MANAGERIAL ACCOUNTING

HONDA ATLAS PAKISTAN

SUBMITTED BY: MBA II SEC C Faizan KhalidAbdullah ArshadZaighum GondalMoeen IllahiZunair Ahmed

TABLE OF CONTENT

INTRODUCTION.........................................................................................................................2

INCOME STATEMENT..............................................................................................................3

Important Ratios...........................................................................................................................3

Important Information..................................................................................................................3

HORIZONTAL ANALYSIS.........................................................................................................5

VERTICAL ANALYSIS...............................................................................................................6

Cost of Sales:..................................................................................................................................8

Vertical Analysis:...........................................................................................................................9

BREAK EVEN ANALYSIS........................................................................................................10

Budgeting......................................................................................................................................20

Budgeted Income statement........................................................................................................22

Variance Analysis........................................................................................................................23

1

INTRODUCTION

From a young age (7), Soichiro Honda had a great interest in automobiles. He worked as a

mechanic at a Japanese tuning shop, A self-taught engineer, he later worked on a piston design

which he hoped to sell to Toyota. The first drafts of his design were rejected, and Soichiro

worked painstakingly to perfect the design, even going back to school and pawning his wife's

jewelry for collateral. Eventually, he won a contract with Toyota and built a factory to construct

them, which was destroyed in an earthquake. Due to a gas shortage during World War II, Honda

was unable to use his car, and his novel idea of attaching a small engine to his bicycle attracted

much curiosity. He then established the Honda Technical Research Institute in Hamamatsu,

Japan, to develop and produce small 2-cycle motorbike engines. Calling upon18,000 bicycle

shop owners across Japan to take part in revitalizing a nation torn apart by war, Soichiro received

enough capital to engineer his first motorcycle, the Honda Cub. This marked the beginning of

Honda Motor Company, who would grow a short time later to be the world's largest

manufacturer of motorcycles by 1964. 

Honda Atlas Cars Pakistan Limited is a joint venture between Honda Motor Company Limited

Japan, and the Atlas Group of Companies, Pakistan. The company was incorporated on

November --, 1992 and joint venture agreement was assigned on August ---, 1993. The ground

breaking ceremony was held on April 17, 1993 and within a record time of 11 months,

construction and erection of machinery was completed. The first car rolled off the assembly line

on May 26, 1994. Official inauguration was done by President of Pakistan, Sardar Farooq

Ahmad Khan Leghari. Mr.Kawamoto, President of Honda Motor Company Limited Japan was

also present to grace the occasion. The company is listed on Karachi, Lahore and Islamabad

Stock Exchanges.

Honda Atlas Cars (Pakistan) Limited is a joint venture between Honda Motor Company

Limited, Japan and the Atlas Group, Pakistan. The company was incorporated on November 4,

1992 and a joint venture agreement was signed on August 5, 1993. The company is listed

on Karachi, Lahore and Islamabad Stock Exchanges. On July 14, 1994, booking of Honda cars

started at six dealerships in Karachi, Lahore and Islamabad. Since then, the company has

developed twenty one 3S dealers (Sales, Service and Spare Parts) twenty 2S dealers (Service and

Spare Parts) and six 1S dealers (Spare Parts) network in all major cities of Pakistan.

2

INCOME STATEMENT

Honda Atlas Cars (Pakistan) Limited Profit and Loss Account for the year ended March 31, 2008-2012

2011 2012 2013

Sales 22,026,109 16,599,608 30,274,604 Cost of sales 21,826,799 16,643,607 28,827,522 Gross profit 199,310 (43,999) 1,447,082 Distribution and marketing costs 139,185 130,550 218,707 Administrative expenses 171,729 158,943 201,908 Other Income 310,914 289,493 420,615

(111,604) (333,492) 1,026,467 Other operating income 83,977 204,456 213,434

(27,627) (129,036) 1,239,901 Other operating expenses 64,945 217,842 524,117 (Loss)/profit from operations (92,572) (346,878) 715,784 Finance cost 152,255 151,926 190,967 (Loss)/profit before taxation (244,827) (498,804) 524,817 Taxation (53,625) (33,409) (280,530) (Loss)/profit for the year (298,452) (532,213) 244,287 (Loss)/earnings per share - basic and diluted (Rupees) (2) (4) 2

Important Ratios2013 2012 2011

Profitability RatiosGross Profit Margin 4.8 -0.3 0.9Operating Profit margin 2.4 -2.1 -0.4

Liquidity RatiosCurrent Ratio 0.8 0.6 0.7Quick Ratio 0.4 0.2 0.2

Activity RatiosTotal Asset Turnover 2 1.8 2.1Fixed Asset Turnover 8.6 4.5 5.6

Important InformationUnits Produced 19387 11040 16440Units Sold 18915 11406 16467Manpower 1003 934 975

3

A fluctuating pattern in sales could be observed and so in cost of sales but in 2013 Honda atlas

has recovered by increasing its profits by almost from the previous and the EPS for Honda aslo

turned from negative to positive “2” this indicates that the burden of higher cost of sales is

simply transferred on to the consumer, and similar pattern could be observed in the gross profit,

however the intensity of burden varies, for instance in 2010 and 2012, Honda was able to capture

a greater sales revenue compared to the past result probably due to higher selling price but not

the whole part of the burden because the increases in the cost of sales was much higher than the

selling price itself combined with probable lesser demand due to a higher price rise.

Honda was quite successful in cutting on the distribution and administration costs over the years,

as the figures show a downward trend, however in case of administrative expenses only a

considerable increased change is observed in 2011 because of intense power crises and inflated

fuel costs. Other operating incomes show a fluctuating pattern over the years depending on the

changes in payment decision patterns of the invested companies or possible changes in the

interest rates if the amount invested as preference shares. Net Profit have shown a downward

trend over the years because of the fact that economy is going through a major slump and

especially the add-ons like energy, fuel, unemployment and inflation crises which have made the

scenario even worse; thus a net loss is observed in the last financial year. This could also be

explained due to a fact that Honda Cars belong to elite class majorly and due to such a high

selling price people switch to other substitutes like Liana, Lancer and other sub-brands of Suzuki

and Toyota which are equally good and comparatively cheap. It represents cash inflows and

outflows which enable the company to carry out its finances whether through operating

activities, financing or investing activities. Cash at the end of the year has been positive

throughout the last three years and has been continuously fluctuating since 2008, though there

had been a drastic decrease in 2009 which has a negative value. In 2012 Cash at the end of the

year have decreased alot because net cash generated from investing and financing activities came

out to be negative. Major component of cash inflows was due operating activities and cash and

cash equivalent at the beginning of the year. In 2012, investing finances were negative as the

company had purchased some plant and equipment and intangible assets. The company is

investing for the future and as an investor it is a positive indication The positive cash flow means

that Honda will always pay its bills because of the availability of funds. Thus during the

downturn the company did not run out of money and was able to survive in drastic conditions.

4

HORIZONTAL ANALYSIS

Honda Atlas Cars (Pakistan) LimitedHorizontal Analysis

for the year ended March 31, 2011-2013

2011 2012 2013 Sales

22,026,109 38.93% 16,599,608 -24.64%

30,274,604 82.38%

Cost of sales 21,826,799 35.62%

16,643,607 -23.75%

28,827,522 73.20%

Gross profit 199,310 183.2%

(43,999) -122.08%

1,447,082 3388.90%

Distribution and marketing costs

139,185 11.42%

130,550 -6.20%

218,707 67.53%

Administrative expenses

171,729 26.15%

158,943 -7.45%

201,908 27.03%

Other Income 310,914 -

289,493 -

420,615 -

(111,604) -

(333,492) -

1,026,467

-

Other operating income

83,977 218.48%

204,456 143.47%

213,434 4.39%

(27,627)

- (129,036) -

1,239,901 -

Other operating expenses

64,945 0.295%

217,842 1.312%

524,117 1.731%

(Loss)/profit from operations

(92,572) 82.63%

(346,878) 274.71%

715,784 306.35%

Finance cost 152,255 66.5%

151,926 -.22%

190,967 25.70%

(Loss)/profit before taxation

(244,827) 75.22%

(498,804) 103.74%

524,817 205.22%

Taxation (53,625) 139.49%

(33,409) -37.70%

(280,530) 739.68%

(Loss)/profit for the year

(298,452) -0.013%

(532,213) -0.032%

244,287 0.0080%

(Loss)/earnings per share - basic and diluted (Rupees)

(2) - (4) -

2 -

5

Honda Atlas Cars (Pakistan) Limited is a joint venture between Honda Motor Company

Limited, Japan and the Atlas Group, Pakistan. The company was incorporated on November 4,

1992 and a joint venture agreement was signed on August 5, 1993. The company is listed

on Karachi, Lahore and Islamabad Stock Exchanges. On July 14, 1994, booking of Honda cars

started at six dealerships in Karachi, Lahore and Islamabad. Since then, the company has

developed twenty one 3S dealers (Sales, Service and Spare Parts) twenty 2S dealers (Service and

Spare Parts) and six 1S dealers (Spare Parts) network in all major cities of Pakistan.

VERTICAL ANALYSIS

Honda Atlas Cars (Pakistan) Limited Vertical Analysis

for the year ended March 31, 2011-2013

2011 2012 2013 Sales

22,026,109

100.000% 16,599,608

100.000% 30,274,604

100.000%

Cost of sales 21,826,799

99.095% 16,643,607

100.265% 28,827,522

95.220%

Gross profit 199,310 0.905%

(43,999)

-0.265% 1,447,082

4.780%

Distribution and marketing costs

139,185 0.632%

130,550

0.786% 218,707

0.722%

Administrative expenses

171,729 0.780%

158,943

0.958% 201,908

0.667%

Other Income 310,914 1.412%

289,493

1.744% 420,615

1.389%

(111,604)

(333,492)

1,026,467

Other operating income

83,977 0.381%

204,456

1.232% 213,434

0.705%

(27,627)

(129,036)

1,239,901

Other operating expenses

64,945 0.295%

217,842

1.312% 524,117

1.731%

(Loss)/profit from operations

(92,572) -0.420%

(346,878)

-2.090% 715,784

2.364%

6

Finance cost 152,255 0.691%

151,926 0.915%

190,967 0.631%

(Loss)/profit before taxation

(244,827) -0.0111%

(498,804) -0.0300%

524,817 0.0173%

Taxation (53,625) -0.0024%

(33,409) -0.0020%

(280,530) -0.0092%

(Loss)/profit for the year

(298,452) -0.0135%

(532,213) -0.0320%

244,287 0.0080%

(Loss)/earnings per share - basic and diluted (Rupees)

(2) - (4) -

2 -

Over the years Honda Atlas has seen various ups and downs

An increasing cost of sales trend shows the reduced gross profit ratio, particularly because

energy crises and inflationary pressures, However despite of these inflationary pressures Honda

is better able to keep up with controlling the Administration and Distribution to sales figures and

this factor could be a strong point if these small percentages comprised of huge actual figures

and thus would help significantly to not to further adversely affect net profit ratio. Other

operating incomes shows a fluctuating trend merely because of the variability in the Dividend

policy of the company being invested and the respected changes in the interest rates. Finally the

high fluctuations in the loss/profit of the year to sales percentage gives an impression of

inconsistency and investor’s confidence would collapse; thus leading to lower MPS.

7

Cost of Sales:

Cost of Sales Data 2011 2012 2013

Raw Material Consumed 19,373,596 13,960,643 26,474,350Stores and Spare Consumed 74,563 50,653 114,071Salaries, Wages and benefits 229,843 261,089 326,464Fuel and power 68,684 62,841 104,389Insurance 32,016 33,729 41,049Traveling and Vehicle running 50,963 45,264 64,028Freight 18,981 15,974 64,174Repairs and maintenance 10,404 11,146 20,800Technical Assistance 26,720 21,917 23,078Depreciation 621,567 607,572 523,962Amortization 38,796 31,604 46,267Royality 464,458 344,190 680,579Canteen SUBSIDY 12,244 10,420 19,791Other Expenses 832 1,040 1,258Total 21,023,667 15,458,082 28,504,260Opening stock of Work in progress 265,139 308,017 323,572Closing stock of work in progress (308,017) (323,572) (288,108)Total (42,878) (15,555) 35,464Cost of goods manufactured 20,980,789 15,442,527 28,539,724own work capitalized (16,988) (12,943) (79,902)cost of damaged cars (3,428) (2,935) (4,668)Total 20,960,373 15,426,649 28,455,154Openings stock of finish goods 650,786 674,739 334,006Closing stock of finish goods (674,739) (334,006) (940,662)Total (23,953) 340,733 (606,656)Cost of sales - own manufactured 20,936,420 15,767,382 27,848,498Cost of sales - Trading goods 890,379 876,225 979,024Total 21,826,799 16,643,607 28,827,522

The Cost of the materials has increased at a much higher rate due to the increasing demand and

sales.

Vertical Analysis:

8

Vertical Analysis of Cost of SalesCost of Sales Data 2011 2012 2013

Rs. % Rs. % Rs. %

Raw Material Consumed 19373596

88.76%

13960643

83.88%

26474350

91.80%

Stores and Spare Consumed 74563 0.34% 50653 0.30% 114071 0.40%Salaries, Wages and benefits 229843 1.05% 261089 1.57% 326464 1.10%Fuel and power 68684 0.31% 62841 0.38% 104389 0.40%Insurance 32016 0.15% 33729 0.20% 41049 0.10%Traveling and Vehicle running 50963 0.23% 45264 0.27% 64028 0.20%Freight 18981 0.09% 15974 0.10% 64174 0.20%Repairs and maintenance 10404 0.05% 11146 0.07% 20800 0.10%Technical Assistance 26720 0.12% 21917 0.13% 23078 0.10%Depreciation 621567 2.85% 607572 3.65% 523962 1.80%Amortization 38796 0.18% 31604 0.19% 46267 0.20%Royality 464458 2.13% 344190 2.07% 680579 2.40%Canteen SUBSIDY 12244 0.06% 10420 0.06% 19791 0.10%Other Expenses 832 0.00% 1040 0.01% 1258 0.00%

Total 21023667

96.32%

15458082

92.88%

28504260

98.90%

Opening stock of Work in progress 265139 1.21% 308017 1.85% 323572 1.10%

Closing stock of work in progress -308017 -1.41% -323572 -

1.94% -288108 -1.00%

Total -42878 -0.20% -15555 -

0.09% 35464 0.10%

Cost of goods manufactured 20980789

96.12%

15442527

92.78%

28539724

99.00%

own work capitalized -16988 -0.08% -12943 -

0.08% -79902 -0.30%

cost of damaged cars -3428 -0.02% -2935 -

0.02% -4668 0.00%

Total 20960373

96.03%

15426649

92.69%

28455154

98.70%

Openings stock of finish goods 650786 2.98% 674739 4.05% 334006 1.20%

Closing stock of finish goods -674739 -3.09% -334006 -

2.01% -940662 -3.30%

Total -23953 -0.11% 340733 2.05% -606656 -

2.10%

Cost of sales - own manufactured 20936420

95.92%

15767382

94.74%

27848498

96.60%

Cost of sales - Trading goods 890379 4.08% 876225 5.26% 979024 3.40%

Total 21826799 100% 1664360

7 100% 28827522 100%

9

BREAK EVEN ANALYSIS

Breakeven is the point where the company’s total revenue equals to its total costs resulting in no

profits and no loss situation. This is the minimum a company should achieve in sales to avoid a

loss.

The breakeven point can be calculated by the under-mentioned formula:

BREAK EVEN POINT= FIXED COST / CONTRIBUTION MARGIN

CONTRIBUTION MARGIN = Net Sales – Variable Cost

Step 1: FIXED COST

The formula shows that given the financial statements of the company, the first step in

conducting break even analysis is to classify costs into fixed components. So the costs provided

in the Income statement and COGS from the notes of the financial statement were classified as

fixed cost.

FIXED COST2011 2012 2013

Administration expenses 171,729 158,943 201,908Finance Cost 152,255 151,926 190,967Depreciation 621,567 607,572 523,962Insurance 32,016 33,729 41,049Distribution and marketing costs 139,185 130,550 218,707Salaries, Wages and benefits 229,843 261,089 326,464Technical Assistance 26,720 21,917 23,078Amortization 38,796 31,604 46,267Royalty 464,458 344,190 680,579Fuel and power 68,684 62,841 104,389Insurance 32,016 33,729 41,049

Total Fixed Cost: 1,977,269 1,838,090 2,398,419

10

Step 2: VARIABLE COST

The second step in conducting break even analysis is to classify costs into variable components.

So the costs provided in the Income statement and COGS from the notes of the financial

statement were classified as variable cost.

VARIABLE COST2011 2012 2013

Taxation 53,625 33,409 280,530Raw Material Consumed 19,373,596 13,960,643 26,474,350Stores and Spare Consumed 74,563 50,653 114,071Fuel and power 68,684 62,841 104,389Traveling and Vehicle running 50,963 45,264 64,028Freight 18,981 15,974 64,174Repairs and maintenance 10,404 11,146 20,800Canteen SUBSIDY 12,244 10,420 19,791Other Expenses 832 1,040 1,258Opening stock of Work in progress 265,139 308,017 323,572Closing stock of work in progress (308,017) (323,572) (288,108)own work capitalized (16,988) (12,943) (79,902)cost of damaged cars (3,428) (2,935) (4,668)Openings stock of finish goods 650,786 674,739 334,006Closing stock of finish goods (674,739) (334,006) (940,662)

Total Variable Cost: 19,523,020 14,467,281 26,207,099

Step 3: NET SALES

Following Exhibit shows the net sales figures of Honda Atlas Pakistan.

2011 2012 2013NET SALES 22,026,109 16,599,608 30,274,604

Step 4: CONTRIBUTION MARGIN

For calculating break even sales contribution margin %age is calculated by formula:

11

Contribution Margin % = (Net Sales – Variable Cost)/ Net Sales

Values for the three years are as follows:

2011 2012 2013CONTRIBUTION MARGIN 11.36% 12.85% 13.44%

Step 5: BREAKEVEN SALES

By dividing the values of step 1 by step 4 we calculated the Break even sales for Honda Atlas

Pakistan. That is depicted in following exhibit:

2011 2012 2013BREAKEVEN SALES 17,399,119 14,309,050 17,851,529

12

ACTIVITY BASED COSTING

Activity-based costing (ABC) is a costing methodology that identifies activities in an

organization and assigns the cost of each activity with resources to all products and services

according to the actual consumption by each. In a business organization, the ABC methodology

assigns an organization's resource costs through activities to the products and services provided

to its customers. ABC is generally used as a tool for understanding product and customer cost

and profitability based on the production or performing processes. As such, ABC has mainly

been used to support strategic decisions such as pricing, outsourcing, identification and

measurement of process improvement initiatives.

ABC involves identifying cost drivers and cost objects. After identifying them, the costs are then

allocated to each business unit with the ratio of its respective consumption. This process is

explained in the tables below.

Total Direct Cost

Direct material = 26,474,350

Direct Labor Cost = 326,464

Other Direct Costs = 524,117

Total Direct Costs = 27,324,931

Units Quantity = 40000

13

Cost of Sales Data

Cost Hierarchy

Cost Driver

Total Budgeted Indirect Costs

Budgeted Quantity of Cost Allocation Base

Budgeted Indirect Cost Rate

Material Arrival/ Handling Output Unit level

Labor Hours

54642 30*8=210 260.2

Setup Product Sustaining

Setup Hours

2145782 360*2 = 720

2890

HeatingBatch Level

Heating Machine Hours

125414 200*4=800 156.7

Frame workBatch Level

Automated machine Setups

118547 100*5=500 237.0

Cooling Batch level Facility Hours

26321 100*2=200 6.80

Garnishing Output Unit level

Hour Based

231241 100*2=200 131.605

Painting Output Unit level

Labor Hour

212547 150*4=600 354.205

AssemblingOutput Unit level

Automated Machine hours

1021458 50*4=200 5107

Indirect Cost of Activities

30% of indirect cost is allocated to civic

35% of indirect cost is allocated to city

25% of indirect cost is allocated to accord

10% of indirect cost is allocated to CRV

Material Handling

City 19392

Civic 19124

14

Accord 16160

CRV 5464

Setup

City 643734

Civic 751023

Accord 536445

CRV 214578

Heating

City 37624

Civic 43894

Accord 31354

CRV 12541

Frame Work

118547

City 35564

Civic 41491

Accord 29636

CRV 11854

Cooling

15

City 7896

Civic 9212

Accord 6580

CRV 2632

Garnishing

City 69372

Civic 80934

Accord 57810

CRV 23124

Painting

City 63764

Civic 74391

Accord 53136

CRV 21254

Assembling

City 306437

Civic 357510

Accord 255364

16

CRV 102145

There are 8 steps in assembling the body of Toyota Car.

Material / Handling

The material is arrived and handled by the labor.

Setup

The machine is setup 360 days. The facility is capital intensive.

Heating

The raw material is heated in 28 different facilities

Frame Work

The capital intensive machinery then formulates the frame

Cooling

After that the scales are cooled down to certain temperature

Garnishing

The Fixation and garnishing is done

Painting

Painting is done by manual labor

Assembling

The respective parts are deployed

17

Budgeting

Budget is a quantitative expression of a proposed plan of action by management for a specified

period. It is an aid to coordinating what needs to be done to implement that plan. It is basically

used as a plan for future income and expenditures that is used as a guideline in order to make

decisions regarding spending and saving. This budget analyses Honda operations for the year of

2013.

Sales Budget

2013

Budgeted Sales 45000

Selling price per unit 1800000

Total Revenue 8,100,000,000

The budgeted sales for 2013 were 45000 units and the average selling price per unit

was1800000. Hence the total revenue came out to be 8100000000.

Production Budget

2013

Sales in units 45,000

Add: desired inventory 16000

Total needed 61000

Less: beginning inventory 5600

Units to be produced 55400

The total sales in unit are 45000. Desired inventory is 40 percent of previous year’s sales by

management. Beginning inventory was taken from the company and then units to be produced

came out to be 55400.

18

Direct Material budget

Direct Materials Budget

Production in units 55400

Materials per unit 756000

production needs 4,188,820,000

add: desired ending

inventory 478,548,384

total needed 4,667,368,388

less: Beginning Inventory 333,388,707

Materials to be purchased 4,333,979,681

Material per unit is 25% of budgeted sale price

Desired ending inventory is 4.5% of production needs

The direct materials budget calculates the materials that must be purchased, by time period, in

order to fulfill the requirements of the production budget, and is typically presented in either a

monthly or quarterly format in the annual budget.  The production units are retrieved from the

production budget. Production needs are calculated by multiplying production in units with the

material per unit cost. By using direct material budget we will be able to calculate the amount of

material to be purchased, that is Rs 4333979681

Direct labor budget

Direct Labor Budget

Production in units 55400

direct labor hours 8

labor hours required 443200

wage rate 600

total direct labor cost 265,920,000

19

Direct labor budget shows the total direct labor cost and number of direct labor hours needed for

production. It helps the management to plan its labor force requirements. In Direct labor budget

production in budget, production in units is retrieved from production budget. Labor hours are

calculated by multiplying production in units with direct labor hours. By using the labor hours

required, we have calculated total direct labor cost, which is Rs 265,920,000.

Budgeted Income statement

Budgeted000’

Sales 81,000,000 Cost of sales 58,378,553 Gross profit 22,621,447

Distribution and marketing costs422608

Administrative expenses 262480.4 Other Income 546799.5

1334407.1 Other operating income 277464.2

22,760,622 Other operating expenses 681352.1

(Loss)/profit from operations930519.2

Finance cost 2600010

(Loss)/profit before taxation19,479,260

Taxation 6817741.07 (Loss)/profit for the year 12,661,519

20

Variance Analysis

Budgeted Actual Variance

Sales 81,000,000 55,600,000 25,400,000 Cost of sales 58,378,553 39,150,041 19,228,512 Gross profit 22,621,447 16,449,959 6,171,488

Distribution and marketing costs422608

318,707103,901

Administrative expenses 262480.4 201,908 60,572 Other Income 546799.5 420,615 126,185

1334407.1 1,026,467 307,940 Other operating income 277464.2 213,434 64,030

22,760,622 16,563,393 6,197,229 Other operating expenses 681352.1 524,117 157,235

(Loss)/profit from operations930519.2

715,784214,735

Finance cost 2600010 190,967 2,409,043

(Loss)/profit before taxation19,479,260 15,848,309 3,630,951

Taxation 6817741.07 5546908.15 1,270,833 (Loss)/profit for the year 12,661,519 10,301,401 2,360,118

Although the profitability of company increases over the years but it is seen that there is a lot of

unfavorable variance in sales volume and material and labor efficiency. So the company needs to

focus on its budgeting. And materials and labor should be planned according to the required

needs because cost of goods sold is major portion of the sales so if these costs are not controlled

profitability will decrease drastically.

The company is advised to hire competent management that can keep a keen eye on the

operations of the company. So that wastages should be avoided and inventory level should be

maintained according to the needs.

Also finance cost should be reduced. Moreover, Honda is about to launch a new model for Civic

and City next year which is expected to increase huge profits for the company and there are

21

chances that the company would not be able to cater demand with such capacity to build and if

this thing goes as it is then the company would have to face immense competition from Toyota

which will also release its new model for Corolla. Budgeted sales are taken from the sales

budget. Total needed is the total of budgeted sales and desired ending inventory. Beginning

inventory of 2012’s is the desired ending inventory of 2011.

Product of units will be equivalent to the sales of the year plus the desired inventory which is 5

percent of the expected sales. From the balance, we calculated the beginning inventory by taking

the stated assumption in the report that value of inventory is equivalent to the material value for

the year. In order to calculate the number of units to be produced the beginning inventory is

subtracted from total production required.

22