Managerial accounting

BEST WAY CEMENT LTD

Submitted by:

Abdur Rehman Bakhshi

Atta ur Rehman khan
Khurram Yar Javed

Submitted to:
Ms. Nadia Ibn Hassan

Section- C
Executive summary:

This project is about evaluating the cost accounting techniques that are practiced in a
manufacturing organization. For this purpose Bestway cement Limited was chosen to analyze all
the cost accountings techniques and procedures that are being followed in the company. The cost
analysis techniques involve how the cost is accumulated during each stage of the manufacturing
process. All the relevant concepts studied during the course of the class were applied in this
project.

These include benefits of cost accounting, cost accumulation method used, analysis of income
statement, analysis of cost of goods sold, application of activity based costing, break even
analysis, Budgeting and variance analysis.

Then in the end of the report, there are conclusions of the whole project and then some
recommendations are given to Bestway cement Limited.
Introduction:

Bestway Cement Limited is part of the Bestway Group of the United Kingdom. Bestway Group
was founded by Sir Mohammed Anwar Pervez nearly thirty three years ago on what could be
best described as one man’s vision and passion. Since then it has translated into a unique and
successful group of businesses spread across the globe with the help of committed, professional
and hardworking management and staff, together with loyal customers and suppliers. The Group
has a well diversified portfolio incorporating within its folds cement manufacturing, global
banking, wholesale cash & carry business, a string of retail outlets, real estate investment, ethnic
food and beverage import and distribution and milling of rice. Recently the group has embarked
upon a large power generation project in Pakistan thus further diversifying its operations and
revenue base.

Bestway Group is an example of a dynamic enterprise. Over the last three decades the Group has
achieved remarkable success and positioned itself amongst United Kingdom’s top 10 privately
owned companies.

Bestway is U.K’s second largest cash and carry operator in terms of turnover with group annual
turnover in excess of US Dollars 3.6 billion and profits in excess of US Dollars 135 million; the
second largest cement producer in Pakistan and joint owner of Pakistan’s third largest bank,
United Bank Limited. Its rice milling facilities are one of the largest of its kind in the country.
The group is the largest overseas Pakistani investor with investments in excess of US Dollars 1
billion and a global workforce of over 22,000 people spread over four continents.

In response to successive governments’ efforts to attract foreign investment in the country

Bestway Group has invested heavily in Pakistan. In just over a decade Bestway’s cement
production capacity is set to more than quadruple to over 6.0 million tonnes per annum, making
Bestway the second largest cement producer in the country.

In early 1992 when the Group decided to set up its first cement plant it faced multiple challenges
mainly due to a lack of credibility as a business due to the absence of a track record in Pakistan.
The domestic economy was highly inhospitable characterized by high interest rates, high
inflation and low liquidity leading to a general economic and political inertia. It has however
successfully exhibited its managerial dynamism and technical excellence in setting up and
managing the manufacturing facilities and achieving market dominance through its
diversification strategy by investing in the local cement industry and continues to be bullish
about Pakistan.

Even during the period of economic slowdown and recession in the country in the late 1990’s
which adversely affected the profitability of the industry Bestway was able to record pre tax
profits even at 60% capacity utilization. The Company has been amongst the leaders in the recent
market boom, operating at above 100% of its installed capacity.
Bestway Cement Hattar

In 1994 work was started on the cement plant in the under developed area of Hattar, Haripur in
the North West Frontier Province, Pakistan. This was an initial investment of US$120 million.
The contract for the supply of main plant was signed with Mitsubishi Corporation of Japan in
June 1995. The suppliers sub contracted some of the equipment to other international
manufacturers, namely the crushers to FAM of Germany, Cement mill to Fuller of USA and
electrical and instrumentation to ABB of Switzerland and Siemens of Germany. Civil works
started in January 1996 and the Kiln was fired in April 1998, which is a record in itself.

Plant Conversion to Gas

Prior to 2001 production at Bestway Cement was being carried out using furnace oil as fuel. The
management’s proactive decision in anticipation of a further hike in oil prices lead to
modification of its plant to operate on natural gas. These were the first steps in achieving a cost
efficient production process and ultimately the production process was converted to coal with a
further investment of approximately US$10 million.

Plant Conversion to Coal

The machinery for coal conversion was procured from IPPR Engineering of China while some of
the fabrication and erection work was done locally. The whole project was supervised by a
highly skilful team of Chinese engineers alongside the Company’s own engineers. The entire
project from signing the agreement to commissioning was completed within a record period of
10 months. The Company has also set up its own coal testing and analysis laboratory, which is
equipped with the most up-to-date equipment to ensure that only quality coal is used in the
process to prevent undesired operational and environmental effects. Conversion to natural gas
and then to coal has significantly reduced the energy cost component, which at times constituted
about 65% of the total production cost.

Capacity Enhancement

Bestway’s proactive management has kept the Company one step ahead of its competitors. The
timely and strategic decisions of the management have enabled the Company to maintain its
current market share of around 8% and its position as the lead exporter.

Hattar plant’s initial capacity was 1.0 million tonnes per annum. In 2002, at a cost of US$20
million, plant capacity was enhanced to 1.15 million tonnes per annum to meet the ever
increasing demand for quality cement.

Owing to the management’s insight on growing market demand and the potential to export, in
2004 the plant’s capacity was further upgraded to 1.25 million tonnes of clinker production.
Listing on KSE

Despite all the challenges the cement plant, since it’s commissioning in October 1998, has been
generating positive cash flows. Bestway Cement was listed on the Karachi Stock Exchange in
February 2001 and since listing its market capitalisation has grown by approximately 850%
making Bestway Cement one of the largest companies by market capitalization. Bestway Cement
Hattar continues to play a key role in the local economy, providing direct employment to over
600 people with a further 1,500 jobs being created in the transportation of cement from the plant.
Due to its prudent policies and professional management Bestway has been one of the most
profitable entities in the industry since it commenced commercial operations in 1998 making
substantial contributions to the public exchequer through direct and indirect taxes.

Exports

The Company has been able to maintain its status as a market leader due to superior product
quality, effective marketing, customer focus and staff dedication. Prior to the commissioning of
Chakwal-I and Mustehkam Cement, Bestway enjoyed more than 8% of the market share of the
domestic market. Successful introduction of its brand in Afghanistan and more recently in India,
Africa and Middle East has made Bestway one of the largest exporters of cement in Pakistan.

Bestway Cement Chakwal-I

In February 2004 owing to the growth in market demand, Bestway Group took the strategic
decision of expanding its operations through the setting up of a 1.8 million tonnes per annum
cement plant near Village Tatral of District Chakwal, Punjab Province, Pakistan. This is the
Group’s second Greenfield development project at a cost of US$ 140 million.

The Company started its land acquisition in June 2004 and civil constructions in January 2005.
The plant specifications were compiled by Bestway’s own engineers selecting the best
equipments available. The raw-mill and coal-mill has been supplied by Loesche, fans by Venti,
gear boxes by Flender, Switch Gear by ABB, Bucket Elevators by Aumund, Motors, Motor
Control Systems and Automation by Siemens of Germany.

In April 2005, the Prime Minister of Pakistan, Mr Shaukat Aziz performed the groundbreaking
ceremony for the plant. Civil works for Bestway Chakwal were initiated in January 2005, the
Kiln was fired in May 2006 and the plant went into production in June 2006 which is an industry
record. During the planning and construction phase the company took all the necessary steps to
guarantee that the plant and machinery not only met the local and international environmental
standards but also exceeded them.
Bestway Cement Chakwal-I has led to the direct and indirect creation of jobs for more than
2,000 jobs - injecting a new lease of life in one of the most economically dispossessed parts of
Pakistan.

Mustehkam Cement

To further extend its presence in the cement industry, Bestway decided to bid for 85.29% of
equity of Mustehkam Cement Limited a 0.6 million tonnes per annum capacity plant, following
an offering by the Privatisation Commission, Government of Pakistan. The company’s bid of
approximately US$70.0 million was accepted in September 2005. Mustehkam’s plant is in close
vicinity of our existing operations in Hattar, District Haripur, NWFP. Though the production of
the enterprise had been discontinued in 1999, due to the hard work and dedication of our local
staff and management, Mustehkam started production in December 2005 – one month after
acquisition.

Capacity Enhancement and Modernisation

Mustehkam Cement has a glorious past with the company winning best performance awards
from the local stock exchanges. Through increased investments in capacity and plant upgradation
Bestway seeks to return past glory to Mustehkam Cement.

Recently, Bestway has embarked upon a major upgradation and modernization of Mustehkam. In
the initial phase, one of the process lines at Mustehkam is being upgraded to a capacity of 0.9
million tonnes per annum at an estimated cost of US Dollars 50 million. This enhancement is
being carried out mainly with the assistance of FL Smidth and will take the total production
capacity at Mustehkam to above 1.2 million tonnes per annum of clinker. Planning is already in
progress to upgrade and enhance the remaining production lines also.

Bestway Cement Chakwal-II

In May 2006 the Group announced plans for the establishment of a second 1.8 million tonnes per
annum capacity plant adjacent to our existing operations in Chakwal at a cost of US$180.0
million. This would be Bestway’s third Greenfield cement plant in Pakistan. This would be an
identical plant to the existing Line-1, having 1.8 million tonnes capacity.

By the end of the first quarter of 2008, through these investments, the Group’s cement
manufacturing capacity is set to exceed 6.0 million tonnes per annum, making Bestway the
second largest cement producer in the country.
Environment a top Priority

Bestway’s plants are environmentally friendly with emission standards that far exceed prevailing
acceptable standards, both local and international. The plants’ emission levels are 50 microns
whereas the Government of Pakistan’s acceptable standards are 300 microns and international
standards are 100 microns per cubic meter of air at NTP.

Quality Assurance

Bestway Cement is driven by high standards of efficiency and quality. Strict quality control
procedures are applied to ensure that these aims are achieved. The best quality control equipment
in Pakistan is in use at its plants. Apart from the usual equipment, Bestway’s laboratories are
equipped with state-of-the-art X-ray Fluorescent Analyzer and Diffractometer technology.
Bestway Group was a pioneer in introducing this technology in Pakistan for the first time. By
virtue of this equipment, the Company has been able to consistently produce better quality
cement than is currently available in the country. Since inception, Bestway has been producing
Portland cement of specifications far superior to the Pakistani, Indian, British and American
istandards.

Benefits of Cost Accounting

Cost accounting is a process of accumulating, measuring, analyzing, interpreting and reporting

cost information that is both useful and relevant to the internal and external stakeholders of a
business entity. External stakeholders are those who have a vested financial interest in a business
or company. For example banks (loans), financial houses (mortgages), investors (investments),
etc. Internal stakeholders are the business or company directors, managers, division heads, etc.

One of the many benefits of cost accounting is that it turns data into information, knowledge and
wisdom about a business entity’s operations that is useful for:

• measuring performance

• reducing or managing costs

• determining the fees or prices for goods and services

• deciding to authorize, modify or discontinue a program or activity

Another benefit is that information on the costs programs and activities may be used as a basis to
estimate future costs in preparing and reviewing budget requests. Once budgets are approved and
executed, cost information serves as a useful feedback on performance. Moreover, costs may be
compared to known or assumed benefits to identify value-added and non-value added activities

Reliable information on the cost of programs and activities is crucial for the effective
management of a business entity’s operations. Cost accounting is especially important for
fulfilling the objective of assessing operational performance. The objective is to improve the
efficiency and effectiveness of operations by furnishing program managers and others with
timely and relevant cost-based performance information to allow for continuous improvement in
delivering outputs and outcomes to stakeholders

Other benefits of COST ACCOUNTING include:

• It reveals profitable and unprofitable activities.

• It helps in controlling costs with special techniques like standard costing and budgetary
control

• It supplies suitable cost data and other related information for managerial decision
making such as introduction of a new product, replacement of machinery with an automatic plant
etc

• It helps in deciding the selling prices, particularly during depression period when prices
may have to be fixed below cost

• It helps in inventory control

• It helps in the introduction of a cost reduction program and finding out new and
improved ways to reduce costs

• Cost audit system which is a part of cost accountancy helps in preventing manipulation
and frauds and thus reliable cost can be furnished to management

Cost Accumulation Method Used

Stores, spare parts and loose tools are valued at weighted average cost except for items in transit
which are stated at cost incurred upto the balance sheet date. For items which are slow moving
and/ or identified as surplus to the Company's requirements, adequate provision is made for any
excess book value over estimated net realizable value. The Company reviews the carrying
amount of stores, spare parts and loose tools on a regular basis and provision is made for
obsolescence

Stocks of raw materials, work in process and finished goods are valued at the lower of weighted
average cost and net realisable value. Cost of work in process and finished goods comprises of
direct materials, labour and appropriate manufacturing overheads. Net realisable value signifies
estimated selling price less costs necessary to be incurred to make such sale.

Markup bearing borrowings are recognized initially at cost, less attributable transaction costs.
Subsequent to initial recognition, markup bearing borrowings are stated at original cost less
subsequent repayments, while the difference between the original recognized amounts (as
reduced by periodic payments) and redemption value is recognized in the profit and loss account
over the period of borrowings on an effective rate basis. The borrowing cost on qualifying asset
is included in the cost of related asset.

Liabilities for trade and other amounts payable are carried at cost, which is the fair value of the
consideration to be paid in future for goods and services received, whether or not billed to the
Company.

Analysis of Income Statement

Rupees
2011 2010 2009

Revenue/ Net Sales 14,814,797,196.0 7,487,162,751.0 5,649,378,012.0

Cost of goods sold 10,044,450,173.0 6 ,478,902,770 4,636,508,040.0

Gross Profit 4,770,347,023.0 1,008,259,981.0 1,012,869,972.0

Selling and 140,138,550.0 1 19,917,940 1 03,121,152

Distribution Cost
Administration 1,395,877,311.0 300,827,927.0 3 8,278,894
Expense
Operating Profit 327,972,309.0 (229,490,785.0) (396,632,200.0)
Other Income - - -
Other Operating 71,506,461.0 - -
Expense
Finance Cost 2,286,086,256.0 1,236,140,238.0 1,211,745,924.0
Workers' Profit - - -
Participation Fund

Profit For The Year 1,204,710,754.0 (419,135,339.0) 56,356,202.0

Before Taxation
Taxation (230,686,768.0) 587,716,818.0 4,817,471.0

Profit After Taxation 974,023,986.0 168,581,479.0 51,538,731.0

Income statements show the Sales, the CGS, the Operating Profit and the Profit before and after
Tax for the company at the end of each year for the five years. As we can see from the table
above, an increasing trend is seen for the sales of the company. Similarly, CGS has also
increased proportionately. Distribution and Administration Costs have also increased. Profit
before Taxation was negative in year 2010, and then it increased in 2011.

Analysis of Profit Margin Ratios

Profit Margins 2011 2010 2009

Gross Profit 4,770,347,023.0 1,008,259,981.0 1,012,869,972.0

Revenue/ Net Sales 14,814,797,196.0 7,487,162,751.0 5,649,378,012.0
Gross Profit Margin 32.20% 13.47% 17.93%

EBIT 3,490,797,010.0 (419,135,339.0) 56,356,202.0

Revenue/ Net Sales 14,814,797,196.0 7,487,162,751.0 5,649,378,012.0
Operating Profit 23.56% -5.60% 1.00%
Margin

Profit After Taxation 974,023,986.0 168,581,479.0 51,538,731.0

Revenue/ Net Sales 14,814,797,196.0 7,487,162,751.0 5,649,378,012.0
Net Profit Margin 6.57% 2.25% 0.91%

The first ratio that has been calculated is the Gross Profit Margin. The formula for this is Gross
Profit/Sales Turnover. This ratio basically tells us what percentage of Sales is the GP. The
higher the ratio is, the better the profitability. Bestway has a higher GP margin as compared to
the industry which shows it has a lower cost of goods sold as compared to the industry.

The second ratio is the Operating Profit Margin. This has been calculated as Operating Profit
(EBIT)/Sales Turnover. Operating Profit for Bestway Cement includes Other Income and Other
Charges have been deducted for its calculations. This decline can majorly be attributed to the
increase in Other Charges in 2008-9. Bestway has better results in all the years as compared to
the industry average.

The third ratio is the Net Profit Margin. It has been calculated as [Net Profit (profit after
tax)/Sales Turnover]. This ratio tells us what percentage of Sales is the Net Profit. The higher
this is, the better the profitability. The trend in this ratio has been the same as the Operating
Profit Margins. Net profit margin for Bestway also has a better figure as compared to the
industry which shows that Bestway is doing quite well in the market.

Analysis of cost of goods sold

2011 2010
Application of Activity Based Costing

Activity-based costing (ABC) is a special costing model that identifies activities in an

organization and assigns the cost of each activity with resources to all products and services
according to the actual consumption by each. This model assigns more indirect costs (overhead)
into direct costs compared to conventional costing models.

Implementation of Activity based costing:

1) Identify the products that are chosen object

In Bestway Cement Company we have selected cement as our cost object.

2) Identify the direct cost of the product

2011
Direct material 7,642,459,375
Direct labour 1,342,218,590
Total direct cost 8,984,677,965

3) Select the activities and cost allocation bases to use for allocating indirect costs to the
product

Activity Cost Hierarchy Cost Driver Cost Driver Quantity

Lime stone Batch Level No. of Materials 1,179,863 tons material
Quarry
Transportation Batch Level Delivery Time 3,000 delivery hours
Crushing Batch Level Machine Hours 16,500 machine hours
Raw Mill Unit Level Machine Hours 24,378 machine hours
Kiln Unit Level Machine Hours 14,667 machine hours
Grinding Batch Level Machine Hours 12,350 machine hours
Packaging & Product No. of Bags 119508 bags of 50 kg
Storage Sustaining
 4) Identify the indirect costs associated with each cost allocation base

Activity Indirect Cost Allocated

Lime stone Quarry 250,578,000
Transportation 192,311,000
Crushing 110,931,000
Raw Mill 1,011,350,000
Kiln 4,015,975,000
Grinding 4,934,503,000
Packaging & Storage 5,151,270,000

5) Compute the rate per unit of each cost allocation base

Activity Cost Pool Rate

Lime stone Quarry 212.37 per ton material
Transportation 64103.66 per delivery hour
Crushing 6723.09 per machine hour
Raw Mill 41486.17 per machine hour
Kiln 273810.25 per machine hour
Grinding 399554.89 per machine hour
Packaging & Storage 43103.97 per bag

6) Compute the indirect costs allocated to the products

Activity Cost Pool Cost Driver Indirect Cost Activity Cost Pool Rate
Rate Quantity Allocated
Lime stone Quarry 212.37 943890 tons 235973 tons 200453919 50113586
material material
Transportation 64103.66 3,000 delivery 1000 delivery 192310980 64103660
hours hours
Crushing 6723.09 16,500 machine 3300 machine 110930985 22186197
hours hours
Raw Mill 41486.17 24,378 machine 4876 machine 1011349852 202286565
hours hours
Kiln 273810.25 14,667 machine 2933 machine 4015974937 803085464
hours hours
Grinding 399554.89 12,350 machine 2470 machine 4934502892 986900578
hours hours
Pack &Storage 43103.97 119508 bags of 50 23902 bags of 50 5151269247 1030271091
kg kg
 7) Compute the total cost of the product by adding all direct and indirect costs assigned to
the product
Cost Total Per Unit Total Cost Description Total
Description
Direct Costs Direct Costs
Direct material 512367200 359.58 128091800 Direct material 512367200
cost cost
Direct labour 113631072 79.75 28407768 Direct labour 113631072
cost cost
Total Direct 625998272 439.32 156499568 Total Direct Cost 625998272
Cost
Indirect Cost Indirect Cost of
of Activities Activities
Lime stone 200453919 140.68 50113586 Lime stone 200453919
Quarry Quarry
Transportation 192310980 134.96 64103660 Transportation 192310980
Crushing 110930985 77.85 22186197 Crushing 110930985
Raw Mill 1011349852 709.76 202286565 Raw Mill 1011349852
Kiln 4015974937 2818.40 803085464 Kiln 4015974937
Grinding 4934502892 3463.02 986900578 Grinding 4934502892
Packaging & 5151269247 3615.15 1030271091 Packaging & 5151269247
Storage Storage
Total Indirect 15616792812 10959.82 3158947141 Total Indirect 15616792812
Cost Cost
Total Cost 16242791084 11399.15 3315446709 Total Cost 16242791084

As you can from the above table that Activity based costing have identified individual activities
as the cost object then allocated indirect cost to each product ‘activities. In this way it has
provided the cost description of each activity and given us enough information to make better
decisions on cost allocation. It will also help in pricing and product mix decisions, cost reduction
and process improvement decisions and planning and managing activities. Activity based costing
equally allocates the cost, as it gives us clear picture of a cost structure we can reduce our cost
where possible and operate more efficiently.

We can look at each activity cost of the product in order to reduce the cost and sell it at a lower
price to compete with other companies by offering lower price and high quality product which
would be their competitive advantage and they would increase their market share by doing so.
Breakeven Analysis

It is that quantity of output sold at which total revenues equal total costs and which results in
Rs.0 of operating income. Breakeven point tells the managers that how much output they must
sell to avoid a loss.

Particulars 2011
Total Per unit
Sales 14,814,797,196 4277.61
Variable Cost 10,477,594,872 2858.50
Contribution Margin 4,337,202,324 1419.12
Fixed Cost 4,009,230,015 747.25
Operating Profits 327,972,309 671.87
Contribution Ratio 0.2927636
Breakeven point 13,694,427,911 2,825,152

The above table tells us that the company should produce minimum 2,825,152 units to breakeven
and avoid the loss, if the company will produce fewer units than it will incur loss and if it will
produce more units then it will earn profits. So the company should produce more than 2,825,152
units to earn profits. On the other hand the company’s sale should be more than 13,694,427,911
to earn profit or it should breakeven exact at this amount, and if it will have less sales than this
than it would incur loss.

Budgeting
Budgeting is done by Bestway in each department. Each department forecast sales for their own
department and then in annual meeting these forecasts are aligned. Each department prepares its
own budget for quarter but it is aligned once a year. Usually keeping in view the demand and
growth prospects of cement industry sales target are estimated. Last year sales target was 115%.
It is elaborated in the table below.

2011 2011 (Budgeted)

Sales (15% increase) 14,814,797,196 17,037,016,775.4 Sales (15% increase)
Cost of goods sold(12.5%) 10,044,450,173 11,300,006,444.6 Cost of goods sold
G/P (32.2% of sales) 4,770,347,023 5,737,010,331 G/P (25.24% of sales)
Expenses (14.03% Sales) 2,074,071,607 2,385,182,348 Expenses (14.03%
Sales)
Net Income 2,696,275,415 3,351,827,982 Net Income

In this way expenses are estimated. The cash disbursement budget is prepared on daily
basis to pay trade creditors of the company. Bestway uses OD for facilitating the process
of cash handling. This cash handling is forecasted on the basis of cash collection and
forecasting the previous year cash budget. In this way budget for company is prepared by
matching revenue and expenditure.

Variance Analysis

Bestway cement Ltd forecasts sales on rupee basis rather than volume basis. However
percentage volume of product is determined on historical basis. It is difficult to prepare
flexible budget in our case because of high volatility in prices and contribution margin
varying from customer to customer. However variance analysis has been done using
actual and budgeted figures. These are presented in table below.
(2011) Actual Variance Budgeted
Sales 14,814,797,196 2,222,219,579(F) 17,037,016,775
Cost of goods sold 10,044,450,173 1.255,556,271(F) 11,300,006,444
G/P 4,770,347,023 966,663,308(F) 5,737,010,331
Expenses 2,074,071,607 311,110,741(F) 2,385,182,348
Net Income 2,696,275,415 655,552,567(F) 3,351,827,982

Bestway has not been able to attain its forecasted sales. Reason behind underperformance
is because of change in sales volume mix. On the other hand the overall deterioration of
the economy and the energy crisis has affected the anticipated growth in sales. Most
businesses related to the cement industry have been hit badly by the above mentioned
crisis and as a result cement industry had to bear these circumstances. Adding more,
unfavorable increase in expenses resulted in overall unfavorable deviations.
Conclusion & Recommendation

The reports conclude that Bestway has simple yet effective accounting system. It
provides all the information necessary for decision making. This system also has some
loop holes e.g. Bestway does not apply activity based accounting system which will
result in lowering costs further. Secondly, Bestway needs to put more effort to sell
products with high margin usually white cement. The method being used for budgeting is
quite straight forward and it needs to be modified and made at individual product level
for more accurate sales volume budgeting.

Concluding the discussion Bestway should upgrade its accounting system to SAP. This
will help easy tracking of funds, budgeting, and forecasting and expense management.
Quantity forecasts would enable Bestway to buy raw material at cheap prices and boost
profit margins. These margins can also boost by shifting business entirely to foreign
market to prevent from competition.

References:

http://www.bestway.com.pk
http://www.kse.com.pk/