Cost & Managerial Accounting

Research Based Project: Financial Analysis of Nishat

Project Report Submitted To: Sir. Muhammad Arsalan

Submitted by:
Shariq

Ahmed Khan

(58549)

&

M. Ali Kazmi

(11212)
Contents

 Executive Summary.................................................................................4
 Introduction.............................................................................................4
 Nishat Linen (Private) Limited.................................................................5
 Nishat Spinning (Private) Limited............................................................5
 Nishat Linen Trading LLC..........................................................................6
 Nature of Business...................................................................................6
 Spinning...................................................................................................6
 Weaving...................................................................................................6
 Processing................................................................................................6
 Nishat Linen.............................................................................................7
 Benefits of cost accounting.....................................................................7
 Cost Accumulation method used...........................................................10
 Process Costing......................................................................................10
 Analysis of Income Statement...............................................................10
 Analysis of Cost of Goods sold...............................................................12
 Contribution Margin..............................................................................21
 BUDGETED FINANCIAL STATEMENTS....................................................30
 Budgeted Cost of Goods Sold............................................................30
 Budgeted income Statement.............................................................31
 Budgeted Cash Flow statement............................................................32
 Balance sheet........................................................................................33
 VARIANCE ANALYSIS..............................................................................34
 Static Budget.........................................................................................34
• 2015......................................................................................................................................34
• 2016......................................................................................................................................34
 Flexible Budget......................................................................................35

1
• 2014......................................................................................................................................35
• 2015......................................................................................................................................36
• 2016......................................................................................................................................37

2
 PRICE AND EFFICIENCY VARIANCES.......................................................37
 CONCLUSION AND RECOMMENDATIONS.............................................41
 Executive Summary
Nishat Mills Limited is one of the most modern and largest vertically integrated textiles
Company in Pakistan. The Company commenced its business as a partnership firm in
1951 and was incorporated as a private limited Company in 1959. Later it was listed on
the Karachi, Lahore and Islamabad Stock. In the report, we are going to focus on the
textile sector and analyze the costing methods the company uses, by obtaining
information from primary as well as secondary sources.

The purpose of this project is to attain the knowledge about how successful companies like
Nishat determine cost drivers and cost objects and how do they allocate costs
throughout the production process. This process then answers the questions as to how
companies get involved in cost reduction in order to increase the value of end product
for the customers. The report looks into detail of cost structure of Nishat textiles and
analyses the costs for its production facilities including spinning, weaving, printing,
dyeing, home textile and garment stitching facilities.

The result of the research shows that Nishat mills is using process costing system because it
produces in mass production the products that are identifiable. Furthermore the
company uses activity based costing system as opposed to the traditional one. It also
shows that the company is not just able to breakeven in this particular category but also
attain profits by reaching beyond breakeven point. Further for budgeting the sales,
production direct labor, direct material, overheads and cash Budgets were examined
and budgeted income statement and balance sheet were established.

After carrying out the cost analysis we concluded that, material cost accounts for a
significant part of the total cost and therefore Nishat mills should concentrate on their
production and operations. Further in the report recommendations are given as to how
the production process can be improved by the company to avail advantages of the
prevalent marketing conditions.
Introduction
Nishat has grown from a cotton e xpor t house into the premier business group of
Pakistan with 5 listed companies, concentrating on 4 core business; Textiles, Cement,
Banking and Power Generation. Today, Nishat is considered to be at par with
multi nati onal operating locally in terms of its quality products and management
skills. The company is holding position in spinning, weaving and dying units with the
extraordinary production capacity. Nishat is running different business with different
famous products like Nishat Linen that has opened its outlets in major cities of Pakistan.

The textile industry occupies a pivotal position in Pakistan’s economy, accounting for
7.7% of GDP with a significant potential for growth.

Company had adopted latest management information systems to access data that
results in producing timely results for different departments. According to financial ratio
analysis, company is enjoying good profits and is consistently running its operations with
critical country conditions. However owing to reduction of load shedding, company did
improve its operations and thus its cost management system.

Following are the key performance indicators:-

• Annual turnover of 108 million rupees

• Earn foreign exchange of US $ 344.744 million
• Pay taxes and levis of 1861.47 million rupees annually

Nishat Linen (Private) Limited

This is a wholly owned subsidiary of the company. The Principal objects of the company
are to operate retail outlets for sale of textile and other products and to sell the textile
products by processing the textile goods in outside manufacturing facilities. The
subsidiary started its operations in July 2011.
Nishat Spinning (Private) Limited
It is a wholly owned subsidiary of Nishat mills limited and thus is a private company
incorporated on February 2014 in Pakistan. The principal business of the company is to
manufacture and sell the textile products in the local market by processing the textile
goods in its own or outside manufacturing facility. The subsidiary will commence its
commercial production in the year 2014-2015.

Nishat Linen Trading LLC

This subsidiary is a limited company incorporated in Dubai, UAE. It is a wholly owned
subsidiary of the company. The subsidiary is principally engaged in the trading of textile,
blankets, towels, linens, ready-made garments, garments accessories and leather
products along with ancillaries thereto through retail outlets and warehouses across
United Arab Emirates. The subsidiary started its commercial operations In May 2011.

Nature of Business
Nishat mills focused on both the macro and micro level economic issues and therefore it
also recognized the business performance for the textile industry.

Spinning
Nishat mills operate with eight spinning units with entire machinery are from world
renowned manufacturers. All yarns made at Nishat are Ring Spun suitable for both
knitting and weaving. Besides that company operates with its own house state of the art
cotton and yarn testing laboratories. The Nishat Group is one the most trusted brands
owing to its high quality products based on the best raw materials due to efficient
production and other quality measures.

Weaving
Nishat Mills weaving division has 670 modern air jet projectile looms which produce
approximately 9 million meters of fabric per month and makes it the largest weaving
facility of Pakistan catering to home textile and apparel fabrics.

Processing

Nishat had the facility to produce custom-made machinery and has capacity of 90
million meters of fabric per annum. Its processing includes, twills, drills canvas/poplins,
fabrics with minimum tensions and thus has all density weaves.
The standards are higher than ever, dedicated by fashion, efficient productivity and
further automation s engineered in the plant. To maintain quality and international
standards, an online Quality Control (QC) department has been setup. The QC
department is augmented by a fully equipped Laboratory, which the fabric process flow
at all levels.

Nishat Linen
Nishat Linen is a concern of Nishat Mills, the textile and home fashion retail chain that
has redefined the industry with acute attention paid to quality, design and affordability.
It prided itself on being the brand of preference for discerning customers which
provides them with unique and high quality products without compromising on the
aesthetics and price. Unsurpassed customer service, including tailor-made orders,
ensures all of the clientele remains loyal to the Nishat family.

From bed linen to kitchen coordinated, upholstery to apparel, Nishat Linen has become
a household name as a creator of stunning high quality designs at reasonable prices.

Benefits of cost accounting

1. Measurement and Improvement of Efficiency

2. Profitable and Unprofitable Activities
3. Information for Proper Planning
4. Control over Materials
5. Decision Regarding Machine vs. Labor
6. Guide in Reducing Prices
7. Expansion in Production

Cost accounting helps in achieving efficiency of its production systems by enabling

Nishat to be more productive thus to reduce unnecessary costs. By comparing different
costs at different point in time, Nishat helps it budget to be aligned with the cost
structure and thus to maintain it thoroughly. For instance Nishat’s last year material cost
for one bed sheet comes out to be 1020 rupees in spinning department. However for a
similar bed sheet the amount was 960 rupees in 2016 which indicates the improvement
in the
Efficiency level. Thus due to costs comparisons, wastage in use of materials or inefficiency at the
time of buying were reduced. Comparisons may also be made with average figures for the whole
industry and with ideal figures which may have been determined before head. This comparison
provides a clear signal to the management about the going up or coming down of efficiency level
and thus to take any action.

Secondly it helps the Nishat Mills to concentrate any of the unproductive and unprofitable line to
disregard or to discontinue by keeping only profitable and well- structured departments. Pakistan's
textile industry continues to suffer from a high cost of doing business with country's textile exports
decline due to cut-throat competition from regional players, an overvalued Rupee, energy shortage,
various taxes and surcharges, and the slowdown in China and other markets. But by analyzing the
cost effective and profitable segments, Nishat Mills earns more than half of its revenues from
exports and single-handedly contributes around three percent to the textile exports of Pakistan. A
segment analysis reveals that the lawn's share of the firm's revenues, which is around 35 percent,
comes from the Processing and home textile segment. In terms of gross profit, however, it accounts
for 56 percent (Starting FY16, the 'Processing and home textile' segment is reported as two separate
segments - 'Dyeing' and 'Home textile.') (Business Recorder, 2016)

Another factor for cost accounting advantage is its relevance for providing information which can be
utilized in proper future planning. Detailed information for available facilities about machine and
labor capacity in Nish at mills was important to recognize the upcoming demand which can only be
done through proper costing system. For instance, during the period, Nish at Mills' spinning
segment took a huge hit, with volumes falling by around 33 percent over 1QFY16. This was due to
subdued demand in core markets. In the weaving segment, exports decreased due to economic
slowdown in Europe, especially in the UK following Bruit. Nevertheless, volume sales were up by
around seven percent year-on-year. The company has started exporting polyester open-end fabric
(used for sun protection) and is also expecting growth in the abrasive fabric market going forward.
(Business Recorder, 2016) This positive effect was gauged through the costing systems which
provide proper information on timely basis.
Information about availability of stocks of various materials and stores must be
constantly available if there is a good system of Cost Accounting. This helps in two ways.
Firstly, production can be planned according to the availability of materials and fresh
stocks can be arranged in time when old stocks are exhausted. Secondly, loss due to
carelessness or pilferage or any other mischief will be known and, therefore, put down.
For instance, in the first quarter ended FY17, Nish at Mills has shown some
improvement. The company's sales declined by three percent year-on-year, but the
bottom line exactly doubled over last year. Gross and net margins have expanded nicely,
as the company has improved its profitability. As per the Director's Report, the main
reason behind the enhanced profitability was the achievement of production
efficiencies and better inventory management. Moreover, a higher other income and
lower finance cost further improved the bottom line.

Also the use cost accounting can also be observed for machine versus labor
requirement. For instance, Nish at mills is enhancing the segment's production capacity
and will be commissioning a new denim jeans facility soon I order to meet the increased
demand of the products and thus to meet in best nature which can enhanced the
overall sales if the company.

Talking about the price factor, Mishit’s real performance, however, came from the
value- added end. Home textile reported a 20 percent growth in volume sales, but
margins were suppressed. This was due to the sharp decline in the pound sterling and
Euro after Brexit. Garments also reported a healthy growth in volume of 27 percent
year-on-year, with much higher margins than before. This shows that cost accounting
helps in the decision of the prices which must be increased or decreased owing to the
economic factor and the informant provided by the accountants.

Lastly, Nish at Mills is focusing on the expansion of its operations as dedicated by the
positive indicator from cost accounting information. Therefore company has started the
new fiscal year on a high note. Although the company is still looking at a lower topline,
recent investments in capacity enhancement and production efficiencies have begun
Paying off. Moreover, the restoration of zero-rating on textile exports might also help
the situation.

Cost Accumulation method used

Process Costing
Nishat textile uses process costing as a cost accumulation method for the production of
its bed set. This is because its products are mass produced in an automated and
continuous production process and it involves the production of small batches of
identical low cost items. Moreover for the cost accumulation purpose this method is
used as costs cannot be directly traced to each unit of product and therefore are
accumulated by process.

Analysis of Income Statement

For the year 2014-2016, we can see that overall net income for Nishat Mills Limited over
a period of 3 years has been fluctuating, however, no drastic change was observed. If we
just look at the net income, one good sign that we can notice is that even though the
net income has been fluctuating but at least the company is earning profits and it is not
incurring a loss. Net income increased in 2014 from 9.24% to 9.97% and then decreased
the following year to 7.85%. Later, Nishat Mills Limited was able to increase its net
income in 2016 to 11.15%, however, a slight decrease to 10.13% was observed in 2014.

In order to identify the reasons for fluctuations, let us first analyze the production
efficiency of Nishat Mills Limited over a period of time. The production efficiency of
Nishat Mills Limited has been decreasing over a period of time. In 2014, it decreased
from 18.96% to 16.16% and then to 15.11% in 2015. The only exception is year 2016 in
which it increased a little, which is 17.25% but for only that year and then
decreased again to 14.44% in next year. Investor who has a limited knowledge about
finance might perceive declining gross profit as a bad sign. However, even though the
percentage of gross profit from total sales is decreasing over a period of time, at least
gross profit is positive and hence no losses are incurred which is a good sign. But gross
profit should increase over a period of time. The factor that directly affects gross profit
is cost of sales. In case of Nishat Mills Limited, generally speaking, cost of sales has
been increasing
Over a period of time. In 2014 it was 81.04% and in 2014 it was at 85.56%. Exception is
year 2016 in which company had lower cost of sales as compared to the previous years.

After the productive efficiency, let us now consider operating efficiency of Nishat Mills
Limited from 2014 to 2016. Operating efficiency depicts how well a company is
maintaining or controlling its operating expenses and earning other incomes to
enhance its operating profits. According to the common size income statement, no
sharp increase or decrease has been observed in their operating expenses. In 2014, the
percentage of operating expenses with respect to sales was 8.08% which fell to 6.75% in
the next year. In 2015, it again rose to 8.08% but then kept on declining in the next two
years at around 7%. In other words, we can say that although the percentage has been
fluctuating over a period of time yet no significant change occurred. Furthermore, the
fluctuations caused were mainly due to the minimal fluctuations in distributive costs; in
which the major contributor was freight costs and fuel prices. The other income has
been increasing over a period of time. The major contributor was dividend income,
interest income and capital gains. So we can say that the operating efficiency of Nishat
Mills Limited over these 5 years had minimal fluctuations merely because of its
operating expenses since an overall increasing trend of other income was observed.

The general trend of finance cost and taxes was decreasing over a period of time which
is a good sign. Furthermore, the percentage of finance cost with respect to sales
decreased from 3.57% in 2014 to 2.96% in 2014. This indicates that company has been
spending fewer amounts on making interest payments to an outside entity and this
ultimately helps in reducing their interest expense.

So, to conclude, we can say that the gross profit or production efficiency of Nishat Mills
Limited remained somewhat reasonable considering the fact that it was still getting
profits instead of incurring losses. The operating efficiency also remained somewhat
reasonable in these 5 years. However, the main reasons for the fluctuation in net
income are due to the increase in cost of sales, and fluctuations in operating expenses
such as the distribution costs. The factors that helped in keeping net income positive can
be control in operating expenses other than distribution cost, and a gradual increase
in other income.
This also indicates that the company has been making more profits from their non-core
activities rather than from their core activities.

Analysis of Cost of Goods sold

Cost of sales sums up the cost that was attributed to the production of products or
services. This cost includes all the direct materials, direct labor, and other indirect costs
such as factory overheads. Over a period of these years, the internal main reason in the
increase in cost of sales is attributed to high salaries, wages, and other benefits provided
to the employees and high costs of their stores, spares and loose tools in short
inventory. Although the overall raw material consumption, which contributes major
portion to cost of sales slightly increased then declined over a period of time.

Furthermore, the main external or macro-economic reason was high prices of fuel and
power. Since Nishat Mills Limited is a manufacturing unit and is heavily dependent upon
fuel and power to run its operations, thus higher costs were incurred due to this.
However, the good sign is that its cost of sales has decreased from Rs. 45 billion in 2015
to Rs. 41 billion.

The main reason behind lowering of cost of sales in 2016 may be attributed to the fact
that fewer amounts was spent on new purchases and the beginning amount of raw
materials coupled with relatively small number of purchases made Nishat to meet its
demand. Overall, the cost of goods manufactured was Rs. 45 billion in the year 2015
which decreased to Rs. 41 billion. So, since 2014 it has been decreasing. Other than this,
the prices of fuel and gas were also somewhat in the favor of Nishat as a result of
which it was able to lower its cost of sales collectively. However, like that of last year,
the amount of salaries, wages and others increased from Rs. 3 billion to Rs. 4 billion
approximately.

Hence we can say that the decrease in cost of sales is due to the lower amount of cost
of goods manufactured; because of lower amount of raw material purchased and hence
produced. The only factor that needs to be controlled is the overhead costs which
include indirect labor, materials and others which have been seen increasing during the
period of 2014-2016.
Breakeven analysis
Breakeven analysis is used to determine when Nishat will be able to cover all
its expenses and begin to make a profit in the years considered I-e 2015 and
2016. Following are the lists of fixed costs and variable costs for these 3 years.

VARIABLE COST

(Rupees in thousands) Variable cost

COST OF SALES 2016 2015
Raw material consumed 24,639,552 27,136,867
Salaries, wages and other benefits 4,466,527 3,949,244
Processing charges 277,302 399,498
Stores, spare parts and loose tools consumed 4,523,950 4,381,843
Packing materials consumed 996,473 985,497
Total cost of sales 34,903,804 36,852,949

DISTRIBUTION COST
Salaries and other benefits 349,113 332,516
Outward freight and handling 926,083 1,067,949
Commission to selling agents 495,921 636,694
Travelling and conveyance 104,838 110,463
Vehicles’ running 7,065 6,255
Total Distribution Cost 1,883,020 2,153,877

ADMINISTRATIVE EXPENSES
Salaries and other benefits 767,824 758,953
Travelling and conveyance 29,934 30,732
Entertainment 24,807 27,453
Repair and maintenance 21,561 22,010
Vehicles’ running 41,857 49,451
Total Administration cost 885,983 888,599

Total Variable cost 37,672,807 39,895,425

FIXED COST

(Rupees in thousands) Fixed cost

COST OF SALES 2015 2014
Fuel and power 4,192,029 4,938,184
Repair and maintenance 304,105 340,236
Insurance 39,217 38,356
Other factory overheads 437,837 453,515
Depreciation 2,065,498 2,023,019
Total cost of sales 7,038,686 7,793,310

DISTRIBUTION COST
Insurance 20,092 20,937
Electricity, gas and water 553 4,498
Postage, telephone and fax 72,149 71,786
Advertisement 1,220 1,565
Miscellaneous 7,065 6255
Total Distribution Cost 101,079 105,041

ADMINISTRATIVE
EXPENSES
 Rent, rates and taxes 4,512 5,247
Insurance 7,062 7,145
Printing, stationery and
periodicals 20,606 19,863
Electricity, gas and water 26,360 22,591
Postage, telephone and fax 7,487 7,259
Legal and professional 22,024 19,769
Fee and subscription 4,242 3,399
Depreciation 86,860 88,053
Miscellaneous 47,409 34,990
Total Administration cost 226,562 208,316

Total Fixed Cost 7,366,327 8,106,667

Contribution Margin

(Rupees in thousands) 2016 2015

Revenue 47,999,179 51,200,223
Variable Cost 37,672,807 39,895,425
Contribution Margin 10,326,372 11,304,798
Contribution margin Percentage 21.51 22.08
Fixed cost 7,366,327 8,106,667
Break Even Revenues 34240258.65 36715663.4

BUDGETED FINANCIAL STATEMENTS

Budgeted Cost of Goods Sold

Budgeted Cost of Goods Sold

Direct Material: 2016 2015 2014
Beginning material inventory 5936585000 7831707000 6504220000
2401547600 2524174500 3111587100
Add: Material Purchases 0 0 0
2995206100 3307345200 3762009100
Material Available for use 0 0 0
Deduct: Ending material inventory - - -
 5312509000 5936585000 7831707000
2463955200 2713686700 2978838400
Direct material use 0 0 0
466698240.
Direct labor 429509339 9 6439706853
Manufacturing overheads 824465000 961023000 571239000
2589352633 2856458824 3679932985
Total manufacturing costs 9 1 3
add: Beginning WIP inventory 1530684000 2013520000 1720313000
2742421033 3057810824 3851964285
Subtotal 9 1 3
- - -
Deduct: Ending WIP inventory 1746041000 1530684000 2013520000
2567816933 2904742424 3650612285
Cost of goods manufactured 9 1 3
Add: Beginning finished goods
inventory 2882924000 2907268000 2720906000
2856109333 3195469224 3922702885
Costs of Goods available for sale 9 1 3
Deduct: Ending finished goods - - -
inventory 2875186000 2882924000 2907268000
2568590733 2907176824 3631976085
Costs of Goods sold 9 1 3

Budgeted income Statement

2016 2015 2014

Revenue 54270000000 45069202500 48825000000
Cost of goods sold 25685907339 29071768241 36319760853
Gross margin 28584092661 15997434259 12505239147
Operating Expenses:
Selling &
Admin 33932500 37225215 41400000
Expenses
Total operating
Expense 138554600 211702515 202388200
Interest Expense 104622100 174477300 160988200
EBT 28340915961 15611254444 12141862747
Tax 8502274788 4683376333 3642558824
Net Income 19838641173 10927878111 8499303923
Budgeted Cash Flow statement

Budgeted Cash Statement 2016 2015 2014

Cash flow from operating activities:
Cash receipts from customers 10352606000 5663361806 7717890200
Cash payments:
To suppliers of raw materials 3300000000 4650007200 3660008400
For direct labor 429509339 466698240.9 6439706853
For manufacturing-overhead
expenditures 824465000 961023000 571239000
For selling and administrative
expenditures 12622500 24125215 31982000
For interest 104622100 174477300 160988200
Total cash payments 4671218939 6276330956 10863924453
Net cash flow from operating
activities 5681387061 -612969149.9 -3146034253
Cash flow from investing activities:
Purchase of Equipment -2595237000 -3915523000 -9,135,413,000
Net cash used by investing activities -2595237000 -3915523000 -9,135,413,000
Cash flow from financing activities:
Payment of dividends 1573781 1400449000 1400445000
Principle of bank loan 1209108000 1769541000 5,839,202,000
Repayment of bank loan -196435200 -2364659000 -2,202,523,000
Net cash provided by financing
activities 1014246581 805331000 5037124000
Net increase in cash 4100396642 -3723161150 -7244323253
Balance in cash, beginning 52219000 2802316000 1128862000
Balance in cash, end 4152615642 -920845149.9 -6115461253
 Balance sheet

2016 2015 2014

Current assets:
Cash 20293626357 2952147850 12392042053
Account Receivables 2330008000 4013030000 3300054000
Raw materials inventory 5312509000 5936585000 7831707000
Work in process inventory 1746041000 1530684000 2013520000
Finished goods inventory 2875186000 2882924000 2907268000
Total Current Assets 32557370357 17315370850 28444591053

Property, plant
& equipment 24715095000 24357269000 22964388000

Total Assets 57272465357 41672639850 51408979053

Accounts Payable 14327689643 16970183150 16180196947

Common stock 3515999000 3515999000 3515999000
Retained Earnings 48639156000 22626824000 5073177000
Total Liabilities & Equities 57272465357 41672639850 51408979053

Static-Budget
Actual results variances Static Budget

Units sold 11,377,827 (656,673) U 12,034,500

Revenues 51200223000 6,131,020,500 F 45,069,202,500

Variable costs

Direct materials 29533020078 (3,109,910,622) F 32,642,930,700

Direct
manufacturing
labor 450000000 (16,698,241) F 466,698,241
 Variable
manufacturing
overhead 845768000 (115,255,000) F 961,023,000
Total variable
costs 30828788078 (3,241,863,863) F 34,070,651,941
Contribution
margin 20371434922 9,372,884,363 F 10,998,550,559

Fixed costs 7366327000 (133,673,000) F 7,500,000,000

Operating
income 13005107922 9,506,557,363 F 3,498,550,559

VARIANCE ANALYSIS

Static Budget 2015

Static-Budget
Actual results variances Static Budget

Units sold 11,377,827 (656,673) U 12,034,500

Revenues 51200223000 6,131,020,500 F 45,069,202,500

Variable costs

Direct materials 29533020078 (3,109,910,622) F 32,642,930,700

Direct
manufacturing
labor 450000000 (16,698,241) F 466,698,241
Variable
manufacturing
overhead 845768000 (115,255,000) F 961,023,000
Total variable
costs 30828788078 (3,241,863,863) F 34,070,651,941
Contribution
margin 20371434922 9,372,884,363 F 10,998,550,559

Fixed costs 7366327000 (133,673,000) F 7,500,000,000

Operating
income 13005107922 9,506,557,363 F 3,498,550,559
 2016
2016
Static-Budget
Actual results variances Static Budget

Units sold 8,727,123 (1,322,877) U 10,050,000

Revenues 47,999,179,000 (825,821,000) U 48,825,000,000

Variable
costs
Direct
materials 26,411,823,127 (3,015,862,373) F 29,427,685,500
Direct
manufacturing
labor 4,400,000,000 3,970,490,661 U 429,509,339
Variable
manufacturing
overhead 812,372,000 (12,093,000) F 824,465,000
Total variable
costs 31,624,195,127 942,535,288 U 30,681,659,839
Contribution
margin 16,374,983,873 (1,768,356,288) U 18,143,340,161

Fixed costs 8214593000 14,593,000 U 8,200,000,000

Operating
income 93475978055 83,532,637,894 F 9,943,340,161

Flexible Budget

2014

2014
Flexible
Actual Budget Flexible Sales Volume Static
Results Variances Budget Variances Budget

Units sold 15555454.57 0 15555454.57 555454.57 12034500

Revenues 54444091000 4666636376 F 49777454624 49777454624 45069202500

Variable costs
Direct Material 33837052901 2183052901 U 31654000000 31654000000 32642930700
Direct 5760000000 101000000 U 5659000000 5659000000 466698240.9
Manufacturing
Labor
Variable
Manufacturing
Overhead 582009000 1133000 U 580876000 580876000 961023000
Total Variable
Costs 40179061901 2285185901 U 37893876000 37893876000 34070651941

Contribution
Margin 14265029099 2381450475 F 11883578624 11883578624 10998550559
Fixed
Manufacturing
Costs 8106667000 54667000 U 8052000000 8052000000 7500000000

Operating Income 6158362099 2326783475 F 3831578624 3831578624 3498550559

2015

2015
Flexible Sales
Actual Budget Flexible Volume
Results Variances Budget Variances Static Budget

Units sold 11377827.33 0 11377827.33 11377827.33 12,034,500

5120022300 4778687480
Revenues 0 3413348200 F 0 47786874800 45,069,202,500

Variable costs
2953302007 2784299900
Direct Material 8 1690021078 U 0 27842999000 32,642,930,700
Direct
Manufacturing
Labor 450000000 -2000000 F 452000000 452000000 466,698,241
Variable
Manufacturing
Overhead 845768000 -2231000 F 847999000 847999000 961,023,000
Total Variable 3082878807 2914299800
Costs 8 1685790078 U 0 29142998000 34,070,651,941

Contribution 2037143492 1864387680

Margin 2 1727558122 F 0 18643876800 10,998,550,559
Fixed 7366327000 -33673000 F 7400000000 7400000000
Manufacturing 7,500,000,000
 Costs

Operating 1300510792
Income 2 1761231122 F 11243876800 11243876800 3,498,550,559

2016
2016
Flexible Sales
Actual Budget Flexible Volume Static
Results Variances Budget Variances Budget

Units sold 8727123.455 8727123.455 8727123.455 10050000

Revenues 47999179000 2618137036 F 45381041964 45381041964 48825000000

Variable costs
Direct
Material 26411823127 -299611873.3 F 26711435000 26711435000 29427685500
Direct
Manufacturin
g 440000000 13656445 U 426343555 426343555 429509339
g Labor
Variable
Manufacturin
g 812372000 2138567 U 810233433 810233433 824465000
g Overhead
Total Variable
Costs 27664195127 -283816861.3 F 27948011988 27948011988 30681659839

Contribution
Margin 20334983873 2901953898 F 17433029976 17433029976 18143340161
Fixed
Manufacturin
g 8214593000 112271000 U 8102322000 8102322000 8200000000
g Costs

Operating
Income 12120390873 2789682898 F 9330707976 9330707976 9943340161

PRICE AND EFFICIENCY VARIANCES

2014:

2014
Actual Price 3500
Budgeted Price 3255
Actual Quantity 15555454.57
15,000,0
Budgeted Quantity 00
Actual Purchased 33837052901
29,658,557,0
Budgeted Purchased 00
Actual Cost 48285728901
Budgeted Cost 36669502853
Actual wage rate 180000
Budgeted wage rate 200349
32,
Budgeted hours 143
Actual hours 32000
Justifications:

When it comes to material price variance, we can see that the actual price and quantity
of materials used were more than expected as a result they affected our net income
negatively and hence the outcome is unfavorable for us. The situation did not go as we
had hoped and assumed based on our secondary research. As far as its efficiency is
Concerned, we can see that actual inputs were used more than the budgeted one which means
negative impact on our net income and hence the outcome is unfavorable when compared to the
budgeted one. Labor variance is favorable because the amount of actual wage rate applied was
lower than that expected according to the respective actual number of hours. The efficiency is
favorable too because the budgeted wage rate and hours were amplified.

2015:

2015

Actual Price 4,500

Budgeted Price 3,745

Actual Quantity 11377827.33

Budgeted Quantity 12,034,500

29,533,020,0
Actual Purchased 78
Budgeted
Purchase 32,642,930,700
d
Actual Cost 38195115078
Budgeted Cost 34070651941
Actual wage rate 18000
Budgeted wage
rate 18746
24,
Budgeted hours 896

Actual hours 25,000

Materials price is again unfavorable as the amount of actual quantity and the actual
prices were higher than expected. We assumed that owing to the energy crisis and
other problems, production and prices would be lower but that did not happen. The
efficiency calculations came out to be favorable for us as the actual quantity of inputs
used were lower than expected with respect to the budgeted price. The labor variance
and efficiency are unfavorable owing to the mismatch between our macroeconomic
assumptions and reality.

2016:

2016

Actual Price 5,500

Budgeted Price 5,400

Actual Quantity 8727123.455

Budgeted Quantity 10,050,000

26,411,823,1
Actual Purchased 27

Budgeted Purchased 29,427,685,500

Actual Cost 35878788127
Budgeted Cost 30681659839
Actual wage rate 20000
Budgeted wage rate 19523
22,
Budgeted hours 000

Actual hours 22,000

As for material price variance in 2016, again we have observed an unfavorable outcome
owing to the mismatch between what we had assumed would occur and what had
actually occurred. However, the actual quantity of inputs used here were lesser than
assumed and the results came out to be favorable. As for labor variance, we can see
that the expected amount of wage rate was higher than the actual one as a result of
which it had a positive impact on our net income and hence it is considered to be
favorable. The efficiency level here is zero because both the actual and budgeted hours
were same.

CONCLUSION AND RECOMMENDATIONS

After carrying out the calculations for Nishat mills, we can conclude that with time the
sales of the companies have decreased from 2014 to 2016. And therefore the need for
material and production decreased simultaneously. However over the 3 years we can
see that besides the fact that Nishat’s sales declined, its net income increased. This can
be specifically attributed to the addition in capacity they made which helped them
improve their efficiency and decrease direct costs related with production. Moreover,
the figures prove that company’s performance overall has increased besides decrease
in sales as the
Company’s cash flows also support it. In years 2014 and 2016 the cash flows for the
company were lower than those obtained in previous two years. We can further
conclude from the cost calculations carried out that company was able to break even in
all three years. Overall the company has been seeing better results with years passing
by, however to improve their costing we have some recommendations for Nishat Mills
which would help them better manage their costs. The recommendations are as
follows:

• The firm should use Invest in marketing and advertising activities so as to

increase the sales as they are decreasing over the years.
• Activity Based Costing should become an integral part of their costing systems as
this will help them keep a close check on the costs during each activity and will
Allow them see which activity has the highest incurring cost so it can be
reduced by controlling costs of that particular activity.
• Also, the company should clearly determine all its cost drivers and cost pools in
Order to manage its costs in a more better and efficient manner
• Flexible budgeting should be used in order to have a close watch on the excess
or shortage of inventory and then manage them according to market changes.
• Also, budgeting on monthly and weekly basis is very important as this will help
Company to have an efficient supply chain management which would
eventually help Nishat Mills to reduce their cost

References
1. Google Research
2. Study & collaboration with an accounting teacher