Cost Method Used in Appollo Ispat Complex Ltd

8/11/2019 Cost Method Used in Appollo Ispat Complex Ltd

1/34

Report on Cost Method and Technique Application

Report on

"Cost Method used in Appollo Ispat Complex Ltd. "

Prepared For

Ms. Bilkis Akhter

Assistant Professor

Accounting and Information SystemsUniversity of Dhaka


2/34


Letter of Transmittal

January 13, 2014

Ms Bilkis AKhter

University of Dhaka

Department of Accounting and Information Systems

Ramna, Dhaka

Subject:Submission of report on Cost Method used in Appollo Ispat Complex Ltd.

Dear Madam,

Enclosed you will find the summary description of the analysis on the study of

"Cost Method used in Appollo Ispat Complex Ltd."as par assigned by you.

This analysis was carried out for the purpose of understanding the cost method

used in this company and its efficiency in calculation of items in Income

statement . We tried our best and contributed to this cohesive effort as much

as we preserve.

This analysis has cleared our concept of the application of cost method in

one of the manufacturing concern . We thank you cordially for giving us an

opportunity to execute this analysis as a part of our "Advanced Cost

Accounting" course and to acquire these collective understanding. Finally,

we would be honored to have presented this report to you. We hope that

you will accept our effort with your generous benevolence.

Sincerely yours,

MD. Sakib Mehedi

On Behalf of the group "Genesis"

Department of Accounting & Information Systems

Faculty of Business Studies

University of DhakaMonth Day Year


3/34


Group name : Genesis

Members

Name Roll No

Ahmed Rizvan Hasan 17001

MD. Sakib Mehedi 17002

Nazmul Ahsan 17010

MD. Mehrab Khan 17036

Bonnishikha Chowdhury 17047Farhana Akter 17074


4/34


Acknowledgement:

The success and final outcome of this report required a lot of guidance and

assistance from many people and we are extremely fortunate to have got

this all along the completion of our report work. Whatever we have done is

only due to such guidance and assistance and we would not forget to thank

them.

First of all we would express our gratitude to that supreme being without

whom we cannot do anything, our Almighty creator Allah.

We respect and thank our honorable course teacher Ms. Bilkis Akhter, for

giving us this opportunity to carry out this report work and providing us all

support and guidance which enabled us to complete this report on time .

We are extremely grateful to her for providing such a nice support and

guidance.

We owe our profound gratitude to our senior brothers and sisters who

helped us selflessly, till the completion of our report work by providing a lot

of necessary information .We would also like to thank our classmates for

their support and encouragement.

We are thankful to and fortunate enough to get constant encouragement,

support and guidance from all Teaching staffs of Department of Accounting

and Information Systems who helped us in successfully completing our

work. Also, We would like to extend our sincere regards to all the non-

teaching staff of department of Accounting and Information Systems for

their timely support.


5/34


Executive Summary

The purpose of this report is to identify the Cost methods and Cost

techniques in a leading Corrugated Iron Sheet manufacturer Appollo Ispat

Complex Ltd. of Bangladesh. During the study we tried our best to identify

all the Costing method used and Costing technique used within this

corporation. First we have discussed the Costing methods that are available

to be used in traditional and modern cost accounting standpoint. Though

the industry is well known to us as "Dheutin Industry" we tried to elaborate

the activities of this industry from an historical and technical basis. We have

shown the production flow of this company and considering those as cost

centers this entity accumulates its' costs under the Process costing method.The report summarizes all the Costing method and Costing technique used

at one point in manufacturing, inventory management and ultimately in

ascertaining the cost of the product , which seems to be absorption costing

rather than variable costing. We have expressed our stance in the

conclusion paragraph and also provided recommendations which the entity

should follow in the foreseeable future.


6/34


Contents

=> Introduction

=> Reasons behind choosing Costing Method

=> Acquaintance of the company=> Problem Statement

=> Objective of the study

=> Methodology of the study

=> Limitations of the study

=> Outline Of the study

=> History of CI sheet Industry

=> Production Flow of the Entity

=> Stages in Production

=> Structure of the Costing System

=> Cost Accumulation Process

=> Cost Elements of CI sheet

(1) Materials

(i)Direct Material

(ii) Indirect Material

(2) Labor

(3) Factory Overhead(i) Administrative Expenses

(ii) Selling Expenses

=> Ascertainment of Cost of Product

=> Inventory Management System (IMS)

=> Summary of the Cost methods and techniques used

=> Finding of the study

=> Conclusions of the study

=> Recommendations

=> References


7/34


Introduction

Costing is a managerial accounting method that describes when all fixed

and variable costs, including manufacturing costs, are used to compute the

total cost per unit. Full costing includes these costs when computing the

amount of money it takes to produce and distribute one unit of output.

Costing is the technique and process of ascertaining cost. This involves

mainly collecting expenditure; recording and classifying the expenditure

according to the elements of cost. For product or service, cost is assigned

on the basis of allocation and apportionment of the expenditure to the

process or operation (Prasad et al, 1984). Costing ensures two aspects they

are (i) cost management and (ii) cost consciousness. These two factors are

important to the manufacturers for two reasons (i)cost control and (ii)cost

reduction. Successful survival in the market and its expansion or sharing

major market share largely depends on producing quality products at

reasonable costs. However, proper costing system aids in keeping the costs

at competitive level.

Before the Choosing of Cost methods following aspects are important :

(A) Cost Object : Cost object is a tangible input for a product

manufactured /Service provided, like labor or material. For example a clothmanufacturing firm requires some amount of predetermined labor and

predetermined raw material for any amount of cloth being manufactured.

The cost of employing labor can be directly fixed as "per man per hour" or

"per man per day per hour per minute per annum", so the labor is a cost

object as we can directly associate cost with it. Similarly the raw material

like cotton or threads or fabric can be another cost object. Other examples

may include services provided by another firm, for example a

transportation company/ courier company can offer some service to all

customers at afixed rate.so the cost can be directly associated with it andthe company/service can be then called as cost object.
http://en.wikipedia.org/wiki/Flat_ratehttp://en.wikipedia.org/wiki/Flat_rate


8/34


(B) Cost Center :A cost center is part of an organization that does notproduce direct profit and adds to the cost of running a company. Examples

of cost centers include research and development departments, marketing

departments, help desks and customer service/contact centers.

Although not always demonstrably profitable, a cost center typically adds

to revenue indirectly or fulfills some other corporate mandate. Money

spent on research and development, for example, may yield innovations

that will be profitable in the future. Investments in public relations and

customer service may result in more customers and increased customer

loyalty. Because the cost center has a negative impact on profit (at least on

the surface) it is a likely target for rollbacks and layoffs when budgets are

cut. Operational decisions in a contact center, for example, are typically

driven by cost considerations. Financial investments in new equipment,technology and staff are often difficult to justify to management because

indirect profitability is hard to translate to bottom-line figures.

Business metrics are sometimes employed to quantify the benefits of a cost

center and relate costs and benefits to those of the organization as a

whole. In a contact center, for example, metrics such asaverage handle

time,service level andcost per call are used in conjunction with other

calculations to justify current or improved funding.

(C) Traceability of cost :The relationship of costs to cost objects canbe exploited to help increase the accuracy of cost assignments. Costs are

directly or indirectly associated with cost objects. Indirect costs are costs

that cannot be traced easily and accurately to a cost object. Direct costs are

those costs that can be traced easily and accurately to a cost object. For

costs to be traced easily means that the costs can be assigned in an

economically feasible way. For costs to be traced accurately means that the

costs are assigned using a causal relationship. Indirect costs cannot be

economically traced to the cost object but instead are allocated to the costobject.
http://searchcrm.techtarget.com/definition/contact-centerhttp://searchcrm.techtarget.com/definition/average-handle-timehttp://searchcrm.techtarget.com/definition/average-handle-timehttp://whatis.techtarget.com/definition/service-levelhttp://searchcrm.techtarget.com/definition/cost-per-callhttp://searchcrm.techtarget.com/definition/cost-per-callhttp://whatis.techtarget.com/definition/service-levelhttp://searchcrm.techtarget.com/definition/average-handle-timehttp://searchcrm.techtarget.com/definition/average-handle-timehttp://searchcrm.techtarget.com/definition/contact-center


9/34


(D) Different Cost Methods

(1) Job order costing: Job order costing orjob costing is a system for

assigning manufacturing costs to an individual product or batches of

products. Generally, the job order costing system is used only when the

products manufactured are sufficiently different from each other. Since

there is a significant variation in the products manufactured, the job order

costing system will create a job cost record for each item, job or special

order. The job cost record will report the direct materials and direct labor

actually used plus the manufacturing overhead assigned to each job.

An example of an industry where job order costing is used is the building

construction industry since each building is unique. The manufacturers of

custom equipment or custom cabinetry are also examples of companies

that will keep track of production costs by item or job.

The job cost records also serve as the subsidiary ledger or documentation

for the cost of the work-in-process inventory, the finished goods inventory,

and the cost of goods sold.

(2) Process Costing :Process costing is a system of accumulating costs of

production by department or cost center. Process costing is a accounting

methodology that traces and accumulatesdirect costs, and

allocatesindirect costs of a manufacturing process. Costs are assigned to

products, usually in a large batch, which might include an entire month's

production. Eventually, costs have to be allocated to individual units of

product. It assigns average costs to each unit, and is the opposite extreme

ofJob costing which attempts to measure individual costs of production of

each unit. Process costing is usually a significant chapter. it is a method of

assigning costs to units of production in companies producing large

quantities of homogeneous products.
http://en.wikipedia.org/wiki/Direct_costhttp://en.wikipedia.org/wiki/Indirect_costhttp://en.wikipedia.org/wiki/Job_costinghttp://en.wikipedia.org/wiki/Job_costinghttp://en.wikipedia.org/wiki/Indirect_costhttp://en.wikipedia.org/wiki/Direct_cost


10/34


(3) Activity Based Costing (ABC method) : Activity based costing(ABC) assigns manufacturing overhead costs to products in a more logical

manner than the traditional approach of simply allocating costs on the basis

of machine hours. Activity based costing first assigns costs to the activities

that are the real cause of the overhead. It then assigns the cost of thoseactivities only to the products that are actually demanding the activities. It

is based on levels , types and necessity of costs :


11/34


(4) Standard Costing: Standard costing is an important subtopic of cost

accounting. Standard costs are usually associated with a manufacturing

company's costs of direct material, direct labor, and manufacturing

overhead. Rather than assigning the actual costs of direct material, direct

labor, and manufacturing overhead to a product, many manufacturersassign the expected or standard cost. This means that a manufacturer's

inventories and cost of goods sold will begin with amounts reflecting the

standard costs, not the actual costs, of a product. Manufacturers, of course,

still have to pay the actual costs. As a result there are almost always

differences between the actual costs and the standard costs, and those

differences are known asvariances.

Standard costing and the related variances is a valuable management tool.

If a variance arises, management becomes aware that manufacturing costs

have differed from the standard (planned, expected) costs.

If actual costs are greater than standard costs the variance is

unfavorable. An unfavorable variance tells management that if

everything else stays constant the company's actual profit will be less

than planned.

If actual costs are less than standard costs the variance is favorable. A

favorable variance tells management that if everything else stays

constant the actual profit will likely exceed the planned profit.

The sooner that the accounting system reports a variance, the sooner thatmanagement can direct its attention to the difference from the planned

amounts.

(5) Direct Costing:Direct costing is a specialized form of cost analysis

that only uses variable costs to make decisions. It does not consider fixed

costs, which are assumed to be associated with the time periods in which

they were incurred. The direct costing concept is extremely useful for

short-term decisions, but can lead to harmful results if used for long-termdecision making, since it does not include all costs that may apply to a

longer-term decision. Also known as Contribution costing, Marginal costing

and Variable Costing.
http://www.accountingcoach.com/terms/S/standard-costhttp://www.accountingcoach.com/terms/V/variancehttp://www.accountingcoach.com/terms/V/variancehttp://www.accountingcoach.com/terms/S/standard-cost


12/34


(6) Absorption Costing :Absorption costing means that all of the

manufacturing costs are absorbedby the units produced. In other words,

the cost of a finished unit in inventory will include direct materials, direct

labor, and both variableandfixed manufacturing overhead. As a result,

absorption costing is also referred to as full costing or the full absorptionmethod.

Absorption costing is often contrasted with variable costing or direct

costing. Under variable or direct costing, the fixed manufacturing overhead

costs are not allocated or assigned to (not absorbed by) the products

manufactured. Variable costing is often useful for management's decision-

making. However, absorption costing is required for external financial

reporting and for income tax reporting.


13/34


Reasons Behind Choosing Costing Method

Determining the costs :

The primary objective of choosing a cost method is to calculate the items in

Income Statement appropriately and efficiently.

Budget control:

In order to improve one's businesss efficiency, it is imperative to control

and reduce costs as much as possible. This allows the elimination of

unnecessary services and products or the sourcing of a cheaper alternative.

And the cost method chosen should be able to dictate the alternatives.

Laws and regulation:

Sometimes the law or regulation dictates the alternative to choose costmethod. Within the mandatory disclosure of detailed information this

method should be implied.

Improving a companysefficiency:

Efficiency is measured in all sectors of a business. The costing method

should assists in introducing a broad understanding of the efficiencies and

inefficiencies of manufacturing operations. By discovering errors and

ineffective components quickly, we can correct the problem and prevent

reoccurrences.

Determining selling prices:

Through efficient costing method, information is categorized into different

sectors, allowing one to browse the details in a structured format. From

that, we can easily evaluate what the ideal selling price for our services or

products are.

Operations management:

By efficiently analyzing the operations, the costing method should dictate

changes or policy corrections to enhance the profitability of the workproduction process.


14/34


Acquaintance of the Company

Appollo Ispat Complex Limited produces corrugated and galvanized sheets.

The company offers hot and cold rolled coils, and galvanized sheets/coils. It

markets its products in Bangladesh and internationally. The company was

incorporated in 1994 and is headquartered in Dhaka, Bangladesh. Appollo

Ispat Complex Limited operates as a subsidiary of Appollo Group.

The Company is engaged in manufacturing and selling of CI (Corrugated

Iron) Sheet at different thickness, ranging from 0.120mm to 0.420mm,

which is marketed mainly in rural and semi-urban areas of Bangladesh

under its well established brand "Rani Marka Dheutin.It has a Public offer

of 100,000,000 ordinary shares of Tk. 10/- per Share at an issue price of Tk.

22/- each, including a premium of Tk. 12/- per share totaling to Tk.

2,200,000,000/-

Basic Capital Structure of The Company :


15/34


Problem Statement

The problem of this study is to find out the cost method and technique

used in this entity and their efficiency in accumulating , allocating and

distributing costs .

Objective of the study

In line with the research topic, the basic objective of the study is to

evaluate costing system and operation procedure of the Appollo Ispat

Complex Ltd. To achieve the aim of the research, the study will seek to

answer the two following questions:

(a) What is the manufacturing process of CI Sheet and Ridge? .

(b) How costs are accumulated in the functional areas?


16/34


Methodology of the studyBasically, this study analyses data from secondary sources only . Apart from

the review of relevant cost accounting literatures, the study has analyzed

the manufacturing process and cost accumulation in the cost centers.

However, the methodology used in this study is largely qualitative and

explorative rather than quantitative and precise . The main sources of

secondary data were the Prospectus and Annual Reports of Appollo Ispat

Complex Ltd., operation manual, cost accounting records etc. Besides,

various records and documents maintained by the company, related books

and journals and relevant websites were also reviewed. The collected data

and information have been processed manually and report in the present

form has been prepared in order to make the study more informative,

analytical, and useful for the users.

Limitations of the StudyThe main limitation is that due to non-accessibility to primary information

we had to rely on the secondary information . As par instructions given to

us the study is limited to a single CI Sheet and Ridge manufacturing

company, Appollo Ispat Complex Ltd which is not unique in its field as well.

As a result comparison between two or among more manufacturers in the

similar product line was not possible.

Outline of the Study

To achieve the general objective and the specific questions of the study

there are more sections in addition to introduction and conclusion. Firstly,

the study will highlight the production flow, structure of costing system and

cost accumulation process. Secondly, cost elements of CI sheet will be

mentioned and then to be discussed ascertainment of cost of product.

Finally, recommendations follow the findings of the study.


17/34


History of CI sheet Industry

Corrugated galvanized iron or Corrugated iron (abbreviated as CGI or CI) is

abuilding material composed of sheets ofhot-dip galvanizedmild

steel,cold-rolled to produce a linear corrugated pattern in them. Thecorrugations increase the bending strength of the sheet in the direction

perpendicular to the corrugations, but not parallel to them. Normally each

sheet is manufactured longer in its strong direction.

CGI was invented in the 1820s in Britain by Henry Palmer, architect and

engineer to the London Dock Company. It was originally made (as the name

suggests) fromwrought iron. It proved to be light, strong,corrosion-

resistant, and easily transported, and particularly lent itself to prefabricated

structures and improvisation by semi-skilled workers. It soon became a

common construction material in rural areas in the United States, Chile,

New Zealand and Australia and later India, and in Australia and Chile also

became (and remains) a common roofing material even in urban areas. In

Australia and New Zealand particularly it has become part of the cultural

identity, and fashionable architectural use has become common.

For roofing purposes, the sheets are laid somewhat like tiles, with a lateral

overlap of one and half corrugations, and a vertical overlap of about 150millimeters (5.9 in), to provide for waterproofing. CGI is also a common

construction material for industrial buildings throughout the world.

Wrought iron CGI was gradually replaced bymild steel from around the

1890s, and iron CGI is no longer obtainable but the common name has not

been changed. Galvanized sheets with simple corrugations are also being

gradually displaced by 55% Aluminum-Zinc coated steel orcoil-

painted sheets with complex profiles. CGI remains common.

The manufacturers of Corrugated Iron Sheet in Bangladesh have taken the

advantages of costing system for reducing production cost. This has

facilitated to make the CI Sheet cheaper and available for building wooden

and semi-pucca houses mostly in the rural area of Bangladesh. Until 1987,

people had to depend on imported CI sheet. Statistics shows that the use of
http://en.wikipedia.org/wiki/Abbreviationhttp://en.wikipedia.org/wiki/Building_materialhttp://en.wikipedia.org/wiki/Hot-dip_galvanizinghttp://en.wikipedia.org/wiki/Mild_steelhttp://en.wikipedia.org/wiki/Mild_steelhttp://en.wikipedia.org/wiki/Work_hardeninghttp://en.wikipedia.org/wiki/Wrought_ironhttp://en.wikipedia.org/wiki/Corrosionhttp://en.wikipedia.org/wiki/Mild_steelhttp://en.wikipedia.org/wiki/PPGIhttp://en.wikipedia.org/wiki/PPGIhttp://en.wikipedia.org/wiki/PPGIhttp://en.wikipedia.org/wiki/PPGIhttp://en.wikipedia.org/wiki/Mild_steelhttp://en.wikipedia.org/wiki/Corrosionhttp://en.wikipedia.org/wiki/Wrought_ironhttp://en.wikipedia.org/wiki/Work_hardeninghttp://en.wikipedia.org/wiki/Mild_steelhttp://en.wikipedia.org/wiki/Mild_steelhttp://en.wikipedia.org/wiki/Hot-dip_galvanizinghttp://en.wikipedia.org/wiki/Building_materialhttp://en.wikipedia.org/wiki/Abbreviation


18/34


CI sheet rose to 4.85 lakh tons in 1999 which was 1.00 lakh metric tons in

1987. To meet up this huge demand, production of CI sheets in private

sector began in 1987 and expanded rapidly in recent times (BOI, 2003).

Moreover, CI sheets have already been exported to Middle East, Sri Lanka,

Singapore, China and other African countries. Appollo Ispat Complex, aleading corrugated iron sheet manufacturer in Bangladesh, has designed

and applied costing system in the production process to minimize costs.

Depending on the nature of production cycle, the company has adopted

process costing technique. Cost accumulation and its analysis are important

to reduce wastage, misuse and attain efficiency in production level.

Therefore, a number of cost centers have been established for

accumulation of costs incurred during the processing of raw material to the

final product. Using costing technique, the company has achieved

operational efficiency at production arena and it sells its products atreasonable price. However, in addition to social contribution, this industry

is also contributing economy by employing a large number of people and

paying a huge amount of VAT and IT to the National exchequer in every

year.


19/34


Production Flow of the Entity

In the manufacturing process, a product usually passes a number of stages

for its final shape. Operational layout largely depends on the nature of

product. Appollo Ispat Complex Ltd has installed two automatic plants thathave minimized the cost of CI Sheet. Total production capacity of first plant

is 60,000 metric tons and second plant is 80,0000 metric tons per year. At

present both plants are in operation. Major production flows are as follows:


20/34


Figure : Conclusive Process Flow Chart


21/34


Stages in Production

(1) Uncoiling :First stage of production flow is uncoiling. That is, foldedCold Rolled (CR) coil, which is imported or locally produced, is unfolded for

running the operation.

(2) Washing : Washing is second stage of operation in which unfolded

sheet is passed through liquid chemical for cleaning. Cleaning is important

for removing corrosion or unwanted materials.

(3) Galvanizing :When sheet is cleaned, it is passed through a zinc pot,

which is third stage known as galvanizing. Zinc pot is a pot in which zinc

ingot and other metals such as tin ingot, lead ingot etc. are melted. When a

sheet is passed through the pot it is coated with melted metals. Galvanizing

protects CI sheet from ferrous oxide.

(4) Re-coiling: After galvanizing the sheet, it is further recoiled. It is fourth

stage of operation and is done for maintaining continuation of the

production.

(5) Shearing: According to market demand, recoiled sheet is sheared

which is fifth stage of operation. Shearing is nothing but making pieces at

different sizes.

(6) Corrugation :Final stage is corrugation. Sheared sheet is corrugated

for making it strong and heavy. After corrugation it is known as Corrugated

Iron (CI) Sheet and ultimately this is the final product. Ridge is nothing but

galvanized sheet rather it is corrugated at different shapes.


22/34


Structure of the Costing System

The ultimate objective in cost accounting is to produce accurate and

meaningful figures for the cost of goods sold. These can be used forpurposes of control and analysis and are eventually matched against

revenue produced in order to determine operating income (Matz, et al,

1996). Certainly, cost management and cost consciousness are important

issues for all manufacturing concerns. Both factors assist the organization

to successfully surviving in the competitive market. However, development

of proper costing system is key to any producers. In this context, Appollo

Ispat Complex Ltd. has designed costing system for production process and

has been applying accordingly. Major cost drivers in costing system are

material, labor and Factory overhead.

Cost Accumulation Process

For maintaining cost records and accounting for, cost accumulation process

is undoubtedly significant for the producers in order to control and for

analytical purpose. Though Appollo Ispat Complex Ltd. has establisheddifferent cost centers for accumulation of cost, it is observed that costs

incurred at different cost centers are maintained centrally at great extent

i.e. costs are not gathered and recorded in cost centers properly. As a result

responsibility assignment and performance assessment are not possible.

However, the following cost records are maintained for accumulation of

costs and accounting purpose:

(1 )Material Control Ledger

(2)Labor Control Ledger

(3)Overhead Control Ledger

(4)Work In Process Ledger

(5)Inventory Ledger

(6 )Cost of goods sold Ledger


23/34


Cost Elements of CI sheet

Cost elements of CI Sheet comprise of core raw materials, which are CR

coil, and Zinc Ingot, Labor and Factory Overhead. More details have been

discussed in the following paragraphs.

(1) Materials

Major materials of CI Sheet are mainly imported from different countries.

Appollo Ispat Complex usually procures Cold Rolled coil (BP Sheet) and Zinc

Ingot from abroad. Chemical and some other slow items are procured from

local market. Basically, two types of raw materials are used for finished

products viz. direct material and indirect materials.

(i)Direct Material

Direct materials are prime cost drivers for manufacturing any products.

Direct materials are all materials that form an integral part of the finished

product and that can be included directly in calculating cost of the product

(Matz et al , 1996). Other two cost drivers i.e. labour and factory overhead

are used for conversion of raw materials into finished goods. So, these two

elements are collectively known as conversion cost. Composites of direct

materials are as follows :

(a) Cold Rolled (CR) Coil.

(b) Zinc Ingot.


24/34


Figure-1 : Cost of Raw Materials (CR Coil) :

Serial Number Constituents of Material Cost Amount

01

02

03

CIF Value ($ 500 @ Tk. 68)

Duty (11% of Assessment Value)

Other Import Duty (3.50%)

34,000.00

3,740.00

1,190.00

Landed Cost Per Metric Ton

Add: Loss on Hot Rolled (HR)

Material Cost Per Metric Ton

38,930.00

1,600.00

40,530.00

Figure-2 : Landed Cost of Raw Materials (Zinc Ingot) :

Serial

Number

Constituents of Material Cost Amount

01

02

03

C&F Value ($ 500 @ Tk. 68)

Value Added Tax ( Based on assessment value)

Transportation

1,36,000.00

25,160.00

3,400.00

Landed Cost Per Metric Ton 1,64,560.00

Figure-3 : For producing one metric ton CI sheet of different thickness,

proportion of zinc ingot consumption is as follows:Thickness Consumption of Zinc Ingot

0.18 mm 90 kgs

0.20 mm 80 kgs

0.22 mm 75 kgs

0.25 mm 70 kgs

0.28 mm 70 kgs

0.35 mm 65 kgs

0.40 mm 60 kgs

0.46 mm 50 kgs


25/34


(ii) Indirect Material

Indirect materials are those materials needed for the completion of a

product, but the consumption of which is so minimal or so complex that

treating them as direct materials is futile (Matz et al , 1996). Approximately,

Tk. 500 is spent for indirect materials to produce one metric ton CI Sheet.

Constituents of indirect materials are mentioned below:

(a) Chromic Acid

(b) Caustic Soda

(c) Hydrochloric Acid

(d) Tin Ingot

(e) Lead Ingot

(2) Labor

Direct labor is labor expended to convert direct materials into the finished

product. It consists of employees wages, which can feasibly be assigned to

specific product (Matz et al, 1996). Both skilled and unskilled labors are

worked in factory. Time Paunch Card is used for calculation of normal pay

and overtime. When a worker enters into and leaves the factory, he/she

just paunch his/ her card in the machine, it automatically calculates normaltime and overtime. Wages are paid monthly basis i.e. almost all workers

are permanent.


26/34


(3) Factory Overhead

Factory overhead is generally defined as indirect materials, indirect labor,

and all other factory expenses that cannot conveniently be identified nor

charged directly to specific products. Unlike direct materials and directlabor, factory overhead is an invisible part of the finished product. There is

no material requisition or labor time ticket to indicate the amount of

overhead (Matz et al, 1996). Control wise factory overhead is usually two

types viz. fixed factory overhead and variable factory overhead but there

are some other costs, which are known as semi-variable that are

segregated according to nature of costs. Though segregation of overhead is

indispensable for control purpose, Appollo Ispat Complex Ltd. does not

segregate its factory overhead by nature. Rather, it treats all accumulated

costs incurred in factory as factory overhead. Depreciation is major share of

factory overhead.

(i) Administrative Expenses

Administrative Division of an organization is responsible for formulating

policies, directing the organization in the desired direction and controlling

the operations and expenses (Basu et al ,1984). As a functional unit,administrative division usually incurs some expenditures which are not

considerable for cost control because of volume of cost.

(ii) Selling Expenses

Dhaka's Naya bazar is a big market for CI sheet, plain sheet and GP(General

Precision ) sheet. Whole country is connected with this place. The company

has a strategic sale office at this place which facilities major volume ofsales. This office receives orders from the wholesaler and retailers and

issues Delivery Order (DO) against factory for delivery of CI sheet and ridge.

Approximately, Tk. 2,000 or 2,200 is spent as administrative and selling

expenses for one metric ton CI Sheet.


27/34


Ascertainment of Cost of Product

Type of CI sheet is measured by thickness. Different thicknesses and even

same thickness in different sizes are produced according to marketdemand. Usual thickness is 0.18 mm, 0.20 mm, 0.22 mm, 0.25mm, 0.28mm,

0.35mm, 0.40mm, and 0.46mm. Sizes are 6 feet, 7 feet, 8 feet, 9 feet, and

10 feet. However, 0.18 mm CI sheet covers 60% of total sales. In this study

we consider only one thickness category i.e.0.18 mm for ascertaining cost

of product. In this line at first the company calculates landed cost of

imported materials mentioned earlier. Usually, cost information is

extracted from various cost control ledgers. First, this section has

highlighted cost flow and finally mathematical presentation of total cost of

producing one metric CI Sheet.

Cost Of Cold Rolled Coil

Cost of Zinc Ingot

Factory Overhead

Administrative and Selling Expenses

VAT on sales

Cost Driver

Cost Driver

Cost Driver

Cost Driver

Cost Driver

Total Cost

of Sheets

Cost Flow


28/34


Details Amount (In Metric Ton)

Cost of CR Coil

Cost of Zinc Ingot

Factory Overhead

Administrative & Selling Overhead

Vat on Sales

Total Cost of CI Sheet

41,030.00

8,000.00

1,900.00

2,200.00

8,400.00

61,030.00

Figure-4

Note: Labor cost is included in factory overhead because payment for labor

is fixed in nature.

Inventory Management System (IMS)

Inventory management is vital for any organizations, as it has direct impact

on the income statement and Balance Sheet. Proper inventory

management not only aids in determining correct profit but also shows

accurate assets in the Balance Sheet. Under or over valuation of inventory

has negative effect on the companys overall performance. Appollo Ispat

Complex Ltd. follows perpetual weighted average method for recording and

valuation of its inventory and it has been continuing years together. Work

In Process is valued on lump sum basis. Inventories at the year-end are

consisted of the following:

(a) Raw materials (CR Coil and Zinc Ingot)

(b) Work-in-Process (Semi-finished CI Sheet)

(c) Finished Goods (CI Sheet and Ridge)(d) Maintenance supplies and Stores and Spare Parts

(e) Loose Tools


29/34


Summary of the Cost Methods and Techniques

Used

(1) Appollo Ispat Complex Ltd. uses process costing for cost accumulation in

the manufacturing process.

(2) The company has separate costing department . This department

maintains proper costing records and follows proper costing procedure

under the supervision of a professional Cost Accountant.

(3) Standard costing is not used in the production level .

(4) Fixed cost is not absorbed fully due to under utilization of the plant

capacity.

(5) No budgetary control in the procurement and production.

(6) Costs are not gathered and recorded in cost centers properly as there is

a tendency to accumulate the cost centrally .

(7) Absorption Costing Method is used .

(8) Appollo Ispat Complex Ltd. does not segregate its factory overhead by

nature. Rather, it treats all accumulated costs incurred in factory as

factory overhead.(9) Appollo Ispat Complex Ltd. follows perpetual weighted average method

for recording and valuation of its inventory.

(10) Work In Process is valued on lump sum basis.


30/34


Finding of the Study

(1) For each element of cost involved in product, standard has to be

established for cost control and cost reduction(Basu et al, 1989). However,standard cost for raw material, labor, and overhead for producing CI sheet

are indispensable for controlling operational costs. The type of

standard(current, basic or normal) needs to be chosen for effective cost

control. While reviewing the raw material element it is found that no

standard is set for material price and usage. As the company does not set

standard for material price and usage and even does not prepare any

procurement plan(budget), so calculation of material variance and analysis

of such variance is not possible. But this is essential for cost control and

cost reduction. Similarly, there is no standard time and rate for labor even,

no standard for labor efficiency measurement However, effective cost

control is not possible in Appollo Ispat Complex without standard costing

system.

(2) For setting standard costs for overheads, the overhead expenses need

to be categorized into (i) variable overheads and (ii) fixed overheads.

Company usually segregates overhead expenses as variable overheads and

fixed overheads but has not set any standard variable overhead rate per

unit or per hour. Even it does not prepare any budget for variable and fixed

factory overhead. Rather, overhead is charged to the product according to

product volume i.e. the product which is produced more; major share of

overhead is charged to that product without considering the nature of

factory overhead costs. Moreover, cost control in cost centre wises are notpossible because lump sum costs are charged in cost centers.

(3) Budget is one of the tools of securing reliable and prompt information

regarding the operation and control of an enterprise. Although the

organization procures a large volume of raw material in every year, it has


31/34


no budgetary control in procurement and even has no procurement and

production plan. Accounts are not classified for proper determination of

variances. However, without budget, control in procurement and

production process is impossible.

(4) Full fixed cost absorption is only possible when plant is operated at full

capacity. During the study, it is observed that from starting of commercial

operation to till-date, the plant is not operated at full capacity. As a result

huge amount of overhead cost does not match with volume of production

and increases the cost of the product. But there is no complexity of under

or over application of Factory overhead control.

(5) Product diversification is necessary to cover major market share. That is,

colored CI Sheet, different designed corrugated sheets should have been

incorporated in the product line as because these have huge demand in the

market. Moreover, Appollo Ispat Complex has not yet incorporated any

diversification in the product line.


32/34


Conclusions of the study

In an open market economy cost management and cost consciousness are

focal issues to the manufacturers. It is evident that the manufacturers who

are aware of cost reduction by using costing technique have becomemarket leaders. CI sheet industry in our country has already substituted

import and even entered in the foreign market. This has been possible to

produce quality product at competitive price. Particularly, in the CI sheet

industry, Appollo Ispat Complex Ltd. has got wide reputation and has large

market share. Its' costing system, maintenance of cost records and cost

analysis are really remarkable. Moreover, its' costing department is strongly

supervised by a professional cost accountant. Though it has matched its

costing system to the production flow , still cost is not accumulated

according to cost centers. Moreover, it has not developed any standard for

cost drivers. Due to weakness of traditional costing system, however, in

recent years, activity based costing method has been emerged as new

costing system, which measures the cost and performance activities and

cost objects. So, it is expected that ABC system would replace traditional

cost system and CI sheet industry in Bangladesh would follow this to bring

more efficiency in the uprising industry.


33/34


Recommendation

(1) Standard cost systems aid in planning and controlling operation.

Standard setting for material, labor, and overhead leads to gainingoperational efficiency. However, the organization should establish standard

cost system and follow it properly.

(2) Budgetary control is important issue for cost control. In the regard the

company should prepare long-term, mid-term and short-term strategic

plan. According to plan, operational budget should be prepared i.e. budget

for production, expenses and sales. However, for control purpose actual

performance should be compared with budget and corrective actions

should be taken.

(3) Fixed cost absorption is an important factor for managerial decision. It

depends on the capacity level of operation. In order to absorb full fixed

plant should be operated maximum capacity level.

(4) Product diversification is necessary to cover major market share. That is,

colored CI Sheet, and other different shaped products should be

incorporated in the product line as because these have huge market

demand.

(5) A broad featured Activity Bases Costing Method should be designed and

implemented to accommodate with the changing business perspective .


34/34


References

(1) Prospectus and Annual Report of Appollo Ispat Complex Ltd.

(2) Cost Accounting - Foundations and Evolutions 8th ed - M. Kinney, et al.,(Cengage, 2011)

(3) Cost Management - Accounting and Control 6th ed - D. Hansen, et al.,

(Cengage, 2009)

(4) Cost Accounting Concepts and Application for Managerial Decision

Making 3rd ed- Polimeni et al., (Mcgraw Hill, 1991)

(5) Basu, P., S., and Das, M. (1996), Theory and Practice of Costing,

Volume-2: Robindra Nath Biswas, Rabindra Library.

(6)Matz, A. and Usry, M.,F. (1996) Cost Accounting, Planning and Control.

Cincinnati: South-Western Publishing Co.

(7) Wikipedia.com

(8) Investopedia.com

(9) Board of Investment Bangladesh

Date post:	02-Jun-2018
Category:	Documents
Upload:	sourovkhan
View:	226 times
Download:	0 times

Cost Method Used in Appollo Ispat Complex Ltd

Documents