Report On Quasem Drycells Ltd. (accounting Procedures)

Cost Accounting System of Quasem Drycells Limited

Abstract There are mainly three drycell battery manufacturers in Bangladesh. So, there is a strong competition among these companies to better serve the market. As an industry, drycell is facing crisis like jute industry for many reasons. Our analysis shows that the cost accounting system of Quasem Drycells Limited serves as managerial control tool. As an ISO Certified Company it maintains adequate sources of documents. For the convenience of the company, it follows non integral system of recording. The company follows mixture of Activity Based Costing System and plant wide rate. They should follow an appropriate cost Allocation System which will be economically feasible in decision making.

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Cost Accounting System of Quasem Drycells Limited

Introduction Any academic course of the study has a great value when it has practical application in the real life. Only a lot of theoretical knowledge will be little important unless it is applicable in the practical life. So we need proper application of our knowledge to get some benefit from our theoretical knowledge to make it more fruitful. When we engage ourselves in a practical field to make proper use of our knowledge, it benefits us in our practical life. To gather real world knowledge we are assigned to visit a manufacturing industry. So we have selected Quasem Drycells Limited which is the largest drycell battery manufacturing & first ISO certified company in Bangladesh of its kind. The journey started in June 14, 1980, where the company brought a new era of modern battery manufacturing technology in Bangladesh.

Title of the Report: The Title of the report is “Cost Accounting System of Quasem Drycells Limited”.

Objective of the Report: The prime objective of the report is to understand the “Cost Accounting System” of Quasem Drycells Limited as well as the methodology and process adopted in conducting day to day business as a manufacturing organization. Besides these, the report has been composed to obtain the following objectives: •

To bridge between theory and practice.

•

To evaluate the performance of QDL in respect of the cost accounting system.

•

To show the cost accounting system of QDL.

•

To analyze cost accounting techniques used by QDL.

•

To justify the cost accounting system.

•

To determine the drawbacks of the existing system.

•

To recommend some guidelines to improve the efficiency and effectiveness.

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Cost Accounting System of Quasem Drycells Limited

Methodology Used: Sources of Information: Primary data We have collected the primary information regarding the cost accounting system of QDL by interviewing through directly communicating with the responsible executives of the accounts department. Therefore; primary information is considered in the following manner. We have made personal interviews and tried to extract our desired information. Following are some of the papers we have received: •

Product wise profit & loss account; Production & sales statement; Materials used for production.

•

Schedule of unit wise direct labour and factory overhead allocation.

•

Schedule of operating expenses.

•

Schedule of direct labour and overhead.

•

Schedule of administrative expenses.

•

Schedule of selling expenses.

Secondary data: Sources of secondary information are: i) Annual Report, and ii) Web site of QDL.

Limitation of the Study:   

 

Lack of availability of data Improper combination among various departments Time is a limitation that would mostly with stands a comprehensive study on the topic selected. Up-to-date information were not available Don’t give the data from their source document

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Cost Accounting System of Quasem Drycells Limited 

Unwilling to give information more because of extra harassment without their responsibility.

COMPANY PROFILE

Quasem Group Quasem Group is a leading Industrial & Trading House in Bangladesh. History of Quasem Group dates back to 1950 when the Group started its business with international trading in jute. Within a span of four decades the Group expanded its business and industrial activities widely, which at present covers production of yarn, weaving and finishing of fabrics, manufacturing of drycell batteries, zinc callots, electrical bulbs and gas lighters. The Group consists of the following industrial units:  Quasem Drycells Limited  Quasem Zinc Limited  Quasem Lamps Limited  Quasem Textile Mills Limited  Quasem Silk Mills Limited  Quasem Rotor Spinning Mills Limited  Sunlite Trading & Services Limited  Quasem Food Products Limited  Quasem Cotton Mills Limited  Quasem Foundation  Quasem Power Generation Limited  Mukul Brothers Limited

About Quasem Drycells Limited Quasem Drycells Limited is the largest drycell battery manufacturing & first ISO certified company in Bangladesh of its kind. The journey started in June 14, 1980, where the company brought a new era of modern battery manufacturing technology in

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Cost Accounting System of Quasem Drycells Limited Bangladesh. And now it is representing as a pioneer company in teams of Dry Cell Manufacturing, where it has successfully established its ‘SUNLITE’ brand as a leader in the drycell industry. Quasem Drycells Limited (QDL) is a public limited company and it is listed in the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE), and both these exchanges have ranked QDL as a blue chip company by qualifying for the DSE top 20 and the CSE top 30 list in the year 2002. QDL has established itself as a producer of quality and this image is reflected in the price premium enjoyed by its brand, SUNLITE. The sponsors of QDL have continually upgraded the drycell production plan and have invested in developing capacity for the company with a vision to be a leading industrial enterprise in Bangladesh.

Management Quasem Drycells Limited, a concern of QUASEM GROUP, is mainly operated by its Managing Director, Mr. Tasvir UI Islam, the youngest son of late Mr. Abul Quasem, who was the founder Chairman of the entire Group. Mr.Tasvir UI Islam completed H.N.D. (Business Studies) from UK & B.S. (Business Administration) from USA. In 1980, he joined in Quasem Drycells Limited (QDL) as a Director. Since then he has been involved in the Management of QDL till 1997 when he was elected as the Managing Director of the Company. The Management of QDL is operated by skilled professional executives and it adopted ISO 9002 in the year 2001 for implementation of the Quality Management in the organization which was updated to ISO 9001:2000 in the year 2003. The Management is using different tools of Quality Management to improve the efficiency of the organization and working for implementation of TQM (Total Quality Management).

Marketing & Distribution

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Cost Accounting System of Quasem Drycells Limited QDL is holding 45% market share for D size UM-1 Drycell battery and 60% for AA size UM-3 drycell battery of the total market in Bangladesh by implementing modern marketing and effective distribution system. Efficient marketing and promotion of the products is a key success element in the drycell industry. For this reason the QDL Management has a dedicated team in the head office that analyses data received from the field and also from other sources to formulate marketing plans on an annual basis. Quasem Drycells Ltd. (QDL) has established sales relationships with over 10,000 wholesalers and 250,000 retailers throughout Bangladesh. There are 92 distributors and 350 sales officers employed by both QDL and the distributors for monitoring and controlling the distribution system. QDL has 150 vehicles comprising of vans, scooters, rickshaws and others. QDL employs 35 direct sales executives who monitor the performance of the distributors. They also provide information regarding competition and the effectiveness of marketing strategies.

Research & Development Quasem Drycells Limited has a laboratory with most modern equipment and technology where a team of highly skilled & efficient workforce is engaged to improve the product quality through extensive research & development work.

Export Packaging Product Large size (UM-1)/D Ammonium

Packaging 12 pcs. In one 03 ply corrugated mini- carton. 12

Chloride (Paper Line) Metal Jacket

corrugated mini-carton in one 05 ply corrugated

Drycells

master carton or 144 pcs.

Pencil size (UM-3)/AA Zinc

(Weight: 14.25 kg per master carton) 10 pcs. In one strip, 12 strips in one corrugated

Chloride (Mercury Free), Heavy-

mini-carton, 4 corrugated mini-carton in one

duty Metal Jacket Drycells.

corrugated master carton or 480 pcs. (Weight: 10.35 kg per master carton)

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Cost Accounting System of Quasem Drycells Limited

Primary Information of Products Products Name Products Type Products Size Trade Name Chemical System Type of Jacket

SUNLITE UM-1 (R-20), UM-3 (R-6) & UM-4 (R-3) "D", "AA " & " AAA" Economy, Super, Hi-Super, Heavy Duty Zinc - Manganese Dioxide (Zn/MnO2) Printed Metal Jacket

Specification of Products Product’s Type

Size

Designation Nominal (As per

Volt

Capacit

Weight

Total

Diameter

y (mAh)

(gm)

Height

(mm)

IEC) UM-1 UM-3 UM-4

D R-20 AA R-6 AAA R-3

(mm) Max. Min. Max. Min. 1.5 1.5 1.5

7000 900 400

93 18 7

61.5 50.5 44.5

60.5 49.5 43.3

34.2 14.5 10.5

Application of Batteries UM-1 (R-20), "D" SIZE Cassette Player, Radio, Torch & Toy etc. UM-3 (R-6), "AA" SIZE Clock, Camera, Toy, Walkman, Torch, Radio etc. UM-4 (R-3), "AAA" SIZE Remote Control, Camera, Walkman, Calculator, Pager

Special Attributes  Produced & tested by modern state-of-art technology.

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32.3 13.5 9.5

Cost Accounting System of Quasem Drycells Limited  Comparable to any other international brand.  No chance of leakage.  Ensures better protection of the appliance.  Excellent power retention even after long storage.

Production Capacity There are 10 production lines with world’s most exclusive technology in drycell battery manufacturing and sufficient production capacity to meet demands of both local and export market. Type of Product Production Capacity per Year UM-1 (R-20) 80 million pcs. UM-3 (R-6) 120 million pcs.

Objectives of Quasem Drycells Limited The following objectives have been set by the management of Quasem Drycells Limited for achievement within the given time-frame mentioned in each specific category. 

To increase existing service life of battery

UM-3 (R6), AA SizeAverage service life in Photoflash test (1Ω) of UM-3 Sunlite batteries shall be increased by 5% from the present status by June 2008. 1. Average service life in Photo pulse test (1.8Ω) of UM-3 Sunlite batteries by 5% from the present status by June 2008. 2. Average service life in Walkman (10Ω), Toy (4Ω), and Radio (75Ω) test of UM-3 batteries shall be increased by 2% from the present status by June 2008. UM-1 (R20), D Size

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Cost Accounting System of Quasem Drycells Limited 1. Average service life in Torch (4Ω) test of both Paper & Paste type of UM1 Sunlite Hi-Super batteries shall be increased by 2% from the present status by June 2008 while in radio (40Ω) test both types of UM-1 Sunlite Hi-Super batteries shall be increased by 1% from the present status within the same period. 2. Average service life in Torch (4Ω) and Radio (40Ω) test of UM-1 Sunlite Economy batteries shall be increased by 2% from the present status by June 2008. 

To increase productivity 1. Productivity of UM-1 & UM-3 shall be increased by 5% & 2% respectively from the present status by June 2008. 2. Productivity of Printed Sheets shall be increased by 3% from the present status by June 2008.



To reduce wastage percentage 1. Wastage of UM-1 (Paper Type) & UM-3 batteries shall be reduced by 3% & 10% respectively from the present status by June 2008. 2. Wastage of Red ink for UM-1, Varnish (untoned) and Isopropanole shall be reduced by 2% from the present status by June 2008.



To reduce market complaint 1. Market complaints of UM-1 & UM-3 batteries due to mishandling during transportation should be reduced by 50% from the present status by June 2008. 2. Market complaints of UM-1 & UM-3 batteries due to manufacturing that is factory defect should be reduced by 40% from the present status by June 2008.



To reduce customer complaint of MPU

Number of customer complaints should be reduced by 15% from the present status by June 2008. 

To increase sales volume

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Cost Accounting System of Quasem Drycells Limited Average Sales Growth of UM-1 and UM-3 batteries will be 12.84% and 15.46% respectively from the last year’s average sales by June 2008. Sector

UM-1

UM-3

Local Market 29,210,112 Pieces 55,023,360 Pieces Export



12,000,000 Pieces 12,000,000 Pieces

To maintain Safety Stock and reduce rejection percentage of imported and local

materials.

Safety Stock of the materials will be maintained properly for the period of July 2007 to June 2008 so that it will not come down throughout the period. 1. Rejection & return of the materials shall be decreased by 50% from the present status by June 2008. 

To reduce spare & maintenance cost including improving user satisfaction of vehicle 1. Spare & maintenance cost of vehicle will be reduced by 5% from the current status by June 2008. 2. User satisfaction will be improved by 2% from the current status by June 2008.



To reduce breakdown time of major machines Breakdown time of Dolly Press (Paper Type) and Metal Jacket making machines

of Unit-1 including Dolly Press and Body Maker machines of Unit-2 shall be kept below 6%, 12%, 15% and 7.5% respectively within the target period up to June 2008. 

To upgrade software and operating install software package including improving user satisfaction of computer 1. All of the existing Oracle based soft wares will be upgraded by using Developer 6i and Database will be upgraded from Oracle 8.0.3 to 10g by June 2008. 2. User satisfaction will be improved by 95% from the current status by June 2008. 3. All users’ operating system will be upgraded to Win XP by June 2008.

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Cost Accounting System of Quasem Drycells Limited 

To increase efficiency of factory employees Number of training programs for increasing efficiency and awareness among the

factory employees shall be increased by 10% from the last year by June 2008. Issue Date: 01.07.2007

QUALITY POLICY It is the policy of Quasem Drycells Limited (QDL) to manufacture and market high quality batteries that maximize customer satisfaction. To achieve that, QDL has adopted ISO 9001:2000 Quality Management Systems model. Acquisition of sufficient knowledge and skills of company personnel are ensured through regular training. It is also the policy of the company to try consistently to meet the objectives for quality and optimise the interests of the stakeholders.

Cost Accounting – A Managerial Control Tool Cost accounting is the accounting that provides information for management accounting and financial accounting. Cost accounting measures and reports financial and non- financial information relating to the cost of acquiring or utilizing resources in an

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Cost Accounting System of Quasem Drycells Limited organization. The objective of cost accounting is to determine the total cost and per unit cost of product and control of cost in production. The Chartered Institute of Management Accountants (CIMA), England, defines cost accounting as that part of management accounting which establishes budgets and standard costs and actual costs of operations, processes, departments or products and the analysis of variances, profitability or social use of funds.

How Cost Accounting Facilitates Planning and Control at QDL: Cost accounting plays a vital role in QDL. We can explain this role in QDL with the help of following Exhibit 1:

Exhibit 1: Example of a Management Decision at QDL

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Cost Accounting System of Quasem Drycells Limited

Planning:

Budgets Expected units sold, rates per unit and revenue

Increase revenue of UM-1 (Hi-Sup) by 1.5% than previous month.

Financial representation of plans.

Accounting System: Source documents (invoices to customers indicating sales and rate of sales and payments received) Recording in general subsidiary ledgers.

CONTROL: .

Performance report: Comparing actual sales units, rate per unit and revenue to budgeted amounts.

Recording transactions and classifying them in accounting records.

Reports comparing budgets with actual results.

Let’s now see how QDL will implement its strategy. The left side of Exhibit 1 provides an overview of the planning and control decisions at QDL. The right side of Exhibit 1 highlights how the cost accounting system is used as a managerial control tool in facilitating decisions.

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Cost Accounting System of Quasem Drycells Limited Let’s consider first the planning decisions. To increase operating income of UM1(Hi-Super) batteries consistent with its strategy, four main alternatives were evaluated: 1. Increase per unit sales price of batteries. 2. Decrease the commission allowed to retailers. 3. Lowering quality and thus decrease cost. 4. Reducing operating expenses.

The last 3 alternatives are not feasible and not viable for the company considering many issues such as – decision regarding decrease in sales commission will induce retailers to sell other brands which give them more commission. Again, if quality is compromised, then company will be benefited in the short-run but will be looser in the long-run. Reduction in operating expenses is not possible now because this practice is in use for last 2 years – from that time when the prices of major raw materials – zinc callot, steel plate and carbon rod have increased by 30%-40% in international market. There is no scope to reduce operating expenses further. So, the only way is to increase the per unit sales price. The management of QDL decided to increase per unit sales price of UM-1(Hi-Super) batteries by 1.5% to Tk.13.50 for July 20XX. Management budgeted revenues from UM1[Hi-Super] to be Tk.6,210,000 (Tk.13.50 per price multiplied by 460,000 pieces predicted to be sold in July 20XX). Now consider the control decisions taken by QDL. One control decision is communicating the new price-list to its sales representatives and customers. Another control decision is performance evaluation such as a monthly “Attainment of Manager Objectives” review in which actual results for a period are compared with amounts budgeted for that period. During the month of July 20XX, QDL sold batteries, issued invoices, and received payments. These invoices and receipts were recorded in the accounting system. Exhibit 2 shows us QDL’s performance report of UM-1(Hi-Super) batteries for July 20XX. This report indicates that 451,250 piece of UM-1(Hi-Super) (8,750 pieces less than budgeted 460,000 pieces) were sold. The average rate per unit was Tk.13.35 14

Cost Accounting System of Quasem Drycells Limited compared with Tk.13.50 budgeted rates yielding actual revenue of Tk.6,024,188. The actual revenues are Tk.185,812 less than budgeted Tk.6,210,000.

Exhibit 2:

Performance report of sale of UM-1(Hi-Super) battery for July 20XX

(all amounts are imaginary) Actual

Budgeted

Units sold Price per

Result 451,250 Tk.13.35

Amount 460,000 Tk.13.50

unit Revenues

Tk.6,024,188 Tk.6,210,000

Difference

Difference as a percentage

8,750 Tk.0.15

of budgeted amount 1.90% UF 1.11% UF

Tk.185,812 2.99% UF

The performance report in Exhibit 2 spurs investigation and more decisions. For example, did the marketing department make sufficient efforts to convince customers that, even with the new higher rate of Tk.13.50 per unit of UM-1(Hi-Super) battery, purchasing this battery will better than other brand(s)? Why was the actual average rate per unit Tk.13.35 instead of Tk.13.50? Did economic conditions such as price hike in daily used goods and commodities affected adversely in the average rate of per unit selling price? Answers to these questions could prompt the management of QDL to take subsequent actions, including, for example, motivating marketing managers to renew their efforts to promote sales of UM1(Hi-Super) to current and potential users.

Justification in Management Control System A management control system is a logical integration of techniques to gather and use information to motivate employee behaviour and to evaluate performance. The purposes of a management control systems are: •

To clearly communicate the organizational goals.

•

To ensure that managers and employees understand the specific actions required of them to achieve organizational goals.

•

To communicate results of an action across the organization.

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Cost Accounting System of Quasem Drycells Limited •

To ensure that managers can adjust to change in the environment.

Exhibit 3 Shows us the components of Management Control System of Quasem Drycells Limited:

What do we want to achieve? How do we set the direction? Are we encouraging the right behaviour?

Set Goals, Measures target

Plan & execute

Evaluate, Reward What is getting in our way?

Monitor, Report How much progress are we making?

This well designed management control system aids and co-ordinates the process of making a bridge between management control system and each & every objectives of QDL as specified in page number 8.

It also facilitates forecasting revenue and cost-

driver levels, budgeting and measuring and evaluating performances as we have seen in Exhibit 2. The first and most basic component in a management control system is the organizational goals. Why? Because, the focus of the management control system is on internal management decision making and motivating (and then evaluating) performance consistent with the organization’s goals. If we again recollect the objectives of the QDL

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Cost Accounting System of Quasem Drycells Limited as described in page number 8. We can have the following Table 1 on Organizational Goals and Performance measures:

Table 1 •

•

Organizational Goals To increase existing service life of battery

Performance Measures

i.

UM-3(R6) AA size

Average service life.

ii.

UM-1(R20) D size

Average service life.

To increase productivity Battery output per quantity of

1. Batteries i.

UM-1

ii.

UM-2

input Battery output per quantity of

2. Printed steel sheets

input •

To reduce wastage percentage Percentage (%) of wastage

1. Battery

•

i.

UM-1(paper type)

ii.

UM-3

2. Red ink

Percentage (%) of wastage

3. Varnish

Percentage (%) of wastage

4. Isopropanole To reduce market complaint

Percentage (%) of wastage

1. UM-1 and UM-3 batteries due to mishandling UM-1 and UM-3 batteries due to manufacturing. And so on.

Percentage (%) of carton returned

Now, for illustration, if we take the first item of the last organizational goal and performance measure as listed in the above table, we see that the objective is to reduce market complaint of UM-1 and UM-3 batteries due to mishandling while transit. This is the introductory phase or starting phase of the exhibit which is – Set Goals, Measures, and Targets. The next phase is to plan and execute that how the above goal can be

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Cost Accounting System of Quasem Drycells Limited achieved, The company has observed that the market complaint due to mishandling master cartons (of 576 batteries in each carton) arise from those destination where the batteries are sent by launches and steamers. Management’s inquiry committee found that carrying labours throw the master cartons for not carrying about the contents in the cartons. The cartons are made of wooden box. We know that, drycell batteries are sensitive to throwing, due to shocks of throwing, because the charge of the batteries goes down although outer look remains good. The company then started to use corrugated paper cartons .These cartons cost Tk.69 plus instead of Tk.61 plus of wooden box. Though an increase of Tk. 7 has been occurred, the company is experiencing a better picture – which is the Third Phase of Exhibit 3 (→ Monitor, Report). With an increased cost of carrying, the company satisfies its users and can expect better customer loyalty in terms of repetitive purchase and in terms of satisfaction level than other competitive brands. As the change is evaluated, it is rewarded and till now remains as a better carrying way (4th phase of exhibit 3). Exhibit 4 shows that top managers of QDL set

Exhibit 4: Setting Goals, Objectives and Performance Measures

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Cost Accounting System of Quasem Drycells Limited

Top level Managers set overall goals, objectives and performance measures

Mid level Managers coordinate among top level and lower level managers

Lower level managers & supervisors execute the desired goal set by top level management

organization wide (overall company) goals, performance measures, and targets. Managers review these goals on a periodic basis, usually one year. These goals provide a long-term performance around which QDL will form its comprehensive plan for positioning itself in the market.

Cost Accounting System in Practice in Quasem Drycells Limited 19

Cost Accounting System of Quasem Drycells Limited As a drycell battery manufacturer organization, Quasem Drycells Limited (QDL) tries to adopt cost accounting to a Cost Management Approach. It keeps thorough records by its computerized cost accounting and financial accounting system. It has very efficient and hard-working accounts department which identifies, records, summarizes transactions and prepares cost reports and financial reports timely with the help of accounting software based on Oracle computer programming language.

Cost Objects Cost objects are theoretically known as anything for which a separate measurement of costs is desired. Examples include departments, products, activities, territories, etc. QDL has final cost objects which are each unit of battery produced. That is, users of information (especially management tax authority, importers, etc.) finally want to know the cost of producing a unit of battery – may be UM-1 or UM-3. Besides the final cost objects, there are some intermediate cost objects – production lines of each unit of UM-1 and UM-3 drycells batteries. Those are – UM-1 (Hi-Super), UM-1 (Economy), UM-1 (Hi-Super Export), UM-1 (Super), UM-1 (Paper Line 144), UM-1 (Super Export), UM-3 (Heavy Duty), UM-3 (Green), UM-3 (Heavy Duty Export), UM-3 (Green Export), UM-3 (Hi-Super), etc.

Cost Centers and Elements of Costs In the cost accounting system of QDL, there are four cost centers. They are – 1. Cost of Goods Sold 2. Administrative Expenses (Head Office) 3. Selling Expenses 4. Financial Expenses Each of the above cost centers is a responsibility centre in which a manager is accountable for costs only. Its financial responsibilities are to control and report costs. Managers use these cost figures to monitor and assess operations. QDL evaluates the performance of cost centers by comparing the centre’s actual costs with target or standard 20

Cost Accounting System of Quasem Drycells Limited cost levels for the amount and type of work done. Elements of the above cost centers are listed below: Elements of Cost of goods sold cost centre: i.

Inventory

ii.

Labour

iii.

Overhead

Elements of Administrative Expenses cost centre: The elements of “Administrative Expenses” are given in Appendix 1 Elements of Selling Expenses cost centre: The elements of “Selling Expenses” are given in Appendix 2 Element of Financial Expenses cost centre: It has only one element – Bank Charge & Interest.

Cost Classification and Basis of Cost Classification: Cost classifications are needed for the development of costs data that will aid management in achieving its objectives. These classifications in QDL are based on the relationship of costs to: 1. The Product (Battery) 2. Volume of Production

Costs in Relation to a Product: The process of classifying costs and expenses begin by relating costs to the operations of business. In QDL, total operating cost consists of (1) Manufacturing costs, and (2) Commercial Expenses.

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Cost Accounting System of Quasem Drycells Limited Manufacturing Costs: Manufacturing Cost, often called production cost or factory cost, is the sum of the three cost elements – direct materials, direct labour, and factory overhead. Direct materials and direct labour may be combined into another classification called prime cost. Direct labour and factory overhead may be combined into another classification called conversion cost, which represents the cost of converting direct materials into finished products. Direct materials are all materials that form an integral part of the finished product and that can be identified directly in calculating the cost of producing a unit of product. Examples include carbon rod, steel plate PVC tube, brass cap, etc. Direct labour is labour expended to convert materials into the finished goods. In QDL, use of direct labour is very minimal now due to technological change in production process. The direct labour cost here includes costs of those employees’ wages who are operating the battery production lines. Factory overhead includes all other manufacturing costs that cannot be charged directly to units produced. Examples include factory cleaning, spare parts, repair & maintenance of factory computers, etc. Indirect materials are those materials needed for the completion of batteries, but the consumption of which is so minimal or so complex to calculate uses per unit that treating them as direct material is futile. Factory supplies, a form of indirect materials, consist of such items as lubricating oils, grease, cleaning clothes & rags, and brushes needed to maintain the working area and machinery in a usable and safe condition. Indirect labour includes supervisors, clerks, general helpers, employees engaged in maintenance works, etc. Commercial Expenses: Commercial Expenses fall into two large classifications here – (1) Selling Expenses, and (2) Administrative Expenses. Selling expenses begin at the point where the factory costs end, i.e., when manufacturing has been completed and the product is in saleable condition. These expenses include the expenses of selling and delivery. Administrative expenses include the expenses incurred in directing and controlling the organization. Detailed elements of selling expenses and administrative expenses were given in appendices.

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Cost Accounting System of Quasem Drycells Limited Costs in Relation to Volume of Production: In QDL some costs vary directly in relation to changes in the volume of production level or output level, while some others remain relatively fixed in amount. The management of QDL considers the tendency of costs varying with output to plan and control costs successfully. There are variable costs, fixed costs, and semi-variable costs. Variable Costs: Those costs in QDL are considered as variable costs which have these characteristics – (1) variability of total amount in direct proportion to volume, (2) relatively constant cost per unit of battery produced as volume changes within a relevant range, (3) assignable, with reasonable ease and accuracy, to operating departments, and (4) controllable by a specific department head. Variable costs include direct materials (both raw & packing) and direct labour. Some factory overheads and manufacturing costs are also variable. Fixed Costs: Those costs in QDL are considered as fixed costs which have these characteristics – (1) total amount fixed within a relevant output range, (2) decrease in per unit cost as volume increases within a relevant range, (3) assignable to departments on the basis of arbitrary managerial decisions, or cost allocation methods, and (4) control responsibility resting with executive management rather than operating supervisors. Examples of fixed costs include office rent, depreciation of machinery and vehicles (both delivery & transport), salaries (salaried employees & salaried workers), etc.

Semi-Variable Costs: These types of costs include an amount that is fixed within a relevant range of output and an amount that varies proportionately with output changes. For example, electricity cost is semi-variable here. Costs of electricity used in lighting is fixed because lights are needed when the plants are operating, regardless of the output level, and costs of electricity used as power to operate machines are variable depending upon the usage of the equipment.

Cost Assignment & Cost Allocation Methods in Use 23

Cost Accounting System of Quasem Drycells Limited

Cost Assignment: Cost assignment is a general term that encompasses both of – 1. Tracing accumulated costs that have a direct relationship to a cost object, and 2. Allocating accumulated costs that have an indirect relationship to a cost object.

Cost Tracing: Direct costs to a cost object are related to the particular cost object and can be traced to that cost object in economically feasible (cost effective) way. For example, the cost of carbon rod used in each battery is a direct cost of producing the battery. The cost of carbon rod can be easily traced to or identified with the battery which is Tk.0.55 for UM-1 batteries and Tk.0.27 for UM-3 batteries.

Cost Allocation: Indirect costs of a cost object is related to the particular cost object but can not be traced to the cost object

in economically feasible (cost effective) way. For example,

the cost of providing medical & welfare to employees working in the factory is an indirect cost of batteries. Medical & welfare costs are related to the cost object (each unit of battery produced) because medical & welfare is necessary for complying with labour law and factory law. Unlike the cost of carbon rod and tinplate, it is difficult to trace medical & welfare costs to each unit of battery produced. Exhibit 4 depicts direct costs and indirect costs of both forms of costs assignment – cost tracing and cost allocation. The final cost object here is each unit of battery produced. There are intermediary cost objects such as – each production line of UM -1 and UM-3 batteries.[UM-1(Hi-Super), UM-1(Economy), UM-1(paper line 144), UM-1(Hi-Super Export), UM-1(Super Export), UM-3(Green), UM-3(Heavy Duty), UM-3(Hi-Super), UM-3(Hi-Super BP), UM-3(Heavy Duty Export), UM-3(Green Export), and so on. Exhibit 4: Cost Assignment to final cost object

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Cost Accounting System of Quasem Drycells Limited

Type of cost

Direct costs Example: Carbon Rod, Tip, Tin plate

Indirect Costs Example: Allowance, Entertainment, Office Maintenance.

Cost Assignment Cost Tracing Cost Object

Cost Allocation

(Each Unit of Battery Produced)

Cost Assignment Methods used in QDL: Cost Assignment methods to each unit of battery produced also have two parts, namely – Cost Tracing methods and Cost Allocation methods.

A. Costs Tracing Methods/ Procedures:

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Cost Accounting System of Quasem Drycells Limited We all know that, direct costs include direct material and direct labour. Procedure of getting per unit cost of materials and per unit cost of packing materials is described in Appendix 3 (Materials Used for Production). But tracing of direct labour cost is not easy like materials because changes in manufacturing technology have made changes in proportion of direct labour required to produce battery. Jobs which were done manually are now being done in automated process. Cost of direct labour has been reduced and indirect cost related to automation has been increased. For this reason, tracing of total direct labour amount is not possible now, and in fact, not done by QDL. Instead of doing this, the elements of direct labour (as shown in) are allocated to two production units in some ways. These ways are listed in the Table 2 to Table 5 below: Table 2: 1st way of Allocation: •

Particulars Allowance

Basis of Allocation These costs are firstly allocated to production

•

Carriage Inwards- Factory

Units (Unit-1 which produces all of UM-1

•

Daily Wages

•

Conveyance Allowance

•

Entertainment

•

Human Resource

UM-1(Hi-Super), UM-1(Economy), UM-1(paper

Development

line 144), UM-1(Hi-Super Export), UM-1(Super

•

Insurance (Fire)

Export), UM-3(Green), UM-3(Heavy Duty),

•

Labour Charges

UM-3(Hi-Super), UM-3(Hi-Super BP), UM-

•

Office Maintenance

3(Heavy Duty Export), UM-3(Green Export),

•

Product Development

etc.

•

Repair & Maintenance

•

Wages

batteries and unit-2 which produces UM-3 of all types). Then the amount allocated to each production unit is further allocated to each type of batteries produced by that particular unit (e.g.

Table 3: 2nd way of Allocation:

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Cost Accounting System of Quasem Drycells Limited Particulars •

Bonus

•

Earned Leave Pay

•

Gratuity

•

Provident fund

•

Salary

Basis of Allocation

Allocated based on salary sheet.

Table 4: 3rd way of Allocation: Particulars • •

Basis of Allocation Meter wise (There are two meters for two production units)

Electric Bills

Table 5: 4th way of Allocation: •

Particulars Medical & welfare

•

Basis of Allocation Unit-1 only

B. Costs Allocation Methods: In QDL allocation of cost is required for four types of indirect costs. They are: 1. Factory Overhead 2. Administrative Expenses (Head Office) 3. Selling & Distribution Expenses, and

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Cost Accounting System of Quasem Drycells Limited 4. Financial Expenses

Allocation of Factory Overhead: Factory Overheads are allocated in two ways. These two ways of Factory Overhead Allocation are listed in the following two tables: Table 6: 1st way of Allocation: •

Particulars Bank Charges & Interests

Basis of Allocation These costs are firstly allocated to production Units (Unit-1 which produces

(Distributors’ Loan)

all of UM-1 batteries and unit-2 which produces UM-3 of all types). Then the

•

Depreciation Expenses

•

Indirect Material Expenses

•

ISO Certification Expenses

produced by that particular unit (e.g. UM-

•

Lease Rental

1(Hi-Super), UM-1(Economy), UM-

•

Power

1(paper line 144), UM-1(Hi-Super Export),

•

Printing & Stationary

UM-1(Super Export), UM-3(Green), UM-

•

Repair & Maintenance

•

Stores & Spares (Factory)

amount allocated to each production unit is further allocated to each type of batteries

3(Heavy Duty), UM-3(Hi-Super), UM3(Hi-Super BP), UM-3(Heavy Duty Export), UM-3(Green Export), etc.

Table 7: 2nd way of Allocation: •

Particulars Car Maintenance

•

Gardening & Plantation

•

Insurance (Car)

•

Miscellaneous Expenses

Basis of Allocation

•

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Unit-1 only

Cost Accounting System of Quasem Drycells Limited •

Postage & Telephone

•

Repair & Maintenance (Computer)

Allocation of Administrative Expenses, and Selling & Distribution Expenses: To allocate Administrative Expenses and Selling & distribution Expenses, the following formula is used: Total Admin. and Selling & Dist. Expenses X Individual Production Lines Total Quantity Sold Here total administrative expenses are from the total shown at the last cell in Appendix 1 and total selling expenses are from the total shown at the last cell in Appendix 2.

Allocation of Financial Expenses: Financial expenses include Bank Charge & Interest of bank accounts that QDL have. Some of them are the following Table 8: Table 8: Schedule of Bank Accounts Bank Charge & Interest Bank Charge & Interest Bank Charge & Interest Bank Charge & Interest Bank Charge & Interest Bank Charge & Interest

Agrani Bank-7620 Agrani Bank-10439-6 Citi Bank N.A.–FD A/C Prime Bank-CA Citi Bank N.A.-CD Sonali Bank-3301433

The total of the Bank Charges & Interest is first allocated to production units and then to individual production lines of those units and finally to each unit of battery produced by those production lines.

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Cost Accounting System of Quasem Drycells Limited

Method of Cost Determination of the Final Cost Object: The final cost object is each unit of battery produced. For illustrative purpose, cost determination method of UM-1 (Hi-Super) battery is illustrated Table 9 by using imaginary figures: Table 9: Determination of Cost Object*

Particulars

Amount (Tk.)

Materials (Raw & Packing)

9.00

Direct Labour Prime Costs Add: Factory Overhead Total Manufacturing Costs Add: Operating Expenses:

0.40 9.40 0.90 10.30

1. Administrative Expenses

0.70

2. Selling Expenses Total Operating Expenses Add: Financial Expenses Total Cost of UM-1(Hi-Super)

0.55 1.25 0.60 12.15

* Source of these amounts is in the Appendices.

Valuation of Inventory: Inventories are valued under the following basis: Item of Inventory Raw Materials Packing Materials Stores and Spares Promotional Stock Work in Process

Basis of Valuation Weighted Average Cost Weighted Average Cost Weighted Average Cost Weighted Average Cost Raw materials cost which includes all the

Finished Goods Miscellaneous Cost

materials issued to production floor Weighted Average Cost Weighted Average Cost

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Cost Accounting System of Quasem Drycells Limited There are other methods used in the business world like “First-in, First Out (FIFO)”, “Last-in, First Out (LIFO), etc. So, why Weighted Average Cost is used at QDL? In the eyes of management of QDL, the following advantages they get from Weighted Average Cost: •

It is realistic costing method useful to management in analyzing operating results and appraising future production.

•

This method minimizes clerical effort.

•

It is less expensive to use.

For example, UM-1(Hi-Super) batteries in stock are from 3 batches. Per unit cost of first batch is Tk.13.20 (25,000 pcs), of second batch Tk.13.25 (45,000 pcs) and of third batch Tk. 13.35 (95,000 pcs). The weighted average cost of each unit of UM-1(Hi-Super) will be – = (Tk. 13.20 * 25,000) + ( Tk. 13.25 * 45,000) + (Tk. 13.35 * 90,000) /165,000 = Tk. 13.30 per piece.

Findings and Evaluations of Cost Accounting System of QDL The major findings of our study in the Quasem Drycells Limited are as follows:  The Cost Accounting System of Quasem Drycells Limited serves as managerial control tool.  QDL follows non-integral accounting system of recording.  We have found that, the company follows a mixture of traditional plant wide rate and activity based rate in allocation of indirect costs.  They determine total cost and per unit cost of batteries produced on the basis of product line.  They value inventory according to Weighted Average Method.  They follow normal costing system.

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Cost Accounting System of Quasem Drycells Limited  Here, some provisional accounts are maintained for controlling purpose. Provisional account (as shown in the following table) means that these accounts bear estimated figures at the beginning of the year. Schedule of Unit Wise Direct Labor and Factory Overhead  Earn Leave Pay 

Gratuity



Bonus

Depreciation Schedule of Operating Expenses Administrative Expenses Selling Expenses  Gratuity  Bonus 



Bonus



Bonus (JSR)



Earned Leave Pay



Advertisement Expenses



Depreciation



Sales Promotion Expenses



Fees & Prof. charges ( BSTI)



Depreciation



Fees & Prof. charges ( others)



Bad Debts



Meeting Expenses (AGM)

 Accounts other than provisional accounts are maintained by Historical costing system.  In the computerized accounting system (both cost accounting & financial accounting), burden of work is very much reduced. Cash transactions – receipts & payments, and bank transactions – receipts & payments are recorded when the transactions occur. These are recorded in cash vouchers.  Non-cash transactions (e.g. depreciation) are recorded in a different type of voucher – called here as “Journal Voucher” or “JV”.  Quasem Drycells Limited has a well-structured cost accounting system.  Keeps proper books of Accounts as needed.  Financial statements are prepared almost in accordance with the Bangladesh Accounting Standard (BAS).

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Cost Accounting System of Quasem Drycells Limited  As an ISO Certified Company it maintains adequate sources of documents.  Standard codes of accounts are maintained.  Generally Accepted Accounting Principles (GAAP) is followed properly.

Recommendations: The following recommendations are believed by us as steps to improve QDL and its performance & reflection of performance in the financial statements:  We have found that some administrative and overhead costs are charged to Unit-1 only, but those costs have no relation with Unit-1. Of these costs, some are truly identifiable with respective production units in effective & efficient ways. These identifiable costs have to be charged according to activity. The rests have to be charged between Unit-1 and Unit-2 in some justifiable basis.  Management of QDL is highly centralized in decision making. As a result, top level management involves in many insignificant and immaterial matters. So, we

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Cost Accounting System of Quasem Drycells Limited suggest that management should be decentralized and responsibility should be divided among different levels of management.

Conclusion: As students of MBA level in Accounting & Information Systems of Dhaka University, We have tried our best to observe the cost accounting system of Quasem Drycells Limited. We have tried to make a bridge between theoretical knowledge and practice. Drycell market is not expanding now as it expanded one or two decades ago. Being the “market leader” as claimed in the company profile QDL enjoys price premium by its brand. Cost Accounting System of Quasem Drycells Limited has been analysed with keeping all the other aspects in mind ─ not only the tables & the charts. We think this analysis will be helpful to some extent. If so happens, then our efforts will be fruitful.

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Cost Accounting System of Quasem Drycells Limited

References: Horngren,C. T.; S. M. Datar and G. Foster. 2000. Cost Accounting: A Managerial Emphasis. Delhi: Prentice Hall. Rayburn, L.G. 1996. Cost Accounting: Using a Management Approach. United States America: Irwin.

Banerjee, B. 2006. Cost Accounting: Theory and Practice. New Delhi: Prentice Hall.

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Cost Accounting System of Quasem Drycells Limited Matz, A.; M.F. Usry and L.H. Hammer. 1984. Cost Accounting: Planning and Control. United States America: South Western Publishing Company.

Cooper, D.R. and P.S. Schindler. 2006. Business Research Methods. Singapore: Mc Graw Hill. Horngren,C. T.; G.L. Sundem and W. O. Stratton. 2004. Introduction To Management Accounting. New Delhi: Prentice Hall. Garison, R.H. and E.W. Noreen. 2005. Managerial Accounting. New York:NY Mc Graw Hill & Irwin. Annual Report of Quasem Drycells Limited – 2005-06. Annual Report of Quasem Drycells Limited – 2006-07.

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