The History Of The Traditional Accounting System Accounting Essay

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Quality occupies strategic importance in industrial environment. It is used as one of the key competitive tools in era of globalization through which product differentiation could be created and market share is improved (Juran 1988, Tapiero 1994, and Eston and Jarrel, 1998).To stand successfully against competitors certain criteria like quality of product, product range, delivery and price etc should be kept in mind. Cost of quality (CoQ) is very broad concept. Numbers of operational definitions have been put forward to get comprehensive understanding of quality costing (Dale, 2003). Quality cost is referred widely as the costs associated with operating, maintaining, designing and implementing a quality management (QM) system, resources costs that are continuously engaged in improving system, failure costs associated with products as well as services, and all costs including non-value added activities having impact on achieving quality standard services and products (Dale and Planket, 1995). Quality costing is capturing attention of all managers in recent era. Good quality is somewhat related to increase of productivity, decrease in quality costs &thus increases sales and eventually leads to higher profits( Dale 2003, Chupra and Garg, 2011). Quality Costing is a Comprehensive system (Chiadamrong, 2003). QC is directly related to RoI, return on equity, ( jaju et al, 2007) .

1.3Problem Statement

Quality costing is a neglected concept. Although different companies insist on quality costing standards, there are very few companies especially in Pakistan that apply this concept for measurement of true costs. In order to depict a true picture of company's productivity, effectiveness and efficiency quality costs must be categorized in a systematic manner. It should be measured in quantitative ways to determine its affect in financial terms.

1.4 Research Question:

The current research is carried out to answer the questions such as how quality costs are defined and categorized? What are the general methods to measure quality costs? How could the determined relationship of these quality costs help management to focus its efforts towards vital few costs in order to improve productivity?

1.5 Purpose of Study:

Main purpose is to answer the questions that why cost of quality is important to discuss. In countries like Pakistan, how a small manufacturing firm could use quality costing to improve productivity and sales. Study discusses different reasons why firms do not systematically apply quality costing approach and what benefits could be achieved by identifying costs in a systematic manner.

1.6 Objective of study

The objective of study is quantifying quality costs as well as examining and analyzing vital few costs to improve productivity and profitability in a workable manner. The methodology is presented to check "Higher Quality- Lower cost" phenomena. Although controlling does not directly reduce quality problems but there are some critical control points where hazards can be eliminated, reduced or prevented successfully (Dror, 2010).


Study will be helpful for management to understand the importance of quality improvements and identification of areas where focused efforts should be made. The study focuses on FMCG. In Fast moving consumer goods (FMCG), if broken down further, study addresses the costs associated to standardizing and maintaining quality of highly perishable items having very short life cycle. The study suggests that small and medium manufacturing organizations could increase their profitability by taking simple steps i.e. by properly measuring the cost associated with scrap, rework and defective items, customers' complaints etc. Hence, it directly affects failure costs .By tackling these costs, overall cost could be minimized. There are a number of models and techniques used to measure quality costing. ABC costing, PAF model and COQ are among those. The basic theme is to identify the components that directly affect cost of quality and indirectly affect the profitability of firm. Some studies further check their relationship in order to identify the cost effective areas and to help management to focus its effort towards reducing costs.

1.2 Quality Costs Model:

Traditional accounting system doesn't take into account the subjective attributes of products and services. CoQ methods are activity/process oriented while traditional accounting system considers categories of expenses instead of activities. So it is viewed as poorly fitted for generating reports on quality measurements. ABC costing model simply states that "Resources generate activities and activities generate costs". COQ-ABC model gives a better picture by merging and sharing common information for better management decisions.

Activity based costing; ABC first identifies the activities in an organization, assigns costs to the identified activities and then measures overall cost of quality by significantly using the information.

According to ABC



COQ represents Total Cost of Quality

PC= Preventive Cost

AC= Appraisal Costs

IFC= Internal Failure Cost


EFC= External Failure Costs.

1.2 Bases for Calculating Cost of Quality:

Percentage to Sales revenue is used to calculate cost figures.

These costs are further divided into sub categories and separate bases for calculating these costs have been defined. Quality Matrixis developed to check the relationship of each sub categories of costs with each other. Quality matrix is a tool for identifying the areas where efforts are required and rank them according to their relative importance.

1.3 Relationship of loss to Society with Prevention, Appraisal, an

Failure cost

Taguchi quadratic value loss function is another concept that is used to calculate those quality related losses that are often neglected. This approach is one of the effective ways, used to calculate costs of "Non Actionable" differences in Product quality. In third part model is developed to check the relationship of Preventive costs, Appraisal costs, failure costs, loss of Goodwill costs and Loss of opportunity costs with dependent variable customer dissatisfaction due to deviation of single characteristic of a product.

If L(v) = monetary value of customer dissatisfaction due to quality loss

= Preventive cost

= Appraisal Cost

=Faliure cost

= cost of Loss of Opportunity

Than we may say

L (v) = α - - - - - + -------------1

(Loss to customer from deviation of single characteristic of product is a function of Appraisal and Prevention Costs)

L (v) = α + + + ----------------2

(Loss to customer from deviation of single characteristic of product is quadratic function of failure cost)


L(v) = α + ---------3

(Loss to customer from deviation of single characteristic of product is a function of cost of Loss of opportunity)



Quality is a very old and broad concept introduced by Juran (1950). Identification of a single accurate definition of cost of quality is not easy and straightforward (Schiffauerova and Thomos, 2006). In early 1950's, Feigenbaum introduced the concept of quality with a name of TQC i.e Total Quality Control. According to Feigenbaum (1991) Quality is a total concept. It includes standardizing all the activities such as maintenance, manufacturing, marketing and engineering associated with products and services, designed to meet customer's requirement.

Quality costing is getting key importance in debates over quality. Quantifying quality is difficult but not impossible. It can improve productivity if treated properly. Traditionally it was suggested that achieving Quality against cost is "trade off decision" but there are number of examples where it is proved that the statement is just a norm. Quality increases productivity, if properly managed reduces quality costs and increases sales. Eventually market penetration, achieved through quality, leads to higher profits (Chopra and Garg, 2011). It is a comprehensive system (chiadamrong, 2003). Standard accounting system is not just enough while compiling, interpreting and analyzing quality costs (jaju et al, 2004). In spite the fact that quality is considered as major tool to get competitive position in market, quality costing is still neglected (Schiffauerova and Thomos, 2006). Still in many organizations, managers usually do not practically support the implementation of Quality management system. As a result companies do not track quality costs, systematically.

Categorizes presented by Feigenbaum (1956) is almost universally acceptable. It includes failure, appraisal and prevention costs.

Prevention costs further classified as new product cost, evaluation costs, quality planning, training and education.

Appraisal costs are inspection of material (inward and outward). Service and process audits, final and in process inspection etc.

And Failure costs after dividing into Internal and external Failure are Direct failure costs, consequential costs, poor efficiency costs, Indirect failure costs such as customers incurred costs, intangible costs, loss of good-will, Environmental costs( Moen, 1998).

These costs are very important to be taken into account while calculating overall cost of products in manufacturing firms. The reason is some costs related to customers' perception about a product are although difficult to quantify but if neglected could lead to serious losses. Top managers usually make decisions on the bases of traditional accounting information. Unfortunately these accounting standards do not consider perception based costs. Objective principle is one of the reasons (Moen 1998). For Admin, no discrimination is usually made between doing things and doing things over (IAQ, 1995).

Individually minor problems are very much unprofitable to remove but collectively they are not acceptable for end user. Failure costs such as failure to meet customer's requirement, rework, scrap and increased down time are some examples (Moen 1998).

According to Chauvel and Andre (1985) there is a significant positive relationship between preventive and failure costs. Overall quality costs could be reduced by investing in preventive costs. However study carried out in 1991 by Marcellus and Dada shows that time plays a vital role in reducing failure costs without corresponding increase in both Appraisal as well as prevention costs. Further Ittner (1996) supported the concept presented by Marcellus and Dada. Kumar and Brittain (1995) carried a study to observe a relationship between reliability and quality (ROQ) and TCOQ. Normally in the beginning TCOQ is as high as 25% of ROQ. With the passage of time figures goes down to as low as 3%. Thus the Large value of TCOQ is linked with lower prevention, higher failure and higher appraisal costs. This reveals that when ROQ is low TCOQ is high and vice versa.

Juran presented a relationship between Cost of Quality, Quality levels, Failure costs, Preventive and Appraisal Costs. He proposed his well-known model for minimizing total cost of quality as in Figure 1.  According to model, the sum of appraisal and prevention costs is unavoidable costs. These are represented as a non-decreasing convex function of conformance rate.  This functional implies that higher rates of conformance requires increasingly more stringent quality appraisal and/or more extensive prevention, causing these costs to climb at an increasing rate.  Likewise, the sum of internal and external failure costs, termed avoidable, is modeled as a non-increasing convex function of conformance rate implying that these costs climb at an increasing rate as conformance level.

However Juran's concept of"zero defects"as the basis of a firm's quality strategy is unacceptable for many researchers.To reconcile this dilemma, many authors led by Crosby [1979] have attempted to show that the minimum cost solution should indeed occur at the perfect conformance point. 

Some other authors, has argued for the relatively flat shape of prevention costs. Diallo et. al. [1995], and Carr and Tyson [1992] views are , if the prevention cost function is not heavily convex but sufficiently flat, minimum cost will be attained at full conformance level as in figure 2.  In the same spirit, Crosby himself claims that "prevention costs do not increase marginally, that no problems are diabolically difficult, and that systematic approaches to prevention of defects do not increase in cost."  This line of reasoning seems to resolve the dilemma in a rather neat way.

The crux of this argument is based on an untested presumption however.  After all, the shape of the prevention cost, or all other costs for that matter, is an empirical question to be considered separately for each individual situation.  There is absolutely no a priori basis on which one can justifiably make such a blanket assumption. 

Benefits that are associated with monitoring QC not only derive financial benefits but help to enhance performance and reliability of product to quality standards (Kumar and Brittan 1995).

Barad and dror (2008) presented series of paper on quality costing. They used House of quality matrix; HOQM to rank the priorities of companies' objectives in relation with improvement needs.

Tannock and Saelem (2007) added disruption costs (D) in PAF quality costs model. According to them disruption cost is the cost that could be expressed in terms of proportionate defects, p, resulted from non-conformance and incurred as a result of disruption of manufacturing process. They first defined and then quantified disruption costs using simulation approach in manufacturing scenario. They found that by adding disruption cost in PAF model, cost increased significantly, especially at non-conformance level.

Dror, 2010 in his paper redefined a method to calculate quality cost in a meaningful way. He presented an innovative methodology so that companies could use their quality cost elements' information in integration with their quality system. He uses House of quality Matrix, in combination with Annova and Control charts to identify the vital few costs and to analyze causal linkages of these costs.He used two manufacturing firms indulged in two different business and proved that production problems are firm specific so modified techniques should be used.

A dynamic model was also discussed in this context by Kim and Nakhai, (2008). They used illustrative examples to give evidences about the significance of their models. According to them, traditional models like PAF don't accurately explain the behavior of Quality costs. Findings suggest that when quality programs are effectively running, higher-Quality and low costs areobserved. However, for Improvement programs that are less effective,higher quality against higher costs are observed. Thus quality level, quality costs and effectiveness of quality improvement programs altogether could better be used for budgeting decisions and planning.

However, Taguchi (1989), in his book has proposed a quadratic function through which intangible losses could be measured in monetary terms. According to him even deviation from a single characteristic of a product from the standards could cause a significant decrease in customers' loyalty. The function he discussed is known as Taguchic's quadratic value loss function.

According to Freman (1995, 2008) Taguchi's proposed function to calculate intangible losses is an important alternative to overcome the failings of PAF, ABC and Pc models.

Taguchi's quality loss function is a great contribution in measuring cost of quality in near to accurate way. It provides a method to quantify all aspects of Failure costs that are intangibles and hidden ( Angell and Chandra, 2001).

Another valuable work has been done by Cheah et al in 2010 to track some hidden costs in a manufacturing firm. It is an action research in which authors measure the impact of quality programs on firm's overall costs and revenues. Cost of loss Opportunity is discussed in detail and it is suggested that by taking effective decision about availing opportunities, profit margin could be increased significantly.

One of the method used for calculating quality related costs in manufacturing organizations is Taguchi approach. It is statistical method developed by Geinchi Taguchi. In some critical ares like biotechnology and engineering the method proves to be a significant tool to study variations.

Due to some criticism on "mean as Blue" theory and "law of large numbers" Taguchi developed a new approach. He named it as "value Loss function". In manufacturing sector to improve estimated mean, "outcome of the process" along with "designs of treatment process" method is used to predict target outcomes.

Traditional quality methods like PAF ignore few important factors like "private costs" and "social costs".

Private costs are the costs which are internal to the firms production while social costs are combination of private costs and external costs. Public economic now suggest that through correcting private costs as well as social costs brand reputation quality could be enhanced. Although these costs are near to negligible if calculated separately but then time plays its part and the losses reach at that point they are two great to deny making targets inaccessible. Taguchi , thus tried to find the solution statistically.

Among the three approaches, "taguchi on-target minimum variation" suits manufacturing organization having assembling department.

Reasons why taguchi used his methods are several but most important are

Taguchi was follower of Fisher and takes least square method as a good approach

Loss (in total) could be measured by the variances and for uncontrollable variances the additive techniques could be applied.

It is "symmetric term in the Taylors series expansion of real analytical loss function relations that causes the losses.

Taguchi is of the view that manufacturing process should be guided from the beginning to avoid variations that causes losses. It is three stage process i.e

System design ________related to innovation creativity

Parameter Design _____several values need to be set related to Designs and dimensions seeking relationships between noise variables and resources that could used to control variations

Tolerance designs _________ peroto Analysis.

To extend each experiment Taguchi used "outer arrays". he thus tested pair of combinations instead of possible combinations.

2.1 Literature Gap

Different models have been presented to measure quality costs but these models are considered mere a technique to identify and measure quality related cost of firm. ABC model is used to measure costs drivers. Then, by using calculated amount of these costs a correlation Matrix is discussed to understand relationship of different costs with elements of ABC model. Preventive and appraisal cost is analyzed as a relationship with Taguchi value loss function. Though a vast literature is available but we failed to find out the literature relevant to the current relationship. The aims of the research described in this paper were firstly to investigate the practical aspects of data collection and measurement of COQ; and secondly to examine the manner in which the resulting information is used as an integral part of business improvement.

2.3 Common Models:

Some of the commonly internationally recognized and known quality models are as under. Unfortunately very small percentage of Local firms in Pakistan, used these models to evaluate quality related costs.

PAF models

P + A+ F

ABC models


Process Cost Models


Opportunity/ intangible Cost models


In Resent research, both ABC model along with some components of PAF model is used to address quality related issues. ABC costing is activity based costing first identify cost drivers and then evaluate their role in manufacturing process. As mentioned earlier, it is very difficult to get accurate required data in organization where no such measure has been taken( references needed). With the help of management this issue could be resolved. However once the initiative is taken, it becomes very easy to evaluate different programs by using same methodology.

Cost of Quality is one of the recognized evaluating methodologies used in many business enterprises for process analysis and maximizing profits. Current research uses data of Silver lake foods, to measure COQ. Traditional approach for the development of data based MIS (management information system) was used by the company. However there was a room for introducing more Account heads to address quality related problems and evaluating quality in quantitative terms. So accounting data recorded manually along with MIS is used to get a precisely true picture of quality costs of the organization.

It is in fact a difficult job to gather data required by quality evaluation process (Reference to put). However once recognized could be a helping tool to manage costs and get simulated results with almost very low or near to negligible cost increment in monetary terms. Simulated software and dash board concepts could be implemented by using same data. In this way analyzing the effect of increasing or decreasing of one variable or more than one variable at a time could give valuable information for future planning. The main thing is Accounting department must worked with quality department to make the effort fruitful. Without the true involvement of all departments especially Finance department, it seems difficult to achieve positive results.

To evaluate Quality costs, Sales in percentage term is used as a base. Quality components as recognized by ABC costing and PAF approach is used to categorize costs. Management helped a lot to identify cost drivers at all levels. Monthly data is gathered while where it was not possible to get actual data on monthly basis (like Depreciation and fixed costs) average amount is used. Costs are tabulated and trends are generated in terms of percentage of sales.

Data once developed is then used for further analysis in different techniques like Matrix building and control charts evaluation.

In Pakistan except some multinational companies, local companies don't bother to evaluate their product performance on quality bases. As a result the experience low profits and declining growth in their earnings. In such organizations the initiative to identify quality cost components and related heads are very difficult to obtain. In Kims, Accounting heads as already identified by accounting department is use. then data is gathered about those heads which is required by ABC costing techniques. Process costing components are revisited, cost centers are identified, direct interviews are carried out and then with the help of top management and general manager other relevant data is collected.

Current research used data of Silver lake foods, to measure COQ. Traditional approach for the development of data based MIS (management information system) was used by the company. However there was a room for introducing more Account heads to address quality related problems and evaluating quality in quantitative terms. So accounting data recorded manually along with MIS is used to get a precisely true picture of quality costs of the organization.



In the light of literature review we have developed the following theoretical framework.

3.1 Methodology:

Micro data on continuous bases, with all data reported monthly of a manufacturing firm from Jan2009 to Dec 2010 is used. Direct interviews from Company's personals have been used to generate information. It became clear from these interviews that the majority of costs were not readily available from the Company's existing systems; this is consistent with similar findings from Dale and Wan (2002). Costs were then allocated to the relevant category and where necessary the collation methods were amended and new assumptions constructed. Cost sheets, Labor sheets and Material ledger Account has been viewed and figures are calculated. ABC costing and COQ models are used to identify cost centers and Process overheads. Mini Tab, Excel and SPSS are used for statistical calculations and analysis of data. Quality Matrix, One way ANOVA is used to indicate vital few costs. F-statistic is used to test for any significant mean differences.MSE criteria is used by Taylor in 2000 as quantitative tool for selecting vital controllable costs and failure costs that could be improved. To validate linkage between identified costs, control charts are used (Dror and Barad (2006), Montgomery (2004)).Correlation and regression Analysis is used to test hypothesis.

3.2 Hypothesis

= there is significant relationship between Preventive Costs and Cost of Quality.

= there is a significant relationship between Appraisal Costs and COQ.

= There is a significant relationship between Failure costs and COQ.

= L(v) is significantly related to Failure costs

= L (v) is significantly related to Prevention and Appraisal costs.

= L (v) is significantly related to Loss of Opportunity costs.

3.3 COQ drivers:

Cost drivers are identified by involving top management and members of accounting departments. some changes are also made as deemed necessary by management. Where data to the relevant category is unavailable or to be modified average data is used.

Cost drivers identified are:

A: Cost of Preventive Measures.( CQP)

B: Cost related to Appraisal Activities (CQA)

C: Internal Failures (CQIF)

D: External failures (CQEF)

Sub categories of each Cost driver used are


Quality planning ----QP

Process control-----PC

Data handling--------DAA


Verifying Designs-------VD

Quality system------QSDM

Quality reporting---------QR

Improvement Projects--------IP



Inspection of material------------TIM

Online testing---------OIT

Setups Cost for inspection____SCI

Equipments and supplies inspection----------IES






Yield losses----YL

Engineering designs------------ED

Product development, New-----NPD



Customer Complaints-------CC

Warranty costs--------------WC

Material returned--------MR

Credit Allowances-----CA

Loss of Goodwill-----LG

Cost of Opportunity losses---QCOL

3.1 Explanation of Cost Drivers selected:

To record details, Month wise data is collected from Jan 2010 to Dec 2010 . Where the data is available on annual bases, Average figures are used.

QP: time period spend by Management on hourly bases is used to calculate Cost of planning. On average Planning time is estimated to be 120 minutes, 5 days in a week & On average monthly figure is 2400 minutes.

PC: process controlling cost is very difficult to identify accurately. Management and data recording department however agree to include Process in term of monitoring and documentation cost in this context. These two heads cover Salary & wages of staff monitoring the quality, cost of control charts and data sheets etc.

DAA: data handling cost, also regarded as data analysis and acquisition cost is recorded in the shape of reports collected from MIS (management information system) and manual works where required. Time spent in these activities is used to calculate cost.

TPD: personae development trainings are regular feature of Silver lake industry. Opportunities are given to employees to go outside and attend seminars while in house training sessions are also organized with well known trainers from industry and academia. Training expenses are recorded to calculate TPD cost,

VD: design verification and test runs techniques are used for new product development. Average time period for the test run is worked out. Man power cost on average monthly bases is estimated. Utility consumed and man power utilized is summed up to record cost of VD.

QSDM: Food safety management system, Quality Management and Environmental management system are managed and maintain by KIMS. Middle managers and top managers played their part to develop the systems. Overall time spends on the system management and maintenance along with petty expense incurred is used to calculate such cost.


MIS system generates reports in integration with Data base Management system. Man power consumed and Actual cost incurred is recorded on monthly bases.

IP: The projects which are carried out to address different issues like minimizing wastes, enhancing productivity, providing hygienic and safety conditions etc are Improvement projects. Data related to all actual expenses is gathered. Improvement made consultant fee and minimizing problems cost are taken into account for this purpose.

PM: salary & wages of almost 6 personnel engaged in the job of maintenance is considered to calculate monetary values PF maintenance costs.

TIM: high class laboratory is developed by the company to test different incoming materials. Trained staff is available to run tests. Environmental tests and specific tests according to the situation are out sourced. Cost of trained staff in terms of their salaries, testing equipment costs and highring services cost are considered to calculate TIM costs.

OIT: process steps and inspection criteria are defined by management with the consensus of trained inspection staff. Samples are taken to test the product on criteria specified. Staff wages and salaries are taken as a measure for calculating on-line inspection costs.

SCI: Depreciation cost of inspection setups is calculated with the help of work department and used as a base to estimate costs.

IES: for this head deprecation cost with the help of finance department is estimated.

QA: internal as well as external audits are carried out in organization. Monetary values of expenses related to certificate bodies, TADA and lodging etc. are used to calculate quality audit costs.

S: Actual data for in terms of cost figures is obtained from production department and inspection department.

R: to work out the data about cost of rework Cost allocated to different cost centers are used. Thus on different process steps cost of rework is calculated.

DT: daily data for the time period in which production process is not possible is calculated on daily bases. The recorded data is then compiled to find down time on monthly bases. Production capacity is used as a a base to calculate expected capacity. Gross profit on units lost is calculated and taken as cost of quality paid due to down time.

YL: As there is by avg. 30 minutes delay in production due to change in shifts, plant efficiency is calculated for 7.5 hours instead of 8. Breakdowns and other delays are counted separately. It is thus found that almost 6.25% yield is lost. Accumulated gross profits on these yield losses are used for calculating cost.

ED: Engineering design cost varies on case to case basis. Such as

Due to the some problem in installation, the unutilized capacity of the candy plant is 50%. It is used to calculate internal failure cost of designs.

Inefficient baking in biscuit department results in some additional failure cost. So it is also taken into account.

Value received as a result of selling surplus hardware is calculated on monthly bases.

Costs of Biscuits spoiled due to overheating are calculated. Data is gathered from management system ENERCON.

Cost of excessive chemicals, utilized in wrappers printing is also considered.

NPD: The entire newly developed product that failed to attract the customers or unable to give positive returns are considered. Abandoned products result in resources wastage. Printing cylinders costs, development costs and left over packing material costs are calculated.

A: Actual costs of the accidents occurred is considered. As a petty expense, Rs. 2000/= is added against each minor expense.

CC: from the ledgers of customers, the product returned is calculated. Expenses incurred to ship the product are also considered.

WC: Company exports different products in countries like UK. USA and Afghanistan. Warranty claims honored value is considered as a component of quality cost.

MR: Total value of stocks returned from the market as a whole is considered.

CA: credit allowance figures are calculated from ledgers account like delays, damages, quality related complaints and wrong supplies etc.

LG: Midi packed products were revised by the company due to a major problem of abrupt increase in input cost. Due to non acceptance of this increase in price from the customer, prices were then set back to the original levels. The expected profit due to increase price is considered as loss of goodwill.

LP: unutilized capacity is considered as loss of opportunity cost. The production capacity of the plant is considered in term of product mix and price index. plant is considered in term of product mix and price index.



According to Helberg, Galletly and Bicheno (1994) there are two main aims of ABC

1. To allocate overhead costs

2. Pinpoint the problem areas generating wastes.

Thus the logic behind activity based costing is, "Activities in a working setting consume resources" while "products produced as a result, consume activities".

In Silver lack, one of the brand Kims is selected to study ABC. Different products like candies, toffees, powdered drinks and biscuits are produced. As the main focus of Kims is on biscuits so all the information related to biscuits is taken into account. Organizational goals are kept in mind while processing data.

Biscuits Manufacturing Process

Mixing: different types of biscuits are manufactured. Creamy and non creamy are two categories. At this point raw material is mixed to make dough. Cream for sandwich biscuits is also prepared at this stage. Thus dough is sent to next step i.e. Cutting department while cream is sent to creamy section.

Cutting: to shape the dough according to design, it is sent to cutting section

Baking: baking is done in ovens. Sui gas is used to heat the ovens.

Cooling: different cooling machines are used to cool down the baked stuff.

Creaming: the biscuits that use cream as an ingredient are sent to creaming section.

Packaging: Different packaging modes are available. Biscuits are first wrapped in plastic packets, then secondary packaging i.e. in cartons and then transfer to warehouse.

Shaping CoQ in ABC

In traditional accounting system overheads are just recorded as a total of production process. According to ABC cost centers should be clearly defined and cost associated to the activities in cost centers should be measured. In this case

Mixing overheads.

Processing overhead &

Packaging overheads

Are the cost centers identified. These cost centers are further divided into relevant sub activities.

For example According to traditional Accounting system, overheads for May 2010, is




Fringe Benefits


Repair and maintenance


Power, Gas and Fuel


Other related overheads




While using ABC we first identify in which activities labors are involved. How much power and fuel is consumed by which machine. What is the proportionate share of fringe benefits distributed among the major cost centers?

The difficult task is to collect data about the manufacturing overheads at all levels. For this purpose general journals and Ledger of all the major Overheads are obtained.

For Labor overheads

Weekly Biscuit attendance report in each cost center based on day to day record is considered. To cross check the accuracy of data, efficiency of workers and products produced sheet is also analyzed. Over time sheets for the month is also analyzed. Performa of these sheets are given in appendix.

For Fringe Benefits and Accident costs, Account activity report having ending balance is used.

For cost center named Baking electricity bills, Sui gas bills and fuel vouchers are collected and data is recorded. Data about the power losses in oven at different levels is also gathered and used in analysis. Time lost due to WAPDA fault is also calculated.

Printing cylinders data is also gathered. Wastages as per printing machine and wrapping machine are collected.

Data related to wrapper usage in each packaging department on shift to shift and daily basis are collected. Sheet for per carton wrapper consumption is also taken into Account for the purpose of analyzing separate costs in packaging department's sub heads.

Thus a detailed actual data is gathered and systematically arranged to generate effective results.