is new and needs brand
promotion so that people know about this firm it pays a monthly cost for its promotion or digital
promotion on digital media. Moreover, when the company launch its own app it uses the biggest
platform to reach out the mass which is digital media and for this kind of project promotion they
spend an amount as advertising cost. Boosting is another part of advertising cost. They use their
facebook page and other social media to promote their company. . They also use google ad to
promote their business. Not every app is suitable for everyone, so the company spend some more
money on advertising for public relations. For example- when they launch an app where their target
market is accountants, they list down all the accounting firms of the country and reach out to them
personally to promote their app through a public relations officer (PRO).

Advertising Cost

No Type of Advertising Cost Price (BDT)

1 Digital media- Brand Promotion 12586 taka
2 Digital Media- Project Promotion 14432 taka
3 Digital Media- Boosting 1258 taka

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*The average cost of their ad on google Ads platform is $1.5 per click and they estimate that they
have to spend for 100 clicks per month. The cost of the total digital media – Brand and project
promotion in taka will be ($1.5*83.91*100) =12586taka [$1=83.91taka]

*The average cost of their ad on facbook Ads platform is $1.72 per click and they estimate that
they have to spend for 100 clicks per month. The cost of the total digital media – Brand and project
promotion in taka will be= ($1.72*83.91*100) = 14432taka [$1=83.91taka]

* They also boost their facebook page. It needs $15/1258taka to boost in per month.

4) Calculating Manufacturing Cost per Unit

They are using absorption costing technique for their product. By using absorption costing they
can calculate fixed MOH in the product cost. And it helps them to measure unit product cost. It
defines the importance of fixed costs involved in production.

Absorption Costing:

Unit product cost = Direct Material+ Direct Labor+ Variable Manufacturing Overhead+
Fixed Manufacturing/number of units Produced

Direct Material = Domain + Hosting

= 2000 taka + 800 taka

= 2800 taka

Direct Labor = As Bangladeshi workers get their salary monthly and there has no per unit basis
salary, that’s why IT Solution Limited give salaries to their employees. They are considered as
indirect labor which is the part of our fixed manufacturing overhead.

Fixed Manufacturing Overhead =Labor of designer+ Labor of content writer+ Labor of

marketing team +Labor of project manager+ Labor of research and development team+ office
rent+ utility+ Guard salary+ Depreciation on equipment+ internet bill

=20000taka+15000taka+40000taka+25000taka+50000taka+20000taka+100000taka+10000taka+
2951taka+5000taka

=287951 taka

Unit Product Cost=2800taka+0+0+287951taka/5unit

=58150 taka per unit

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 5) Determining the unit selling price
We know that, total Cost (TC) = a + bx

Here, a = Total Fixed Cost, b = total variable cost per unit, X= number of units produced

So, their Total Fixed Cost = Total fixed Manufacturing Overhead cost + Total Fixed Non-
manufacturing Overhead or Period Cost per Month

= 287951 + (28276+15000)} Taka

= 331227 Taka

And, their per unit Variable Cost is = per unit Direct Materials Cost + per unit variable
manufacturing Overhead Cost

= 2800 Taka + 0 Taka =2800Taka

Total Cost (TC) = 331227 + (2800Taka *5 Units) Taka

= 345227 Taka

They want to make 30% profit on their Total Cost.

So, their profit = 345227*30% = 103568

So, their Selling Price = Total Cost + Profit

= 326951 Taka + 103568 Taka

= 430519 Taka

Unit selling Price = 430519taka/5 Unit

= 86104 Taka

6) Cost- Volume- Profit (CVP) Analysis

A) Contribution Margin per Unit: Selling Price per unit – Variable Expense per Unit

= 86104Taka per unit – 2800 per unit

= 83304 Taka per Unit

B) Break-Even-Point (Units) = Fixed Expenses/ Contribution Margin per Unit

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 = 331227taka / 83304taka per unit

= 3.97 units per month

C) Break-Even-Point (taka) =Break-even point (unit) * selling price per unit

= 3.97 units per month * 85007 taka per unit

= 337477 taka per month

D) Degree of Operating Leverage =Contribution Margin / Net operating income

= (Sales – Variable expense) / (Sales –Variable expense-fixed expense)

= (430519 taka – 14000 taka) / (416519taka -331227 Taka)

= 416519/85292

= 4.88

E) CVP Graph

Here,

Break-even point Units = 3.7 units per month

Selling Price Per Unit = 86104 Taka

Break-even Point Sales = 337477 Taka per month

Variable Cost Per Unit = 2800 Taka

Fixed Cost = 331227 Taka Per Month

BREAK-EVEN POINT ANALYSIS

500000
450000
400000
350000
300000
TAKA

250000 Sales
200000 Fixed Cost
150000
Total cost
100000
50000
0
0 2 4 6
UNITS

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In this graph we see that their break-even point unit is 3.7 unit per month and their break-even
point sales is 337477. That means if they sales in this point they will not get any profit and loss.

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 7) Conclusion
The firm “Far East IT Solution LTD” provides the best IT service to the RMG sectors and other
business industries. They also make different kinds of entertainment oriented applications. Their
targeted customers are mainly students, service holders and business men. Their objective is to
make our county digitally improve. They also try to develop well-structured business management
so that, business sectors of our country can cope up with the modern business. This company is
trying their utmost to achieve their ultimate goal and make their project globally.

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 8) Reference
1) https://www.feits.co/

2) https://www.youtube.com/watch?v=7MxlVMzRxa8

3) Phone Number of managing Director: 01798012640

4) Photo and visiting card of Managing Director:

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