Provogue: Financial Performance and Accounting Report

This report examines the financial performance of Provogue, a Mumbai-based retail clothing company, focusing on the challenges of declining profitability in one of its major product lines (trousers) despite higher sales. The study critiques the current job costing approach for overhead allocation, highlighting its limitations in accurately assigning costs to products like t-shirts and trousers. The report then introduces Activity-Based Costing (ABC) as a potential solution, detailing the steps involved in implementing an ABC system and identifying key activities, cost drivers, and cost pools. Through a comparative analysis, the report demonstrates how ABC can reduce the cost per unit for trousers and increase profitability. Based on stakeholder feedback and the financial analysis, the report recommends the implementation of ABC to improve cost accuracy and enhance overall financial performance. The report concludes with a reflection on findings and a recommendation for the CFO to implement ABC.

Running head: ACCOUNTUING IN BUSINESS
Accounting in business
Name of the student
Name of the university
Student ID
Author note

1ACCOUNTUING IN BUSINESS
Fashion industry in India is highly prominent. Further, Indian fashion market is
rapidly growing and caters wide range of the casual, formal as well as fashion garments.
However, brands play crucial role in the socioeconomic status of the people and hence,
consciousness regarding brands are becoming the status symbol for the people. Provogue is
the Mumbai based retail clothing company that was developed in the year 1998 as the
contemporary clothing for menswear fashion range. Indian fashion market is projected to be
around 108 billion and is expected to be reached to 223 billion by the end of the year 2021
(Forbes India 2019). The study will focus on the information gathered from discussing the
matters with the stakeholders of Prvogue regarding the issues currently the entity is facing.
Among the issues related to financial performance of the company the major issue that is the
company is facing is irrespective of higher sales one of its 2 major products are running in
loss (Provogue.com 2019).
Current approach of overhead allocation
At present the company uses job costing approach for allocating the overheads. As per
the job costing approach this system used for the individual output. Job costing is generally
useful while the company produce more than one products those are dissimilar in some of the
major aspects. Here in the taken case, main product in which the company deals with are t-
shirt and trousers. As per the current approach direct material and labour used by the
production unit are assigned to production overhead.
Evidence against the current approach
Talking with the shareholders it is observed that majority of the stakeholders are in
the view that the current approach is not appropriate for allocating the overheads as it
involves various issues as follows –

2ACCOUNTUING IN BUSINESS
Basis of allocation – specific allocation basis like direct labour hours are used for allocating
the overheads. To be more specific, it can be said that the management use known cost to
allocate the unknown cost. Hence, the management assumes that the overheads spent by each
of the product are directly proportional to the use of labour hours by each product however in
actual it may not be correct (Osadchy and Akhmetshin 2015).
Allocation rate – after determining the allocation basis the overheads are differentiated into
different cost objects based on the assumption that allocation basis will be done on the basis
of consumption. For example, if t-shirts uses 12 labour hours and trousers uses 18 labour
hours and total amount of overhead is $ 30,000, allocation of overhead will be in the ratio of
1:1.5. Hence, overhead for t-shirt will be 30000*1/2.5 = $ 12,000 and for trouser will be
30000 * 1.5/2.5 = $ 18000. However, in reality it may not be so simple (Osadchy and
Akhmetshin 2015).
Potential for introducing activity based costing
Activity based costing is the accounting approach that allows the businesses gathering
data regarding operating costs. Costs are allocated to particular activities like manufacturing,
engineering and planning and these activities are related to various services or products.
Hence, this approach enables the business to decide regarding the products and resources
those are increasing the profitability and those are contributing to losses. While implementing
the ABC costing system the initial analysis of the activities is the most difficult part (Haroun
2015). However, the major advantage of the system is it avoids or minimizes the distortion
son the product costs that may arise from the arbitrary allocation of the overhead costs. Steps
involved in the development of ABC systems are – (i) Identifying the activities – the
organisation is required to undertake in-depth analysis regarding the operating process for
each of the responsibility centre (ii) Assigning cost of resources to the activities – it involve

3ACCOUNTUING IN BUSINESS
categorization of costs into indirect, direct and general costs and tracing the costs to the cost
object (Lakmal 2014) (iii) Assigning the activity costs to the outputs – it is done through
using the activity drivers that assigns the activity costs to the outputs on the basis of demand
or consumption of activities (iv) Reporting benefits or drawbacks – based on the outcomes
the benefits or drawbacks of ABC implementation is reported (Costabile et al., 2017).
Key activities, potential cost drivers and potential cost pools
Key activities and potential costs drivers for allocating overheads can be explained
through the following sample run conducted with the products of the company as follows –
Details of the sample are as follows –
T-shirt Trousers
Units produced and sold 1700 1600
Cost per unit for direct material $ 350 $ 580
Cost per unit for direct labour $ 175 $ 280
The activities and total overhead costs and are detailed below –
Inspection - $ 30,000
Pattern cutting and sewing - $ 200,000
Boxing up - $ 80,000
Storage - $ 40,000
Activities used by the products and cost drivers for allocating overheads are as follows –
Activity T-shirt Trousers Cost drivers
Inspection 760 210 Inspection
Pattern cutting and sewing 60 510 Machine hours
Boxing-up 4700 3500 Number of pieces
storage 120 270 number of boxes

4ACCOUNTUING IN BUSINESS
Selling and administration expenses for trousers = $ 300,200, office rent = $ 42,800 and
interest expenses = $ 40,500
Other details –
Trousers are sold under the existing system at total cost plus 30% and the
management will maintain the same price level as per the new system.
Under the existing job costing system, allocation of overhead on the basis of labour
cost will be as follows –
Allocation of overhead as per ABC method will be as follows –

5ACCOUNTUING IN BUSINESS
As the stakeholders mentioned that the company is generating loss from selling of
trousers that have adverse impact on the profitability of the company comparison of cost and
profits as per both Job costing as well as ABC method is carried out for trousers as follows –
Above table is indicating that under ABC method the company will be able to reduce
the costs from $ 1234.30 per unit to $ 1219.14 and the resultant profit will be increased from
$ 370.29 per unit to $ 385 per unit.

6ACCOUNTUING IN BUSINESS
Follow up with stakeholders
As the stakeholders are mainly concerned about the return on the money invested by
them they will prefer the system that will increase the profitability of the entity. Showing the
above presented table regarding the outcomes of applying ABC system against Job costing
method 85% of the stakeholders have given positive feedback regarding implementation of
ABC. However, the rest 15% of the stakeholders are not in favour of implementing ABC as
they feel that it will require additional investment of money and time.
Reflection on findings and recommendation
Through the above analysis I have found that the company can improve its
profitability by applying the ABC method. I can establish the same though the fact that under
ABC method the company will be able to reduce the costs of trousers from $ 1234.30 per unit
to $ 1219.14 and at the same time the resultant profit will be increased from $ 370.29 per unit
to $ 385 per unit. Hence, I would recommend the CFO to implement ABC method and use
the same in place of job costing system. Further, ABC approach will help is assessing the
costs of each activity on the basis of the resources used which in turn will enable the accurate
costing for all the activities that is to be obtained throughout the organisation.

7ACCOUNTUING IN BUSINESS
References and bibliography
Costabile, G., Fera, M., Fruggiero, F., Lambiase, A. and Pham, D., 2017. Cost models of
additive manufacturing: A literature review. International Journal of Industrial Engineering
Computations, 8(2), pp.263-283.
Forbes India. 2019. What's trending in the fashion industry | Forbes India Blog. [online]
Available at: http://www.forbesindia.com/blog/luxury-lifestyle/whats-trending-in-fashion-
industry/ [Accessed 28 May 2019].
Gurcanli, G.E., Bilir, S. and Sevim, M., 2015. Activity based risk assessment and safety cost
estimation for residential building construction projects. Safety science, 80, pp.1-12.
Haroun, A.E., 2015. Maintenance cost estimation: application of activity-based costing as a
fair estimate method. Journal of Quality in Maintenance Engineering, 21(3), pp.258-270.
Keiser, S., Garner, M.B. and Vandermar, D., 2017. Beyond design: The synergy of apparel
product development. Bloomsbury Publishing USA.
Lakmal, D., 2014. Cost Analysis for Decision Making and Control: Marginal Costing versus
Absorption Costing.
Osadchy, E.A. and Akhmetshin, E.M., 2015. Accounting and control of indirect costs of
organization as a condition of optimizing its financial and economic activities. International
Business Management, 9(7), pp.1705-1709.
Provogue.com. 2019. Provogue India. [online] Available at: https://www.provogue.com/#1
[Accessed 28 May 2019].
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting.
John Wiley & Sons.

8ACCOUNTUING IN BUSINESS