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.

1


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.

2


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

Unwilling to give information more because of extra harassment without their

responsibility.

3


COMPANY PROFILE

Quasem GroupQuasem 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

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.

4


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

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

5


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 Packaging

Large size (UM-1)/D Ammonium

Chloride (Paper Line) Metal Jacket

Drycells

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

corrugated mini-carton in one 05 ply corrugated

master carton or 144 pcs.

(Weight: 14.25 kg per master carton)

Pencil size (UM-3)/AA Zinc

Chloride (Mercury Free), Heavy-

duty Metal Jacket Drycells.

10 pcs. In one strip, 12 strips in one corrugated

mini-carton, 4 corrugated mini-carton in one

corrugated master carton or 480 pcs.

(Weight: 10.35 kg per master carton)

Primary Information of Products

6


Products Name SUNLITE

Products Type UM-1 (R-20), UM-3 (R-6) & UM-4 (R-3)

Products Size "D", "AA " & " AAA"

Trade Name Economy, Super, Hi-Super, Heavy Duty

Chemical System Zinc - Manganese Dioxide (Zn/MnO2)

Type of Jacket Printed Metal Jacket

Specification of Products

Product

’s Type

Size Designatio

n (As per

IEC)

Nomin

al Volt

Capacit

y

(mAh)

Weig

ht

(gm)

Total

Height

(mm)

Diameter

(mm)

Ma

x.

Mi

n.

Ma

x.

Mi

n.

UM-1 D R-20 1.5 7000 93 61.5 60.5 34.2 32.3

UM-3 AA R-6 1.5 900 18 50.5 49.5 14.5 13.5

UM-4 AA

A

R-3 1.5 400 7 44.5 43.3 10.5 9.5

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

7


Produced & tested by modern state-of-art technology.

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

8


1. Average service life in Torch (4Ω) test of both Paper & Paste type of UM-

1 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

9


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.

10


3. All users’ operating system will be upgraded to Win XP by June 2008.

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

11


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

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

12


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.

BudgetsExpected units sold, rates per unit and revenue

Planning:

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

Financial representation of plans.

CONTROL:

.

Accounting System:

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

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

amounts.

Reports comparing budgets with actual results.

Recording transactions and classifying them in accounting records.

13


Let’s consider first the planning decisions. To increase operating income of UM-

1(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 UM-

1[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


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

Result

Budgeted

Amount

Difference Difference as a percentage

of budgeted amount

Units sold 451,250 460,000 8,750 1.90% UF

Price per

unit

Tk.13.35 Tk.13.50 Tk.0.15 1.11% UF

Revenues Tk.6,024,18

8

Tk.6,210,000 Tk.185,81

2

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

UM-1(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.

15


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.

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:

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.

Set Goals, Measures target

Monitor, Report

Plan & execute

Evaluate,Reward

What do we want to achieve?How do we set the direction?

Are we encouraging the right behaviour?

How much progress are we making?

What is getting in our way?

16


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

as described in page number 8. We can have the following Table 1 on Organizational

Goals and Performance measures:

Table 1

Organizational Goals Performance Measures

To increase existing service life of battery

i. UM-3(R6) AA size

ii. UM-1(R20) D size

Average service life.

Average service life.

To increase productivity

1. Batteries

i. UM-1

ii. UM-2

2. Printed steel sheets

Battery output per quantity of

input

Battery output per quantity of

input

To reduce wastage percentage

1. Battery

i. UM-1(paper type)

ii. UM-3

2. Red ink

3. Varnish

4. Isopropanole

Percentage (%) of wastage




To reduce market complaint

1. UM-1 and UM-3 batteries due to

mishandling

UM-1 and UM-3 batteries due to manufacturing.

Percentage (%) of carton

returned

And so on.

17


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

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

18


Exhibit 4: Setting Goals, Objectives and Performance Measures

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.

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

19


Cost Accounting System in Practice in 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

20


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

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

21


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.

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.

22


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.

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.

23


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

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.

24


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

Direct costsExample: Carbon Rod, Tip, Tin plate

Indirect CostsExample: Allowance, Entertainment, Office Maintenance.

Type of costCost Assignment

Cost Tracing

Cost Allocation

Cost Object

(Each Unit of Battery Produced)

25


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:

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 Basis of Allocation

Allowance

Carriage Inwards- Factory

Daily Wages

Conveyance Allowance

Entertainment

Human Resource

Development

Insurance (Fire)

Labour Charges

Office Maintenance

Product Development

These costs are firstly allocated to production

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

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.

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),

26



Repair & Maintenance

Wages

etc.

Table 3: 2nd way of Allocation:


Bonus

Earned Leave Pay

Gratuity

Provident fund

Salary

Allocated based on salary sheet.

Table 4: 3rd way of Allocation:


Electric Bills

Meter wise (There are two meters

for two production units)

Table 5: 4th way of Allocation:


Medical & welfare Unit-1 only

27


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

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:


Bank Charges & Interests

(Distributors’ Loan)

Depreciation Expenses

Indirect Material Expenses

ISO Certification Expenses

Lease Rental

Power

Printing & Stationary

Repair & Maintenance

Stores & Spares (Factory)

These costs are firstly allocated to

production Units (Unit-1 which produces

all of UM-1 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. 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), etc.

28


Table 7: 2nd way of Allocation:


Car Maintenance

Gardening & Plantation

Insurance (Car)

Miscellaneous Expenses

Postage & Telephone

Repair & Maintenance (Computer)

Unit-1 only

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 Agrani Bank-7620

Bank Charge & Interest Agrani Bank-10439-6

29


Bank Charge & Interest Citi Bank N.A.–FD A/C

Bank Charge & Interest Prime Bank-CA

Bank Charge & Interest Citi Bank N.A.-CD

Bank Charge & Interest 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.

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)

Direct Labour

9.00

0.40

Prime Costs 9.40

Add: Factory Overhead 0.90

Total Manufacturing Costs 10.30

Add: Operating Expenses:

1. Administrative Expenses

2. Selling Expenses

0.70

0.55

Total Operating Expenses 1.25

Add: Financial Expenses 0.60

30


Total Cost of UM-1(Hi-Super) 12.15

* Source of these amounts is in the Appendices.

Valuation of Inventory:

Inventories are valued under the following basis:Item of Inventory Basis of Valuation

Raw Materials Weighted Average Cost

Packing Materials Weighted Average Cost

Stores and Spares Weighted Average Cost

Promotional Stock Weighted Average Cost

Work in Process Raw materials cost which includes all the

materials issued to production floor

Finished Goods Weighted Average Cost

Miscellaneous Cost Weighted Average Cost

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

31


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.

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)

32


Earned Leave Pay

Depreciation

Fees & Prof. charges ( BSTI)

Fees & Prof. charges ( others)

Meeting Expenses (AGM)

Advertisement Expenses

Sales Promotion Expenses

Depreciation

Bad Debts

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).

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.

33


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

suggest that management should be decentralized and responsibility should be

divided among different levels of management.

34


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.

35


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.

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.

36


Annual Report of Quasem Drycells Limited – 2005-06.

Annual Report of Quasem Drycells Limited – 2006-07.

37

report on quasem drycells ltd. (accounting procedures)

Documents