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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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