Product cost estimation in a cartoon box production plant

Project principle investigators: Meshari Al-Jabr, Abdullah Al-Ahmadi, Bader Saleh Al-Hamed

Supervisor: Dr. Muhammad Al-Salamah

Course: ISE-304 Principles of Industrial Costing

Institution: King Fahd University of Petroleum and Minerals

Objective and brief description about the project

This case study is about calculating all the costs associated with an order in the Gulf Carton Factory and assigning these costs to the unit of production.

The study is divided into two parts: first, illustration of how the plant calculates the costs of an order by applying the methods the factory uses, and second, the outline of our recommendation to calculate the costs.

Any order will contain the following information: 1- Quantity. 2- Dimensions. 3- Thickness (known as GSM in the factory).

Calculation of the costs of an order

We have performed the calculation for an order of 200,000 carton boxes using the method followed in the factory.

The costs associated with any order are divided into 4 main categories:

1. Direct materials cost
2. Labor cost
3. Indirect cost
4. Overhead cost

Before we go throw those costs we need to measure the dimensions and weight of the carton:

Specifications: Tall= 750 mm. Width= 200mm. Height= 150 mm The top cover= 100 mm

To calculate the dimensions: Tall = 750 + (2X150) + (2X100) = 1250mm

Width= (150X2) + (100X2) + 200= 700mm Dimensions: 1250 mm X 700 mm.

GSM (thickness): 850 gm/m^2, Area of the box = 1.25m X 0.7m = 0.875m^2. Weight of the box = 0.875m^2 X .850KG/m^2 = 0.744 KG/ box.

Direct material costs

1. Costs of the paper= 2SR/KG
2. Costs of starch (glue) = 0.2 SR/KG

Total costs of direct material in this order: = costs of paper + costs of glue = (200,000 X 0.744 X 2) + (200,000 X 0.744 X 0.2) = 327,360 riyals.

25,000 pieces / hour is the average of the production time. So the total time needed for this order = 200,000/25,000= 8 hours (which is equal to the production time of 1 day).

Labor cost

The budget of the labors is limited with 8,000,000 riyals/ year.

The production days= 360 – 52(weekend) – 8 days (holiday) = 300 days.

The labor costs / day= 8,000,000/300= 26,700 SR/day. The labor costs per piece= 26,700/200000= 0.1335 SR /piece.

Indirect costs

These costs include marketing, research, administration, management and utilities.

From historic data we got: Total production capacity= 50,000 M.T./year (metric ton)/year. Total Indirect cost = 5,000,000 SR/year Indirect cost per M.T. = 5,000,000/50,000= 100 SR/M.T. = 0.10 SR/KG

Indirect cost for this order = 0.10 X 0.744 X 200,000= 14,880 SR

Overhead cost

These costs include depreciation and government fees.

From historic data we got: Total overhead cost = 6,000,000 SR/year Overhead cost/ M.T. = 6,000,000/ 50,000 = 120SR/M.T.= 0.12 SR/KG.

Overhead cost for this order = 200,000 X 0.744 X 0.12 = 17,856 SR.

Finally, the total costs for this order = 327,360 + 26,700 + 14,880 + 17,856 = 386,796 SR. The cost of 1 carton box = 386,796/ 200,000 = 1.93398 SR/piece.

Analysis and results

The order cost distribution is shown in the next histogram:

We can see from the histogram that most of the costs come from the direct material.

We can see that the way they are calculating the costs are not organized and not fair.

Suggestions

The labor cost should be divided into direct labor and indirect labor. The indirect labor has to be included to the overhead cost and the direct labor can be calculated by wage.

What assigned in the overhead and indirect costs are not applicable, fair or organized.

The factory's overhead and indirect costs are distributed as follows:

The correct cost distribution is

Conclusion

We conclude that in real life, it is not easy to assign the costs to the product in a fair way. However, we have suggested that they should change their way of calculating costs as what we have analyzed.