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Explore the costing decisions in a furniture manufacturing business

发布时间:2017-04-26
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COSTING DECISION OF AN ENTERPRENEUR

ABSTRACT

This case demonstrates the manufacturing and costing of furniture in furniture manufacturing business. It highlights the key issues of managerial accounting relating to costing of product by classifying different costs. It emphasizes on two major issues one of sacrificing routine business by receiving one order and separating one unit for manufacturing one product only and secondly selling a chair even below than market price. It also highlights the pricing issue, which suggests the criteria for setting price for product, if you are selling below cost then what should be the level till you can sell and it also highlights the cost volume relationship. Finally it emphasizes on two different approaches for computation of income i.e. variable costing and absorption costing.

Key words: Product cost, manufacturing overhead, period cost, loss.

INTRODUCTION

On 18th February 2013, Mr. Nazir was sitting in his office along with his son Mr. Junaid waiting for Mr. Tariq who is procurement manager at an NGO, on telephonic conversion Mr. Tariq has told Mr. Nazir about his NGO that it is currently working on primary education in remote areas of Sindh. Rather than asking for bids and searching lower rates NGO has given freedom to Procurement manager to search the best price and quality trade off. Last time NGO had bad experience with a furniture manufacturing business. So this time Mr. Tariq wanted to meet with Mr. Nazir to discuss rates and quality of furniture and also clearly communicated the expectations referring to prior experience.

BUSINESS PROFILE

Mr. Nazir Ahmed Khuwaja is the Owner and CEO of NAK Furniture. The business offers a wide variety of office and home furniture including beddings, kitchen furniture, TV trolley, dining tables, shelves, office tables, chairs and much more. NAK furniture also sells lighting accessories, wall coverings ad window dressings hence it offers a wide variety of designs for its customers including the customized designs ordered by customers from catalogues and magazines.

Nazir Ahmed and the start of Struggle:

It was the summer of 1983 when Nazir, a teenager was sitting idle near the main market in Khairpur; worrying about the worsening financial conditions of his family. Death of his father about two months ago left his family at the mercy of destiny and ruthless society. Nazir Ahmed Khuwaja, the 18-eighteen years old boy was only a middle school graduate at that time with no up hand skills through which he could earn some bread and butter for himself and his family. As an eldest child and the only male of the family, he had a bulging responsibility on his weak shoulders. Nazir Ahmed belonged to the Khuwaja family of Khairpur District. His father was a small wood cutter by profession.

Having lost all his hope in fate and family (relatives), Nazir decided to look for a job himself. The main market of Khairpur city starts off with furniture shops. This central market of the city sells everything ranging from home stuff to office supplies. As a son of a woodcutter, he had a little bit of knowledge about wood cutting as he used to help his father in his life. Nazir started visiting the furniture shops including the one where his father used to supply the wood, asking them for a job but all his efforts go in vain when he got a same negative response from everyone. He continued his visit for getting job till 3 days.

Destiny seemed to have decided everything against his struggle and the boy himself started believing in it too. On the 4th day of his struggle for job searching, Nazir again walked 2 miles to the market, looking for the job and as soon as he reached the market, he was surprised to see all the shops closed. Upon asking a passerby he came to know that it was Friday and the main market remains close due to the Friday prayers. Nazir went crazy after hearing it as he walked so long from his home to the market. He looked for a shade to sit and regain his energy for few minutes before leaving back for home. Nazir was in a mind-boggling condition due to this shock and he was unable to decide what to do next. He literally lost his patience and all of a sudden he heard a voice “OOYE; OO CHOKRA” (Hey You; Hey Boy). Nazir sitting on the floor looked back and he saw a person standing outside the furniture shop calling him. The guy again called him “Aray Tou khay Thou Chawan; Haiday Ach” in Sindhi language which means Yes I`m calling you, come here. Nazir got up and went to him then he got to know that it was the owner of a local furniture shop Mr. Qalandar Ali whom he went for the job 2 days back. Mr. Qalandar inquired from Nazir that either he was still looking for a job or not on which Nazir sobbed and gave an approving nod. Mr. Qalandar Ali told him that still he has no vacancy but he can provide him an opportunity to work and learn without any remuneration. Nazir without taking a second, agreed with Mr. Qalandar Ali. Mr. Ali said that you can have free lunch with other workers and will have to come to work for 6 days in a week from Saturday to Thursday. Nazir was keyed up as he was asked to start his work from tomorrow.

Nazir was extremely happy with this no pay job cum learning opportunity as if he was offered a post of CEO in a company. Since the death of his father it was the first moment of his happiness. He went back, told his mother and sisters who also became blissful. Nazir`s mother started weeping and thanking GOD for this. For the past many days Nazir could not sleep properly and his condition was similar even on the Friday night but the thing that was changed was his mood indeed he was excited for his new job.

The next 4 months was the ‘revitalization period’ that actually changed the life of Nazir Ahmed. He put uphill efforts and focused on learning every bit and byte about the furniture cutting; designing and development which made him dominant among all. Mr. Qalandar made him his permanent salaried employee from 5th month. Nazir Ahmed developed many new designs which resulted in earning huge bucks to Mr. Qalandar.

In the late eighties, a trend started in which people from the upper Sindh region started migrating to urban areas of the province i-e to Hyderabad and Karachi. Parallel to that in 1988, Mr. Qalandar also decided to move to Karachi and give furniture business ownership to someone else for some time period. He had planned to start a grocery business in the Karachi. Mr. Qalandar wanted someone to take over the business on a contract basis that if he fails to successfully run business in Karachi, he will come and take the furniture business back. There were many interested buyers but they wanted to buy the business on cash. Mr. Qalandar was not ready to put everything on risk and migrate. Nazir Ahmed was alarmed to this situation and his job was also on risk.

This confusing critical situation bought an idea to Nazir that what if he takes over the business as a contractor. Nazir Ahmed discussed his intention with Mr. Qalandar on which he showed no reservations but Nazir Ahmed puts a condition on that proposal which was:

“Mr. Qalandar will have one year in which he may come back and take over the business again if he fails in his plans and if he succeeds in establishing a business in Karachi city, he will sell all the shop equipments on half of the market and furniture items with no profits.”

Mr. Qalandar a

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