Prime Cost Analysis

Prime Cost Analysis

 

Ø        Direct material

The spice rack is made up of 7 pieces of stainless steel plate and two screws and chains.

 

The size of stainless steel plates are: A piece of 28×15cm; A piece of 26×9cm; A piece of 26×6cm; Two pieces of 19×9cm; Two pieces of 15×6cm.

 

So total surface areas of one product is:

(28×15)+(26×9)+(26×6)+[2×(19×9)+2×(15×6)] =1332 cm²

 

A stainless steel plate is about 244cm×122 cm. So its surface area is 29768cm². 29768/1332≈22 units. So one stainless steel plate can make 22 space racks.

 

The cost of one stainless steel plate is RMB220. Thus, the cost of stainless steel for one product is RMB10.

 

Additionally, cost of two chains is RMB1.5 and two screws are RMB0.5.

             

So the direct material is 10+1.5+0.5=RMB12.

 

Ø        Direct labor

As mentioned above, there are 11 workers involved in the production process. Their wages are 800 Yuan per months per person. So the labor cost for one worker is: 800/22*8≈RMB4.54 per hour. Then total labor cost is: 4.54*11=RMB 50 per hour.

 

Then, the number of products produced in one hour can be calculated, in addition, the efficient rate is 75%: 4000/3*22*8*75%≈10.10units/hour

 

So the labor cost for space rack is 50/10.10≈RMB4.95 per unit.

 

Ø        Direct overhead

Total Overhead:

Electricity = RMB 100, 000

Rent = RMB 12, 000

Maintenance = RMB 3,000

Insurance = RMB 14, 400

Transpiration = RMB 3,000

So, the estimated total overhead is RMB 182, 400 for the first year. The estimated machine hours are 48*40*75%=1440 hours. Then, predetermined overhead rate is: 182400/48*40*75%≈RMB126.67 per machine hour.

 

According to the layout design, the machine hour for one product is 8 minutes. Using overhead rate, assume the following:

Direct Materials       RMB 12

Direct Labor             RMB 4.95

Overhead                  (8/60 machine hours*126.67) =RMB 16.69

 

Total Production Cost = RMB 33.84

 

Ø        Selling Price

To make profit, the mark-up should be 30%.

So the price is = 33.84+33.84*30% = RMB43.99 per unit.

 

Ø        Some information for accounting statement

-          Sales: price*volume=43.99*15000=RMB 659850

-          Purchase: Since the factory produces 4000 units a quarter of a year, the total units for one year should be 16000. One stainless steel plate can produce 22 units of spice rack, so the price is:

[16000/22] *220=RMB160000,

Chains and screws are 2*16000=RMB 32000

-          Closing stock is (16000-15000)*cost =1000*33.84=33840

-          Depreciation: Supposing the total price of machines is RMB 290000, the ratio of straight-line depreciation is 5%, so the depreciation for machine is 290000*5%=RMB14500.

-          Accumulated depreciation is 14500*5=RMB72500

-          Tax rate is 17%.

 

The Profit & Loss account, Balance Sheet for the first is on the next page.