SAFZR WATER PUMPS

Cost and Managerial Accounting Project

Submitted by

• Saba Jogezai

• Muhammad Ammar Riaz

• Rohan Khan Durrani

• Faisal Hussain

• Zain Ul Hassan

1

Contents

Overview ................................................................................................................................................. 2

Vision .................................................................................................................................................. 2

Mission ................................................................................................................................................ 2

The Concept ........................................................................................................................................ 2

The Market Analysis ............................................................................................................................... 2

The Sales Strategy ............................................................................................................................... 2

Products .............................................................................................................................................. 2

Financial objective .............................................................................................................................. 3

Non-Financial Objectives ................................................................................................................... 3

Budgets ................................................................................................................................................... 4

Sales Budget........................................................................................................................................ 4

Sale collection policy .......................................................................................................................... 4

Production budget ............................................................................................................................... 5

Direct material Budget ........................................................................................................................ 5

Cash disbursements of materials ......................................................................................................... 6

Direct labor Budget ............................................................................................................................. 6

Manufacturing overhead ..................................................................................................................... 7

Ending Finished goods Inventory ....................................................................................................... 7

Selling and Administration Budget ..................................................................................................... 8

Cash Budget ........................................................................................................................................ 9

Financial statements .............................................................................................................................. 10

Income statement .............................................................................................................................. 10

Balance sheet .................................................................................................................................... 10

Financial Analysis ................................................................................................................................. 12

2

Overview

Vision

To provide efficient water pumps globally preserve the high standards and prices.

Mission

To provide our customers with efficient, reliable and high quality water pumps at affordable

prices.

The Concept

Today’s consumer demands products that are latest in technology along with the highest degree

of durability and reliability. That's what you get with SAFZR Pumps cutting edge product

design utilizing the latest technology, rock solid performance and a lifetime of convenience.

The extensive range of SAFZR Pumps is the product of around 60 years leadership in Pakistani

industrial, agricultural & domestic pump market. SAFZR Pumps knows the importance of

pump reliability when it comes to transferring water. The Company firmly believes in honoring

its customers by giving more than the true value for their money and is determined not to

compromise on quality at any cost. As a company SAFZR Pumps is committed to produce "top

of the range" products.

The Market Analysis

Water pumps in Pakistan are sold commonly, but they are not reliable and they use too much

of the electricity. Thus, our customers have to pay hefty amounts to pay the electricity bills.

So our main focus is to provide high quality and electrically efficient water pumps to our

customers and these would be sold at affordable rates.

The Sales Strategy

We will manufacture the water pumps in winters, according to the trends in winters the demand

of the water pumps is quite low and the electricity outages are comparatively low, so we will

store the finished product i.e. in a factory warehouse and we will sell them in summers through

our dealers. These dealers will sell them across the country.

Products Our main product would be water pump. But we will also sell its accessories along with it,

which are as follow;

• Injector

3

• Pipes

• Fluid Switch

Market Analysis Summary

SAFZR Pumps would target the middle class, because they require a good quality water pump

that is efficient and reliable.

Objectives

The objectives of SAFZR Pumps! Are: To provide high quality and efficient water pumps to

our customers.

Financial objective

• Wealth maximization

• Minimizing firm’s cost

• Using resources in efficient way

Non-Financial Objectives

• Satisfaction Quality

• Customer Service

• Public Relation

4

Budgets As a new business, we want to make some forecasts regarding the future years i.e. 2015, 2016

and 2017. The budgets will tell us how much there would sales, how many units that we need

to produce, how much material, we need and how much would they cost in order to meet our

production needs and how much labor would be needed.

First we will look at the sales budget.

Sales Budget We have increased our sales by 30% because our product will gain popularity and people will

be willing to buy our product. In 2015 our sale price would be Rs. 7500 and we would increase

our prices in the coming years. The reason behind this increase is that the inflation rate,

demand, cost of raw material and labor wages changes.

2015 (Rs.) 2016 (Rs.) 2017 (Rs.)

Sale Budgeted 10,000 13,000 13,500

Selling price 7,500 8,100 8,500

Total Sale 75,000,000 105,300,000 114,750,000

Sale collection policy Our sales collection policy is that we would get our 60% of sales in the current year in which

we have made sales on and 25% in the first year and 10% in the second year.

Current Year 60%

Next Year 25%

Third Year 10%

5

Production budget The production budget shows the required production needs that is needed by the business to

produce the product. Our opening inventory would be zero because our business is new and we

need to acquire inventory. Our budgeted sales increase in the 30% in 2016 and then it would

increase by 35% in 2017 if we compare it with the sales of 2015.

Direct material Budget In the production budget we have forecasted the required production that is needed to produce

a water pump. Now we will estimate or forecast the material needed to manufacture it. To

produce a water pump we need 22 kg of raw material and the cost per kg is Rs. 80 and it will

increase in the coming years.

Column1 2015 2016 2017

(Units) (Units) (Units)

Budgeted Sale 10,000 13,000 13,500

Add: Ending Inventory

1,500 1,000 1,000

Total Units 11,500 14,000 14,500

Less: Opening inventory

0 -1,500 -1,000

Required Production

11,500 12,500 13,500

2015(Rs.) 2016(Rs.) 2017(Rs.)

Units produced 11,500.00 12,500.00 13,500.00

DM per unit (kg) 22 22 22

Production Needs 253,000.00 275,000.00 297,000.00

Ending Inventory 55,000.00 59,400.00 59,400.00

Total DM Needed(KG)

308,000.00 334,400.00 356,400.00

DM opening inventory

0 -59,400.00 0

6

Cash disbursements of materials The materials purchased are on credit but 40% of the cost of materials purchased would be paid

off in the first year, 40% in the second year and 10% in the third year, respectively.

The cash disbursement schedule shows how much out of our credit would be paid off.

Direct labor Budget The direct labor budget shows the cost of labor that is needed to paid for the manufacturing of

water pump. The time required to produce each unit is 0.34 minutes. We would be paying Rs.

75 per hour. The cost of labor would not stagnant it would increase in the following years as

shown in the budget.

2015(Rs.) 2016(Rs.) 2017(Rs.)

Required Production 11500 12500 13500

DM needed (grams)

308,000.00 279,400.00 297,000.00

RS per KG 80 86.38 91.76

Cost of Materials to be Purchases

24,640,000.00 24,134,572.00 27,252,720.00

Percentage of purchases in first year 50%

Second year 40%

Third year 10%

Column1 2015(Rs.) 2016(Rs.) 2017(Rs.)

Beginning Balance 0

2015 Purchases 12,320,000.00 9,856,000.00 2,464,000.00

2016 Purchases 12,067,286.00 9,653,828.80

2017 Purchases 13,626,360.00

Total Cash Disbursements of Materials

12,320,000.00 21,923,286.00 25,744,188.80

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time required to produced one unit (minutes)

0.34 0.34 0.34

total hours needed 3910 4250 4590

DL Cost per hour 75.00 81.00 87.00

Total Direct Labor Cost (Disbursement)

105,570,000.00 123,930,000.00 143,758,800.00

Manufacturing overhead As production moves up or down, support services and other costs related to production will also

change. Our Fixed FOH is being increased by 2% each year. These overhead costs represent the

third major costs of production.

2015(Rs.) 2016(Rs.) 2017(Rs.)

Budgeted DL Hours 3910 4250 4590

Variable FOH rate 400.00 400.00 400.00

Total Variable FOH 1564000 1700000 1836000

Add: Fixed FOH 2,596,285.00 2,648,210.70 2,701,174.91

Total Manufacturing Overhead

4,160,285.00 4,348,210.70 4,537,174.91

Less: Depreciation -800,000.00 -800,000.00 -800,000.00

Cash Disbursement of Manufacturing Overhead

3,360,285 3,548,210.70 3,737,174.914

Manufacturing Overhead Rate 1,064.01 1,023.11 988.49

Ending Finished goods Inventory

We have also forecasted the ending inventory of each year. It gives as an estimate that how much of

inventory we would have at the end of each year.

2015(Rs.) 2016(Rs.) 2017(Rs.)

Production Cost Per unit:

Direct Material 1760 1900.36 2018.72

Direct Labor 25.5 27.54 29.58

8

Selling and Administration Budget We can now estimate our expenses by looking at all remaining operating expenses. The major type

of operating expense is selling and administrative expenses. Our variable expense changes 8.03%

each year as projected. Advertising and expected salaries remain constant. Sales Manager's will

prepare and submit a selling and administrative Budget.

Manufacturing Overhead 361.763913 347.856856 336.0870307

Product Cost Per unit 2147.263913 2275.756856 2384.387031

Budgeted Finished Goods Inventory:

Ending Finished Goods (Units) 55,000.00 59,400.00 59,400.00

Production Cost Per Unit 2,147.26 2,275.76 2,384.39

Ending Finished Goods (Rs.) 118099515.2 135179957.2 141632589.6

2015 2016 2017 Budgeted Sales (Units) 10,000.00 13,000.00 13,500.00

Variable Selling and Administrative Expense per unit

230 230 230

Total Variable Selling and Administrative Expense

2300000 2990000 3105000

Fixed Selling and Administrative Expenses:

Advertising 750000 750000 750000

Salaries 890000 890000 890000

Insurance 130000 130000 130000

Property Taxes 150000 150000 150000

Depreciation 600000 600000 600000

Utilities 250000 250000 250000

Other Expenses 300000 300000 300000

Total Fixed Selling and Administrative Expenses

3070000 3070000 3070000

Total Selling and Administrative Expenses

5370000 6060000 6175000

Less: Depreciation -600000 -600000 -600000

Cash Disbursements for selling and administrative expenses

4770000 5460000 5575000

9

Cash Budget We can use our previous forecasts to help us prepare a Cash Budget. For example, we can get

an idea of payable disbursements for manufacturing by looking at the Materials Budget, Labor

Budget, and the Overhead Budget. We will pay some portion of the Interest by the end of each

year at the rate of 10 %.

2015(Rs.) 2016 (Rs.) 2016 (Rs.)

2017(Rs.)

Opening cash 0 286680715 322380677

Add: Cash collections

45000000 85680000 104190000

Cash available 45000000 372360715 426570677

Less: Cash disbursement

16919285 23593538 33202177.31

Excess (deficiency) 28080715 348767177 26262473

Financing:

Borrowing 150000000 0 0

Repayment 108750000 26250000 15000000

Interest 150000 136500 97980

Closing cash 286680715 322380677 11164493

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Financial statements

Income statement The income statement is made on the basis of future projections (only for two years).

2015 2016

Sales 750000000 105300000

CGS:

Op inventory 0

Add purchases 27104000 24916800

Less end inventory -4224000 -4976400

Less CGS -2288000 24164400

Gross profit 52120000 81135600

Less selling & admin expense -4800000 8500000

Net operating income(EBIT) 47320000 72635600

Less interest -1788654 -1518060

EBT 45531346 71117540

Less taxes (40%) -18212538 28447016

Net income 27318808 42670524

Balance sheet We made balance sheet for two years based on our future projections

2015 2016

Assets

Cash 286680715 322380677

A/R 30000000 49620000

Inventory (Dec) 11250000 8100000

Equipment & machinery 7920000 7840000

Building 15000000 15000000

Suppliers 250000 300000

Prepaid insurance 30000000 2500000

Land 5000000 5000000

Furniture 250000 240000

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Total 125369432 231771251

Liabilities

A/P 12776100 37500000

N/P 20738286 17000000

Owner equity 50,000,000 80000000

Retained earning 21855046 34136400

Long term debt 20000000 40134831

short term debt 23000000

Total 125369432 231771251

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Financial Analysis After making the budgets of our company now we are going to do a financial analysis. By

calculating the values of NPV, IRR, MIRR & PAY BACK PERIOD we are going to conclude

our analysis that starting that business is either beneficial for us in future or not.

The value of our NPV is greater than our initial investment and the internal rate of return is

very high which shows us the same sign as NPV that investment in that business is profitable.

And we will recover our initial investment in just 1.16 or in nearly 1 year. So this business is

profitable and our decision of investment in this business is beneficial for us.

Cash Flow Investment (Rs.)

Acc. Cash Flow (Rs.)

Discount Rate (%)

Initial Investment (50,000,000) 21%

Cash Flow-1 52,699,432 52,699,432

Cash Flow-2 143,171,251 195,870,683

Cash Flow-3 230,671,593 426,542,276

NPV 226283944.67

Internal Rate of Return 12.50%

Payback Period 1.16