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COST ACCOUNTING REPORTON
SUBMITTED TO:
RAO NISAR AHMED
SUBMITTED BY:
HAFSA ZEESHAN
CLASS & SECTION:
BBA III / II
DATE OF SUBMISSION:
NOVEMBER 27, 2000
INSTITUTE OF BUSINESS ADMINISTRATION
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TABLE OF CONTENTS
Preface
Acknowledgement
Company Profile
The Finance Department
The Work Flow
Cost Accumulation System
Costing Method
The Elements of Cost
Cost Allocation to Departments
Costing for Performance Evaluation
Allocating Joint Costs
Budgeting
Spoilage and Quality Management
Production Cost Reports
System Application Program (SAP)
Conclusion
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PREFACE
In the name of Allah, the most Beneficial, and the most Merciful
his report covers the cost accounting system of BOC Gases, Pakistan, a
subsidiary of The BOC Group. It puts forth the practices and policies
followed by the company when accounting for the costs of various elements and
processes and tracing them to the products.
T
The company has a Finance Department that has been divided into the following
three sections:
Financial Accounting
Management Accounting
Treasury Section
The Management Accounting section is responsible for handling all the
responsibilities with regards to the cost accounting activities.
The company has also implemented SAP, an Enterprise Resource Planning
System in its effort to computerize the whole system and bring it up to the
standards of its parent company.
The report also gives the format and some samples of various documents listing
the comprehensive cost information.
Hence, this report gives a comprehensive summary of the methods used for the
costing of the products by the company and their analyses.
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ACKNOWLEDGEMENT
he reports at IBA have always been a source to gain insight into the
practical applications of what is taught during the course of the
academic terms. This report is also one of them. It allowed me to realize how
the different concepts that we studied in our Cost Accounting course are
applied practically in business organizations.
T
This report has only been possible under the able guidance of the instructor,
Rao Nisar Ahmed. Without his continuous guidance the report may not
possibly have been what it is now.
I also acknowledge the support and help from Mr. M. Ashraf Bawany, Deputy
General Manager Finance, who helped a lot with the collection of information
for the report.
Last, but not the least, we express our gratitude for our parents who have been
and will be an inspiration at each stage of life.
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THE BOC GROUP PLC
he BOC Group has an international portfolio of companies grouped for
management control and reporting into three business segments. These are
Gases & Related Products, Health Care, and Vacuum Technology & Distribution
Services.
T
BOC adds value to a diverse range of industries and organizations world-wide:
from electronics to food; from water treatment plants to chemical processes; from
pharmaceuticals to sophisticated anesthesia equipment for hospitals and clinics;
from coating most of the world's high-performance glass to distributing food,
clothes and other consumables.
PRODUCTS:
he BOC Group is one of the world's leading producers of industrial gases.
Its major products include the atmospheric gases (oxygen, nitrogen, argon
and the noble gases, neon, krypton and xenon) produced by the separation of air
by plants chiefly of its own design and manufacture. BOC also markets carbon
dioxide, helium, hydrogen and liquefied petroleum gas.
T
In addition, BOC markets dissolved acetylene and a wide range of specialty
gases, medical gases, gas mixtures, and gaseous chemicals.
BOC Gases operates in more than 50 countries around the world, including the
UK, the United States, South Africa, Australia and many Pacific rim countries,
supplying customers with over 20,000 different gases and mixtures.
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BOC PAKISTAN LIMITED
LEGAL STATUS:
he company was incorporated in Pakistan under the Companies Act, 1913
(now Companies Ordinance, 1984), as a private limited Company in 1949
and converted into a public limited Company in 1958. Its shares are quoted on all
the stock exchanges of Pakistan.
T
NATURE OF BUSINESS:
he company is principally engaged in the manufacture of industrial and
medical gases, welding electrodes and marketing of medical equipment.TThe main business areas of the company are:
Industrial Gases
Specialty Gases
Health Care Medical Gases and Equipment
Welding Products
HOLDING COMPANY:
he companys holding company is The BOC Group plc, which is
incorporated in the U.K. and holds 60% of the companys shares. This
includes The BOC Group PLC nominee shareholders. Other foreign shareholding
in the company is about 1.62%.
T
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MARKET SHARE:
he company enjoys the highest market share among its competitors. It has a
market share of around 70%. However, the market share of the company
has been on the decline. Efforts are being made to maintain the high market share
of the company.T
CUSTOMERS:
he company has no authorized retailers. Mostly the company has direct
contact with its customers. The retailers who buy from the company are
also considered as independent customers. Discounts are offered to them but no
legal agreement exists between the company and its retailers.TThe biggest customer of the company is ICI. A plant facility has been established
at Port Qasim to meet the requirements of ICI.
Another plant has been set up at Mehmood Kot solely for PARCO.
COMPUTER SYSTEM:
he company is using the SAP system, which integrates all the functions and
the branches. Previously, the company used a very outdated system known
as Insight. Keeping in view the current requirements and shortcomings of the old
system, the company switched to the SAP system in May 1999. However, till
September 1999 both the systems were running parallel to each other. From
October 1, 1999 the old system has been eliminated.
T
SAP has five modules in all. Out of these, three modules have been implemented
in the company: Financial Information, Materials Management and Sales &
Distribution. The two other modules; Human Resources and
Manufacturing/Production; have not yet been implemented.
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The implementation of SAP has not been fully successful so far. Work is still
being done on it and efforts are being made to utilize the full potential of the
system.
ORGANIZATIONAL STRUCTURE:
usiness strategy determines the structure of the organization. The structure
is also influenced by the culture prevalent in the company.B
STEP 1
nitially the strategy is accumulation of resources. The sole power rests with
the entrepreneur and thus the power culture prevails. The structure is not
formal. The authority lies with the entrepreneur and each employee reports
directly to the entrepreneur. The structure is bureaucratic with the entrepreneur
dictating orders to the employees.
I
STEP 2
s the organization grows, the strategy changes to that of rationalization of
resources. The culture now changes to role culture where the authority
and responsibility are delegated to the functional heads. The structure is
therefore, functional in nature.
A
STEP 3
he organization now feels the need to diversify and hence the strategy is
diversification of resources. The structure is divisional in nature.T
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STRUCTURE AT BOC:
t BOC, the structure is a matrix structure, which is both functional and
divisional in nature. For example, the finance department looks over the
finances of all the three divisions i.e., Industrial Gases, Health Care and Welding.A
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THE FINANCE DEPARTMENT
he Finance Department of the company is located at the Head Office in
Karachi. It handles the financial operations of all the branches. The Finance
Department has been divided into three main sections:
T Financial Accounting
Management Accounting
Treasury Section
The Financial Accounting has been further divided into sub sections:
Bookkeeping
Sales and Stores Accounting
Accounts Payable
This report mentions the working of all these sections and sub sections.
FINANCIAL ACCOUNTING SECTION:
BOOKKEEPING
he bookkeeping section is responsible for maintaining the general ledger of
the company. This is the section that generates monthly reports to be
submitted to the senior management. These reports mention the performance of
the company during the month as compared to the budgeted performance.TSALES AND STORES ACCOUNTING
he sales and stores section is responsible for the inventory management,
management of Accounts receivables and the daily cash reciept documents.
In short, it is responsible for inventory and collections from customers.
T
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ACCOUNTS PAYABLE
he Accounts Payable section is responsible for authorizing all payments
made through checks. The payment advice prepared by the accounts
payable section is given to the cashier for typing the check.
T
TREASURY SECTION:
he main functions of the treasury section relate to the payroll, insurances,
management of workers funds and banking procedures. The treasurysection is also responsible for the reimbursement of petty cash funds. This section
also deals with the income tax and other taxes. In short, the treasury section is a
public dealing section.
T
It has the following responsibilities:
Workers Funds
Banking Procedures
Insurance
Payroll
MANAGEMENT ACCOUNTING SECTION:
he Management Accounting section at BOC was established 10 years back.
It comes under the finance department along with two other sections:
Financial Accounting and Treasury. This section comprises of a team of four
members: management accountant, accounts officer, accounting analyst and
assistant accountant.
T
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There are 11 branches of BOC Pakistan that are distributed among three regions:
South (Karachi, Hyderabad, Sukkur and Quetta), North (Lahore, Multan,
Gujranwala and Faisalabad) and North West (Taxila, Peshawar and Rawalpindi).
The production plants are set up at Karachi, Lahore and Taxila and these three
sites provide gases to the other branches in their respective regions. The other
branches are only sale depots.
The 11 branches of BOC Pakistan send their monthly gases reconciliation
statements to the management accounting section at Karachi so as to reach this
section by the 2nd of each month. The management accounting section then
confirms these statements and prepares a consolidated reconciliation statement
for all these branches.
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THE WORK FLOW
he main raw material for BOC Gases is air, which is decomposed into its
various components and then sold. Hence, the air is passed through various
departments where it is first treated so that it breaks into the different gases it
composes of. Then these gases are passed through several other departments to
treat each gas individually to meet the specifications of the customers.
T
The costs flow along with the gases through the various departments, with the
decomposition department yielding many joint products, the allocation of which
will be discussed later. The most important of these costs is the power cost to run
the machinery for various functions. All the processes at BOC are mechanized
and hence, the quality of the end products is consistent.
Since the gases need to be transmitted from the factories and plants to various
other places like the end consumer, the main loss is from transmission, due to the
highly mobile nature of gas molecules. This will also be discussed later in detail.
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COSTING METHOD
he company uses standard costingfor its variable, fixed, and allocated
costs. Hence, it uses a predetermined rate for all these types of expenses,
and allocates the costs on the basis of these rates. The base used for each element
of cost is the same, that is, quantity. The rates for each element are calculated by
dividing the estimated costs of that element by the expected 100 cubic meters to
be produced. Total costs are estimated for each of the elements of cost (listed in
the next section) to arrive at the total estimated cost for each type of expenses.
Then, the per 100 cubic meter rate is determined for the total material costs, total
variable power costs, total variable costs, fixed power costs, total employee costs,
total maintenance costs, depreciation costs, total fixed costs, each head under the
allocated cost, total allocated costs, and finally, total costs. These rates are used to
allocate costs during the month to the gases for the pricing purposes.
T
Then, at the end of each month, SAP is used to generate cost sheets that lists and
compares the actual and budgeted usage, price, and total and per 100 meter cube
cost of each of these elements. A third column gives the variance in these factors
between the actual and budgeted values. This variance is adjusted into the cost of
sales calculated every month.
This enables the company to have access to timely information, though it may not
be very accurate due to fluctuations in the costs of materials and labor. To
overcome this efficiency, the rates are revised every quarter based on past trends.
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THE ELEMENTS OF COST
The manufacturing costs at BOC come under the following headings:
VARIABLE EXPENSES:
RAW MATERIALS
Caustic Soda
Alumina Pallets
Slica Gel
T. C. E.
Lubricating Oil
Calcium Carbide
Acetone
Rregenetal
Calcium Choloride
Ammonium Nitrate
Direct Chemicals
Other Materials
Water Purchased
Natural Gas
Purchase Gases
Argon for Lamp Mixture
Nitrogen for Lamp Mixture
Nitrogen
Argon
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VARIABLE POWER
Energy Charges
Duty
FAC (Fuel Adjustment Charges)
Economizer Power
FIXED EXPENSES:
FIXED POWER
EMPLOYEE COST
Salary, Wages & Benefits
Temporary Wages
Overtime
REPAIR & MAINTENANCE
Slag Wool
Maintenance Material Building
Maintenance Material P/M
N2 Internal Consumption
Purchase Repair Building
Purchase Repair P/M
DEPRECIATION
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ALLOCATED COSTS:
MAINTENANCE GASES
FACTORY OVERHEAD
HO ENGINEERING COST
These material and conversion costs are added to the gases as they are incurred in
the various departments based on their functions. The materials and labor are
added throughout the process with the labor costs being quite low due to the
mechanization of the processes. The largest expense, thus, is that of fuel and
power to run these machines.
The variable materials included are not exactly the direct materials. The per unit
usage for these materials is not a fixed amount i.e. their usage is not directly
affected by the production volume. This is the reason why their usage is not
specified in the budget as well as in the actual figures. The only major raw
material for the production is air, which is available free of cost. The materials
considered as variable, are those required to keep the plant running. By their
nature they should have been classified under repair and maintenance or factory
overheads. They have been termed as variable due to the fact that their usage is
affected by the production volume to some extent e.g., when the productionvolume is increased by a large amount, the usage of these materials also
increases. However, the lubricating oil classified as variable material in the
operating cost sheet is included under the repair and maintenance in the
production cost report generated by SAP.
The power costs are direct costs, which are in direct proportion with the
production volume. The power costs have also been classified as the variable and
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COST ALLOCATION TO DEPARTMENTS
he company uses departmental allocation for allocating overhead of the
service departments. It allocates these costs using the reciprocal method of
allocation. This method, though, is more time-consuming and more detailed, is
easily put into practice with the use of SAP. The costs of service departments like
Finance and Human Resources (HR) are allocated to each other and to the
manufacturing departments on the basis of resources consumed. These costs are
included under the element of factory overhead in allocated costs.
T
COSTING FOR PERFORMANCE
EVALUATION
ith the help of SAP, the company generates variable costing income
statements for each type of product every quarter to see the contribution
made by each product toward the coverage of fixed expenses. This serves as
critical information for decision-making as well as for performance evaluation.
Even the cost sheets separate the fixed and variable costs to give a clear picture of
the total costs. And this has been possible only through the implementation of
SAP.
W
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ALLOCATING JOINT COSTS
any departments and processes at BOC lead to joint products, especially
the decomposition plant, which has several joint products. The costs of
these processes are allocated on the basis of the estimated net realizable
value. The reason for not using the physical quantities method is that the
values of the gases are inversely proportional to their physical quantities at
the split-off point.
M
This is due to the following reason:
The composition of air is such that it comprises of 78% Nitrogen, 21% Oxygen
and other gases like Hydrogen, Argon, Helium, Carbon dioxide, Krypton and
Xenon make up only 1% of air. Subsequently, the price of Nitrogen and Oxygen
falls between Rs. 20 and 30 per m3 while that of Hydrogen and Argon goes up to
as much as Rs. 200 per m3.
Hence, the company uses the estimated net realizable value for the allocation of
joint costs. Again, though the method can be cumbersome due to the subtraction
of additional processing costs at each split-off point from the sales value, the
company faces no problems in doing so due to the implementation of SAP.
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BUDGETING
he budget is prepared every year for every month. There is a flexible
budget for the variable costs and a fixed budget for the fixed costs. The
flexible budget includes usage, unit price (Average Selling Price - ASP) and total
cost for the variable expenses and the cost of the fixed expenses. The fixed
budget includes only the budgeted cost for the fixed expenses. The budget or the
AP (Annual Plan) is prepared by the management accounting section by mid of
August for the next financial year (Oct. Sep.) and is sent to the BOC UK for
approval. The key figures such as sales, operating profits, etc are reforecast
approximately once every quarter to account for the price fluctuations etc. The
cost budget is just prepared once and is not reforecast. The average selling price
is used because the company sells to the government (Karachi Shipyard and
Engineering Works) at low prices and to the northern areas at higher prices. So
the average selling price is used for reporting to the senior management.
T
VARIANCE:The price variance is calculated as:
Price Variance = UA (PA PB)
The usage variance is calculated as:
Usage Variance = (UA UB) PB
Where:
UA = Actual Usage
UB = Budgeted Usage
PA = Actual Price
PB = Budgeted Price
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A SAMPLE OF QUARTERLY REFORECAST
BOC PAKISTAN LTD
2nd REFORECAST 1999/2000 & ANNUAL PLAN 2000/2001
DETAILS OF COST ELEMENTS
ANNUAL Cum.
Expenditure
Expected TOTAL ANNUAL
PLAN Upto May-Sep 2nd RF PLAN
1999/00 Apr. 2000 2000 1999/00 2000/01
Raw MaterialsCaustic Soda
Alumina Pallets
Slica Gel
T. C. E.
Lubricating Oil
Calcium Carbide
Acetone
Rregenetal
Calcium Choloride
Ammonium Nitrate
Direct Chemicals
Other Materials
Water Purchased
Natural Gas
Purchase Gases
Argon for Lamp Mixture
Nitrogen for Lamp Mixture
Nitrogen .
Argon
Variable power
Energy Charges
Duty
FAC
Economizer Power
Fixed Power
Employee Cost
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Salary,Wages & Benefits
Temporary Wages
Over Time
Repair & Maintenance
Slag Wool
Maint.Material Building
Maint. Material P/M
N2 Internal Consumption
Purchase Repair Building
Purchase Repair P/M
Depreciation
Maintenance Gases
Factory Overhead
HO Engineering Cost
Total
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SPOILAGE AND QUALITY
MANAGEMENT
he only inspection point lies at the beginning when the materials entering
the process are checked to assure that they are up to the required quality
standards. After that, since the processes are mechanized, it is assumed that the
quality is consistent and is up to the levels that the company maintains. The only
source of feedback on quality of the final product is the end consumer.
T
However, the major losses occur while the gases are in transit. These losses are
expensed and shown as losses. The company is all the time trying to minimize
these transmission losses but has not yet been able to eliminate them completely
due to the highly mobile nature of gas molecules.
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PRODUCTION COST REPORTS
he Finance Department, with the help of SAP generates monthly cost
sheets and submits them to the senior management. These sheets show
neither the flow of costs, nor the flow of units. Instead, they list all the actual and
budgeted costs along with the variances for the month.
T
A sample cost sheet is presented below:
COST SHEET
ASU PRODUCTION KARACHI 07-200
April 2000
Volume Actual Budget Var%
VARIABLE
EXPENSESRaw Materials
Caustic Soda
Alumina
PalletsSlica Gel
T. C. E.
Lubricating Oil
Calcium
Carbide
Acetone
Rregenetal
Calcium
Choloride
Ammonium
Nitrate
DirectChemicals
Other Materials
Water
Purchased
Natural Gas
Purchase Gases
Argon for
Lamp Mixture
Nitrogen for
Lamp Mixture
Nitrogen .
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Argon
TOTAL
MATERIALS
Per 100 M3
Variable
power
Energy
Charges
Duty
FAC
Economizer
Power
TOTAL
VARIABLE
POWERPer 100 M3
TOTAL
VARIABLE
COST
Per 100 M3
FIXED
EXPENSES
Fixed Power
Per 100 M3
Employee
Cost
Salary,Wages
& Benefits
Temporary
Wages
Over Time
TOTAL
EMPLOYEE
COST
Per 100 M3
Repair &
Maintenance
Slag Wool
Maint.Material
Building
Maint. Material
P/M
N2 Internal
Consumption
Purchase
Repair
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Building
Purchase
Repair P/M
TOTAL
MAINTEN.COST
Per 100 M3
Depreciation
Per 100 M3
TOTAL
FIXED COST
Per 100 M3
ALLOCATEDCOST
Maintenance
Gases
Per 100 M3
Factory
Overhead
Per 100 M3
HO
Engineering
Cost
Per 100 M3
TOTAL
ALLOCATED
COST
Per 100 M3
TOTAL
COST
Per 100 M3
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costs.
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CONCLUSION
The implementation of SAP has made it easy for BOC Gases to use the most
sophisticated and detailed methods of cost accounting. However, two modules of
SAP have not been implemented so far since they have failed to pass the cost-
benefit analysis test. Besides, its potential for maximizing the efficiency of the
cost accounting practices is not being fully tapped. The reason is that people still
feel more comfortable with the older system and some activities are even being
done manually. Hence, BOC should look into this matter and try to remove the
barriers to maximum efficiency.
A lot of resources are also going waste. For example, the finance department is
overstaffed and a lot of employee costs are being incurred due to idle time.
Hence, the company should also try to check this issue.
One emerging and very popular concept in cost accounting today is activity-
based costing. It lets you identify non-value-added activities, and hence potential
cost saving areas. BOC should conduct a cost-benefit analysis of implementing
this costing and management system, and if the benefits outweigh the costs, it
should try implementing this system for greater profitability.
Overall, the practices and policies of the management accounting department,
also responsible for capital expenditure decisions, are clear-cut and the ones most
beneficial to the company. Another criterion that they must satisfy is the
conformance with the standards maintained by the international BOC Group.
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