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PERCENTAGE OF UTILIZATION:
The cement Industry has been performing well in the utilization of its resources. Fauji Cement Ltd. prepares a statement of production capacity that shows the percentage of utilization of the production capacity as well as the machine hours. The statement is divided into two parts. The first part shows the utilization of production capacity comparing the installed capacity with the actual utilization.
The above figure is an example of a cement manufacturing company that manages it’s cost accounts as shows the percentage of utilization of capacity. The cement industry has almost 97% utilization of capacity which is very good.
The other part of the statement records the utilization of the machine hours. This part compares the standard hours with the actual hours taken by the machine for the production.
The above figure is an example of a cement manufacturing company’s accounts showing the percentage of utilization of machine hours. The cement industry has almost 86% utilization that is somehow low and can be improved by effective measures.
COST ACCOUNTING SYSTEM:
Fauji Cement Pakistan Ltd. uses process costing system to determine the cost of products. The production process of the company has been separated into different cost centres i.e. Process Centre and Services Centre. The expenses which are identifiable and can be easily allocated to a particular centre are charged directly while the expenses are not easily identifiable are allocated to all other cost centres. The allocation is based on the proportionate role that each cost centre plays in the complete process of manufacturing and packing of cement. The rates of proportion of charging indirect cost were approved by the Board of Directors after conducting a study in 2005 in which the percentage were agreed. Moreover, the company keeps on revising these percentages yearly as per the new addition of fixed assets and apportioned basis of depreciation and insurance are altered therefore.
THE PROCESS OF RECORDING RAW MATERIALS:
The process of recording raw material in a cement industry starts from the receiving the order. The receipt of material is recorded in Receiving Report (RR) after inspection by the store department. The costing of the raw material includes all the cost that has been incurred up to the receipt of material i.e. the cost of material, transportation cost, loading and unloading cost and the other miscellaneous expenses occurred during the delivery of goods. The closing inventory is valued on weighted average basis.
The above figure is taken from the accounts of Fauji Cement Ltd to show how the cement companies record the costing of the raw materials. The raw material of a cement company majorly includes Limestone, Clay, Laterite and Gypsum. Their cost is recorded in the cost accounts and plus the carriage charges on materials are also added to them in order to come to the final costs of raw materials.
The cost of raw materials are recorded, furthermore, their consumption per unit of production is then compared with the standard consumptions in order to calculate the variances. These variances helps the managers to get information about the change in consumptions and can make decisions accordingly.
The above figure shows the method of comparing the consumption of raw material with the standard consumptions.
WAGES AND SALARIES:
The cement manufacturing companies records the cost of labor in two categories. The cost accounts are prepared into two different parts. The first parts shows the wages and salaries paid to the different categories of employees during the year. These cost categories are employees include Direct labour cost, employees on administration, employees cost on selling and distribution and the bonuses to workers and employees. The example of the first part of the labor cost account is shown below.
The other part of the labor cost accounts consist of the salary and perquisites of directors and chief executives. This part deals with the costs like managerial remuneration, company’s contribution to provident fund, compensated absences, utilities and upkeep. The example is shown below.
Fauji Cement Ltd also prepares the sheet of utilization of the labor hours. The sheet provides the information about how much proportion of the available days of direct labors is utilized. The sheet compares the available days with the actually worked days.
The company also prepares the sheet for recording direct labor cost per unit in order to compare them with the standard figures and calculate the variances. These variances helps the managers to decide upon the increase and decrease in the direct labor cost per unit and can take measures accordingly. The sheet is shown below as an example.
PROPERTY, PLANT AND EQUIPMENT & DEPRECIATION TREATMENT:
Except for free hold land and capital work in progress, the company reports property, plant and equipment at cost less accumulated depreciation and impairment loss. Cost of property, plant and equipment includes purchase cost, borrowing cost during construction phase and other directly attributable costs including trial run production expenses. However Freehold land and capital work in progress are stated at cost less allowance for impairment, if any. On management’s intend, when the assets are available for use, transfers from capital work in progress are made to the relevant category of property, plant and equipment.
At the specified rates, deprecation is recorded directly against income, on basis of straight line method for property plant and equipment taking into consideration their useful lives (from the date asset is in use till when it is disposed of). As the company is only producing cement, any depreciation charged to cost of sales forms part of the cost of cement. Lastly, the cost of the day to day servicing of property, plant and equipment are recognized in profit or loss as incurred.
To show an example of the allocation of depreciation, below is the chart that shows how the depreciation is charged to different departments.
STORES, SPARES AND LOOSE TOOLS:
Cost for stores and spare is determined using weighted average method. In specific, stores, spares and loose tools are valued at lower of weighted average cost and net realizable value less impairment, if any. However, for items in transit, their cost is determined on the basis of cost incurred up to the balance sheet date. Adequate impairment is recognized for items which are slow moving and/ or identified as surplus to the Company's requirement. On a regular basis, the carrying amount of stores, spare parts and loose tools is reviewed and provision is made for obsolescence accordingly. All items of stores and spares are recorded in stores ledgers and are being accounted for on perpetual inventory system.
STOCK IN TRADE
Stock of raw material, except for those in transit, work in process and finished goods are valued at the lower of average cost and net realizable value. Cost of work in process and finished goods comprises cost of direct materials, labour and appropriate manufacturing overheads. However, materials in transit are stated at cost comprising invoice value plus other charges paid there on less impairment, if any. Stock of packing material is valued at moving average cost less impairment, if any.
Net realizable value signifies the estimated selling price in the ordinary course of business less estimated cost of completion and estimated costs necessary to be incurred in order to make a sale.
Borrowing cost includes exchange differences arising from foreign currency borrowings to the extent these are regarded as an adjustment to borrowing costs. Borrowing costs are recognized as an expense in the period in which they are incurred except where such costs relate to the acquisition, construction or production of a qualifying asset in which case such costs are capitalized as part of the cost of that asset.