RAHAT BAKERY

Introduction

The founders Chaudhary Ghulam Nabi and Chaudhary

Rehmatullah provide quality and hygienic baked products on
the market.

First outlet was established in 1950

In Lahore, initially named as National Bakery.

It was located in the Day Building on Sarwar Road, Lahore

Cantt.

Continued

Products

Rahat bakery has wide variety of products with excellent

taste and quality there products include:

Cakes, Breads, Pastries, Puffs, Nimko, Sweets, pizza, biscuits,

Drum sticks, Chicken Shami, Chicken sandwich, Chicken
patties, Chicken bread roll and Donuts.

Aim

The aim of the company is to provide best quality product at a

reasonable price.

Competitors

The major competitor for Rahat Bakers is Jalal sons, Gourmet and Green
valley.

Jalal sons is one of Rahats major competitors because it has set a

strong brand name in the market and because of the high quality Jalal
sons provide to their customers.

Gourmet is another major competitor for Rahat bakers because

gourmets strategy is to target the middle class by provide less costly
bakery items compare to Rahat bakers.

Green Valley has given a lot of competition to Rahat the major reason is
green valley is next to Rahat location wise which is a disadvantage for
Rahat bakers. Green Valley provides high quality products at reasonable
prices so it gives customer a choice to choose Rahat or Green Valley.

Perceptual Map

Total Cost
Anum Shan

Direct Material

Direct material cost is the cost of the raw materials and

components used to create a product

The materials must be easily identifiable/traceable with the

resulting product

Raw Material

Quantity(Total)

Rate

Total (Rs.)

Butter
Sugar
Flour
Baking Powder
Eggs
Flavor
Fresh Cream

373
299
373
6
12238
6
1524

300
55
50
150
8.33
600
300

111900
16445
18650
900
101942.54
3600
457200

Rate
300
55
50
150
8.33
600
300

Cost per Kg
30
5.5
5
30
33.32
1.2
153
228.32

For Each pastry & Puff (1 KG)

Raw Material
Quantity
Butter
0.1
Sugar
0.1
Flour
0.1
Baking Powder
0.2
Eggs
4
Flavor
0.002
Fresh Cream
0.51
For 1 kg Pastries

Assumption

Approx. 5000 kg of material used in 1 month. Approx. 35000

pastries/ puffs are produced in 1 month

Material per pastry/puff = 5000kg/ 35000 = 0.142 kg

(approx.)

Cost of 1 kg of material = Rs. 228.32 Material cost for 1

pastry/puff = Rs. 32.62

Direct Labor

Direct labor consists of labor involved in production

Rather than administration, maintenance, and other support

services

The labor is directly involved in producing the product.

Labor Cost

No. of
workers

Salary

Total

Master Chef

50000

300000

Helpers

16

12000

192000

Assistant Cooks

14

30000

420000

Total Labor Cost

912000

Labor Cost Per KG

8.290909091

Assumption

1 pastry/ puff has 0.142 kg material

Labor Cost for 1 Kg = 8.29

*8.29x0.142 = 1.77

Labor cost for 1 pastry/ puff = Rs. 1.77

Factory Overhead

Factory overhead, also called manufacturing overhead or

factory burden

It is the total cost involved in operating all production

facilities of a manufacturing business

Manufacturing overheads

Rs.

Electricity

1200000

Gas

600000

Fuel

800000

Guards

144000

Depreciation

143975

Building Rental

900000

Indirect Labor

50000

Total Factory Overheads

3837975

Overhead Rate
Overhead Rate = Total Overhead / Total Material in Kg

= 3837975 / 110000
= Rs. 34.89 per kg

Per pastry = 34.89 x 0.142

= Rs. 4.95

Standard Costing

Associated with a manufacturing companys cost of direct materials,

direct labor and manufacturing overhead

Many manufacturers assign standard or expected costs to the

manufacturing overheads rather than the actual costs

This means that a manufacturers inventories and cost of goods sold

will reflect the standard costs, not the actual costs of a product

Manufacturers still have to pay the actual costs, as a result of which

there are differences between the actual and the standard costs,
which are known as variances.

Standard costing and its variances are an important and valuable

management tool.

Continued

If a variance arises, management becomes aware that

manufacturing costs have differed from standard costs

If actual costs are greater than standard costs, the variance is

unfavorable

This tells the management that the companys actual profit will
be less than planned

If the actual costs are less than the standard costs, the
variance is favorable

This means that the actual profit will be more than the planned
profit.

Variances

Material Price Variance

= (Actual Unit Price of Material Standard price of Materials) * (Actual

Quantity of material used)

Butter
Eggs
= (300 295) *373 kg

= (8.33

7.5) *12238
= Rs. 1865 Unfavorable
10157.54 Unfavorable

= Rs.

Variances

Material Quantity Variance

= (Actual Quantity of Material Standard Quantity of Material) * Price of

Material

Butter
Eggs
= (373kg 385kg) * Rs. 295
(12238 12500) * 7.5
= 3540 Favorable
1965 Favorable

=
= Rs.

Total Variance
Butter
Eggs
= 3540 1865
10157.54 1965
= Rs. 1675 Favorable
8192.54 Unfavorable

=
= Rs.

Break-Even Analysis

Point at which cost or expenses and revenue are equal, there is no net
loss or gain

Total

Unit

Sales

2275000 (35000
units)

65

Less variable cost

1300017

37.14

Contribution margin

1219983

27.86

Less fixed cost

299833

Operating income

920150

Break-even sales volume

Total fixed costs/ contribution
margin
299833/ (sale price per unitvariable cost per unit)
299833 / (65-37.14)
= 10762 pastries

Break-even sales (Rs)

= Total fixed costs/ (1 (VC/
Sales))
= 299833 / 1 (1300017/
2275000)
= Rs. 713888

Cost of Goods Manufactured

Beginning work in process

Direct Material:
Beginning Material Inventory

2,813,802.817

+Purchases
11,255,211.27
Material available for use
Less ending material inventory

Direct Material Consumed

14,069,014.09
3,939,323.944

10,129,690.14

Cost of Goods Manufactured

Direct Labor:

912,000

Factory Overhead:

Indirect Labor

50,000

Electricity

1200,000

Gas

Fuel

Guards

Depreciation

Building rental

Less ending Work in process

Total manufacturing overheads

5,891,675

Cost of Goods Manufactured

16,933,365

600,000
800,000
144,000
143,975
900,000
0

Cost of Goods Sold

Beginning material inventory
2,813,802.817
+ Purchases
11,255,211.27
-Purchase return and allowances
Materials available for use
14,069,014.09
-Ending materials inventory
3939323.944
Direct materials consumed
10,129,690.14

Cost of Goods Sold

Direct Labor

Factory Overhead:

Indirect Labor

50,000

Electricity

1200,000

Gas
600,000

Fuel
800,000

Guards

Depreciation

Building rental

Total manufacturing Cost

912,000

144,000
143,975
900,000
5,891,675

Cost of Goods Sold

+Beginning work in process inventory

0
16,933,365.14

-Ending work in process

Cost of goods manufactured
+Beginning FG inventory
Cost of goods available for sale
-Ending FG inventory
Cost of goods sold

0
16,933,365.14
955985
15977380.14
955985
15,021,395.14

Order Point

Order point is that level of inventory where the company places

a new order.

The company needs to place frequent orders for raw material

because of perishable nature of its products and due to
frequent changes in demand levels.

The lead time should not be more than 3 days for flour and
safety stock should not be for more than 3 days also.

Assuming a 30 days month and 165 kg of raw material:

Order point= (12.4*3 lead time)+37.3 safety stock=74.5kgs of
flour

Economic Order Quantity

It is that quantity for an order, which provides optimum

combination of ordering costs and carrying costs to the firm.

Assumptions :

Ordering costs= Rs 100 each

Carrying costs per unit of flour inventory=Rs 73.4

Total amount required annually (373 C*12 months)= 4476kgs

EOQ= 110kgs of flour

INVENTORY

The company uses FIFO method for costing the inventory.

The reason is that the raw material is perishable, so it needs

to be used on immediate uses

Process Costing

The company use process costing system. The two

departments in production department are:

Baking

Decorating

The assumptions are as follows:

Beginning Work in process=5% of production (35000) which

means 1750 units

Ending WIP = 10% of 35000 units

Summary

Rahat
Cost of Production

For one month

Cost of Work in process, beginning of the month-Baking
Rs
Rs
Material
14647.83
Labor
16480.52
Factory Overhead
143924.06 175052.41
Cost of production for the month
Material
292956.65
Labor
329610.4
Factory Overhead
2878481.25 3501048.3
Total costs to be accounted for =
3676100.71

Unit output for the month

Finished during the year

Equivalent units of WIP, end of month (3500, completed)

Total
37625

Unit cost for the month

Material

4.65

Labor

9.198

Factory overhead

Total
25.34

Inventory Costs

Cost of goods finished during the month (25.34*35000)

35000
2625

11.49

886917.49

Cost of WIP

Material

Labor

Factory overhead

12206.25
24123.75
30161.25

66491.2

Total Production costs accounted for

953408.74

Conclusion

Rahat bakery has been known as one of the top

bakeries in Pakistan.

Customers throughout Pakistan who are aware of

Rahat bakery trust the quality of their products.

Rahat bakery had a steady clientele since the time

it had been established.

Their sales dropped when the competition grew,

and bakeries like Gourmet came in the market.

They use a flexible budget plan which helps it in

achieving its objectives.

To grow the bakery business and improving the

costing without significantly increasing the
overhead, the business needs to venture into the
wholesale business by contracting with caterers or
restaurants to offer their products.

They use old traditional ways of costing.

Recommendations

Needs to increase the quality of its bakery items as they are

deteriorating day by day

Brand image and the name it had gained by working so hard

from the beginning needs to be maintained by improving
their service

The company is using the cost-effective strategy which is

working in its way but it must also combine the cost-effective
strategy with responsive strategy in order to maintain its
share in the market

It is losing its share currently, in order to maintain its share it

needs to use a combination of these two strategies

Continued

It should focus on its current bakery service rather than using market
spreading strategy and keeps on opening a new bakery in various places

First, it should focus on its current position and try to improve it and then
opt for a market spreading strategy by opening its new outlets at
various places.

ABC costing can be adopted by Rahat bakery as it is currently following

the traditional methods of costing. Traditional costing increases cost and
the time consumed whereas, if the company implements ABC costing,
cost will be decreased and lesser time will be consumed per operation.
The overall efficiency of the company will enhance creating more profits
for the company