Ma0907 13 New

From the Holy Qur-n
In the Name of ALLAH, the Most Magnificent, the Most Merciful.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. I swear by the sky and by the Night-Comer, And what may let you know what the Night-Comer is? The star of piercing brightness! There is no human being, but there is a watcher over him. So, let man consider of which stuff he is created. He is created of spouting water That comes out from between the loins and the chest-bones. Surely He is Powerful to bring him back On a day when all the secrets will be searched out, And he will have neither strength (to defend), nor a supporter. I swear by the sky that rains, And the earth that cracks open (for plants), This is a decisive word, And it is not a joke. They are devising plans, And I Am devising plans. So leave the disbelievers alone at the moment; give them respite for a while.
Translation : Mufti Taqi Usmani http://www.quranexplorer.com
Surah: 86 - Surah At-Tariq; verses 1 to 17
Our Vision
To be the Preference in Value Optimization for Business
Our Mission
To develop strategic business leaders through imparting quality education and training in Management Accounting, to continually set and upgrade professional standards and to conduct research bringing value-addition to the economy.
Journal is also available on ICMAP Website : www.icmap.com.pk
I.C.M.A.P.
ICMA
Pakistan
National Council 2012-14

President and Chief Executive
Mr. Zia ul Mustafa, FCMA Chairman: Executive, Education and Disciplinary Committees
CFO & Business Administrator Expo Lahore (Pvt) Ltd.
Estd. 1951
Institute of Cost and Management Accountants of Pakistan
Vice President
Mr. Ghulam Mustafa, FCMA
Chairman: Examinations and Technical Support & Practicing Development Committees Partner, Qazi & Co. Cost & Management Accountants
Honorary Secretary
Mr. Abdul Wasey Khan, FCMA Chairman: Students Affairs Committee
Manager - Internal Audit Pakistan Telecommunication Company Ltd.
Honorary Treasurer
Mr. Shahzad Ahmad Awan, FCMA
Chairman: Research and Publications Committee Chief Officer (Billing & Recovery) Sui Northern Gas Pipelines Limited (SNGPL)
Members
Mr. Mohammad Ashraf Bawany, FCMA
Chairman: Quality Assurance and Ethics Committee Deputy Managing Director Linde Pakistan Ltd.
Research & Publications Committee

Chairman/Chief Editor
Mr. Shahzad Ahmad Awan, FCMA
Mr. Sajjad Ahmad, FCMA Chairman: Audit and Members Welfare & Coordination Committees General Manager (Cost Accounts) Pakistan Telecommunication Company Ltd.
Mr. Jawed Mansha, FCMA
Chairman: Corporate Relations & Communications Committee Assistant Secretary & DGM Corporate Affairs Pakistan International Airlines Corporation
Members
Mr. Nazir Ahmed Shaheen, FCMA Mr. Amir Raza, FCMA Mr. Anwar ul Haq, FCMA Mr. Mohammad Iqbal Ghori, FCMA Mr. Naeem Haider, FCMA Mr. Muhammad Imran Afzal, FCMA Mr. Aamer Ijaz Khan, FCMA Mr. Saqib Masood, ACMA Mr. Waqar Akhtar, ACMA Mr. Kamran Mahmood Butt, ACMA Mr. Syed Adnan Hussain Shah, ACMA
Mr. Abdul Khalil, FCMA Chairman: Continuing Professional Development (CPD) and Seminars/Conferences Committee
General Manager Finance Askari Aviation Pvt. Ltd. / Army Welfare Trust (AWT)
Members - Government Nominees

Mr. Mahmood Akhtar
Chief Cost Accounts Officer Finance Division Ministry of Finance
Mr. Tahir Mahmood, FCMA Chairman & Commissioner (Co. Law Division & IT Dep.) Securities and Exchange Commission of Pakistan (SECP) Mr. Muhammad Abdul Basir
Chairman: Public Sector Coordination Committee
Secretary
Email: rp@icmap.com.pk URL: www.icmap.com.pk
Deputy Auditor General (APR&SD) C/o Auditor General of Pakistan
Mr. Muhammad Haroon Rasheed

Executive Director, FRM State Bank of Pakistan
Volume : 22.3 l May-June, 2013
MANAGEMENT ACCOUNTANT
Official Journal of Institute of Cost and Management Accountants of Pakistan
The only Professional Journal in Pakistan with a circulation of over 10,500 copies per issue
Inside
4 5
From the Desk of President and Chief Executive From the Desk of Chief Editor
C o s t
24 27 28
Cost Audit and Cost Records By Muhammad Akbar Qamar FCMA, APFA, B.Sc. Advantages of Cost Audit
By Mohammad Iqbal Ghori, FCMA
Member, R&P Committee-ICMA Pakistan
Role Models Success Story

6
Mr. Khurshid Ahmad, FCMA
Former President, ICMA Pakistan
Cost Competitiveness - the Sustainable Business Strategy

By Dr. D. Mukhopadhyay
31
Interview Section
8
An Exclusive Interview with
Total Cost Management (TCM) for Sustainable Performance Excellence By P. K. Jayaram, FICWA
Activity-based Costing (ABC) and Activity-based Management (ABM) Implementation Is This the Solution for Organizations to Gain Profitability? By Ildik Rka CARDO, tefan PETE
36
Mr. Tahir Mahmood

Chairman, Securities & Exchange Commission of Pakistan (SECP)
11 An Exclusive Interview with
42
Cost Accounting
By Asif Hussain Siddiqi, APFA
Mr. Muhammad Abdul Aleem
Meritorious Article
46
Lean Accounting: What's it all About?
By Frances A. Kennedy, CPA & Peter C. Brewer, CPA
Secretary General, Overseas Investors Chamber of Commerce & Industry (OICCI)
Focus Section
14
Cost Accountants' Role in Economic Growth of Pakistan
By Research & Publications Department, ICMA Pakistan
Articles Section
36 51 36 55
Budget 2013-14 - Highlights
Evaluation of Accounting Practices: Some Insights from the Era of Hazarat Umer (RA)
By Muhammad Akhtar, FCMA & Irfan Ahmed
16 21
Cost Audit By Wasful Hassan Siddiqi, FCMA Cost Accounting in the Hospitality Industry
By Assad Mahmood, FCMA
Update
36 63 Heads of Government Enterprises and Autonomous Bodies 65

Cost Accounting Records Order, 2012
Pharmaceutical Industry Chemical Fertilizer Industry Electric Power Generation Industry Synthetic and Rayon Companies
Disclaimer: Views expressed herein are authors own thoughts/viewpoint and do not represent ICMA Pakistan policy unless so stated. Publication of paid advertising and new product/service information does not constitute an endorsement by the ICMA Pakistan.
Our Next Issue
Pakistan Economy and Corporatization

Research & Publications Committee would welcome articles on the above-mentioned topic before August 10, 2013 for Journals forthcoming issue.
Message
From the Desk of
President and Chief Executive

Cost audit practice was adopted in the Sub-Continent in 1967 and today a number of industries are following cost audit practices. In Pakistan, Cost audit has been made mandatory for six industries viz. cement, sugar, ghee and oil, chemical fertilizer, pharmaceuticals and synthetic and rayon industries. Other industries on which cost audit is expected to become applicable are electric power generation and automobile industries. Let me put on record the significant role of the Securities and Exchange Commission of Pakistan (SECP) in promulgating the Cost Accounting Records Orders for different industries with the main objectives of fostering efficiency; ensuring effective enterprise governance and promoting sustainable growth. This also helps them, as a regulator, to assess the performance of companies engaged in production of same line of products and evaluate performance of individual companies. The cost data available from cost audit of the industries can help the regulators in many ways such as SECP can utilize this cost data for application to issues such as payment of dividends or settlements of disputes; FBR can determine taxes and the Competition Commission of Pakistan can handle problems like price fixing, price control, and tariff protection. The Pakistani industry is facing global competition and challenges. The main detriment to foster Pakistan's competitiveness in the export market is the high cost of production of our industries. With the introduction of WTO and SAFTA, it has become inevitable that Pakistani companies should not only become quality conscious but also cost-competitive. And for that, cost audit, among other things, is a pre-requisite. The industries can optimize their cost of production by adopting Cost control techniques. Cost accounting system builds competitiveness in the Industry, and helps maintain competitive cost advantage to face the global challenges. Cost Audit and Cost management can help the Pakistani industries in enhancing their productivity and improving quality of their products through cost optimization. It will enable them to measure the efficiency of their manufacturing processes and to make necessary improvements. A good system of costing promotes prosperity of the business and thus ensures greater security of service and adequate reward to employees. I would like to urge upon the Pakistan entrepreneurs to realize the fact that survival of their industries, in today's fierce market conditions, depends greatly on their adopting best international practices, removing inefficiencies and coming out of fears and apprehensions, associated with production, labour, tax and financial reporting etc. Though cost audit will require some cost for them but let me say you with confidence that the ultimate benefits of cost audit will significantly surpass its relative expenses.
t gives me much pleasure to present the May-June 2013 Issue of the 'Management Accountant' which is on the theme of 'Cost Audit" the essence of the cost and management accountancy profession.
Zia-ul-Mustafa,
FCMA
4 | Management Accountant, May-June, 2013
Message
From the Desk of
Chief Editor
am delighted to present the May-June Issue of the Management Accountant Journal which has been brought out on the theme of Cost Audit'. In fact, it was realized during the last meeting of the Research and Publications Committee that the selection of themes for the Journal had been confined mostly to management accounting, business and economic related issues and other relevant subjects but 'cost audit' which is the main area of specialization of our members has not been given much emphasis. This realization is quite true to some extent, though it is also to be acknowledged that the Research Department has been contributing during the past two decades in shape of developing and forwarding 'Cost Accounting Records Rules' for different industries to the Securities and Exchange Commission of Pakistan (SECP). The SECP has promulgated several of these Cost Accounting Records Orders and others are under its active consideration. This special issue begins with an exclusive coverage of Success Story of a Role Model: Mr. Khurshid Ahmad, former President of the Institute during the years 1976- 78 and one of few qualified Cost Accountants who opted for service in Pakistan at the time of independence in 1947. Mr. Khurshid Ahmed rendered such valuable services that he was awarded "IFAC Scroll" in 1989 in recognition of his contribution to the accounting profession worldwide. The award of IFAC Scroll was a singular honour not only for Mr. Khurshid Ahmed individually but also for the Institute as well as the country. He was the first Pakistani to receive such international recognition of service to the profession. This issue contains exclusive interviews of two highly successful members of the Institute, namely, Mr. Tahir Mahmood, Chairman, Securities and Exchange Commission of Pakistan (SECP) and Mr. Muhammad Abdul Aleem, Secretary General Overseas Investors Chamber of Commerce & Industry (OICCI). The self-made careers of both Mr. Mahmood and Mr. Aleem epitomize the fact that with quality education, commitment, and persistent hard work, there is nothing in this world that cannot be achieved. I specially urge the young members and students to peruse the interviews to learn how role models are made and try to emulate them in their future careers. In the Focus section, the Research & Publications Department has contributed a relevant paper in which it has highlighted the multi-dimensional roles that the Cost and Management Accountants can offer to the Government to assist it in economic development and growth of the country. It is now upto the government as to how it takes maximum benefit from the professional skills and expertise of management accountants in reviving the loss-making public sector organizations; controlling inflation; conducting performance evaluation of PSPD projects; developing cost accounting sub-systems for local bodies etc. Other relevant articles included in the Focus Section are from our senior fellow member viz. Mr. Wasful Hasan Siddiqi on 'Cost Audit'; Mr. Assad Mahmood on 'Cost Accounting in Hospital Industry'; Mr. Muhammad Akbar Qamar on 'Cost Audit and Cost Records'; and Mr. Muhammad Iqbal Ghori on 'Advantages of Cost Audit'. Two very useful articles of Indian fellow Cost Accountants from ICWA India are on the subjects of cost competitiveness and total cost management. In the Meritorious Article Section, an article titled 'Lean Accounting What's it all about', written jointly by Frances A. Kennedy and Peter C. Brewer has been selected which has been judged as one of the 'Article of Merit' by the PAIB Committee of IFAC. Both the authors are professors of accountancy in Miami, USA. In the Articles Section, a very interesting and knowledgeable article has been contributed by our senior fellow member, Mr. Muhammad Akhtar on "Evaluation of Accounting Practices: Some Insights from the Era of Hazarat Umer (RA). Some highlights of Federal Budget 2013-14 recently announced by the Finance Minister, have also been included in the Articles Section. In the update section, the complete text of Cost Accounting Records Orders, released by the SECP for four industries namely Pharmaceuticals, Chemical Fertilizer, Electric Power Generation; and Synthetic and Rayon Industries have been included (available on e-version of this Journal placed on ICMA Pakistan's website www.icmap.com.pk) as reference. I hope that the readers will find this Issue quite informative.
Shahzad Ahmad Awan, FCMA
Management Accountant, May-June, 2013
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Role Model
Success Story Mr. Khurshid Ahmad

Former President, ICMA Pakistan
Can you share with us recollections of the Institutes' early days?
My first flash back goes to Mr. Muhammad Shoaib who was controller of factory Accounts in the Government of India in 1941. Mr. Shoaib was a fellow member of the British Institute of Cost and Works Accountants and later in 1944 had founded the Institute of Cost and Works Accountants of India. It was Mr. Shoaib who founded our Institute, which was then known as Pakistan Institute of Industrial Accountants. Being a man of exceptional ability, practical experience and vision he had foreseen the need for trained manpower in the discipline of industrial accounting and therefore moved fast to found the Institute in 1951, which is now the ICMA Pakistan. Its first office was housed in the verandah of Mr. Shoaib's residence and continued to operate from there until he left Karachi to join the World Bank. The Institute's secretariat was then shifted to the office of Mr. Billimoria who was a practicing Chartered Accountant and a close associate of Mr. Shaoib.
Mr. Khurshid Ahmad, FCMA (F-10) was born at

Bangaon, Azamgarh, India. He is a senior Fellow Member of the Institute of Cost and Management Accountants of Pakistan. He qualified ICWA, India in 1947. Besides, serving a multinational electrical company as Chief Accountant and Secretary, he has served Military Accounts both in India and Pakistan before and after partition of India. He acquired glass factories at Karachi and Lahore in 1971 and operated them with complete success. He has a great contribution in organizing the Cost and Management Accountancy profession in Pakistan. He worked with selfless devotion since 1951 starting from the days of founder president (late) Muhammad Shoaib in organizing the affairs of PIIA (now ICMA Pakistan) and held the honourable positions of Treasurer, Secretary, Vice President and finally as President of ICMA Pakistan. He has widely traveled and attended conference of CAPA in 1960, 1968, 1984 and 1986 in Australia, New Zealand, and India. He has been technical member of Financial Management Accounting Committee (FMAC) of IFAC. He was awarded Medal of Honour in recognition of his services as member of FMAC. He attended World Congress of IFAC in 1982 and 1987 at Mexico and Koyoto, Japan.
Some other personalities who played pioneering roles in the early years of the Institute?
Mr. Shoaib had played the pivotal role in establishing the Pakistan Institute of Industrial Accountants because he had foreseen that Pakistan would be needing cost and management accountants in order to meet the growing industrialization of the country. In this task Mr. Shoaib was lucky in having the full support and commitment of some other distinguished persons in the profession. First of all I would mention Mr. Mumtaz Mirza who like Mr. Shoaib was an officer of the Military Accounts Service, who also later joined the World Bank and was its Vice-President. Mr. Mirza played very crucial role in the early years of the Institute. He was able to secure finances by way of grants from the government an the help and guidance from the Canadian Cost / Management experts under the Colombo Plan for over ten years in organizing administrative, academic and teaching activities. Besides Mr. Mirza other who actively served and contributed their professional abilities to the Institute included Mr. R. M. Billimoria, Mr. M. Yakub, Mr. Rahim Jan, Mr. Muhammad Iqbal, Mr. M. H. Khan, Mr. N. N. Postwala and Mr. F.M. Khan. I must also mention the name of late Mr. Mateen Ansari, former Executive Director of the Institute. He was a very dynamic person who worked most diligently to strengthen not only the professional base of the Institute but also upgrade the academic image of the Institute.
Role Model
How would you assess the role of Canadian experts in developing Institute's sound tutorial base?
We were able to get the services of Canadian advisors for the Institute under the Colombo Plan. They worked very hard to formulate a sound Tutorial base of the Institute. The Valuable advices and guidance provided by the Canadian experts for over ten years from April 1960 to May 1971 covered organizational setup, organizing case study, editing lesson notes, establishing reference library and preparation of longterm plan for organization of Study and Chapters. These were of great value in establishing the Institute on a sound, strong foundation and gave it a prestigious standing in the industrial and business sectors of the country's economy. Because of its highly systematic management the Institute has acquired a very high standard and reputation for their qualified ACMAs and FCMAs who are in great demand by commercial and industrial corporations and organizations. Coaching classes in Karachi started in 1951. The classes were first held at Mama Parsi School and later at the Institute's building in Soldier Bazar. prescribe limits applicable to price fixing and conduct studies of the desirability of replacing machine and tools.
What is your assessment of the Institute's success in providing technical and professional training for career in cost and management accountancy?
I think the ICMA courses are well devised and professionally planned and the quality and standard of its teaching is of high standard. Indeed it gives me great professional pleasure and satisfaction to say that the Institute has done much better than what we had earlier visualized and expected.
Any suggestions on the teaching activities of the Institute.

I would say that the ICMA Pakistan must keep a constant watch on the requirements of job market and keep on making changes in its courses of study particularly with reference to the vast scope offered by Information Technology and its manifold uses. If the Institute succeeds in getting alongwith the innovations taking place in the concepts and usage of information technology the graduates will be in great demand not only in Pakistan but also in other countries. In this context I would suggest that the ICMA Pakistan should consider the feasibility of setting up an a Centre of Excellence in cost and management accountancy for providing teaching of higher level not only to practicing professional in Pakistan but also to nationals of other countries of the Third World. I am told that the Russian Federation and several countries in the Middle East and Central Asia would like to give higher training to their professionals in the field of accounting. ICMA Pakistan Centre of Excellence can provide such education and training. The proposed Centre of Excellence can be set up at the Institute's plot in Gulistan-e-Jauhar, Karachi.
For the benefit of our general readers and students can you please identify some of the specialties of cost and management accountancy as different from the accounting and auditing of financial accounts, taxations and corporate laws?
Cost and Management Accountants are more specialized and concentrate on internal growth of the organization by laying emphasis on Management Information System, Budgetary Control, Feasibility Report, Standard Costing and Marginal Costing, Cash Flow Planning and Control, Return in investment and Investment Policy, Capital Expenditure Analysis, Financial Aspects of Long Term Planning, Pricing Policy, Optimum Stock Levels, Business Forecasting, Production Cost and allied matters. Thus it would be seen that the Cost Accountant holds the responsibility to classify, record present and interpret in a significant manner the cost of material, labour and expense necessary to manufacture and sell a product. It is also through the collection of these data that a Management Accountant is able to determine the unit cost or operating cost of an article, product, process, service, section or a department in a business. In addition to tracing the flow of costs by unit, product, process or service, the cost accountant's function and responsibilities are the studies of the extent to which costs are controllable. The cost accountant is also required to study the extent to which costs are controllable, prepare cost reports to aid management in reducing cost and expenses, prepare break-even charts, estimate future costs and future profits,
What do you think of our efforts to combat corruption?

The ICMA Pakistan is no doubt doing a pioneering work in the fight against corruption. We must always keep in mind that corruption has be to be fought at all levels and stages where corruption practices have crept in. Apart from having some new laws the need is to observe and enforce the existing rules, regulations and laws without fear or favour. As regards the role of accounting professionals in the fight against corruption my considered view is that unless the professional accountants have due protection they cannot be expected to submit report and managerial information in a precise and independent manner.
We thank you for sharing with us your recollections on the early years of the Institute and for your advice on how to help promote its aims and objects. Editor
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Interview Section
An exclusive interview with
Mr. Tahir Mahmood

Chairman, Securities and Exchange Commission of Pakistan (SECP)
Sir, you joined the Commission in 1989, when it was Corporate Law Authority, and since then you have been serving at various senior level positions. Would you like to tell us something about your career progression, experiences and achievements?
Though I started my career as a banker, I have been associated with the Securities and Exchange Commission of Pakistan / former Corporate Law Authority since 1989. I Joined as Deputy Registrar (BBP-18) through Federal Public Service Commission, and was elevated to BBPS-19 in 1993 again through FPSC as a Joint Registrar. I was deputed at EOBI as Head of Finance & Secretary to the Board from 1995 to 1998. Later in 1999, I rejoined SECP to serve as head of Karachi Office as Additional Registrar / Director. I was promoted as Executive Director (Enforcement) in July, 2006. In September 2010, I was appointed as Commissioner by the Federal Government. I represent the category of Commissioners who are appointed from within the SECP, based on their outstanding performance.
Being a senior fellow member of ICMA Pakistan, what are your views about the role and contribution of the Institute towards promotion of management accounting profession in the country?
The role of management accountants in today's world is of great importance in view of the global competition and challenges. The Institute is one of the leading professional accounting bodies of Pakistan and enjoys a very good reputation at the national and global levels. The Institute is playing an important role by fulfilling the human resource needs of the country, for leading positions in the public as well as private sectors. The Institute has played significant role in the national economic development of Pakistan imparting professional skills and expertise for the growth of public and private sector entities. The role played by the institute also has a socio-economic dimension as it is providing quality education to the less privileged at a competitive fee compared to other professional institutes.
Mr. Tahir Mahmood joined former Corporate Law Authority (CLA) in 1989 as a Grade-18 officer through the Federal Public Service Commission (FPSC). The Securities & Exchange Commission of Pakistan (SECP) subsequently succeeded CLA under the SECP Act 1997. After 21-years of service at the CLA & SECP, including five years as Executive Director, Enforcement, he was appointed Commissioner, SECP in September 2010. As a regular employee of the Commission, he was appointed Commissioner under section 5 of the SECP Act, 1997. A fellow member of the Institute of Cost & Management Accountants, Pakistan (ICMAP) and Institute of Corporate Secretaries of Pakistan (ICSP), he has a degree in Law with extensive experience in company law administration, takeover laws, corporate restructuring, mergers and takeovers, corporate finance, judicial order writing, etc. Mr. Tahir Mahmood is responsible for issuing around four hundred judicial orders, in his capacity as adjudicating officer and member of appellate bench, while working as Executive Director/Commissioner, SECP. A large number of these orders were published in Corporate Law Decisions (CLD) Journals, and are referred to, today, by the legal community in their corporate law practice. He is also a member of the Company Law Review Commission (CLRC), headed by Chief Justice of Pakistan (retd) Mr. Ajmal Mian. Mr. Tahir Mahmood has spearheaded the drafting of various laws during his tenure with SECP; his expertise in corporate laws, especially company law, and takeovers laws, are largely acknowledged by the legal fraternity. In addition, he is a member of various professional forums including National Council of ICMAP, and the South Asian Federation of Accountants (SAFA).
The mandate of SECP has expanded over the years, in addition to regulation of corporate sector and capital market. Would you like to elaborate on its other supervisory, oversight and regulatory roles?
The SECP was constituted on January 1, 1999 in pursuance of the Securities and Exchange Commission of Pakistan Act, 1997
Interview Section
(SECP Act) as an independent statutory regulatory body mandated to administer corporate laws, and regulate capital market and corporate sector. While the mission has remained largely unchanged, the SECP's regulatory ambit has expanded over time and now includes following sectors: Insurance Sector (from 2000) Non-Banking Financial Sector including Modaraba (from 2003) Private Pensions (from 2008) The SECP regulates the entities operating in insurance, capital markets and NBFCs sectors. It issues licenses, supervises their businesses and takes enforcement actions, where required. In case of the corporate sector, the SECP regulates all entities irrespective of the business being undertaken. The SECP's current mandated also includes registration and licensing of not-for-profit associations, self-regulated institutions like stock exchanges, commodity exchanges, securities depositories, clearing companies and credit rating agencies. Furthermore, it also registers/licenses market intermediaries like stock brokers/agents, commodity brokers, underwriters, registrars and transfer agents, debenture trustees, balloters, consultants to issue, book runners, asset management companies, investment advisors, pension fund managers, private equity and venture capital managers, REITs, investment banks, leasing companies, housing finance companies, modarabas, insurance companies, insurance brokers and surveyors. were developed and notified in consultation with ICAP and ICMAP. The aforementioned institutes have extended immense support in developing the special orders.
What benefits have cost audit brought to the sugar, cement and vegetable ghee/cooking oil industries?
Cement industry
Cost audit supported the switch-over from furnace-firing system to coal-firing system which substantially reduced the cost of fuel, and cost of manufacturing up to 15 percent. Bursting of paper bags used to be over 1 percent until few years back. The same has reduced by more than half. In cement industry, energy conservation steps were initiated to switch over to captive power generation which is cheaper than that purchased from WAPDA/KESC. Obsolete and slow-moving items of stores and spares were identified and monitored to improve the cash flows by way of curtailing the blockade of funds in such inventory. Comparison of actual production with 'rated' / 'budgeted'/ 'previous-year' capacity enabled management to look for the reasons for variance and rectifying the causes. Transmission losses of electricity in cement industry were identified and several companies have taken corrective measures and reduced the cost of power substantially.
Sugar Industry
On the suggestion of cost auditors, a few units have installed their own refineries to further process molasses to produce alcohol. Few other units have started manufacturing chipboards. Pilferage and wastage has reduced and valuation of raw materials, work in process, finished goods and store/spare has improved considerably. Yield comparison, through the prescribed orders, also highlights the pilferage, wastage and usage of material as well as process problems. The valuation of bye-products is important to arrive at the true cost of the white sugar.
SECP has an important regulatory role in enforcing cost audit application to industries and services sector in Pakistan. Do you think that SECP has fulfilled this role effectively and what are the challenges and hurdles in expanding the cost audit scope in Pakistan?
Like other developing economies, business in Pakistan is predominantly overseen by the government instead of being self-regulated. The government has to prescribe detailed rules and procedures; monitor compliance and initiate disciplinary action in cases of non-compliance. It is therefore imperative to have compliance & monitoring mechanisms in place, till such time that our businesses attain the desired level of selfdiscipline. Being well aware of its responsibility, the SECP has ensured that we enable provision for mandatory maintenance of cost accounting records and cost audit for various manufacturing industries. Requirements for maintenance of mandatory cost accounting records were first introduced in 1990 for Vegetable Ghee and Cooking Oil companies. Up till now the requirement has been extended to five different sectors in consultation with the stakeholders. Moreover, requirements in three more industries are in developmental stage. One of the greatest challenges is to develop consensus while introducing cost audit regime for new industries, e.g. pharmaceutical, electric and power generation, etc. The approach of the Commission is to facilitate the industry and not overburden them with the new regulations. It was because of this approach that the Companies Cost Accounting Records (General Order), 2008 was withdrawn. Later, special orders for specific industries
Vegetable Ghee and Cooking Oil Industry:

Data contained in the cost audit reports is beneficial in reviewing the duty structure for imported oil, cost of bye-products, such as oxygen or carbon dioxide. It helps to arrive at the correct cost of materials used in the production. The oil manufacturing industry, which has been operating at low capacity, was able to identify the idle capacity through these records. Statistical statements and other records such as yield statement, TFM (total fatty matter) recovery & other by-products statement, and details relating to chemical & energy consumption, tinplate yield & scrap records maintained under the order provide a mechanism for accurate cost reporting enabling better cost control by the management.
SECP has made some sincere efforts in the recent past to bring the informal business sector into the corporate network; however, these efforts have not been so successful. What are the reasons?
At present, around 63,000 businesses out of an estimated three million operate in the form of a company structure. Absence of
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Interview Section
fiscal measures like reforming the tax framework, reducing the cost of registering property, and ease of enforcing contracts as well as business registration reforms for investor facilitation has been a major hurdle in this regard. In order to facilitate the entrepreneurs and investors, and ensure an expeditious service delivery, the establishment of a Business One-Stop Shop, commonly referred to as a One-Stop Shop (OSS), is underway. There is a need to have one registration database where a businessman can provide details required by the corporate and tax regulators rather than providing details to the said regulators separately. This central information can then be accessed by respective regulators for their specific functions. The proposed reforms would not only streamline the business processes of the concerned regulators, these would also facilitate the investors and the general public. registered with the SECP. Under the MoU, the SECP has provided information on 61,552 companies registered with the SECP to FBR in 2012.
What future initiatives the SECP intend to take to promote corporate governance in the corporate and public sector organizations in Pakistan, especially with the coming into power of the new government?
The SECP issued Code of Corporate Governance, 2012 for listed companies in April 2012 with various major changes to the previous code of 2002 and making one independent director mandatory, separating the offices of Chairman and the CEO and introducing new concepts like board evaluation and HR & Remuneration Committee. Accordingly, 40% of directors will be independent within the next 2 years, whereas thereafter 51% will be independent directors. CEO will be appointed only on the recommendation of the BoD. Concepts like audit committee, procurement committee and mandatory usage of International Financial Reporting Standards (IFRS) has been introduced. For the first time in Pakistan, now there are rules for Public Sector Companies' governance by the regulator aimed at board empowerment, transparency, accountability and better functioning of PSCs. With reference to the PSCs, these measures can contribute significantly to reduce their losses via better governance. Additionally, the SECP is in the process of developing principles of Corporate Governance for non-listed companies. The Draft principles are available on the SECP's website for public comments. Similarly, the SECP has invited public feedback on Draft Not-For-Profit Associations (Licensing and Corporate Governance) Regulations, 2013.
SMEs are regarded as the engine of economic growth and the success of Asian Tiger countries is an ample proof of this. In Pakistan, the SMEs sector has been neglected in policy making and they are faced with liquidity and other financial constraints. What is the policy of SECP to attract SMEs to get corporatized and play their role in economic development of Pakistan?
Major incentives for SMEs to corporatize are reduction in corporate tax rates in comparison with association of persons. On SECP's recommendation corporate tax rate for the nonbanking companies is reduced from 35% to 34% and it will be gradually reduced to 30% over five years. Reduction in Corporate tax is a positive move to encourage corporatization. Second incentive is to provide SMEs access to capital markets. For this purpose, we are working with the stock exchanges on introducing a Small and Medium Enterprises Exchange. We are contemplating whether to have it as a separate exchange or as a part of the existing exchanges. This will be an exchange where small and medium companies can raise money. Presently, only large companies can raise capital in Pakistan. The SECP has formed a technical committee, comprising members from all the three stock exchanges and the SECP for the introduction of SME board for listing of small capital based companies and venture companies.
What is your message to the Management Accountants in Pakistan?

With a shift in focus from compliance and control function to competitiveness support, a management accountant's main role, which was once confined to identification of problems, has now expanded to providing solutions. Management accountants are broadly involved in supporting, planning, organizing, controlling, directing and coordinating the decisionmaking of organizations in the private and public sector. A contemporary management accountant necessarily needs to focus on expanding his abilities in the field of information management for the use of non-financial information, to give substance to the new definition of performance which is reflected in total quality management and organizational culture. Globally, the organizations and businesses now perceive the management accountants as the ones that can help them to succeed. This is a challenging proposition which also gives rise to great opportunities, and management accountants need to rise to the challenge.
The interview ended with a vote of thanks to Mr. Tahir Mahmood, Chairman, Securities and Exchange Commission of Pakistan (SECP) a distinguished professional who spared his valuable time and gave his candid views exclusively for this journal. Editor
Do you agree that there should be better coordination between SECP and FBR to detect those companies which are registered with SECP but are not registered with FBR and thus are outside the tax net?
The SECP ensures close coordination with other regulators and departments such as SBP and FBR. The SECP and FBR signed an MoU in March 2012 for better coordination and information sharing. Under the MoU, the SECP can seek information for its investigation or enquiry to any violation of laws administered by it in the form of information about corporate/non-corporate entities/individuals available with FBR. The FBR also seeks information about companies
Interview Section
An exclusive interview with
Mr. Muhammad Abdul Aleem

Secretary General Overseas Investors Chamber of Commerce & Industry (OICCI)
As the chief spokesman of the large foreign investors in Pakistan, what role the Overseas Investors Chamber of Commerce plays in the economic development of the country?
Indeed OICCI and its members have a significant role in the economic development of Pakistan. Before I elaborate it further, let me introduce OICCI which is the premier body of large multinationals operating in Pakistan. It is a 153 year old organization and represents the collective voice of top 190 foreign companies belonging to 33 countries and operating in 14 key sectors of the Pakistan's economy. Our members are serious players and annually contribute roughly 30 % of the tax collection in the country, provide employment to about one million people and are key players in the CSR field. In view of all these facts, OICCI has a significant role in the economic development of Pakistan. We work as a catalyst in attracting quality FDI in the country. We help facilitate the inflow of FDI through sharing of a balanced picture on the incentives available in Pakistan and experience of those foreign investors who have been operating in Pakistan for many years, which is by and large, quite positive. Simultaneously we also share with key Government authorities the important irritants in the smooth operation of large foreign investors in Pakistan. One of our important objective is to raise the profile of Pakistan with the key stakeholders so that the country develops on a fast track with the help of foreign investment despite constraints of security, law and order and energy etc.
Mr. Abdul Aleem is a Fellow Chartered Accountant (Gold Medalist); Fellow Cost and Management Accountant. He enjoys over 30 years of work experience with two leading multinationals, including the last ten years in CEO role overseas. Since 2004, Abdul Aleem has worked for very large Government of Pakistan (GoP)-owned corporations. His last government assignment was as Managing Director, Pakistan State Oil, a post that he left in October 2008.
margin, the role of management accounting professionals is already well defined. All good multinationals and leading national organization that interacts with me are already well aware of the critical importance of managing accounting profession in promoting their business. However, the more important role that people like me can play, and am already playing on a limited basis, is to groom the professionals coming out of ICMA etc. is to change their mind set from being an accountant to a forward looking business professional who is sought after by management. I sit on the Board of few leading companies and give the same message to younger managers, which is to think differently, think ahead and manage the environment better than the competition to succeed.
Being a qualified member of ICMA Pakistan, how you feel about your association with the Institute and what role you would like to play to promote the profession of management accounting profession in the multinational companies operating in Pakistan?
Well I am a proud member of the ICMAP for over thirty five years. I am also a Fellow Member of ICAP. Most of my working experience of forty years has been with multinationals where not only through my work but through induction, training and development of professionals like ICMA and ICAP members, I have been able to promote the benefits of management accounting at the highest level in the MNC's and government owned Corporations. In today's highly challenging business environment where survival and growth is dependent on successfully managing competitive pressures for marketing and
Pakistan is presently passing through a very difficult and challenging phase of history with host of economic and political issues confronting
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the nation? Would you like to share your thoughts on this:
Pakistan indeed is going through a very difficult time especially in economic terms. After the financial meltdown of 2008, many countries in Asia have recovered but Pakistan has continued to slide down in terms of economic growth and in attracting Foreign Direct Investment (FDI). May be our leadership, Parliament and other key stakeholders were too busy focusing on politics and did not pay required attention to the economic growth of the country. We are pleased that the democratic process has progressed well and we now have a new team with a business friendly agenda. It is too early to make any comment on the new Government's economic performance, but the expectations are high. There is hope that we will soon see better governance, better economic management and some bold decision to challenge the sacred cows with politically difficult decisions to boost the economic resources of the country, accelerate economic growth and promote an equitable economic system. We believe in Pakistan and are confident that provided the quality leadership the country can outperform the comparable economies, attract large FDI and achieve the full potential of the country. Energy concern is well known, the other two major concerns identified in this research identify, i) Paying Taxes, and ii) enforcement of contracts as the top three issues which is well within our means and is an indication of poor coordination and lack of governance in our system. Another OICCI research with foreign investors in Pakistan also identifies the top five concerns affecting FDI are law and order situation, Energy supply, political stability, Inflation and policy implementation, high cost of doing business and lack of good governance in the system. We believe that all of these issues are within our reach to resolve provided the Government and other stakeholders including leading business and trade associations and the public in large show commitment to uplift the country. We do not need foreign assistance to improve our taxation system or policy implementation or in implementing contracts once we have signed it or in eliminating corruption in our system. Look how many years it has taken to auction the 3G Telecom license in Pakistan or import LNG in Pakistan, it has been over four years that we have been talking about these matters, promising the nation that it will be done soon, and we are still talking about it.
What, in your opinion, are the main economic issues of Pakistan today? Do you think that the new government that has taken charge of the country will be able to tackle these issues prudently?
Pakistan has many economic challenges including those of widening energy supply gap and high cost of utilities, serious security, law and order concerns in economically sensitive areas, poor policy implementation , high cost of doing business , ballooning circular debt , very low tax to GDP ratio and high fiscal deficit with insignificant investment in the infrastructure and growth oriented development projects. The foreign investment, because of above reasons, have been at one of the lowest levels in the past few years. Having said this, I believe most of these problems are manageable provided the new government shows the commitment to lead the country through good governance, transparency and with determination to take bold but politically risky decision in the interest of the country. I am optimistic that given time, the new Government will be able to show noticeable improvement in the situation.
The government has set a target of US$ 5 billion for the year 2013. Do you think that this target is achievable in view of past performance
Yes Pakistan has the potential to attract annual FDI of 5-6 billion dollars annually. We have done this in 2007-08 and can easily do it. We have many sunrise industries and infrastructure projects which can attract large FDI.
The foreign direct investment (FDI) into Pakistan has fallen considerably in view of the alarming security situation. Do you think that there are other impediments as well which are hampering the foreign entrepreneurs to invest in Pakistan.
In the annual World Bank study on ease of doing business, Pakistan has declined sharply from being 74 out of 185 countries in 2007 to 107 in 2013. This is disgusting and not at all reflective of the potential of this country. I give below the chart showing the causes of concern identified by the survey. While
It is a general perception that Pakistan has failed to penetrate into the international export market despite its immense potential and quality products. Where we are lacking and what has been the role of government export facilitation organizations in this regard?
Frankly speaking this is not my area of expertise. But as a responsible business person, all I can say is that with high cost of doing business and lack of energy and poor support structure, it is not easy for our exporters to make a mark in the international market. Moreover, the image of the country and lack of innovative approach by our exporters are also not helpful in promoting exports.
Interview Section
Would you like to apprise us as to what CSR activities and other community development programs are being undertaken by OICCI member companies in Pakistan? Do you think that a lot more is to be done by the corporate sector in Pakistan in this area.
Thanks for asking this question. OICCI members are leaders in doing CSR activities in and around their operating areas. OICCI has a full-fledged CSR subcommittee to share the best CSR practices of member companies. Based on our information, the socially conscious corporate sector in Pakistan is doing its honest bid to participate in the community development through innovative schemes and initiatives. Contribution in the area of education and social uplift in the neighborhood are also part of their plan. A full-fledged report on CSR activities of our members will soon be available to public. Pakistan. While the interest cost has reduced only in the past 12-18 months, otherwise it also had a big impact on the overall cost.
Pakistan has one of the lowest tax to GDP ratio in the world. Would you like to elaborate on this and how could the tax base could be broaden.
Yes the low tax to GDP ratio is a serious concern. We have thought through very seriously on this subject and have given many practical proposals on the subject to the Government which you can see on our website www.oicci.org under Research and Publications.
What economic scenario you foresee in Pakistan after five years. Would there be any improvement or our economy is sliding down?
Well, we cannot afford to be as bad as we were in the past five years. But the whole community including the powerful media is responsible for what we got, whether it was massive corruption or destruction of institutions, bleeding of PSE, total lack of governance. We did not focus on economics and business and remained hung up on politics only. So with hope of good governance and some efforts by the new Government and the business community we are somewhat positive of better times ahead.
The OICCI had submitted its recommendation to the Government for Federal Budget 2013-14. How far these recommendations have been incorporated and what are the views of OICCI on the budget announced by the Finance Minister?
Overall, we think that the 2013-14 Budget was an improvement over the past and some effort is certainly visible in broadening the tax base in the country. We also understand that the government had very little time to present the budget so it has relied on officials who have restricted the ability of the new Government to do what it had promised. We see that many of our recommendations like reduction in corporate tax rate, Reduction In Tax Rates For Corporate Sector, Advance Tax On Distributors, Withholding Income Tax Rates On Import Of Raw Materials & Capital Goods, Tariff/ Non Tariff Area, Return Of Income - [Section 114], Unexplained Income Or Assets [Section 111], Wealth Statement - [Section 116], Other Tax Broadening Measures have been incorporated. However, we are disappointed that the Government has focused on taxing the already the taxed one like the increase in Sales Tax, increase in turnover tax and very major increase in the salary tax, the levy of wealth tax on movable assets etc. The agriculture income and many of the exempted income remained outside the net. We have raised our concern with the Finance Minister and will continue to engage with the Government to bring equity and rationale in the whole taxation system.
What role do you think the Management Accountants, qualifying from ICMA Pakistan, can play in the economic development of Pakistan.
The qualified Management Accountant have to move on with time, continuously developing themselves and be ready to play a leading role in the development of the country. There will be more and more opportunities for the competent people who are not only technically qualified but also have strong communication, presentation and managerial skills. These skills can be learnt and the young accountants must always be focused on self-development as well.
What message would like to give to the Management Accountants

I have already given my message in the above comments. What I want to emphasize is that think ahead, do not look in the past, use your technical skill and experience to develop yourself, always learn new things, increase your network, read new literature on business and technical matters, stay tune to the changing challenges and you will be successful . You will be in demand and approached by the headhunters and prospective large corporates before you think of applying there. There is always opportunity waiting for the smart professionals. The more challenging the time, the more opportunity for management accountants. Best of luck to you all.
The interview ended with a vote of thanks to Mr. Muhammad Abdul Aleem, Secretary General, Overseas Investors Chamber of Commerce & Industry (OICCI) a distinguished professional who spared his valuable time and gave his candid views exclusively for this journal. Editor
There is a general reservation of the industrial sector that the cost of doing business in Pakistan is very high as compared to other countries. To what extent this reservation is true and what are the main reasons for this high cost of business?
Yes the cost of doing business in Pakistan is quite high. Besides very high energy cost, the additional cost of security and inequity in the system add substantial cost to operators in Pakistan. The taxation and local levies of various forms affect ethical operators which add to the cost of doing business in
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Focus Section
Cost Accountants' Role in Economic Growth of Pakistan

By Research & Publications Department, ICMA Pakistan
The 'Cost and Management Accountants' can play an instrumental role in supplementing the efforts of the new government in achieving economic growth of Pakistan. They can be helpful to the government in multi-dimensional tasks such as bringing cost efficiency in industries, better utilization of public funds and resources, reviving inefficient public sector organizations, tackling acute energy crisis, checking rising inflation and unfair business practices etc. Unfortunately, the Management Accountants have so far never been given the opportunity at the government level to show their mettle in delivering the above specified tasks. It is now expected from the new Government that it would give due importance and a possible role to the Management Accountants in associating them not only in the policy-making process, but also in the overall economic revival process. Their professional skills and expertise can be utilized to tackle a host of economic ills and malpractices that are prevailing in our society. Now, let's see how the 'Management Accountants' can help the government in different areas. recommended that qualitative and social audits be carried out to evaluate the project success, especially for those projects that create a broad social impact. The above observations and recommendation of Planning Committees greatly necessitates the importance and urgent need for carrying out 'cost audits' of PSDP Projects. The Management Accountants, qualified from ICMAP, should be associated for effective 'cost management and control' of the Public Sector Development Programs (PSDPs) implemented in all the provinces. The new government should associate the Management Accountants, nominated by ICMA Pakistan for conducting cost audit of development projects in all the Provinces.
Setting up a 'Cost and Efficiency Department' to keep check on Inflation

The government should establish a new Department by the name and title of Cost and Efficiency Department' to reduce the spiraling inflation in the country. Cost and Management Accountants may be hired for this department to conduct cost audits of companies and monitor their profit margins and control price increases made by manufacturers / wholesalers/retailers in essential commodities without any valid reason. This department should supervise that any increase in price should be allowed only with relevance to taxes and duties imposed by the regulator, e.g. 1% increase in GST should not result in a price increase of 15%. Likewise, an increase of Rs 5 per kilometer should not go unchecked against an increase of Rs2 per liter in gasoline price, this, being the behavior of transporter community. The proposed 'Cost and Efficiency Department', by utilizing the expertise of Management Accountants can help the government in putting a check on rising inflation, especially of essential commodities and materials of national importance such as steel, cement etc. The cost audit to be performed by Management Accountants would determine the actual cost of production of these products, thereby bringing into limelight the cost price margin. On the basis of correct costing data, the government would be in a position to fix reasonable selling prices of products and thus undue profiteering will be checked, and consumers/general public would
Reviving the Inefficient Public Sector Organizations (PSEs)

The Management Accountants can be associated by the government to develop rescue plans for the revival of inefficient Public Sector Entities (PSEs) like Pakistan Railways, PIA, Pakistan Steel, etc. They can help such units in overcoming their management-related problems and achieving efficiencies and maximum production capacity. Similarly, the Management Accountants can also offer their professional expertise to the private sector in reviving the sick and low-operating industries, especially textile mills and fertilizer plants. Irrespective of few textile units, which can be considered healthy, others are giving minimal production or are presently inoperative. The textile sector can utilize the services of ICMA Pakistan professionals as Consultants, in diagnosing the reasons of sickness or idleness of sick textile units and putting such units in operating condition with their consultation.
Performing Cost Audits of PSDP Projects for Performance Evaluation

The Planning Commission of Pakistan has observed in its Report titled 'Analysis/Review of the PSDP (Public Sector Development Programme)' released in August 2011, that poor planning, unclear scope definition, unclear goals, procurement leakages, deficient planning and poor governance are some of the key reasons for the failure of PSDP projects. The Report further pointed out that over Rs 50 billion, equivalent to 21% of original Federal PSDP for 201011, was allocated for political programs which, considering the tight fiscal space needed to be curtailed. The Planning Commission
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May-June, 2013
Focus Section
be saved from exploitation and unreasonable price hike. A healthy competition would be generated among the various units in an industry. The above role of Management Accountants could only be possible if the government decides in principle to make a mandatory requirement for all the manufacturing units to obtain a cost audit report / certificate from a Cost Accountant, qualified from ICMAP, verifying therein the actual cost of product (s). This requirement needs legal cover through an act of the Parliament. Cost audit will enable the government to ascertain the actual cost of production and the profit margin being earned by the producers and business community, and thus the inflation will be controlled. It is proven in cost calculation of CNG Prices previously and the public is able to have CNG at cheap rates. Same could be done if costs of production/services of others are calculated The Management Accountants have the required expertise in 'Zero-based budgeting' and can assist the government in preparing and implementing budgets based on costed strategic plans.
Assisting the CCP in identifying Predatory and Transfer Pricing Cases

The multinational companies have a prominent presence in Pakistan and they frequently transfer resources among associate concerns / units operating in different parts of globe. Such transactions have a great impact on their profitability vis--vis tax liability. Unfortunately, there is not any regulation or legislation that can check such transfer pricing transactions. The Cost Auditors can play a role in providing a system of check on such transfer pricing mechanisms. In this context, the 'Management Accountants' can extend their professional expertise to the Competition Commission of Pakistan (CCP) in identifying and filing cases against 'Predatory Pricing' and 'Transfer Pricing' transactions, thereby ensuring competitive environment for all market players. Predatory pricing is the practice of selling a product or service at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors. Transfer pricing refers to the pricing of contributions (assets, tangible and intangible, services, and funds) transferred within an organization. The choice of the transfer price will affect the allocation of the total profit among the parts of the company. This is a major concern for fiscal authorities who worry that multi-national entities may set transfer prices on cross-border transactions to reduce taxable profits in their jurisdiction. This has led to the rise of transfer pricing regulations and enforcement, making transfer pricing a major tax compliance issue for multi-national companies.
Introducing Cost Accounting Sub-Systems in Local Bodies

It is a fact that the public delivery system in Pakistan is not to the satisfactory standards and is declining with the passage of time. Moreover, there is also no control mechanism in place in local government for effective utilization of public funds and resources, which leads to wastage or misuse of public money. There is, therefore, need to strengthen local administration and delivery of basic services. It should be made pre-requisite for the Local bodies to develop a 'Cost Accounting Sub-system', in addition to existing financial management system, as an instrument to support local government management. This would lead to better efficiency, effectiveness and economy in resource application, thereby allowing a more suitable mechanism for better use of tax payers' money. The professional expertise of Management accountants could be utilized in developing and administering the 'cost accounting sub-systems' at the provincial and local bodies levels.
Assisting government in implementing budgets based on cost strategic plans

In the budget making process in Pakistan, there is a tendency to use simple Incremental Budgeting approach, based on previous year's budget without any careful attention to the costing side. There are two major shortcomings of incremental budgeting i.e. each budgeted item is started at last year's level, and next period's level is planned as an increment to that level. Secondly, the Government Ministries / Departments resort to unnecessary spending of left-over funds available with them at the end of budget period with the intention that if they do not finish all the funds, they would receive lesser funds next year. There is need to introduce Zero based budgeting approach, which requires justification for every expenditure incurred. In this approach, each budget item starts with an assumed value of 'zero', with all changes above that having to be justified. It leads to more efficient allocation and utilization of resources and helps in detection and elimination of inflated budgets, or budgets that reflect wasteful operations. It puts the burden of proof on the manager (whether he is in government or private sector), and demands that each manager justify the entire budget in detail and prove why the organization's money be spent in the manner proposed.
Assisting the NTC to help Industry in Anti-dumping Cases based on Cost information
The provisions relating to anti dumping laws are of special significance in the context of cost accounting. The determination of normal value, domestic price, quantum of injury etc. all requires cost information. Manufacturers in the developed world are so well equipped with data that they obtain speedy relief under WTO while benefiting from the lack of data available in developing countries. In Anti-Dumping cases, the International Dispute Resolution Authority accepts the authenticated cost data from the Cost Audit records, maintained by the companies. Unfortunately, when a Pakistani company is facing such an anti-dumping duty from a foreign country, it does not make available cost data to pursue their cases and finally they fail to convince the concerned authority. The Management Accountants can work jointly with the National Tariff Commission (NTC) to assist the industry to make them aware of the anti-dumping / counter vailing duties and convince them to put their cost data in order to face such a challenge in future in the international market. An in-built cost accounting system could be a great support to the industry itself in order to check dumping as well as to provide inputs in cases of alleged dumping in legitimate exports. If our industries maintain cost accounting system, they can file and fight a large number of Anti Dumping cases against the foreign importers.
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Focus Section
By Wasful Ha ssan Siddiqi, FCMA
Cost Audit Versus Financial Audit Invisible/Hidden Losses Cost and Management Accountants have an Edge Over Chartered Accountants Features of Cost Audit Objectives of Cost Audit Cost Audit SECP Notifications Suggested Improvements in the Contents of Cost Audit Reports
Cost Audit
Prelude
In an environment of increasing foreign trade under WTO regime, the Cost Audit Reports have assumed greater importance and significance being the important source of reliable and authentic feedback to the government and its various departments and agencies. The Cost Audit Reports do not only contain merely the cost details, but are full of information related to all aspects of business organization which, if harnessed properly can provide a comprehensive analysis about the company, the industry and the economy as a whole. The Cost Audit Report serves as an effective tool of information in the hands of directors on the Board ensuring good corporate governance. Cost Audit in fact is the Cost & Benefit Analysis or more appropriately Cost Performance Review of the companies engaged in manufacturing, processing and mining. Cost auditor helps those who help themselves to identify grey areas of cost inefficiency including invisible losses inherent in the industrial units. Cost audit gives advance signals for cost control to avoid industrial sickness.
availed by proper planning. By all means cost audit is forward looking which helps the management to evaluate the future opportunities for availing cost benefits.
Invisible / Hidden Losses

It is pertinent to point out that most of the invisible losses of financial implications are not reflected in the books of account or in the financial statements as such these losses escape the attention of the auditor in financial audit. Example of such losses are as follows: i) Loss arising from non utilization of full plant capacity. ii) Loss arising from over capitalization and high markup. iii) Loss arising from unfavourable input/output ratios. iv) Loss arising from liquidity problem due to: a) Blocking of funds in slow moving and debt inventories, trade debts and other held up assets. b) Slow recovery of receivables. c) Poor management of funds d) Uneconomical procurement planning. v) Loss arising from lack of budgetary controls and nonexistence of costing procedures of products or services and variance analysis thereof. vi) Loss arising from unfavourable ratios of utility consumption of gas, electricity and power etc. vii) Loss arising from low yield of inputs. viii) Loss arising from hidden losses such as evaporation of gas, inefficiency of boilers, loss of steam and power. ix) Loss arising from loss of output due to plant bottlenecks. x) Loss arising from non existence of R & D and non switch over to alternate process/technology. xi) Loss arising from inefficient use of human resources.
Cost Audit Versus Financial Audit

Cost audit begins where financial audit ends: In financial terms: 2 + 2 = 4 In contrast to the above said financial equation, cost audit means that it should be either 5, 4 or 3. Because In case of 5, benefit of 1 is the reward of input cost and efforts made by the entrepreneur. OR In case of 3, loss of 1 is the cost of inefficiency in cost control, whereas in case the equation is 4, money is saved but efforts are lost. The duty of the cost auditor is to analyze the reasons and probe the areas of cost performance in either case. The financial auditor will be satisfied if 2 + 2 equate 4 (i.e. debits and credits are equal); but cost auditor will not be satisfied unless the equation ends up at 5; and even if it is 5 he will find out why it was not 6. Financial audit rests on historical data whereas cost audit peeps into the future to assess opportunities and benefits to be
Cost and Management Accountants have an Edge Over Chartered Accountants

Cost audit is an exclusive domain of cost and management accountants. In the neighboring country India, ONLY the Cost and
Focus Section
Works Accountants (an equivalent cadre to Pakistan's Cost and Management Accountants) are authorized by law to act as the sole cost auditors of companies. However, in Pakistan this condition is relaxed to the extent that if any firm of chartered accountants wants to engage itself as a cost auditor; in order to become eligible for its appointment it will have necessarily to appoint a cost and management accountant to work with them on the cost audit assignments. The firms of cost and management accountants in Pakistan are however not bound by this restriction, they are appointed as cost auditors of companies without any precondition. They enjoy the trust and confidence of the industry people and help them immensely also on post audit consultancy assignments. no statutory rules are prescribed for watch making a c t i v i t y. T h e d e t a i l e d provisions relating to the manner of prescription of cost accounting records, selection of the product, the contents of the rules and the list of products/industries covered by the statutory rules. Thus Cost Audit does not embrace a particular activity of the company unless a separate cost accounting record rule is already notified for that particular activity detailing the nature of cost accounting records to be maintained. The legal provisions relating to statutory cost audit are applicable only to companies registered under the provisions of Companies Ordinance. Therefore, cost audit is not applicable to other enterprises like partnership, cooperative societies, etc. The Cost Audit is conducted by a Cost Accountant or a Chartered Accountant in practice. The cost auditor is appointed by the Board of Directors of the company with the previous approval of the SECP. The report of cost auditor is to rendered to the SECP with a copy to the Company.
Scope of Cost Audit

Companies Ordinance requires the auditor of a company to state whether the accounts in his opinion give a true and fair view of the state of the company's affairs in the case of the balance sheet and of the profit or loss for its financial year. Therefore, statutory financial audit of a company conducted by the Chartered Accountant is an essential annual feature of all the companies registered under the provisions of Companies Ordinance. The Board of Directors of every company has a statutory obligation to place its audited annual accounts viz. Profit and Loss Account and Balance Sheet before the shareholders in the Annual General Meeting, duly certified by a Chartered Accountant appointed as an 'Auditor'. However, there is no corresponding statutory provision for compulsory annual audit of cost accounts of a company covered of the Companies Ordinance or under relevant Cost Accounting Records Rules. One of the pre-requisites of cost audit is the maintenance of cost accounting records by the company. However u/s 230 of Companies Ordinance, 1984 it is obligatory for a company pertaining to any class of companies engaged in production, processing, manufacturing or mining to maintain such particulars relating to utilization of material or labour or to other items of cost as may be prescribed, if such class of companies is required under the rules to include such particulars in the books of accounts. The SECP shall prescribe the separate cost accounting records for each class of companies i.e. companies manufacturing a particular class of product or activity like vegetable ghee and cooking oil, Cement, Steel, Chemicals and Electricity etc. and these are called the Cost Accounting Records Rules for that specific industry or class of companies. When cost accounting records/formats are prescribed, they apply to those companies engaged in the manufacture of a particular product or activity. In the case of companies engaged in production or processing of other products or activities also in addition to production, processing or manufacture of the specified product, the records will have to be maintained only for the manufacture of particular product for which rules are issued and not necessary for other products. A company manufacturing bulk drugs, formulation and watches need not necessarily maintain cost accounting records in respect of watch making activity if
Features of Cost Audit

The cost audit of the companies under the relevant provisions of the Companies Ordinance, 1984 and applicable cost accounting records orders for specified industries has the following features: (i) Assessing compliance of the relevant cost accounting records rules as applicable to the product under review; (ii) Study of the costing system to assess whether it is adequate for the cost ascertainment of the product under review; (iii) Evaluation of the operating and other efficiencies of the organization under audit with special reference to the product under review; to ensure the submission of necessary details required under the Cost Audit Report Rules. (iv) Submission of Cost Audit Report in the format prescribed.
Objectives of Cost Audit

Cost Audit has both general and social objectives. The general objectives can be described to include the following: o Verification of cost accounts with a view to ascertaining that these have been properly maintained and compiled according to the cost accounting system followed by the enterprise. o Ensuring that the prescribed procedures of cost accounting records rules are duly adhered to. o Detection of errors and fraud. o Verification of the cost of each cost unit and cost center to ensure that these have been properly ascertained. o Determination of inventory valuation. o Facilitating the fixation of prices of goods and services. o Periodical reconciliation between cost accounts and financial accounts. o Ensuring optimum utilization of human, physical and financial resources of the enterprise. o Detection and correction of abnormal loss of material and time. o Inculcation of cost consciousness. o Advising management, on the basis of inter-company
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Focus Section
comparison of cost records, as regards the areas where performance calls for improvement. o Promoting corporate governance through various operational disclosures to the directors. Among the social objectives of cost audit, the following deserve special mention: o Facilitation in fixation of reasonable prices of goods and services produced by the enterprise. o Improvement in productivity of human, physical and financial resources of the enterprise. o Channelising of the enterprise resources to most optimum, productive and profitable areas. o Pinpointing areas of inefficiency and mismanagement, if any for the benefit of shareholders, consumers, etc., such that necessary corrective action could be taken in time. vi) Cost Accounting Records Order, 2013 SRO # 343/2013 dt. April 23 2013 Pharmaceuticals Industries (New Addition)
vii) Draft Cost Accounting Records Order, 2012 SRO # 302(1)/2012 dt. March 26 2012 Electric Power Generation Industries (Draft for seeking public comments before finalization) viii) Draft Cost Accounting Records Order, 2012 SRO /1/2011 dt. March 19 2012 Automobiles Industry Companies (Draft for seeking public comments before finalization)
Circulation and Distribution of Reports

(SRO # /I/2008, dt September 26, 2008) It has been mandated by SECP that: (1) Each company which falls within the industries specified in paragraph 1(3) above, shall be required to circulate the cost auditor's report to Directors prescribed in sub-rule (3) of rule 4 of the Companies (Audit of Cost Accounts) Rules, 1998 together with the Reconciliation stipulated in 3 (b) above within 6 months of the close of the financial year to members, directors and shareholders of the company, the Commission and the Registrar concerned. Such reports may be disseminated to its shareholders by posting the same on the company's website within six months of the close of the financial year. The cost audit report shall not be required to be printed and it shall be permissible to circulate photo-copies thereof. (2) Every company in respect of which a special order has been issued by the Commission prior to this notification that is to say companies engaged in production of cement, vegetable ghee and sugar industries shall be required to comply with the requirements of this paragraph and paragraph 2 and 3 above. (3) It shall be the duty of every person referred to in sub-section (7) of Section 230 or sub-section (2) of section 246 of the Companies Ordinance, 1984 (XLVII of 1984), to comply with the provisions of this Order in the same manner as they are liable to maintain books of financial accounts required under section 230 of the said Ordinance.
Cost Audit SECP Notifications

Following notifications are applicable to the specified companies engaged in manufacturing, processing and mining. 1. Audit of Cost Accounts by the Cost Auditor Companies (Audit of Cost Accounts) Rules, 1998 SRO # 846(1)/98 dt. July 24th 1998 2. Maintenance of Cost Accounting Records by the Companies i) Cost Accounting Records Order, 1990 SRO # 1131(1)/90 dt. November 1st 1990 Vegetable Ghee & Cooking Oil Companies ii) Cost Accounting Records Order, 1994 SRO # 386(1)/94 dt. May 14th 1994 Cement Industry iii) Cost Accounting Records Order, 2001 SRO # 97(1)/2001 dt. February 13th 2001 Sugar Industry iv) Cost Accounting Records Order, 2012 SRO # 243(1)/2012 dt. March 08 2012 Chemical Fertilizer Industries (New Addition) v) Cost Accounting Records Order, 2012 SRO # 371(1)/2012, dt. April 17, 2012 Polyester Fiber (New Addition)
Conditions Applicable to Firms of Chartered Accountants for Appointment as Cost Auditors

(Circular # 09 Reference No. Co-258(2)RCP/91 dt July 29, 2000)
Pursuant to provisions of section 258 of Companies Ordinance, 1984 and Rule 3 of the Companies (Audit of Cost Accounts) Rules, 1998 the companies which are required to maintain cost accounting records prescribed by this Commission under section 230(1)(e) of Companies Ordinance, 1984, are hereby, directed to furnish complete profile of the proposed Cost Auditors especially the following information with the applications seeking prior approval of Securities & Exchange Commission of Pakistan for appointment of Cost Auditor:(i) (ii) In case, a firm of Cost & Management Accountant is appointed as Cost Auditor details of qualified as well as supporting staff. In case, a firm of Chartered Accountant is recommended for appointment as Cost Auditor, in addition to details of qualified and supporting staff, the particulars of Cost and Management Accountant(s) associated with it.
(iii) In case, a firm of Chartered Accountants does not associate a Cost & Management Accountant as suggested in (ii) above, it would disclose the experience of cost audit and particulars of such partners/employees who have actually been working and maintaining the cost accounts in some organizations. Sd/. (Nazir Ahmed Shaheen)
Joint Registrar
Focus Section
SYNTHESIS OF COST AUDIT RULES, 1998
SRO : 846(1)/98 Dated July 24, 1998 Companies (Audit of Cost Accounts) Rules, 1998
1. Legal Provisions Under Companies Ordinance, 1984. Powers of Government to make rules (Section 506) Maintenance of Accounts (Section 230) Audit of Cost Accounts (Section 258) July 24, 1998 All Companies engaged in (i) Vegetable Ghee & Cooking Oils (ii) Cement (iii) Sugar (iv) Chemical Fertilizer (v) Polyester Fibre (vi) Pharmaceuticals All other companies as and when notified subsequently by special / general order for maintenance of cost accounting records by Securities Exchange Commission of Pakistan (SECP) will also come under cost audit. Maintenance of Cost Accounting Records by the Companies i. Cost Accounting Records Order, 1990 | SRO # 1131(1)/90 dt. November 1st 1990 Vegetable Ghee & Cooking Oil Companies ii. Cost Accounting Records Order, 1994 | SRO # 386(1)/94 dt. May 14th 1994 Cement Industry iii. Cost Accounting Records Order, 2001 | SRO # 97(1)/2001 dt. February 13th 2001 Sugar Industry iv. Cost Accounting Records Order, 2012 | SRO # 243(1)/2012 dt. March 08 2012 Chemical Fertilizer Industries (New Addition) v) Cost Accounting Records Order, 2012 | SRO # 371(1)/2012 dt. April 17, 2012 Polyester Fiber (New Addition) vi) Cost Accounting Records Order, 2013 | SRO # 343/2013 dt. April 23 2013 Pharmaceuticals Industries (New Addition) In case of the following industries, draft cost accounting records orders have been issued for seeking public comments before finalization: i) Draft Cost Accounting Records Order, 2012 | SRO # 302(1)/2012 dt. March 26 2012 Electric Power Generation Industries (Draft for seeking public comments before finalization) ii) Draft Cost Accounting Records Order, 2012 | SRO /1/2011 dt. March 19 2012 Automobiles Industry Companies (Draft for seeking public comments before finalization) In case of other industries, SECP is in touch with ICMAP and ICAP for drafting the industry specific cost accounting rules. 'Company' as referred in the rules means as company formed and registered under the Companies Ordinance 1984 (XLVII of 1984). It means that all the private / public companies whether quoted or not are covered under these rules. Practicing Cost & Management Accountants OR Practicing Chartered Accountants By the directors with prior approval of SECP within SIXTY DAYS of the close of financial year of the Company. An application to SECP will be submitted by the Company on a prescribed form (Appendix I) not later than Thirty Days before the date on which cost auditor is to be appointed. It will be fixed by the directors and paid by the company. It is presumed that auditors remuneration will be negotiable between directors and auditors depending upon volume of work. a. person who has been appointed as (statutory) auditor of the company of the respective period under section 252 of the Companies Ordinance, 1984. b. a person who is, or at any time during the preceding three years was, a director, officer or employee of the company. c. a person who is a partner of, or in the employment of, a director, officer or employee of the company. d. a person who is a director of the company. e. a person who is indebted to the company; and f. a body corporate. Explanation:- In this sub-rule reference to an officer or employee shall be construed as not including reference to a cost auditor. In addition to the records and statements specified in special / general orders (SROs) every company shall prepare. a. a statement of production capacity of the plant, in terms of machine hours and production units, the actual utilization of the capacity and the reasons of difference between the two. [Rule 4(1)(a)] b. a statement of stock-in-trade of the company as at the end of financial year in terms of quantity and cost thereof distinguishing between:(i) stock of raw material and component:(ii) stock of work in process (iii) stock of finished products; and (iv) other stock. [Rule 4(1)(b)]
2. 3.
Effective Date Application
4.
Special Orders (SROs) Issued by SECP.
5. 6.
Company Defined Appointment of Cost Auditors i. Qualification ii. Appointment
7.
Ineligibility of persons to become Cost Auditor
8.
Cost Statements
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9. 10. Authentication of Cost Statements Time frame for Cost Audit All the Cost Statements will be signed by the Chief Executive and Chief Accountant of the Company. Companies will obtain consent of cost auditors and process it for approval from SECP within 30 days of close of its financial year as under: (i) Pass a BOD Resolution appointing the cost auditors and fix remuneration. (ii) Forward the resolution alongwith Appendix-I as per rule 3(3) of SRO: 846(I)/98 dt. 24-07-1998 duly filled in and signed within 30 days of the close of financial year alongwith a paid challan of Rs. 500/=. SECP will approve the name of the cost auditor and send letter of confirmation within 30 days to the cost auditors with a copy to the sugar company. In short, whole process shall be completed within (30 + 30 days) i.e. sixty days after the close of the financial year. The cost auditor will complete the audit of cost accounts and send his report within 60 days after his appointment. Copies of Cost Audit Report will be sent to: (i) Board of Directors of the Company (ii) Director Enforcement, Securities & Exchange Commission of Pakistan, Islamabad with paid challan of Rs. 500/-. (iii) Registrar Joint Stock Companies, SECP Company Registration Office at the designated place in the province where company has its registered office with challan of Rs. 500/-. Company shall within THIRTY DAYS from the date of receipt of the copy of the Cost Auditors Report shall furnish alongwith paid challan of Rs. 500/ to the SECP, Islamabad with full information and explanations on every reservation or qualification contained in the Cost Audit Report. Cost Auditors Report will be circulated and distributed by the Company as under: (i) Each company which falls within the industries specified above, shall be required to circulate the cost auditor's report to Directors prescribed in sub-rule (3) of rule 4 of the Companies (Audit of Cost Accounts) Rules, 1998 together with the Reconciliation stipulated in 3 (b) above within 6 company, the Commission and the Registrar concerned. Such reports may be disseminated to its shareholders by posting the same on the company's website within six months of the close of the financial year. The cost audit report shall not be required to be printed and it shall be permissible to circulate photocopies thereof. (ii) Every company in respect of which a special order has been issued by the Commission prior to this notification that is to say companies engaged in production of cement, vegetable ghee and sugar industries shall be required to comply with the requirements of this paragraph and paragraph 2 and 3 above. (iii) It shall be the duty of every person referred to in sub-section (7) of Section 230 or sub-section (2) of section 246 of the Companies Ordinance, 1984 (XLVII of 1984), to comply with the previsions of this Order in the same manner as they are liable to maintain books of financial accounts required under section 230 of the said Ordinance. Non Compliance or contravention of the rules is punishable, in addition to any other liability under Companies Ordinance, 1984.
11.
Cost Auditors Report
12.
Comments by the Company on Cost Auditors Report Circulation and distribution of report
13.
14.
Penalties
Suggested Improvements in the Contents of Cost Audit Reports

Although cost audit is an useful tool which provides useful information for cost control and for profit maximization; but it has still not gained acceptability of business entrepreneurs in Pakistan. In order to make it attractive and user friendly it is suggested that formats of cost audits reports should be suitably modified and updated to include the following extra information.
therefore necessary of each financial year to workout trends of the financial position of the companies under consideration.
iv) Review of Actual Results of Capital Expenditure on Balancing, Modernization and Replacement (BMR)
The companies do spend funds on BMR. It is advisable to analysis the actual results of: a) Return on investment (ROI) b) Internal Rate of Return (IRR) c) Payback period d) Any other ratio which may be relevant under the given situation.
i)
Gross Profit Analysis
Following three points need further analysis: a) In case the company has more than one product including by products, GP from each product should be separately shown to asses profit contribution from each product. b) In case the rate of G.P. varies from year to year, the reason for variation should be analyzed. c) Extra ordinary items of profit / loss in the particular financial year should be separately considered as they may not repeat in future resulting in profitability variation between different periods.
v) Cost Comparison
Make comparison of actual performance with standard consumption norms (technical standards) of raw materials, utilities and other input cost in respect of: a) Industrial average at national level b) Companies own last three / five years average Give reasons for the variances
ii) Break Even Analysis

It is necessary to find out break even points of production / sales so that fixed cost of the industrial unit may be matched with contribution to set targets above break even points to get positive results.
vi) Financial Cost of Blocked Funds

Age analysis of debtors is required to review the funds blocked in trade receivables. The slow moving and dead inventories alongwith debtors viz a viz markup cost on borrowed funds may also be reviewed and analyzed. About the author: Mr. Wasful Hassan Siddiqi, B.COM, LLB, FITM, FICS, FPFA, FCMA, is a practicing Cost and Management Accountant. He is also the author of academic and professional, books on finance, tax and corporate laws.
iii) Ration Analysis

The financial ratios show economic trends. Ratio analysis is
Focus Section
Cost Accounting in the Hospitality Industry

By Assad Mahmood, FCMA
ost accounting and auditing is a formalized function in the hospitality industry in general and in 5 star hotel industry in particular. This formalized function is very strong and the ERPs being used in the hotel industry treat it as a specialized domain altogether. Hotel is one of the industries which give a prime weightage to the records on the basis of cost accounting. A hotel is divided into atleast 10 departments which are headed by the managers. Each department has its own Profit & Loss account. In totality the P&L comprises of around than 100 expense accounts which are reported in each of the income statements of the operating departments. Each expense exhibits a behavior which may be traced into the conic section i.e. some expenses exhibit a linear behavior and make a straight line, some are cyclical in nature i.e. they occur after regular intervals and make a circle, and some are parabolic while few are hyperbolic in nature. It is very pertinent that the nature of each expense is understood which helps in prior planning and forecasting. Accurate budget formulations are vital for making any enterprise not only competitive but also more productive. Cash flows of the enterprise need to be positive all the times which is only possible when the expenses and their nature are correctly mapped and tracked. In the hospitality industry the departmental P&L is based on the principles of marginal costing techniques wherein revenues (Gross Less Rebates & Discounts) of each department are equated against the departmental payroll, direct expenses and indirect expenses (hotel overheads) which are allocated from Minor Operating Departments. Gross operating profit / loss is determined for each and every department. This is in line with the 'Universal System of Accounts' for the hospitality industry being followed globally. This treatment enables the managers to calculate the C/M ratios as well as a host of other expense ratios.
Capacity Variance Ratios:

Standardized ratios such as RevPAR (Revenue Per Available Room), Total RevPAR (Total Hotel Revenue Per Available Room), Meal Period Ratios, Average Spend, GOPAR (Gross Operating Profit Per Available Rooms) and a number of other ratios are preestablished which not only highlight deviations from the industry standards but also are a ready mean for judging the efficiency and productivity in relation to the capacity. Abnormal variances seek the attention of the management.
calculated in the management P&L accounts. The variances are calculated on month to date as well as year to date results. High expenses indicate extravagant spending whereas low expense may indicate poor quality and absence of essential replacements. The department of Cost Control is headed by a controller who reports to the head of finance. The cost controller is responsible for the affairs of cost control in general and the Food & Beverage related cost issues in particular. The manager / controller is assisted by several assistants and supervisors. Various functions being performed by the cost control department are explained hereunder: a) Day To Day Operations: The Cost Controller is involved in day to day operations of the hotel for generating a number of analytical reports which are forwarded to the Finance Head, the GM and the Head Office of the hotel. The cost controller's department generates a daily Food & Beverage Cost Report which is sent to the F&B Head as a check against excessive issuances, consumptions and wastages. The report gives an elaborate comparison (Outlet Wise) for the consumptions and the on-going Food & Beverage cost percentage. b) Materials Management: i. A major portion of procurement done by the hotel is B2B (Business to Business) transactions i.e. the preferred mode is the procurement directly from manufacturers, wholesalers and authorized dealers for ensuring quality and competitive prices of products and services. Emphasis is therefore laid on the strict compliance of Standard Operating Procedures. Purchase orders and Standing Purchase Orders are prepared for every purchase. The POs & SPOs are supported by competitive quotes which are based on quotations from the market. Each comparative sheet is counter signed by the cost controller. ii. All the inventories are scrutinized and subjected to the benchmarks and the requirements of the hotel and the user
Spending Variance Ratios:

Variances from the budget, last period and the last year are readily
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departments. Goods received are either forwarded to the user department or are sent to the stores for future consumption. The stores are segregated into several categories which are: Food & Beverage (For storage of perishable items), General Stores (For chemicals, Stationery),Guest Supplies and other supplies, Small Operating Equipment Stores, Fridges for perishable items ( for Meat, for Dairy Products) & Engineering Stores. Issuance & subsequent earmarking of the issued stock to the P&L of appropriate user departments are performed. 'Par Stocks' are the minimum inventory levels maintained in the stores. The 'Par Stocks' are developed for each category of store items on the basis of consumption, order time and the lead time. The Economic Order Quantities (EOQs) are arrived at on the basis of these par stocks and the usages. This exercise is performed in light of the annual budgets which are set in accordance with the seasonal fluctuations in sales and the relevant consumptions. At each month end and year end stock count of inventory is carried out for every store and the physical stocks are matched with the booked stock. Yield management is carried out for various inputs to the kitchen. The yields calculated are compared with the industry standards to observe any discrepancies. Market Survey: Market survey is carried out on a regular basis for all perishable items and for other items on a periodic basis. The
iv.
iii.
v.
vi.
Top Sheet of a P&L of a 5-Star Hotel prepared as per Universal System of Accounts for the Lodging Industry:
DESCRIPTION
TOTAL REVENUE ROOMS DEPARTMENT Sales Expenses Payroll & Related Expenses Other Expenses Total Expenses Departmental Profit Sales Food Sales Beverage Sales Mini Bar Sales Other Income Total Sales Cost of sales Food Cost Beverage Cost Mini Bar Cost Other Expense Total Cost of Sales Expenses Payroll & Related Expenses Other Expenses Total Costs Departmental Profit Sales MOD Cost Departmental Profit Permit Room Sales Permit Room Cost Departmental Profit Maisha Sales Maisha Cost Departmental Profit Limousine Service Revenue Limousine Service Cost Departmental Profit Rental & Other Income Head Office Income Total Other Income Total MOD Profit Gross Operating Profit
Last year Amount %
YEAR-TO-DATE Current Amount %
Budget Amount %
VARIANCE OF CURRENT Budget Last Year Amount % Amount %
Focus Section
DESCRIPTION Last year Amount % YEAR-TO-DATE Current Amount % Budget Amount % VARIANCE OF CURRENT Budget Last Year Amount % Amount %
UNDISTRIBUTED OPERATING EXP. Hotel Admin & General Security Cost Sales & Marketing Electricity Cost Fuel Cost Gas Charges Other Energy Costs Total Energy Costs Repair & Maintenance Property taxes and insurance INCOME BEFORE FIXED CHARGES Head Office Charges Management/Royalty Fee EBITDA Finance Cost Depreciation PROFIT/(LOSS) BEFORE TAXATION Rooms in Property Rooms Available Rooms Occupied Rooms Occupancy % Number of Beds Available Number of Beds Occupied Average Room Rate Total RevPAR Total Covers (Food) Average Spend Food Average Spend Beverages Total Average Spend Total Payroll Expense Total Number of Employees % to Revenue
cost controller is part of the market survey team which monitors the fluctuation in market prices and the same are translated in the procurement process.
Sale Price Management:

i. When it comes to the price determination domain, the cost control department plays the key role. Menu prices of buffet as well as la carte items are set by the department on the basis of the prevailing market prices of the ingredients. Revision in the prices is done usually on an annual basis but more frequent revisions may be introduced due to abrupt changes in the input costs. Industry standards are referred to for maintaining a balance between the costs and the prices. Banquet Pricing: Prices for the standardized packages are preset at the inception of budget formulation exercise. Prices of specific
ii.
and infrequent banquet events are tailored by the respective department in consultation with the cost control department. These prices are set on the basis of differential and marginal costing principles. iii. Transfer Pricing - Minor Operating Departments (MODs): MODs comprise the Laundry, Health Club, Room Service, Telephone and other smaller units which function independently. MODs produce outputs which are transferred to other major departments as well as are sold to the customers. Cost controller ensures that the costs of the products of these departments are accurate. This helps in accurate cost allocation to the transferor and the transferee department for arriving at the correct profitability of both the departments. About the Author: Mr. Assad Mahmood, FCMA is Corporate Financial
Controller at Serena Hotels Ltd.
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By Muhammad Akbar Qamar FCMA, APFA, B.Sc.
Cost Audit and Cost Records

in quantities and amounts. The cost shall include all direct charges incurred up-to the works/ locations. The issues should be identified with departments, cost centers and products. The material records should also include separate records for recording wastage, spoilage, rejections and losses in terms of quantity and cost, whether arising in transit, storage during manufacture or for other reasons. Sale proceeds of the waste materials, rejected materials and scrap should also be recorded and taken into account in determining the cost of production. The method followed for adjusting the various losses should also be kept in record. Materials issued for capital projects should be properly indented and recorded. If the value of materials consumed is determined on any basis other than the actuals, e.g. on standard costing, the method adopted for such valuation as well as the method of reconciling such consumption with actuals and the treatment of variances, if any, should be kept on record. Manufactured components and intermediates With regard to components and intermediates manufactured by the company, separate records are required to be maintained showing the cost of manufacture of major components and intermediates. Records of quantities and values of manufactured components and intermediates along with the wastages, if any, are required to be maintained. Stores and spares Adequate records to show receipts, issues and balances, both in quantity and value, of various stores and spare parts required for repairs, maintenance and production are to be maintained. The value should include all direct charges, such as carrying and other relevant cost. The value of stores and spare parts used should be charged to the relevant heads, i.e., production or repair to plant and machinery, repairs to building or capital construction, if any; the value of stores charged to manufacture, should further be allocated to different departments or production units or cost centers, as may be appropriate. Any wastage, either in storage, transit or due to other reasons, should be shown separately. The method of dealing with such losses in the calculation of cost should be mentioned in the cost records.
Cost Audit Introduction

Cost Audit refers to the audit of cost records. It has been considered an effective and ---- tool of cost control. It may be defined as the verification of the correctness of cost accounts and of the adherence to the cost accounting plan. It therefore means that cost auditor verifies the correctness of cost records and also establishes whether the cost accounting plan has been properly adhered to, as laid down by the management of the firm. According to the Institute of Cost and Management Accountants of England, cost audit represents the verification of cost accounts and a check on the adherence to cost accounting plan. Hence, cost audit comprises: o Verification of the cost accounting records such as the accuracy of the cost accounts, cost reports, cost statements, cost data and costing techniques, and o Examination of these records to ensure that they adhere to the cost accounting principles, plans, procedures and objectives. Definitions Internationally, following are two of the most popular definitions of cost audit: Cost Audit means the detailed checking of costing system, techniques and accounts to verify their correctness and to ensure adherence to the objective of cost accounting. (Smith and Day ) Cost Audit is the verification of correctness of cost accounts and a check on the adherence to the cost accounting plans. (R. W. Dobson) It is evident that the emphasis is on record keeping of cost accounts.
Cost Records
The following are the general features of cost recordsMaterials Under this broad head, records for raw materials, processed materials, consumable stores, etc, are to be maintained. Generally, these records are to show the materials purchased or procured, issue of the materials for production and the balance
Wages and salaries

Proper records should be maintained to show the attendance and earning of all employees, department-wise, cost center-
Focus Section
made on the basis of the actuals, the basis adopted for such allocation should be indicated. Similarly, the expenses incurred on staff canteen or maintenance should also be apportioned on some reasonable basis and that is required to be indicated in cost records. Depreciation Adequate records in respect of the depreciable fixed assets are required to be maintained showing the cost and other particulars of such assets, indicating: o Cost of each item of asset inclusive of installation charges; o Date of installation; o Rate of depreciation; o Amount of depreciation provided. The cumulative quantum of depreciation charged in respect of any asset in the costing records should be limited to the original cost of the concerned assets. Packing Proper records needs to be kept showing the quantity and cost of various backing materials such as tin, cartons, gunny bags, etc. and for wages and other expenses incurred on packing size wise. Similarly, if any income is received by sale or disposal of these spoiled, rejected waste materials, the method of treating these recoveries in the determination of the cost of the product should be mentioned. By-products Sufficient records should be maintained for each item of byproduct, if any, showing the receipts, issues and balances both in quantity and value. The basis adopted for valuation of the byproducts should be equitable and consistent. Records indicating the actual sales realization of by-products should be maintained. If any expenses have been incurred in further process of by-products, such expenses should also be separately stated. The treatment of realization of By-products in the determination of cost of main product should also be mentioned. Production and Sales Adequate records of production are required to be maintained in terms of value and quantity. If the goods are sold in packed condition then separate records of production of unpacked finished goods and packed finished goods should be maintained. These records should show all the receipts, issues and balances of goods produced by the company. The value should be based on the cost of production of the items concerned. The value of the issues and balances may, if the company so desires, be recorded monthly or at such shorter intervals as the company may decide. These records will also constitute quantitative records of sales of the finished goods and inventory of the finished goods. Inventories Inventories may be classified as o Raw materials o Stores & spare parts
wise and job-wise. Separate records are required to be kept for: o Overtime wages earned; o piece-rate wages earned; o Incentive wages earned, either individually or collectively as production bonus or under any other scheme based on output; and o Earnings of casual labour. Idle time is required to be separately recorded under classified headings, indicating the reasons. The cost records should also contain the method followed for accounting idle time payments in determining the cost of products. The extent of wages and salaries capitalized, as additions to plant and machinery, buildings or other assets, should be accounted for under the appropriate capital heads. Care should be taken to exclude all wages and salaries that do not pertain to the manufacture of products.
Overheads
In respect of overheads, the requirement is for a proper maintenance of records showing the various items of expenses comprising overheads. These expenses should be analyzed and classified under the following heads: o Works, o Administration, and o Selling and distribution. Overheads often are general in nature in the sense that the benefit of the expenditure is enjoyed by various departments, products, cost centers and capital projects. Overheads allocation should be applied properly. Service department expenses including expenses on utilities These include expenses incurred on power, fuel, water and steam produced or utilized for manufacturing operations, expenses on subsidized canteen, and maintenance operations by a separate maintenance department, if any. Power, fuel, steam, water etc. may be purchased also by the company. There should be proper records of units purchased, their rates and duties, if any. However, if power, water and steam is generated by the company itself, separate records should be maintained to show, in sufficient detail, the different items making up the cost of such power, water or steam produced and consumed. The records should be so maintained as would enable the assessment of consumption of the services by the different departments or manufacturing units. In cases, where allocation to various departments of manufacturing units is not
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o Work-in-progress, and o Finished goods. It may be observed that separate records to account for raw materials, spare parts and production in their balance column will have to be maintained. However, separate records should be maintained for the work-in-progress showing the quantity and value at the end of the financial year (i.e. the period for which the costs are made up). Stock of all kinds should be physically verified and the stock verification records should be maintained in respect of all items held in stock, such as, raw materials, components, processed materials, packing materials, consumable stores, machinery spares, chemicals, fuels, finished goods and fixed assets. Reasons for shortages and excesses, if any, arising out of such verification and the method followed for adjusting the same in the cost of the products shall be indicated in the records. The method followed for determining the cost of work-in-progress and finished goods stock shall be indicated in the cost records so as to reveal the cost elements that have been taken into account in such computation. The method adopted should be followed consistently. Variances Where the company maintains cost records on any basis other than actuals, such as standard costing, the records should indicate the procedure followed by the company in working out the cost of the products under such a system. The method followed for adjusting the variances on determining the actual cost of the product should be indicated clearly in the cost records. The reasons for variances should be detailed in the cost records. Cost Statements Cost Statements or cost sheets are required to be prepared as part of the cost records in respect of each product. The forms of cost sheets have been prescribed in the Annexure to the respective Rules. The forms have been so devised arranged that they progressively build up the cost of production of the concerned products. The nature, purpose and contents of the cost sheet depend upon the nature of the products, production method, process involved, cost centers and the elements that make up the cost. Reconciliation of Cost and Financial Accounts The cost records should be reconciled (periodically, preferably on monthly basis, with the financial books of account so as to ensure accuracy.) Variations, if any, should be clearly indicated and explained. The period for which such reconciliation be effected should not exceed the period of the financial year of the company. The reconciliation should be done in such a manner that profitability of the product under reference can be correctly adjudged and reconciled with the overall profits of the company. This statement, then, should be reconciled with the financial profit and loss account for the period. Royalty Adequate records shall be maintained showing the royalty paid (in cases where royalty payment exists) or any other payment made to foreign collaborators in terms of agreements entered into with them. Such records should be kept separately for each foreign collaborator. Also the basis of computation of royalty for the financial year shall be mentioned in cost records. If the total royalty paid is allocable to different cost centers or semi-finished goods or products, the case of motor vehicles, the amount of royalty may be apportioned to various components produced by the company, sub-assemblies or completed motor vehicles according to the terms of agreement. Royalty should be treated as a direct charge wherever it is practicable. Where it is not so, this can be treated as overhead. Statistical records Statistical data, as relevant in the different cases, are required to be maintained. These data generally include data on plant utilization, idle machine time with reasons, capital employed and capital work-in-progress including fresh investment in fixed assets that have not contributed to the production during the period under consideration. Moreover, data that are of specific relevance should be maintained separately. For example, in the case of infant milk food, data such as percentage of fat and solid non-fat content in wet milk purchased and consumed need to be kept; also quantitative reconciliation should be done of the fat and solid non-fat content of the wet milk and other milk based inputs with the fat and solid non-fat content of the various outputs that the inputs have produced including the byproduct. Similarly, for cement and caustic soda, proper statistical records about actual hours worked by each manufacturing unit or plant should be maintained. In the case of cement, records should also be maintained to show the production by each manufacturing unit or department producing raw materials process materials or finished products. Some similar requirements can be found in respect of other products as well. Pricing is central to international trade under the liberalized economy. Normally, no inter-company transfer should take place below cost. Therefore, it is imperative that the respective Cost Accounting Records Rules should uniformly contain appropriate provisions requiring maintenance of cost records in all such cases.
Conclusions
As Cost Audit is based upon the Cost Records, so proper record keeping provides comfort and a strong backing to the Cost Audit. Hence, the management and Cost Accountants should focus on the Cost Records, so that the benefits of Cost Audit can be availed at an optimum level.
Focus Section
Advantages of
Cost Audit
By Mohammad Iqbal Ghori, FCMA
Member, Research & Publications Committee-ICMA Pakistan
What is Cost Audit?

The verification of cost records and accounts, and a check on adherence to prescribed cost accounting procedures and their continuing relevance. Cost audit refers to the detailed checking of the costing system, the techniques used and the accounts to verify their accuracy. It also ensures that the company is adhering to the objective of cost accountancy. The important advantages of cost audit are briefly discussed as follows:
Advantages of Cost Audit to the Management

1. Cost audit provides foundation to the management for articulatation of business plan. 2. Cost Audit enables management for efficient and detail oriented managerial and operational decision making. 3. Cost Audit helps management in process re-engineering for optimum utilization of resources. 4. Cost audit helps management to regulate production. 5. Cost audit helps management in smart pricing and making the organization market competitive. 6. Cost audit highlight errors, frauds and irregularities so that reliable and smooth functioning of the system is continued. 7. Cost audit rationalize the consumption of resources and reduces the cost of production through plugging loopholes relating to wastage of material, labor and overheads. 8. Cost audit helps management to introduce performance management system and provides data to fix the responsibility. 9. Cost audit provides opportunities to revise all SOPs to improve the efficiency of the organization as a whole and Management Information System (MIS) in particular.. 10.Cost audit reveals the gray areas through variance analysis and attracts the attention of management to initiate actions where needed. 11. Cost audit helps exporters and manufacturers those are supplying merchandise on cost plus basis. Cost Audit gives confidence to buyers about the efficiency of manufacturing process and transparency of cost records. 12.Cost Audit is a tool to measure the profitability of the different units. 13.Cost audit exercises moral influence on employees which keeps them efficient and alert. 14. Cost audit ensures that the cost accounts have been maintained in accordance with the principles of costing employed in the industry concerned.
wealth. ensures that proper records are maintained as to purchases, utilization of materials and expenses incurred on various items C o s t i.e wages and overheads etc. It also makes sure that the industrial unit has been working efficiently and economically. 4 The cost audit helps shareholders to evaluate the performance of Board of Directors and operational management. A well planned and comprehensive cost audit not only attracts new investment but also builds confidence among all stakeholders including Shareholders, Govt. Agencies, Public and regulators.
Advantages of Cost Audit to the Society

1. Indigenous resources are limited for human being and Cost audit identifies the wastage of resources and lead management to process re-engineering for optimum utilization of resources. 2. It cost audit is available than different segment of society can easily participate in regulatory process while rate making and issuance of license to distributors and generators and producers of various utility goods and services. 3. When cost audit helps in cost reduction and improvement in quality than even a common man can maintain their standard of living.
Advantages of Cost Audit to the Government

1. Cost audit assists regulators i.e. NEPRA, OGRA, PEMRA, PTA and other in tariff setting. Presently there is no provision of Cost Audit departments in NEPRA which is major cause of irrational tariff setting of different category and overall average tariff. 2. Cost Audit ensures transparency in measuring the cost of services which further helps in elimination of cross subsidy. 3. Cost Audit helps Govt Agencies and regulators to take decision about a sector or industry for subsidy support or other incentives. 4. Cost Audit reveals the real taxable business profits which enhance the government revenues. 5. Cost Audit helps Government and policy maker to promote modern technology in the interest of public at large. 6. Cost audit brings producer, government and regulators on board for industrial rehabilitation. 7. Cost audit could not attained due recognition in Pakistan Public Sector but financial audit remained over emphasized. The severe bleeding of in Public Sector Enterprises i.e. PIA, SNGPL, SSGCL, PEPCO, DISCOs, NTDC, Generation Companies, PECO, Pakistan Railways and other companies may be stopped through the implementation of Cost Audit. 8. Cost Audit reveals the real value of organization which helps the government while taking decision on privatization of public sector entities.
About the Author: Mr. Muhammad Iqbal Ghori is a senior Fellow member of ICMA Pakistan and currently working as the Finance Director / Chief Financial Officer at Faisalabad Electricity Supply Company Limited (FESCO).
Advantages of Cost Audit to the Shareholders

1. Cost audit provides opportunity to measure the performance of management. 2. Cost Audit protects the interest of minority interest. It also gauges transparency and commercial consideration in related party transaction. 3. Cost Audit provides an analytical view about the consumption of shareholders resources for maximization of all shareholders their
Courtesy: accountlearning
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Cost Competitiveness the Sustainable Business Strategy

By Dr. D. Mukhopadhyay, M. Com., LL.B., FCMA, MBA., Ph.D., D.Litt.
Introduction
To begin with, cost is the common denominator and the principal guide for achieving competiveness under the environment of competition. Under the competitive business environment, price is determined by the interactive force of demand and supply. In other words, price is determined by the market and a business has to sell its products or service at the price determined by the market when there competition.. Price is the contribution and consideration that contains cost and profit. Under competitive market environment, a business can make only normal profit and there is no scope for extraordinary profit. What a business can do is to manage the cost of production and distribution of the product or service and here lies the role of the CMAs who are essentially business strategists that help a business navigate at the correct harbour in order to achieve both the short term and long term objectives. Cost management at the various phases of production and distribution cycle is the sustainable and surviving strategy for a business that faces the heat of cut throat competition under the business environment of market driven economy. The efficiency of a business is measured by the degree of efficiency it controls and manages the cost. Cost management is given prime importance from the angle of supply chain involved in the process of procurement of inputs to transfer of the ownership in the products or service in favour of the customers. Supply chain management takes care of management of cost of supply of inputs and it continues its effort till the output is finally handed over to the ultimate consumers or customers. There are various techniques used in cost management and some of them are value analysis, activity based costing, activity based budgeting, target costing, theory of constraints, lifecycle costing etc. and CMA is the architect of cost management methodology with the help of the modern tools and techniques developed and available for cost management. For instance, in raw materials procurement, there involves transaction processing cost, input purchase cost and input holding or carrying cost. It is imperative to mention that CMAs guide the business with regard to the methodology and scope of cost reduction and control of cost in each and every stage of product planning and design. The business must know at what stage of its operation it would be able achieve its breakeven and when it would be able to start earning profit. It is to make industry analysis and make a thorough SWOT analysis in order to identify the avenues when it can enjoy competitive advantage over others. The profession of cost and management accountancy has reached over such a stage over
last two hundred years where it became an indispensible discipline that guides the business under different situations. It plays its role under different phases of business cycle in appropriate manner. A CMA guides the business in financing and investing activities besides product costing, pricing and profit planning. Architecting the business plan for operating under different market situations is prime responsibility of the CMAs. CMAs by virtue of their education and training become specialists for designing business strategy which ultimately helps a business achieve its mission, vision, objectives and goal. Porter's five forces model signifies the role CMAs in framing business strategy. Five forces identified by Porter are threat of new competition, threat of substitute of products or services, bargaining power of the customers or buyers, bargaining power of suppliers and degree of intensity of the completive rivalry. Threat of new competition is assessed from the angle of cost and quality perspectives of the product and service. New competitors normally follow penetrating pricing policy for gaining entry in a particular market. The competitive advantage of the competitors is analysed in objective manner and a recommendation is transmitted by the CMAs. Secondly threat of the substitute products is analysed. Substitute is the alternative. For instance, Journey by bus is substitute of journey by train. When service from both of these elements is compared, the service quality, time factor, comforts and cost of obtaining the required service is to be taken into consideration. Thirdly, bargaining power of customer is examined and taken into consideration while adopting a particular pricing policy. Customers bargain on the basis of the criteria of price of the substitute, quality, post sale service and quality. It is to ascertain the cost of replacement, post sale service cost and other relevant factors that drives cost. Similarly the bargaining power of the suppliers is examined. The CMAs are expert in assessing the profitability in terms of sales and investment. For example, while examining the capital structure of a firm, it is to examine the source of finance i.e. debt or equity and to ascertain which one is cheaper and which combination of debt and equity mix would fetch optimum return on investment. Here also, decision
Focus Section
workable domain. Branding helps in product differentiation and branding has also a cost and it has to decide that whether a firm should go for branding or not and comparative analysis for cost with or without branding is made and conclusively an appropriate decision is taken.
Marketing Mix
is taken by the management on the basis of cost of capital. The paper under context of Cost Competitiveness aims at dealing with certain issues where the role of the CMAs is pivotal and vital. The issues concerning Cost Competitiveness as a sustainable business strategy are dealt with hereunder: A marketing mix is nothing but a planned mix of the four Ps within a marketing plan. The four Ps of marketing mix consist of product, place, promotion and price. A successful marketing mix must have all four elements created to reach the target market effectively in order to have an efficient and desired market share for a product likely to be launched. Each element of marketing mix is analyzed and the cost perspective and implication of the same are examined. As far as first 'P' i.e. product is concerned, the first question arises whether the product likely to be marketed in near future is cost competitive and it takes care of analysis of cost with reference to physical shape , packaging and brand etc. When we talk of product, we mean the relevance of customer-value, physical appearance and associated services are taken into consideration in the definition of the product. Physical distribution or place comes into the next purview of analysis of the CMAs. Place is the location where the product or service is available for the purpose of purchase by the customers. It is to ensure that the product or service is available whenever the customers want to buy it. Sometimes product may be available on a particular location and here the distribution cost is of prime concern and the same is taken into consideration while the decision with reference to place is taken into consideration. The prime location or location on posh locality is involved with greater bracket of distribution cost. The third 'P i.e. promotion which communicates the product value through advertisement and it has to be a cost effective media otherwise it would overburden product. As far as product promotion is concerned, advertising, public relations, personal selling and distribution of samples are the cost drivers when the product or service concerned is the cost object. Finally fourth 'P' i.e. price that represents the monetary benefit a customer is willing to sacrifice for acquiring the product or a particular service. Price is the consideration that includes the financial term along with time and effort of the customer and they same defined in term of cost of procurement by a customer.
Competitive Advantage
Why do customers buy one product in preference to other is nothing but the competitive advantage between the two is compared and it is again cost and quality aspects that matter and help in taking a decision. Competitive advantage is a set of unique features of a company expressed and translated in terms of quality and cost per unit. It also takes into consideration its products that are perceived by the target market as significant and superior to the competition. The CMAs advise the firm to focus on the issues relating to cost, product differentiation and niche strategies. These aspects together constitute the foundation stone of competitive advantage. When a firm is able utilize skilled workforce, judicious purchase of raw materials and efficient commercial operations, it is said to be working with competitive advantage. The example of Bata India Ltd. Can be cited in this context. Bata India Ltd manufactures different kinds of Shoes and sandals and the customers enjoy competitive advantage of Bata products over other shoe manufacturing companies both in terms of cost and quality. This is from customers point of view. From the side of the firm, the firm enjoys competitive advantage in the shoe market as it does have customers' support since it is able to offer the wider range of products at reasonable cost with desired quality. Similarly, we may cite the example of Maruti Suzuki, an Indo-Japanese car manufacturing firm, does have competitive advantage over other car manufacturing companies in term of cost and quality. It is the CMAs who are professional cost managers and cost is the only mantra for survival and sustainability under the context of competitive business environment. Cost management is exercised at product design and development stage and technology with cost efficiency prescribed by the cost manager is one of the ways of cost minimization.
Market Penetration and Development

Market penetration is a strategy for gaining market share for a new product or service. It is an earnest effort of a firm to increase its sales with the existing and prospective customers. Market
Product Differentiation
Product differentiation is another mantra for survival under competitive environment. The mechanism of product differentiation keeping cost at minimum level with requisite quality conformity allows a firm to compete with others. The gulf between sales and cost is the profit. The firm cannot influence price under competitive environment but cost control and cost reduction are under its
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upon the financial health of the product. Finally, it must ensure that cost for post selling period is minimum and the cost implication aspects from product planning to product reaching the final users is anlaysed for the new product and before diversification these issues are critically analysed by the cost manager and places the same before the management for their appropriate action.
Conclusion
CMA is an expert to certify and recommend to the management with regard to cost competitiveness of a product or service. It may not be irrelevance to assert that a product failing the test of cost competiveness cannot sustain and survive in market other than monopoly. In monopoly, the firm is the price maker whereas under competition, it is price taker since price is determined in competitive market by demand-supply forces prevailing in the market. In the same way, it can be stated that product differentiation ensures how a firm's product or services differ from other competitors in terms of quality and cost. Product development strategy is adopted by a firm when its existing market is saturated and it tries to leverage its market related experience and effective customer relations management with the existing customers to push the new products after designing the same in terms of customers preference. Product development strategy is practiced to move away from hard degree cut throat competition and creating uncontested market which may be called 'Blue Ocean Strategy'. Here it is to ascertain the impact of research and development cost and advertisement focus over the concerned product or service. Finally, diversification strategy enables a firm entering into new markets with completely new product and here lies the risk and risk assessment and risk management professional is the CMA. It may not be irrelevant to mention that to cite the example of Honda that leveraged upon the core competency of engines to enter into the business of generators and lawn mowers as has been dealt with by Gary Hamel and C. K. Prahlad in their famous book 'Competing for the Future' and here also the role of cost management is well accepted and thus cost is the principal guide in framing the sustainable business strategy and cost competitiveness is the test that needs to be passed by any product or service for survival and sustaining in the competitive business environment particularly when it is the buyers' market. Moreover for the purpose of generating maximum customer value, cost competiveness is a must for the product or service in order to create a niche of its own.
About the Author: Dr. D. Mukhopadhyay, M. Com., LL.B., FCMA, MBA., Ph.D., D.Litt. is Director & Dean-College of Management Shri Mata Vaishno Devi University, Katra
development is the process of expanding the market for product and samples of the product are freely sent to the prospects with a hope that soon the prospects shall be converted into loyal customers. Now the samples etc which are freely distributed among the prospects are definitely are not free from cost implication. It is to cover in the price of the products that would be coming to the market for regular commercial transaction. The cost manager is to advise the marketing manager how to cover up the product development cost for the new product.
Diversification
This is a strategy for increasing sales by creating new market for the new products. Diversification is prone to higher risk but generates healthy profit too. While taking a decision with regard to diversification, it is imperative to scan the cost structure of the products or services and here the expertise of the CMAs are utilized. For taking any decision for a new project, it is essentially to evaluate the project in terms of cost and benefit. Benefit is the cash flow generated over the life of the project and its economic viability is judged by CMAs before it is recommended for acceptance or rejection of a particular project. CMAs use modular contribution approach for marketing cost analysis. The whole market is divided into certain number of segments and it ascertains contribution of each segment to profit besides indirect fixed cost that is associated with the segment. The modular contribution approach assesses the profitability of specific marketing mix in a specific zone and evaluates and examines the feasibility for making change in the marketing strategy in the concerned zone. The fundamental objective of a business is to maximize its revenue and profit. In order to achieve this objective, it is important to keep in view that quality and cost aspects of a product are to given necessary weightage at the time of product planning, product design, manufacturing and use. Product planning involves taking decision about which products and services a firm is contemplating for marketing. The management is to take a decision with regard to market segment, product features, quantity level, price and expected volume of sales. The manufacturer must take into consideration the design of the product by product designer and it must take care of abnormal spoilage and waste of inputs otherwise it tell
Focus Section
Total Cost Management (TCM) for Sustainable Performance Excellence

By P. K. Jayaram, M.Com., CAIIB, MBA, FICWA There is an urgent need to re-discover powerful performance applications of Total Cost Management. The TCM approach combined with several cost and management tools and techniques has enormous potential to transform not only an individual business firm but also an entire industry. If TCM approach is quickly developed to make it embedded in the corporate management and decision-making system, it becomes proudly owned by everyone joyfully experiencing the benefits percolating throughout the firm and industry. TCM is an inclusive approach and not a stand-alone cost management technique. It is a way of life and culture seen in companies glowing with sustainable competitive advantage and performance excellence.
Introduction
A protected Indian economy, a widely accepted cost-plus pricing system and the absence of customer power in the past gave the Corporate India many reasons for not looking for better means of managing cost. Post-liberation India has opened Corporate eyes to look for shedding costs piling up. Business environment has changed. Cost information must change with it. The changing opportunities and imperatives of the business world have rendered traditional accounting systems inadequate. TCM offers the right alternative. With the worldwide competitors offering high quality low cost goods and services, most companies are striving to operate with a 'lean and mean' philosophy not only to survive but also to grow. TCM is considered as a powerful approach with which a business firm can manage cost in a most effective manner (also cost effectively) instead of hitting out blindly at all its cost simultaneously. If muscle gets cut along with the fat, we know the exercise is counterproductive!
Supplier collaboration: In today's challenging global economy,

companies are under intense competitive pressure to drive top-line revenue, reduce operational costs, increase market share and accelerate innovation. The most successful companies are not doing it alone. Instead, they are looking to their suppliers and partners to help maximize competitive advantage through faster time-to-market and cost reductions. These companies are shifting their strategic sourcing initiatives toward Total Cost Management, or TCM.
concept in the 1990s and published the full presentation of the process in the Total Cost Management Framework in 2006. AACE defines total cost management as follows: Total Cost Management is the effective application of professional and technical expertise to plan and control resources, costs, profitability and risks. Simply stated, it is a systematic approach to managing cost throughout the life cycle of any enterprise, program, facility, project, product, or service. This is accomplished through the application of cost engineering and cost management principles, proven methodologies and the latest technology in support of the management process. AACE International in their TCM framework has given a list of thirteen key Introductory Concepts for Total Cost Management. It is very useful for operational efficiency. However, it heavily dwells on the engineering side of manufacturing and processes. Hence, though the definition sounds appealing, in reality, TCM, if looked at from an Engineer's viewpoint, does not yield the powerful results it is expected of. The reasons are : Manufacturing companies struggle against increasing challenges to deliver quality products on time and at the required price. All these functions must be performed ensuring the profitability and growth requirements of a demanding public marketplace. The cost management - heavily skewed towards mechanical computer-aided design (MCAD) and/or product lifecycle
What is TCM?
Total Cost Management is a company-wide systematic and structured approach which provides a holistic framework to control, reduce and eliminate costs - throughout the value chain. This process of managing the financial outcome of activities encompasses all operations - internal and external. For these reasons, TCM is one of the most powerful approaches that corporations can adopt in their quest for sustainable competitive advantage. Total cost management (TCM) was originally a name given by AACE International [AACE stands for Association for the Advancement of Cost Engineering]. AACE first introduced the
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Scope in Managing Value Chain
A firm's internal value chain includes all the physical and technological activities within the company that add value to the product. The key to evaluating a company's internal value chain is to understand the activities that give that company a competitive advantage, and then pinpoint and exploit those advantages better than other companies in the industry. TCM helps to identify 'nonvalue adding' or even 'cannibalizing' activities which should be immediately eliminated. Thus the entire value chain, using TCM, can be made faster, better, and more profitable by minimizing its total costs. Attempt to lower the cost of an activity is accompanied by an examination of its cost implications on upstream and downstream activities, both within and outside the company. This unique characteristic of TCM makes organizational change practices such as TQM or Business Re-engineering subsets of TCM instead of subsuming it. One key principle in TCM approach states a firm cannot manage its cost effectively if the firm focuses only on the costs incurred during the production stage. Rather it is more important to focus on 'pre' and 'post' production stages. TCM philosophy says: Don't try to remove cost after the product is designed because cost is designed into the product and hard to remove later. In this context, the concepts like target costing, life cycle costing etc. would be increasingly applicable for a TCM environment.
management (PLM) - continues to miss the hopeful expectations of industry pundits. The PLM market has underperformed for a variety of reasons. The theory of product lifecycle management is sound, but the vision has eluded many companies, taken far longer, in practice, incurred cost much more than expected and failed to deliver as promised. A probable reason for the perception of failure, if any, seems to be the inherent disconnection between the goals and objectives of the product-centric engineering constituents and a company's financially based business objectives. The best example of this departmental conflict is the stark difference between the language of engineering and the language of business. MCAD and PLM, historically, had focused on the engineering and design aspects of product delivery. The language of engineering as spoken by MCAD and PLM is based more on physical attributes of the product and technological capabilities of the software solutions used. The result tends to revolve around a series of conversations about features, rounds, fillets and chamfers. Business operations focus on financially related concerns such as margin, contribution, and profit. The language of the business is time and money. Right or wrong, the profit motive drives critical company decisions. Again, the ability of the product to achieve the expected financial goals is driven by design and manufacturing decisions that occur early in, and continually throughout, the product delivery process. The holy grail of collaboration is meaningless if the parties are not speaking a common language. The only way to translate the language of engineering into the language of business is cost, specifically, product cost. Therefore, it will be more appropriate if we state that the definition of TCM should be based on multidisciplinary approach with tools and techniques from subjects that deal with cost estimating and cost analysis in a variety of contexts, and with systems and concepts that affect costs and their estimation/ analysis. Areas of interest would also include subsets of accounting, statistics, forecasting, economics, and production operations management. Thus, the important features of TCM can be identified as : Total cost management has become very important today as a guiding force for embedding new learning and capabilities into the organization. TCM translates itself into the universally applicable set of all efforts to improve operational efficiencies in a way that lowers the cost of those operations. It provides a link between operations and strategy.
Mere Cost-Cutting Doesn't Work

Mercer Management Consulting analyzed 800 companies from 1987 to 1992. They identified 120 of these companies as costcutters. Of those cost-cutting companies, 68% did not go on to achieve profitable revenue during the next five years. There are also intangible adverse impacts of an excessive focus on cost reduction: it eats away effort and talent that could be applied to more productive activities, like developing better and innovatively useful new products and improving operations. For instance, for a company, will it be wiser to give time for training on low-cost product development or to continue being too busy with some cost reduction efforts focusing on a few parts and labour? TCM is not a basket of stand-alone cost-cutting methods but it is a distinctive approach to cost management built around unique information, tolls, techniques, processes and systems. It revolves around four pivots: (1) Total Cost Consciousness (2) Total Cost Responsibility (3) Total Cost Measurement, and (4) Total Cost Improvement.
Total Cost-conscious Culture

A company that gets every employee to worry about each of the costs he or she incurs each time he or she incurs stand better chance of being a more efficient and effective than the company where such spontaneous 'cost conscious' culture does not exist. TCM strongly supports this and provides the chemicals that can achieve this conversion, i.e. right culture. In TCM environment, cost is an important aspect for management as well as for everyone in the firm. Monitoring the small cost is believed to help manage bigger ones better. For, when you develop
Focus Section
a corporate culture to care small cost savings as well, the feeling that costs are important percolates through the organization. Top-down commitment as reflected in the management time allotted to cost management planning and review of execution would act as a catalyst to sustain the right organizational culture getting people to switch to a cost consciousness paradigm. In the advanced stage, the firm would immensely reap rich benefits when the participation of its people by empowering them to manage cost is visibly greater than the compulsion of forcing control-mechanism down their throats. Organizations creating a culture that supports, honours and prioritizes TCM would create greater sustainable competitive advantage to succeed than those which continue to interpret and practice TCM as mere 'austerity-measure'. eliminate the inefficiency, measurement is the key. In the past, companies seldom cared to embrace improvement of while collar productivity, probably because of the nature of knowledge work which, in the early stages, had lesser significance. But today knowledge workers' high contribution, cost factor and roles have grown substantially. 'Activity-Based Costing is one of the tools which support effective management of costs involved in indirect support functions or service industry. Hence, TCM using ABC is seen more relevant in a non-manufacturing environment as well. In measurements, it is better to be approximately right, than to be precisely wrong. This calls for a structural change in the measurement systems for undistorted reliable information. Activity based costing got evolved to serve this need.
Total Cost Responsibility

Cost management is a responsibility of Finance Department. It is true that the data compilation, reporting and analytical activities are generally carried out by persons attached to costing department or management accounting or finance department. But, cost management pervades every functional activity in a company. It transcends the traditional number-oriented cost-cutting. TCM enables a company manage costs in a holistic manner. Total because it covers all functions, total - because it pervades strategy as well as operations. Total because it involves everything and everyone.
Total Cost Improvement

If the business environment has changed at macro level, the cost information used for managing business also must change with it. The role of TCM in sustaining and enhancing competitive advantage stems from the fact that it provides non-traditional integrated cost information concepts that help one analyze business processes, improve analytical basis for planning and improve performance throughout the company. The type of cost information gathered should support strategy implementation and help minimize misalignment between strategy and strategy execution.
Total Cost Measurement

TCM prompts the Management to ask the following questions. It also provides the right answers : Does your existing system provide reliable information to answer the following : Which are your profitable customer segments? What are your product costs and their profitability? How well informed are your sourcing decisions? Do your costs go up despite cost cutting efforts? Can you reduce your price and yet increase customer value? If not, turn to Total Cost Management. TCM believes in this statement: If you cannot measure it, you cannot manage it. In an ever-increasing competitive environment, inefficiency of one firm is becoming an opportunity for the other. Most of this inefficiency is in terms of the non-value adding activity present in the system. To identify and gauge the progress and to
TCM and Innovation

If 'Improvement' refers to 'being better at what we are doing', 'Innovation' refers to 'discovering new ways to do better and to be better'. TCM accelerates adopting new or novel approaches none in the past could use in sourcing, manufacturing, distribution and marketing strategies, as simplified by Michael E. Porter in the words of 'cost-leadership' or 'differentiation' strategies - or a hybrid of both as appropriate in the five different environmental conditions (or market forces such as entry-barriers, buyer-power, supplierstrength, substitutes, and the intensity of competition). TCM can also take the company to a true and sustainable competitive advantage position that is unique in the sense it can never be copied by competitors. However, TCM has since evolved to include tools and techniques of cost and management accounting which can be broadly classified as : Managing Organizational Cost
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Managing Delivery Cost Managing Structural Cost Managing Process Cost Managing Production Cost. The above categorization is only from the point of view of managing the cost with regard to the strategic intent of the firm to ensure proper alignment of strategy with cost management. For instance, while considering the management of delivery cost, the activities and processes in following areas come in strong focus: Distribution cost, transport cost, breakage cost, marketing cost, brand building and brand sustaining cost, brand enhancing cost, advertisement cost, publicity cost, dealer development cost, dealer servicing cost, stockist/retailer relationship management cost etc. When we discuss 'managing production cost', application of relevant concepts could include Cellular manufacturing, supply chain management, Just-In-Time, Total Product Maintenance, Total Quality Management, Total Quality Control, Statistical Quality Control, Lean Manufacturing, Rationalizing Production Schedules, Strategic Sourcing, Inventory Management Techniques, Supply Chain integration etc. Similarly, in the context of Organizational cost, TCM tools could include Administrative Rationalization, Workforce Rationalization, Compensation Models, Labour Contract for outsourcing, Organization restructuring. etc. This call on cost management require an integrated approach, involving both strategic and operational areas, a system that pervaded through the organization, horizontally as well as vertically. Total Cost Management (TCM) rose to this call. Some tools and techniques of TCM Activity based costing Activity based management Target Costing Supply chain management Strategic cost management PDCA (Plan-Do-Check-Action) Cycle (also using TQM) EPM (Enterprise Performance Management) ERP (Enterprise Resources Planning). CRM (Customer Relations Management) PIMS (Plant Information Management System) Areas of focus for cost reduction also include Financial management Material cost reduction Energy cost management Process improvement Inventory management including JIT. TCM (Total Cost Management) as an approach is remarkably powerful tool if, for identifying, managing and controlling business costs, modern cost management techniques are adopted throughout the organization - techniques that can help get companies into shaping and giving the managers real financial understanding. It details how to improve the total company's performance by identifying and restructuring these activities that use up company's resources. TCM approach can not only help manage 'period cost' better but also can unlock the perceived fixed cost element of a 'non-variable expenditure' and release value from such huge investment over a definable period of time. TCM has three fundamental components (1) Business Process Analysis (2) Activity Based Costing (3 Continuous Improvement. The usage of total cost management (TCM) as an alternative to traditional cost reduction techniques is making it more popular. TCM is a strategic business concept intended to institute long-term cost reduction by considering an organization's cost structure and by coordinating competitive strategy, technological decisions, personnel planning and investment management. Some of the components of TCM are mission/goals, top management focus, technology, monitoring and control, culture, continuous education and commitment. Total Cost Management approach highlights an important message: The modern management is increasingly deploying technology to deal with the mundane data capture which results in freeing resources that can engage in activities to study and analyze techniques needed to drive business success. While pennypinching is an important part of building a financially successful business, it is important that one does not tend to become pennywise and pound foolish. Thus, the management accountant should care in not being solely focused on cost cutting, but must also be mindful of measuring and instituting controls that drive an efficiently produced product of high quality.
TCM and Value Chain Concept

Total Cost of Ownership (TCO) is considered a key principle in supply chain management. The principle of TCO has impacted commercial negotiations by expanding the narrow confines of Price to a vast field of opportunities for attaining Win-Win results. Anyone can get a lower price. The object of good business is to attain the lowest TCO. The four elements of cost are : Quality, Service, Delivery, and Price (QSDP). TCO = the sum of the cost elements in QSDP, or TCO = Quality + Service + Delivery + Price In the value chain, considerations include upstream (suppliers) as well as downstream (distributors) and how cost advantage could enhance the value creation in every level of the value chain to derive and ensure sustainable competitive advantage supporting the chosen strategic objective of the company. The organizational costs would consider all aspects of organizational-wide operational effectiveness. Change management practices, total quality management, costing and benchmarking systems, concept of price of non-conformance (ponc) would be some of the focused considerations in managing process costs. Managing structural costs could be involving scale of operation, technology, financial restructuring, administrative strategies etc. Market determines the price; Cost determines the profitability In this market-oriented economy, organizations are striving to offer customers maximum value at minimum possible price. Since they have more control over cost than price, the obvious option is to turn towards cost management to address the seemingly paradoxical situation of offering more value at lesser price and still maintain profitability.
Focus Section
Total Cost Drivers
TCM leads a more powerful and different search to manage cost by throwing light on the right points. Output in terms the number of units and input in terms of labour, land and capital alone drive cost. Measuring them through aggregate figures can be understood correctly a to identify the true constituents, as mentioned by the cost management guru Daniel Riley, one should look at the two broadly categorized cost drivers - Structural and Executional. Structural cost arising from the strategic choices of the firm about how the management wants to do business can be as : Scale : the volume [of production, source and selling]. Scope : the degree of your vertical integration. Experience : the length of time you are in business. Technology : the process technologies used at every step on the value chain. Complexity : the variety in products and services. It is obvious that the choice in each case will have a direct bearing on your costs. The second set of drivers originates from competency level i.e. how well you do what you do. These are : Workforce Involvement level TQM practice level | Capacity Utilization level Plan Layout efficiency level Product configuration level Value Chain linkages achieved
organizational understanding of ERP philosophy. Proactive strategies become the mainstay of the company-wide operating system. Without this organizational understanding, well-intended efforts will deliver wrong results. Organizational profitability is derived from the organization's overall willingness and ability to improve. Therefore, people at every level must see beyond their local functions and interactively understand how their individual actions increase or decrease profitability. It is in this context that TCM environment offers excellent scope for success in ERP implementation.
Conclusion
A company adopting TCM approach can not only benefit sustainable competitive advantage but can also break its own performance records. Achieving both - i.e. sustainable competitive advantage and performance excellence - are critical in the current business environment. The TCM approach should be taken forward to the next level of applicationfrom the level of individual company to that of an entire industry. TCM adoption is more effective if done (a) industry-specific and also (b) country-specific. Advanced TCM framework for each industry and for each business environment could be developed. This approach has the following advantages : 1. Scaling high globally : Productivity and efficiency in many Indian economic sectors significantly lag behind global standards. Embedded TCM approach would compel the management to address business challenges for more appropriate solutions and take advantage of opportunities specific to industry and/or geographical location. The pressures, actions required, capabilities, enablers are different for each industry. 2. Caring for a bleeding Sector : Secondly, in India, agricultural and allied sectors (including production, yield management, distribution and technology adoption) pose challenges which are unique and different from other countries in the world. Application of TCM to agricultural and allied sectors is an urgent need to save even the nonagricultural sectors whose prospects depend on the agriculture and allied sectors. 3. Achieving quick progress: Speed matters. Cost escalation, particularly in project management, is a common phenomenon rather than an exception. Growing areas such as Telecom sector, infrastructure (cost control was generally weak in infrastructure projects as a majority of them were long-term projects, where there were many uncertainties that could not be anticipated), manufacturing sector, IT/IT-enabled service sector, construction and project management, healthcare, education, hospitality industry etc. offer wide scope for tailor-made TCM applications and practices for enhancing their competitiveness in cost, quality and timely service and for creating break-through achievements with unparallel global excellence which others in the world would, if unable to emulate, admire for sure.
About the Author: Mr. P. K. Jayaram, M.Com., CAIIB, MBA, FICWA., is Practising Cost & Management Consultant and Visiting Faculty in B-Schools
TCM and Value Analysis

The concept of Value : The value of a product can be interpreted in different ways by different customers. Its common characteristic is a high level of performance, capability, emotional appeal, style, etc. relative to its cost. This can also be expressed as maximizing the function of a product relative to its cost : Value = (Performance + Capability)/Cost = Function/Cost We use Value Analysis to analyze and understand the detail of specific situations. We can use it to find a focus on key areas for innovation. We can also use it in reverse (called Value Engineering) to identify specific solutions to detailed problems. Value is not just a matter of minimizing cost. In many cases, the value of a product can be increased by increasing its function (performance or capability) and cost as long as the added function increases more than its added cost. The concept of functional worth can be important. Functional worth is the lowest cost to provide a given function. However, there are less tangible selling functions involved in a product to make it of value to a customer. To understand use of this concept, it is important to capture into the product the 'value' perceived by the customer. It appears complex. However, TCM approach respects the importance of Value Analysis and helps to manage and execute strategy successfully.
TCM and ERP

ERP has, undoubtedly, enormous potential to create organizational synergy that drives the development of highly effective processes; but the people in the company have to properly manage it for continual success. The dramatic results are derived from a deep
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Focus Section
Activity-based Costing (ABC) and Activity-based Management (ABM) Implementation Is This the Solution for Organizations to Gain Profitability?
By Ildik Rka CARDO, tefan PETE Abstract. Adherents of ABC/ABM systems claimed traditional management accounting systems generated
misleading costs in a contemporary, tumultuous, often changing business environment and implementing ABC/ABM would remedy this. That is why activity-based costing (ABC) and activity-based management (ABM) represents the symbol of improved competitiveness and efficiency in every organization. The purpose of this article after analyzing the existing literature in the field is to emphasize that new cost systems such as ABC and ABM could be a strong couple that assures competitiveness and efficiency for each company. Another objective is to present that, besides its disadvantages, firms implement the ABC/ABM system because it permits better tracing of costs to objects, superior allocation of overheads to cost objects, financial and non-financial analysis and measures useful to managers and management accountants in the decision-making process. Keywords: ABC, ABM, implementation process, profitability | JEL Classification: M41, M10, M49
Introduction
Changes in the business environment, triggered by global competition and technological innovation, have led to innovations in the use of financial and non-financial information in organizations. The new environment demands relevant information and data about costs and performance within the organization's activities, processes, products, services and customers. Usually, leading companies are using their cost systems to (Kaplan & Cooper, 1998:5): o Design products and services that both meet customers' expectations and can be produced and delivered at a profit; o Signal where either continuous or discontinuous improvements in quality, efficiency and speed are needed; o Assist employees in their learning and continuous improvement activities; o Guide product mix and investment decisions; o Negotiate about price, product features, quality, delivery and service with customers; o Efficient and effective distribution and service processes to targeted market and customer segments. Still, many companies are not gaining competitive advantages from these enhanced cost systems because they rely on information from a cost system designed for a simpler technological age when competition was only local instead of global, and companies were producing standardized products and services and when speed, quality and performance were less critical for success. Using these systems managers doesn't have timely and relevant information to guide their improvement activities and they don't have accurate and valid information to shape their strategic decisions about processes, products, services and customers. Nowadays companies and managers need cost systems to perform three primary functions (Kaplan & Cooper, 1998):
Valuation of inventory and measurement of the cost of goods sold for financial reporting because of the external circumstances with investors, creditors, regulators and authorities; o Estimation of the costs of activities, products, services and customers because of the internal managers needs to understand and improve the economics of their operations; o Provide accurate and timely cost information and economic feedback to managers and operators about process efficiency to make both strategic decisions and operational improvements. Under these conditions managers need to rethink their managerial practices and in close relation to this they need to reshape their existing accounting systems, especially the managerial accounting systems. As a response to this changes researchers turned into the study of changes and innovations in managerial accounting, and nowadays we are witnesses of a re-evaluation of managerial accounting in terms of developing new techniques and systems (Yazdifar & Tsameny, 2005). Traditional managerial accounting techniques such as absorption costing, budgeting and profit-based performance measures were replaced with such things as strategic management accounting, activity-based costing (ABC), strategic cost management, nonfinancial measures, balanced scorecard (BSC) and target costing. Some of them, for example, ABC and BSC, have also gained a degree of popularity in practice (Jarvenpaa, 2007:100). Moreover, the most notable contribution is considered to be activity-based costing. Activity-based cost (ABC) and activity-based management (ABM) systems emerged to meet the need for accurate information about the cost of resource demands by individual products, services and customers and these system also enabled indirect and support expenses to be driven first to activities and processes and then to products, services and customers. In this way managers have obtained a clearer picture of the economics of their operations and could improve their decisions. These changes, the intense debate and high interest coming from
Focus Section
researchers, at international level, made us to turn into the study of managerial accounting changes and new managerial accounting practices, tools and techniques. Contributing to the managerial accounting literature, the paper examines how activity-based costing and management evolved over the years; how the ABC/ABM couple was received, adopted and implemented by organizations and practitioners over the years.
Figure 1: The Development in the Number of Articles on ABC/M, 1987-2000

90 80 70 60 No. of ABC/M aricles 50 40 30 20 10 0 1987-88 1989-90 1991-92 1993-94 1995-96 1997-98 1999-2000
No. of articles on ABC/M
Research Methodology
Recent years have witnessed significant changes in both management accounting research and practice. For both management accounting researchers and management accounting practitioners these are changing times (Scapens, 2006:329). Source: Bjornenak & Falconer (2002:489). Still, how can we create good management accounting research? According to the existing literature in the field costs. Later in the 1970s and 1980 American and French researchers (Zimerman, 2001; Lukka & Mouritsen, 2002) there is a need for more Cooper, Kaplan, Porter, Lebas, Lorino formulate, elaborate and rigour, more testing and more theory. According to them theorizing can crystallize the method through articles, publications and works. In be a liberating effort, an attempt of making sense in our world in a more these years, CAM-I (The Consortium of Advanced Management, abstract level than that of merely describing the immediately perceived International), an international consulting group, had an important role practice. Testing can be viewed as seeking to find out the connections during the research, financing various works and projects, and it also that hold in the world. Rigour again can be about seriousness in finding provided a formative role for studying and formalizing the principles that this out. These propositions offer one set of qualitative criteria to create have become more formally known as Activity-Based Costing. knowledge good knowledge, relevant knowledge, insightful In the late 1990's and early 2000's Bjornenak and Falconer conducted knowledge (Lukka & Mouritsen, 2002:806). a study about the development of ABC/M journal literature between Qualitative researchers, unlike their quantitative counterparts, do not 1987 and 2000. They began their research in 1987, the year when the intend to test hypotheses at the beginning of their research process. first accounting journal publication on ABC/M appeared and stopped at Theory is used not to obtain predictions but to gain understanding of a the end of 2000, the latest practical data for the authors. The literature certain phenomenon. Data analysis is a process of reality construction of two countries UK and USA formed the basis of their study and they whereby the researcher, the theory, and the method used in the analyzed only the accounting literature on ABC/M both in research, together with the data derived from the research, are all applied/practitioners' journals (Management Accounting UK; interdependent and interrelated (Siti-Nabiha, 2009:43). Management Accounting USA; Journal of Cost Management USA The purpose of our research was to lecture in the field of management and Journal of Accountancy - USA) and academic research journals accounting, analyze and understand the cost systems. We paid special (Management Accounting Research, Accounting and Business attention to new and contemporary cost systems, tools and techniques, Research and Accounting Horizons in UK and Journal of Management especially to activity-based costing and activity-based management. Accounting Research, Accounting Horizons, Accounting Review and We analyzed the implementation process of ABC/ABM, underlined Critical Perspectives in Accounting in the USA). both the advantages and disadvantages of these systems. We also The mentioned survey shows that after a take-off period in the late analyzed and tried to present the results of the studies and surveys 1980's a high and consistent volume of papers on the topic of made, at international and national level, about the implementation and ABC/ABM has been evident. Moreover, these articles are spread adoption of ABC and ABM in practice. That is why this paper relates across thirteen of the seventeen journals included in the study. Indeed, mainly to the data analysis. The methods used were: grounded theory the breadth of exposure through the accounting journals occurred and comparative analysis. relatively quickly because as early as 1990 almost half of them Literature Review contained materials on ABC/M. According to Bjornenak's and Falconer's study the specialist Activity-based costing/management have attracted high levels of management accounting journals predominates in publishing articles interest from both academics and practitioners since its emergence in about ABC/ABM. They account for 358 (89%) of the 404 published the late 1980's (Bjornenak & Falconer, 2002: 481). papers. In particular, the three professional journals contribute 325 ABC was developed as an approach to address problems associated (80% of total) of the papers with all three providing a major portion: with traditional cost management systems, which tend to have the Management Accounting (UK), 98 (24% of total); Management inability to accurately determine actual production and service costs, or Accounting (USA), 87 (22% of total); Journal of Cost Management, 140 provide useful information for operating decisions. With these (35% of total). The two management accounting research journals deficiencies managers can be exposed to making decisions based on contain other 33 papers (8% of total). inaccurate data. The higher exposure is for companies with multiple We noticed that there still is an interest in ABC/M in the last years (2002products or services. 2010), evidenced by papers and articles published. This pattern of The origins of ABC are in the United States of America and it is the result publication has been characterized by a high proportion of authorship of multiple theoretical and practical research and works. It is also from the accounting practitioner and, in particular, from the consultancy considered one of the most important innovations in cost calculation constituencies. While much of this has been positive and promotional it and managerial accounting. has also been subjective and anecdotal in substance. In 1963 Peter Drucker draw attention on the fact that the characteristic Writings about ABC were theoretical and prescriptive (Hopper, 1994; of traditional cost calculation methods is the lack of pertinence and Lukka & Granlund, 2002). Others considered that ABC promotes relevancy and this leads to mutual subsidy between products and their
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Focus Section
rationality, efficiency and ultimate profitability (Jones & Dugdale, 2002; Cohen et al., 2005; Hooper & Major, 2007). However, ABC/M has, in addition, attracted an academic research interest which has brought a wide range of research methods to bear on the topic. Analysis of this work indicates a US-based predilection for quantitative approaches to research and a greater propensity for theory development as opposed to the UK where reviews and field studies have been more common. There is also some indication of temporal clustering in the use of specific research methods and the use of empirical methods relatively late in the research cycle (Bjornenak & Falconer, 2002: 503-504).
Figure 2: Using ABM for Operational Improvements and Strategic Decisions

Activity-based Costing
Operational ABM Doing things right
Strategic ABM Doing the right things
ABC and ABM Together or Separate?

Activity-based costing (ABC) is defined as a methodology that measures the cost and performance of activities, resources, and cost objects. Specifically, resources are assigned to activities, then activities are assigned to cost objects based on their use. ABC recognizes the causal relationships of cost drivers to activities (Institute of Management Accountants, 1998).
Performing activities more efficiently

o Activity management o Business process reengineering o Total quality o Performance measurement
Choosing the activities we should perform

o Product design o Product line and customer mix o Supplier relationships (pricing, order size, delivery, packaging) o Market segmentation o Distribution channels
Source: adapted by Kaplan & Cooper (1998).
ABC begins (Hughes & Gjerde, 2003) with the companies' products, determines the activities used in the production and delivery of those products, and computes the costs of various activities. The costs of the activities used in the production of a product are then assigned to that product in a manner that approximates a causal relationship. As a result, advocates insist that ABC systems provide more useful information for cost management purposes than traditional systems do. These differences are significant for companies with large amounts of overhead, multiple products, and high product diversity. In today's competitive environment organizations require a reliable cost system and relevant cost information to survive. By implementing an ABC system managers will obtain accurate information about the true cost of products, services, processes, activities, distribution channels, customer segments, contracts, and projects. Needy et al (2003) suggests that the implementation process of an ABC system should rely on the following four steps: (1) cost system evaluation; (2) ABC design; (3) ABC implementation; and (4) system evaluation and validation. Moreover, the ABC process should not be a one-off event; it demands a fundamental mind shift by the management, it should be a process of relentless and continuous improvement (Hughes, 2005). ABC's originators recommended it for economic, normative, realistic and deterministic reasons that is, it represents best value, accurately represents financial events and aids rational decision making and contracting. Alleged benefits include: increased cost awareness and understanding; better tracing of costs to objects; superior allocation of overheads to cost objects; and financial (cost driver rates) and nonfinancial (cost driver volumes) measures for cost management and operational decision (Hopper & Major, 2007:61). The clearer picture from ABC systems led naturally to activity-based management (ABM). ABM enables the organization (Kaplan & Cooper, 1998) to accomplish its outcomes with fewer demands on organizational resources. Activity-based management (ABM) is subsequently defined by CAM-I (Consortium for Advanced Manufacturing-International) as a discipline that focuses on the management of activities as the route to improving the value received by the customer and the profit achieved by providing this value. ABM includes cost driver analysis, activity analysis, and performance measurement, drawing on ABC as its major source of data. Using ABC data, ABM focuses on how to redirect and improve the use of resources to increase the value created for customers and other stakeholders.
ABM accomplishes its objectives through two complementary applications: operational and strategic ABM. Operational ABM works to enhance efficiency, lower costs and asset utilization. It can increase the capacity of resources by reducing machine downtime, improving or eliminating entirely faulty activities and processes and increasing the efficiency of the organization's resources. The benefits from operational ABM can be measured by reduced costs, higher revenues through better resource utilization and cost avoidance. Strategic ABM explores various ways a company can create and sustain a competitive advantage in the marketplace. ABM attempts to alter the demand for activities to increase profitability, encompasses decisions about product design and development where the biggest opportunity for cost reduction exists, improves relationships with suppliers and customers. Some of the specific uses of ABM in organizations today include attribute analysis, strategic decision making, benchmarking, operations analysis, profitability/pricing analysis, and process improvement. ABC/ABM systems can use (IMA, 1998) many different attributes or data tags for a specific cost. Data attributes allow a company to perform analysis on many different dimensions of a management problem using the same basic store of data. Organizations that are designing and implementing ABM will find there are five basic information outputs: o relevant information about the cost of activities and business processes; o the cost of non-value-added activities in order to identify activities that do not contribute to customer value or the organization's need and make improvement efforts; o activity-based performance measures to provide scorecards, to report how well improvement efforts are working; o accurate product/service cost (cost objects) information this is vital for selecting the segmented markets where an organization competes; o cost drivers in order to identify factors that can cause changes in the cost of an activity. The shift from ABC (for product profitability assessment) to ABM (for more general managerial control and decision support) has been supplemented by the broadening of ABC/M application to different types of business, to different functional specializations within business
Focus Section
and to the complementarities of ABC/M to other new highprofile management and accounting techniques (Bjornenak & Falconer, 2002: 504). Together, ABC and ABM methodologies provide the tools and the knowledge base for making informed decisions decisions that relate to the pricing, management, and improvement of products and services. They are utilized to gain fuller understanding of the real cost dynamics and cost structures involved in business operations. ABM together with ABC principles can enable managers to better understand (a) both product and customer profitability, (b) the cost of business processes, and (c) how to improve them. ABC and ABM are a continuum of value. ABM is the application of ABC data to manage product portfolios and business processes better. ABC becomes ABM (management) when it is used to (CIMA, 2001): o
Figure 3: Outputs of the ABM Model

Cost Assignment View Continuous Improvement Process RESOURCES Process View COST DRIVERS PERFORMANCE MEASURES ACTIVITY ANALYSIS COST DRIVER ANALYSIS PERFORMANCE ANALYSIS COST OBJECTIVES
ACTIVITIES
Source: Miller (1996:236) CIMA ( 2001).
design products and services that meet or exceed customers' expectations and can be produced and delivered at a profit; signal where either continuous or discontinuous (re-engineering) improvements in quality, efficiency and speed are needed; guide product mix and investment decisions; choose among alternative suppliers; negotiate about price, product features, quality, delivery and service with customers; employ efficient and effective distribution and service processes to target market and customer segments; improve the value of an organization's products and services.
o o o o o o
ABC/ABM systems are very effective means for improving company performance on many fronts. An organization can realize the power of ABC and ABM when the right individuals access the right information in the best format for improving performance
The Role of Managers and Management Accountants when Implementing ABC/ABM

There has been a lively academic and professional debate on the changing role of accountants, particularly management accountants, during recent years. The propagated role shift has essentially meant transition from being oriented around number crunching and maintaining the overall functioning of the accounting systems to an increasingly business-oriented role (Jarvenpaa M, 2007:99-100). Management accountants can perform an important role in the design of an ABC system. Based on their skills and training, they can help identify what is appropriate for analysis (product, customer, process, etc.) and explain the probable causes of an existing cost system's deficiencies. In addition, based on their detailed knowledge of the information in their company's costing information systems, they are uniquely qualified to judge the level of aggregation appropriate to the ABC costing system. They can use their understanding of costing methods to recommend appropriate methodologies for the assignment of costs to activities and cost objects. Finally, they will be able to use their understanding of the information and cost relationships to support the system once it is implemented (IMA, 1998:4). As with any new management technique or tool, an effective change management process must be in place when implementing an ABC/ABM system. An objective of this process should be to ensure that there is support for the system at all levels of an organization. This includes having a top-level manager to champion the initiative, as well as acceptance by lower-level managers.
Besides management accountants and managers, the organization's information technology (IT) systems play an essential role in the implementation process. Information Technology (IT) refers to information systems and the organizational planning of resources required, acquiring, implementing, delivering and monitoring them. For many years, information technology (IT) has been playing an important role in the operations of organizational, strategic and managerial systems. It is often difficult, however, for generalists - who most board members are - to keep up with the rapid changes taking place in IT and, therefore, to know what questions to ask to ensure that IT issues are being properly addressed (The Canadian Institute of Chartered Accountants, 2004). IT systems must provide data that measures the outputs. Collectively, the organization's IT systems should contain information about most of the cost objects and the resource and activity cost drivers. All and all effective communication - at all levels of an organization is essential. An organization needs to communicate the deficiencies of its existing costing system, the effect of this distortion on managerial decision making, how ABC costing principles can be used to provide information that is more relevant for managerial decision making, and the effect of the new system on the evaluation and rewarding of individual employees. Communication is a multi-way process, and employees', managers', accountants' concerns need to be addressed. After this process, thanks to the existing communication the managerial accounting function and management accountants' role changes from being the scorekeeper and watchdog to being the active advisor of management and an increasing participant in decisionmaking (business partner) (Jarvenpaa, 2007).
ABC/ABM Adoption and Implementation What does the Practice say?

As presented in previous paragraphs, ABC/ABM has attracted the interest of both researchers and academics to a considerable extent in recent years. Researchers (Jarvenpaa, 2007; Akarany&Yazdifar, 2007; Askarany et al., 2007) consider that ABC and ABM are the most discussed and popular accounting innovations in last two decades because they are largely linked to the notion that information provided is more accurate and detailed than that provided by traditional costing systems. Moreover, these new managerial accounting techniques have aimed at helping business decision and taking control in an increasingly sophisticated way and with this they enhance the business orientation of managerial accounting. However, despite the strong advantages of these techniques, survey evidence suggest that the take-up of ABC and ABM has been low in practice (Askarany & Yazdifar, 2007); over the past decade there has
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Focus Section
been a growing awareness of ABC and ABM, but the overall rate of implementation has been low (Cohen et al., 2005). In the early 1990s the implementation rates of ABC and ABM were low both in the USA and Europe. In 1999 Groot find out that only 18% of the investigated companies have implemented ABC, while 58% of the respondents were considering the possibility to implement the method. In Canada around 23% of the surveyed companies implemented ABC/ABM, 18% considered to adopt, 4% considered to adopt in the near future (Bescos et al., 2002). In Europe the adoption rates were similar. In France and Belgium the adoption rates were around 20%, in Netherlands around 12%, while in other countries less than 10% (Clark et al., 2002; Bescos et al., 2002). In the early 1990s researchers (Innes et al., 2000) reported low adoption rates of ABC (around 10%) in the UK, but few years later the same survey showed more companies implementing ABC, adoption rates reaching 20%. As for the public sector 54% of local authorities, 17% of government agencies and 55% of healthcare organizations were using ABC/ABM techniques (Baird, 2007). A survey conducted among German companies (services, insurances, banking, retail and manufacturing) shows that only 7% of the respondents are using ABC as a stand-alone system, while 24% of the respondents combine ABC with other cost systems, tools and techniques (Friedl et al., 2009). Few years later, findings from Australia and Asia present a mixed picture. Adoption rates of ABC and ABM varies between 12%-56%. Japan was represented with low adoption rates but with considerable interest regarding the examination of the possibility of such an adoption; while in India researchers identified adoption rates around 20-23% of ABC (Cohen et al., 2005). Australia reported considerable variation in ABC adoption rates, with many reporting low rates of adoption between 10%-17% in the private sector (Baird, 2007). In 2005 a dedicated team of professionals, Better Management Team, with business management experience conducted an empirical study among companies all over the world do determine the state of ABC and ABM. The respondents came from various industries, like manufacturing, financial services, communication, consulting, IT, healthcare or public sector. The main conclusion of the study conducted is that the implementation of ABC varies by industries. Companies that implemented and are actively using ABC/ABM are represented by the communication (58%) or financial services sector (46%), followed by the public sector (29%), manufacturing (24%) and other industries (32%). The examined surveys show that the reasons to implement ABC/ABM are driven by the need to improve customer profitability, to gain accurate and relevant cost information for pricing or budgeting, to modernize cost systems, improve cost control and improve business processes, to meet current managerial needs, to improve product profitability. However the implementation process has also disadvantages and faces difficulties such as resistance to change in firms; uncertainty about the implementation costs and about the risk of the implementation; absence of technical conditions required to successful implementation; the reluctance of employees or managers; uncertainty about the support from top management; difficulties in identifying and selecting activities; problems when collecting data for these new systems (Bescos et al., 2002; Cohen et al., 2005). Besides ABC adopters there are companies that consider ABC implementation as a future target and companies that do not consider adopting ABC. According to the findings of relevant researchers (Bescos et al., 2002; Cohen et al., 2005, Askarany & Yazdifar, 2007) the main reasons for rejecting the implementation process of ABC/ABM might be: satisfaction with the existing traditional cost systems, lack of management support and interest, implementation process associated with high costs, consumption of time and resources. In Romania managerial accounting has a different and slower evolution, being influenced by the political, social and economical regimes and business environment of our country. For many years managerial accounting in Romania was associated with cost calculation and budgeting, only at the beginning of 2000, influenced by the international literature, Romanian researchers experienced a modern approach to managerial accounting. Literature in the field (Jinga et al., 2010; Cardos, 2010) shows that within Romanian companies' contemporary practices, tools and techniques are still widely adopted than recently developed ones. Romanian practitioners seem to be satisfied with the existing cost systems; the adoption rates of ABC are low and vary between 6% and 12%; while the majority heard about the method but never considered implementing it. Resistance and lack of interest and support from the management, high implementation costs and complicated work processes were considered to be the main challenges identified within companies coming from industries like manufacturing, services or trade. We can conclude that, on international level, over the years the managerial accounting literature has witnessed a growing interest in the study of new and contemporary managerial accounting practices and techniques; there has been a high interest and intensive debate on the importance, adoption and implementation, advantages and disadvantages of ABC and ABM from both researchers and practitioners. The literature shows a mixed and various picture of ABC/ABM. Variation might be attributed to the manner in which ABC has been operationalized in the studies presented in the literature, with many different terms used and ambiguity surrounding the definition of the terms (Baird, 2007). Others (Askarany&Yazdifar, 2007) consider that ABC and ABM have not been highly diffused among practitioners and that is why practitioners are having doubts in terms of replacing traditional techniques. This might be the reason why ABC is not so known to Romanian companies and practitioners. On national level the managerial accounting literature is relatively poor; little is known about managerial accounting practices, tools and techniques, especially about contemporary and recently developed ones. Despite this variation identified we consider that new managerial accounting practices like ABC and ABM can cope with today's managerial needs and with the requirements of technological changes.
Conclusions
The main conclusion of this paper is that the literature and the practice show a mixed picture of ABC and ABM. Successful implementation of ABC/ABM is not the same in every organization or follows the same path. Tailored to the unique strategy, structure, capabilities, and needs of the firm, ABC/ABM is a universally useful concept and system that can take on a multitude of shapes and uses. ABC/ABM data should meet the needs of the company's decision makers and support their efforts to create value for all stakeholders. We are sharing Hughes's (2005:14) opinion, according to which the successful implementation of ABC and ABM requires the following issues to be considered: (1) top management commitment the need for the senior managers to be fully conversant with the principles of ABC/ABM, to show commitment to the process, to advise on strategic and day-to-day operational problems; (2) ABC/ABM implementation training by universities, researchers and academics through workshops and seminars; (3) Education, training and learning highlighting the principles, capabilities, goals and objectives of ABC/ABM for all employees. (4) Analysis of critical activities and monitoring the process, ensuring the results of implementation are rolled out into effective decision making.
Focus Section
Based on the existing literature in the field we can conclude that companies use the ABC/ABM couple with varying results, suggesting the successful application of them requires the mastery of new management tools and techniques as well as a management mind shift. Analysis, not control, must become the focus of managers using financial and non-financial information in a process-driven, customercentered organization. Defining, measuring, and improving the ability of an organization to create value has to become the stimulus shaping management information systems, as well as the actions and decisions they support. Achieving this goal lies at the heart of ABC/ABM systems. Still, the best system will be useless if no one understands how to use the information. As important as it is to design and implement a theoretically sound and properly maintained system, it is just as important to ensure: (1) management has been trained in the concepts and use of ABC/ABM; (2) management receives reports that are not only useful but understandable; and (3) the ABC information is kept current. Technical doubts about ABC/ABM, about its definition, terminology, methods and usage exist and vary (Jones&Dugdale, 2002; Hopper&Major, 2007). Even the ABC originators are wondering whether ABC provides relevant costs for decisions under stringent conditions or the implementation process isn't excessively costly. Even though these questions exist, the benefits of the ABC/ABM implementation are stronger. Moreover, given the escalating speed of recent technological innovations, the changes generated by globalization and intensive competition organizations from all over the world, from all industries could cope with the current needs of a changing environment only if they put a great emphasis on new managerial accounting tools and techniques such as the ABC/ABM couple. This is also emphasized by a planning manager working at a Portuguese telecommunication company: ABC implementation is directly linked to the information request of the telecommunications regulator. But I am sure that sooner or later we would have adopted ABC, especially if we had known that other companies were using it successfully. (Hopper & Major, 2007:77)
Hopper, T.; Major, M. (2007), Extending Institutional Analysis through Theoretical Triangulation: Regulation and Activity-Based Costing in Portuguese Telecommunications, European Accounting Review, Vol. 16, No. 1, pp. 59-97. 13. Hughes, A. (2005), ABC/ABM Activity-based costing and activity based management. A profitability model for SME's manufacturing clothing and textiles in the UK, Journal of Fashion Marketing and Management, Vol. 9, No. 1, pp. 8-19. 14. Hughes, S.B.; Gjerde, K.P. (2003), Do Different Cost Systems Make a Difference? Management Accounting Quarterly, Vol. 5, No. 1. 15. I nnes, J.; Mitchell, F.; Sinclair, D. (2000), Activity Based Costing in the UK largest companies: A comparison of 1994 and 1999 survey results, Management Accounting Research, Vol. 11, pp. 349 362. 16. Jarvenpaa, M. (2007), Making Business Partners: A Case Study on How Management Accounting Culture Was Changed, European Accounting Review, Vol. 16, No. 1, pp. 99-142. 17. Jinga, G.; Dumitru, M.; Dumitrana, M.; Vulpoi, M. (2010), Accounting systems for cost management used in the Romanian economic entities, Accounting and Management Information Systems, Vol. 9, Nr. 2, pp.242 267. 18. Jones, T.; Dugdale, D. (2002), The ABC bandwagon and the juggernaut of modernity, Accounting, Organizations and Society, 27 (1/2), pp. 121163. 19. Kaplan, R.S.; Cooper, R. (1998), Cost & Effect. Using Integrated Cost Systems to Drive Profitability and Performance, Harvard Business School Press. 20. Lukka, K.; Granlund, M. (2002), The fragmented communication structure within the accounting academia: the case of activity based costing research genres, Accounting, Organizations and Society, 27 (1/2), pp. 165-190. 21. Lukka, K.; Mouritsen, J. (2002), Homogeneity or heterogeneity of research in management accounting?, The European Accounting Review, Vol. 11, No. 4, pp. 805-811. 22. Miller, J.A. (1996), Implementing Activity-Based Management in Daily Operations, John Wiley & Sons Inc. 23. Needy, K.L.; Nachtmann, H.; Roztocki, N.; Warner, R.C.; Bidanda, B. (2003), Implementing activity-based costing systems in small manufacturing firms: A field study, Engineering Management Journal, Vol. 15. Iss 1, p. 3. 24. Scapens, W.R. (2006), Changing times: Management accounting research and practice from a UK perspective, Contemporary Issues in Management Accounting, pp. 329-354. 25. Siti-Nabiha Abdul-Khalid (2009), Sensemaking in Interpretive Management Accounting Research: Constructing a Credible Account, International Journal of Qualitative Methods 8(1). 26. Yazdifar, H.; Tsameny, M. (2005), Management accounting change and the changing roles of management accountants: A comparative analysis between dependent and independent organizations, Journal of Accounting & Organizational Change, Vol. 1, No. 2, pp. 180-198. 27. Zimmerman, J.L. (2001), Conjectures regarding empirical managerial accounting research, Journal of Accounting and Economics, 32, pp. 41127. 28. CIMA Activity based management An overview, Technical briefing, April 2001. 29. Institute of Management Accountants, (1998), Implementing ActivityBased Management: Avoiding the Pitfalls, Statements on Management Accounting Statement Number 4CC. 30. The Canadian Institute of Chartered Accountants, (2004), 20 Questions Directors Should Ask About IT Revised. 31. Better Management Report: Activity-Based Costing: How ABC is Used in the Organization, September 2005, at http://www.sas.com/ offices/europe/switzerland/romandie/pdf/actualites/abm_survey _result.pdf, accessed on April 21 2011. About the Author: Ildik Rka Cardo, Babe-Bolyai University, Faculty of Economics and Business Administration, Cluj-Napoca, tefan Pete, BabeBolyai University, Faculty of Economics and Business Administration, ClujNapoca. 12.
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1. 2. Askarany, D.; Yazdifar, H. (2007), Why ABC is not widely implemented?, International Journal of Business Research, Vol. VII, No.1, pp. 93-98. Askarany, D.; Smith, M.; Yazdifar, H. (2007), Technological innovations, activity based costing and satisfaction, Journal of AccountingBusiness&Management, No. 14, pp. 53-63. Baird, K. (2007) Adoption of activity management practices in public sector organizations, Accounting and Finance, No. 47, pp. 551-569. Bescos, P.L.; Cauvin, E.; Gosselin, M. (2002), Activity based costing and activity based management: a comparison of the practices in Canada and in France, Comptabilite-Control-Audit, Special Issue May, pp. 229-244. Bjornenak, T.; Falconer, M. (2002), The development of activity-based costing journal literature, 1987-2000, The European Accounting Review, Vol. 11, No. 3, pp. 481-508. Cardos, I.R. (2010) Contabilitate managerial i calculaia costurilor. Trecut, prezent i viitor, Editura Alma Mater, Cluj-Napoca. Clark, P.; Hill, N.T.; Stevens, K. (2002), Activity based costing in Ireland: Barriers and opportunities for change, Critical Perspectives on Accounting, No. 1, pp. 443-468. Cohen, S.; Venieris, G.; Kaimenaki, E. (2005), ABC: adopters, supporters, deniers and unawares, Managerial Auditing Journal, Vol. 20, No. 9, pp. 981- 1000. Friedl, G.; Hammer, C.; Pedell, B.; Kupper H.U. (2009), How do German companies run their cost accounting systems?, Management Accounting Quarterly, Vol. 10, No. 2, pp. 38-52. Groot, T. (1999) Activity based costing in US and Dutch Food Companies, Advances in Management Accounting, No. 7. pp. 47-63. Hopper, T. (1994), Activity based costing: A critical commentary, Fukuoka University Review of Commercial Sciences, 39 (1/2) pp. 479511.
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Focus Section
Cost Accounting
By Asif Hussain Siddiqi
B.COM; M.A. (Economics); APFA
ost accounting is a process of collecting, analyzing, summarizing and evaluating various alternative courses of action. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future. Since managers are making decisions only for their own organization, there is no need for the information to be comparable to similar information from other organizations. Instead, information must be relevant for a particular environment. Cost accounting information is commonly used in financial accounting information, but first we are concentrating on its use by managers to make decisions. Unlike the accounting systems that help in the preparation of financial reports periodically, the cost accounting systems and reports are not subject to rules and standards like the Generally Accepted Accounting Principles. As a result, there is wide variety in the cost accounting systems of the different companies and sometimes even in different parts of the same company or organization. All types of businesses, whether service, manufacturing or trading, require cost accounting to track their activities Cost accounting has long been used to help managers understand the costs of running a business. Modern cost accounting originated during the industrial revolution, when the complexities of running a large scale business led to the development of systems for recording and tracking costs to help business owners and managers make decisions. In the early industrial age, most of the costs incurred by a business were what modern accountants call "variable costs" because they varied directly with the amount of production. Money was spent on labor, raw materials, power to run a factory, etc. in direct proportion to production. Managers could simply total the variable costs for a product and use this as a rough guide for decision-making processes.
Some costs tend to remain the same even during busy periods, unlike variable costs, which rise and fall with volume of work. Over time, the importance of these "fixed costs" has become more important to managers. Examples of fixed costs include the depreciation of plant and equipment, and the cost of departments such as maintenance, tooling, production control, purchasing, quality control, storage and handling, plant supervision and engineering In the early nineteenth century, these costs were of little importance to most businesses. However, with the growth of railroads, steel and large scale manufacturing, by the late nineteenth century these costs were often more important than the variable cost of a product, and allocating them to a broad range of products lead to bad decision making. Managers must understand fixed costs in order to make decisions about products and pricing. For example: A company produced railway coaches and had only one product. To make each coach, the company needed to purchase Rs. 60 of raw materials and components, and pay 6 laborers Rs. 40 each. Therefore, total variable cost for each coach was Rs. 300. Knowing that making a coach required spending Rs. 300, managers knew they couldn't sell below that price without losing money on each coach. Any price above Rs. 300 became a contribution to the fixed costs of the company. If the fixed costs were, say, Rs. 1000 per month for rent, insurance and owner's salary, the company could therefore sell 5 coaches per month for a total of Rs. 3000 (priced at Rs. 600 each), or 10 coaches for a total of Rs. 4500 (priced at Rs. 450 each), and make a profit of Rs. 500 in both cases.
Cost Accounting VS Financial Accounting

1. Financial accounting aims at finding out results of accounting year in the form of Profit and Loss Account and Balance Sheet. Cost Accounting aims at computing cost of production/service in a scientific manner and facilitate cost control and cost reduction. Financial accounting reports the results and position of business to government, creditors, investors, and external parties, owners etc. Cost Accounting is an internal reporting system for an organization's own management for decision making. In financial accounting, cost classification based on type of transactions, e.g. salaries, repairs, insurance, stores etc. In cost accounting, classification is basically on the basis of functions, activities, products, process and on internal planning and control and information needs of the organization. Financial accounting aims at presenting 'true and fair' view of transactions, profit and loss for a period and Statement of financial position (Balance Sheet) on a given date. It aims at
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computing 'true and fair' view of the cost of production/services offered by the firm. 4. By Behavior : fixed, variable, semi-variable. Costs are classified according to their behavior in relation to change in relation to production volume within given period of time. Fixed Costs remain fixed irrespective of changes in the production volume in given period of time. Variable costs change according to volume of production. Semivariable Costs are partly fixed and partly variable. By control ability: controllable, uncontrollable costs. Controllable costs are those which can be controlled or influenced by a conscious management action. Uncontrollable costs cannot be controlled or influenced by a conscious management action. By normality: normal costs and abnormal costs. Normal costs arise during routine day-to-day business operations. Abnormal costs arise because of any abnormal activity or event not part of routine business operations. Eg: Costs arising of Floods, riots, accidents etc. By Time : Historical Costs and Predetermined costs. Historical costs re costs incurred in the past. Predetermined costs are computed in advance on basis of factors affecting cost elements. Eg: Standard Costs. By Decision making Costs: These costs are used for managerial decision making. Marginal Costs: Marginal cost is the change in the aggregate costs due to change in the volume of output by one unit. Differential Costs: This cost is the difference in total cost that will arise from the selection of one alternative to the other. Opportunity Costs : It is the value of benefit sacrificed in favor of an alternative course of action. Relevant Cost: The relevant cost is a cost which is relevant in various decisions of management. Replacement Cost: This cost is the cost at which existing items of material or fixed assets can be replaced. Thus this is the cost of replacing existing assets at present or at a future date. Shutdown Cost: These costs are the costs which are incurred if the operations are shut down and they will disappear if the operations are continued. Capacity Cost: These costs are normally fixed costs. The cost incurred by a company for providing production, administration and selling and distribution capabilities in order to perform various functions. Other Costs
Types of Cost Accounting

The following are different cost accounting approaches: a. b. c. d. e. f. g. h. standardized or standard cost accounting lean accounting activity-based costing resource consumption accounting throughput accounting Life cycle costing environmental accounting Target costing
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Elements of cost
Basic cost elements are: 1. 2. 3. Raw materials Labor Indirect expenses/overhead o o o Material (Material is a very important part of business) Direct material/Indirect material Labor Direct labor/Indirect labor Overhead (Variable/Fixed) Production or works overheads Administration overheads Selling overheads Distribution overheads Maintenance & Repair Supplies Utilities Other Variable Expenses Salaries Occupancy (Rent) Depreciation Other Fixed Expenses 6.
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(In some companies, machine cost is segregated from overhead and reported as a separate element)
Classification of Costs
Classification of cost means, the grouping of costs according to their common characteristics. The important ways of classification of costs are: 1. 2. By Element: There are three elements of costing i.e. material, labor and expenses. By Nature or Traceability: Direct Costs and Indirect Costs. Direct Costs are Directly attributable/traceable to Cost Object. Direct costs are assigned to Cost Object. Indirect Costs are not directly attributable/traceable to Cost Object. Indirect costs are allocated or apportioned to cost objects. By Functions: production, administration, selling and distribution, R&D.
Standard Cost Accounting

In modern cost accounting, the concept of recording historical costs was taken further, by allocating the company's fixed costs over a given period of time to the items produced during that period, and
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Focus Section
recording the result as the total cost of production. This allowed the full cost of products that were not sold in the period they were produced to be recorded in inventory using a variety of complex accounting methods, which was consistent with the principles of GAAP (Generally Accepted Accounting Principles). It also essentially enabled managers to ignore the fixed costs, and look at the results of each period in relation to the "standard cost" for any given product. For example: if the railway coach company normally produced 40 coaches per month, and the fixed costs were still Rs.1000/month, then each coach could be said to incur an Operating Cost/overhead of Rs.25 =(Rs.1000 / 40). Adding this to the variable costs of Rs.300 per coach produced a full cost of $325 per coach. This method tended to slightly distort the resulting unit cost, but in mass-production industries that made one product line, and where the fixed costs were relatively low, the distortion was very minor. For example: if the railway coach company made 100 coaches one month, then the unit cost would become Rs.310 per coach (Rs.300 + (Rs.1000 / 100)). If the next month the company made 50 coaches, then the unit cost = Rs.320 per coach (Rs.300 + (Rs.1000 / 50)), a relatively minor difference. An important part of standard cost accounting is a variance analysis, which breaks down the variation between actual cost and standard costs into various components (volume variation, material cost variation, labor cost variation, etc.) so managers can understand why costs were different from what was planned and take appropriate action to correct the situation. are those regular actions performed inside a company.[5] "Talking with customer regarding invoice questions" is an example of an activity inside most companies. Accountants assign 100% of each employee's time to the different activities performed inside a company (many will use surveys to have the workers themselves assign their time to the different activities). The accountant then can determine the total cost spent on each activity by summing up the percentage of each worker's salary spent on that activity. A company can use the resulting activity cost data to determine where to focus their operational improvements. For example, a jobbased manufacturer may find that a high percentage of its workers are spending their time trying to figure out a hastily written customer order. Via ABC, the accountants now have a currency amount pegged to the activity of "Researching Customer Work Order Specifications". Senior management can now decide how much focus or money to budget for resolving this process deficiency. Activity-based management includes (but is not restricted to) the use of activity-based costing to manage a business. While ABC may be able to pinpoint the cost of each activity and resources into the ultimate product, the process could be tedious, costly and subject to errors. As it is a tool for a more accurate way of allocating fixed costs into product, these fixed costs do not vary according to each month's production volume. For example, an elimination of one product would not eliminate the overhead or even direct labor cost assigned to it. ABC better identifies product costing in the long run, but may not be too helpful in day-to-day decisionmaking.
The Development of throughput Accounting

As business became more complex and began producing a greater variety of products, the use of cost accounting to make decisions to maximize profitability came into question. Management circles became increasingly aware of the Theory of Constraints in the 1980s, and began to understand that "every production process has a limiting factor" somewhere in the chain of production. As business management learned to identify the constraints, they increasingly adopted throughput accounting to manage them and "maximize thethroughput dollars" (or other currency) from each unit of constrained resource. Throughput accounting aims to make the best use of scarce resources(bottle neck) in a JIT environment. Mathematical formula Throughput = (Sales revenue Direct Material Costs) Throughput accounting ratio = (Return per factory hour)/ Cost per factory hour
Integrating EVA and Process Based Costing

Recently, Mocciaro Li Destri, Picone & Min (2012). proposed a performance and cost measurement system that integrates the Economic Value Added criteria with Process Based Costing (PBC). The EVA-PBC methodology allows us to implement the EVA management logic not only at the firm level, but also at lower levels of the organization. EVA-PBC methodology plays an interesting role in bringing strategy back into financial performance measures.
Lean Accounting
Lean accounting has developed in recent years to provide the accounting, control, and measurement methods supporting lean manufacturing and other applications of lean thinking such as healthcare, construction, insurance, banking, education, government, and other industries. There are two main thrusts for Lean Accounting. The first is the application of lean methods to the company's accounting, control, and measurement processes. This is not different from applying lean methods to any other processes. The objective is to eliminate
Activity-based Costing
Activity-based costing (ABC) is a system for assigning costs to products based on the activities they require. In this case, activities
Focus Section
waste, free up capacity, speed up the process, eliminate errors & defects, and make the process clear and understandable. The second (and more important) thrust of Lean Accounting is to fundamentally change the accounting, control, and measurement processes so they motivate lean change & improvement, provide information that is suitable for control and decision-making, provide an understanding of customer value, correctly assess the financial impact of lean improvement, and are themselves simple, visual, and low-waste. Lean Accounting does not require the traditional management accounting methods like standard costing, activitybased costing, variance reporting, cost-plus pricing, complex transactional control systems, and untimely & confusing financial reports. These are replaced by: lean-focused performance measurements simple summary direct costing of the value streams decision-making and reporting using a box score financial reports that are timely and presented in "plain English" that everyone can understand radical simplification and elimination of transactional control systems by eliminating the need for them driving lean changes from a deep understanding of the value created for the customers eliminating traditional budgeting through monthly sales, operations, and financial planning processes (SOFP) value-based pricing correct understanding of the financial impact of lean change Sales () Variable Costs Contribution Margin () Fixed Costs Income from Operations Rs. Rs. Rs. Rs. Rs. 1,000,000 600,000 400,000 300,000 100,000
Contribution Margin Ratio

The margin contribution can also be expressed as a percentage. The contribution margin ratio, which is sometimes called the profitvolume ratio, indicates the percentage of each sales dollar available to cover fixed costs and to provide operating revenue. For the company Fusion, Inc. the contribution margin ratio is 40%, which is computed as follows: Contribution Margin Ration = (Sales Variable Costs) / Sales The contribution margin ratio measures the effect on operating income of an increase or a decrease in sales volume. For example, assume that the management of Fusion, Inc. is studying the effect of adding Rs. 80,000 in sales orders. Multiplying the contribution margin ratio (40%) by the change in sales volume (Rs. 80,000) indicates that operating income will increase Rs. 32,000 if additional orders are obtained. To validate this analysis the table below shows the income statement of the company including additional orders: Sales (-) Variable Costs Contribution Margin (-) Fixed Costs Income from Operations Rs. 1,080,000 Rs. 648,000 (1,080,000 x 60%) Rs. 432,000 (1,080,000 x 40%) Rs. 300,000 Rs. 132,000
As an organization becomes more mature with lean thinking and methods, they recognize that the combined methods of lean accounting in fact creates a lean management system (LMS) designed to provide the planning, the operational and financial reporting, and the motivation for change required to prosper the company's on-going lean transformation.
Marginal Costing
The cost-volume-profit analysis is the systematic examination of the relationship between selling prices, sales, production volumes, costs, expenses and profits. This analysis provides very useful information for decision-making in the management of a company. For example, the analysis can be used in establishing sales prices, in the product mix selection to sell, in the decision to choose marketing strategies, and in the analysis of the impact on profits by changes in costs. In the current environment of business, a business administration must act and take decisions in a fast and accurate manner. As a result, the importance of cost-volume-profit is still increasing as time passes.
Variable costs as a percentage of sales are equal to 100% minus the contribution margin ratio. Thus, in the above income statement, the variable costs are 60% (100% 40%) of sales, or Rs. 648,000 (Rs.1,080,000 X 60%). The total contribution margin Rs. 432,000, can also be computed directly by multiplying the sales by the contribution margin ratio (Rs. 1,080,000 X 40%). References 1. 2. 3. 4. 5. 6. Principles of Cost Accounting - Edward J. Vanderbeck Google Books. Books.google.co.uk. Retrieved 2013-03-01. Performance Management, Paper F-5. Kaplan publishing UK. Pg 3 Cost and Management Accounting. Intermediate. ICAI. p. 15. Performance management, Paper f5. Kaplan publishing UK. Pg 17 Performance management, Paper f5. Kaplan publishing UK. Pg 6 Mocciaro Li Destri A., Picone P. M. & Min A. (2012), Bringing Strategy Back into Financial Systems of Performance Measurement: Integrating EVA and PBC, Business System Review, Vol 1., Issue 1. pp.85-102. Maskell & Baggaley (December 19, 2003). "Practical Lean Accounting". Productivity Press, New York, NY.
Contribution Margin
A relationship between the cost, volume and profit is the contribution margin. The contribution margin is the revenue excess from sales over variable costs. The concept of contribution margin is particularly useful in the planning of business because it gives an insight into the potential profits that can generate a business. The following chart shows the income statement of a company X, which has been prepared to show its contribution margin:
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Meritorious Article
Lean Accounting:
What's it all About?
By Frances A. Kennedy, CPA and Peter C. Brewer, CPA
This is one of the Articles of Merit, judged as such under Professional Accountants in Business - Articles of Merit Programme 2006, for distinguished contributions to Management Accounting, established by the Professional Accountants in Business Committee (PAIB), (under its former name of FMAC) of IFAC.
o, lean accounting has nothing to do with the South Beach Diet! Heck, you don't even need to count calories to become lean! But you do need to count what matters to the success of your business if you want to practice lean accounting. Though measuring what matters sounds intuitive, too many organizations are attempting to drive operational improvement with data that actually impedes the goals of improving customer satisfaction and financial results. Indeed, non-accounting managers in numerous lean organizations across the globe would argue that their accountants are better off counting calories or carbohydrates rather than tracking performance indicators geared to the bygone era of mass production. The reason? Mass production metrics contradict lean thinking and often compel managers to make dysfunctional decisions. Lean thinking is about eliminating all forms of waste. To be a lean thinker, or a lean accountant for that matter, you must relentlessly seek to view your organization through the eyes of your customers. Sounds simple enough, right? Yet a closer look at most customer-focused companies reveals that their employees myopically optimize functional performance, which results in enterprise-wide waste and unhappy customers. And, yes, in case you are wondering, the accountants often lose sight of the customer as well. Let's take a look at one company's experiences.
The first step of lean thinking is to Define Value. During this step it's critical to understand who's doing the defining and what they are valuing. The customers are the ones who define what they value in specific products and/or services. The second step is to Identify the Value Streams -- all the value-added activities that go into delivering specific products and services to customers. Inevitably, these value streams span functional boundaries, thereby requiring employees to see how their organization functions from the customer's viewpoint. The third step, Make the Value Stream Flow, requires a departure from the mass production era approach of functionally organized batch-and-queue production that leads to inventory build-up, unsatisfactory order-to-delivery cycle times, and excessive rework and waste. Instead, lean uses cellular work arrangements that pull together people and equipment from physically separated and functionally specialized departments. The various pieces of equipment are sequenced in a manner that mirrors the steps of the manufacturing process, thereby enabling a continuous onepiece flow of production. Employees are cross-trained to perform all the steps within the cell.
Figure 1: THE LEAN THINKING MODEL
STEP 1 Define Value
LEAN THINKING AT MIP

As the new millennium dawned, Midwest Industrial Products (MIP), a fictitious name for confidentiality purposes, didn't have cause for celebration. Bloated inventories, excessive waste, disgruntled customers, and unsatisfactory financial results were the order of the day for this Fortune 500 U.S. manufacturing company. In an effort to right the ship, MIP adopted the principles of lean thinking featured in Figure 1.
STEP 5 Strive for Perfection
STEP 2 Identify the Value Stream
STEP 4 Implement a Pull System
STEP3 Make the Value Stream Flow
*Source: This figure was adapted from the lean thinking model created by James Womack and Daniel Jones in their 2003 book Lean Thinking , Free Press Publishing.
Meritorious Article
The fourth step is to Implement a Pull System where customer demand dictates the production level. Visual controls are used to trigger upstream links in the value stream to initiate additional production. For example, when a point-of-use storage bin of component parts becomes empty, it automatically signals the upstream link in the value stream to replenish the parts without the need to prepare paperwork such as a materials requisition. Furthermore, establishing a takt time (the average production time allowed for each unit of demand), which is calculated by taking the total operating time available during a period and dividing it by the number of units demanded by the customer during that period, ensures that the pace of production remains in sync with customer demand. The fifth step, Strive for Perfection, leverages the process knowledge of frontline workers. Rather than relying exclusively on management-level employees to generate ideas for improvement, management views all employees as intellectual assets capable of improving the flow of value to customers. To learn more about the principles of lean production, see Tom Greenwood, Marianne Bradford, and Brad Greene's Becoming a Lean Enterprise: A Tale of Two Firms in the November 2002 Strategic Finance. First, the accountants were relying heavily on variance data that they tabulated in conjunction with the monthly financial accounting cycle. Variance data tabulated on March 5 -- five days after the month-end close -- was totally useless when it came to helping managers make real-time operational decisions on February 5. Second, the accountants were providing data that motivated managers to make decisions that contradicted MIP's lean production goals. For example, lot size variances and production volume variances motivated managers to maximize lot size and to keep workers busy making product to stock. Of course, these behaviors contradict the one-piece flow and make-to-order pull aspects of lean production where customer demand dictates the amount of production. Third, the financial accountants were inaccurately characterizing the financial impact of operational improvements. Most notably, the absorption costing income statement, which treats direct materials, direct labor, and variable and fixed overhead as product costs and all selling and administrative expenses as period costs, penalized managers' inventory-reduction efforts with a major hit to the bottom line. The reason? In the illogical world of absorption costing, building up inventory increases income because of the fixed overhead deferral, while reducing inventory decreases income because of the need to expense previously deferred fixed overhead. To make matters worse, the absorption costing income statement was unintelligible to operations managers and
GET OUT OF THE WAY!

With the transition to lean production under way, the nonaccounting managers at MIP had one clear message for their colleagues in accounting -- add value or get out of the way! Three sources of discontent were underlying this message.
Figure 2:
STRATEGIC OBJECTIVES
LINKAGE BETWEEN STRATEGIC OBJECTIVES AND CELL

VALUE STREAM GOALS VALUE STREAM MEASURES CELL CRITICAL SUCCESS FACTORS
QUALITY AT THE SOURCE
STRATEGIC GOALS
CELL GOALS
CELL MEASURES
OVERALL EQUIPMENT EFFECTIVENESS
PROFITABLE GROWTH
SALES GROWTH
ECONOMICAL PROCESSES
ON-TIME DELIVERY
REDUCE BATCH SIZES
PRODUCING TO CUSTOMER DEMAND
COST PER UNIT
QUICK CHANGEOVER
REDUCE MACHINE DOWNTIME
FIRST-TIME THROUGH/ CROSS-TRAINING
PERFECT QUALITY AT THE SOURCE
FIRST-TIME THROUGH
KANBAN AND PULL
BUILD TO ORDER
DAY BY THE HOUR
UNITS PER PERSON
EFFECTIVE MACHINE USAGE
ELIMINATE VARIABILITY
STANDARD WORK
INCREASE CAPACITY
INCREASE CROSSTRAINING
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Meritorious Article
frontline workers. Thanks to the concepts of closing out variances and fixed overhead deferrals, MIP's operations managers were confused -and frustrated -- by an absorption costing income statement that didn't reflect the economics of the lean business model.
Table 1: VALUE STREAM COST ANAL YSIS
SALES & MARKETING
PRODUCTION CONTROL
MATERIAL HANDLING
EMPLOYEES Cost Productive $48,743 27% 51% 5% 17% $11,000 18% 60% 5% 17% $5,899 8% 65% 5% 22% $9,100 81% 16% 3% 0% $2,600 0% 69% 6% 25% $4,550 40% 25% 4% 31% $8,576 10% 58% 6% 26% $2,275 20% 42% 5% 33% $1,950 0% 55% 5% 40% $2,793 0% 76% 5% 19%
ENTER LEAN ACCOUNTING
In an effort to respond to what the Nonproductive accountants viewed as fair criticisms Other from their counterparts in operations, Available Capacity MIP initiated a transition to lean MACHINES accounting in May 2002 by forming two Cost cross-functional blitz teams that Productive included members from operations, Nonproductive purchasing, engineering, and Other accounting to design lean accounting Available Capacity practices for one manufacturing cell. Average Conversion Cost The cross-functional teams focused their efforts in four areas: (1) performance measurement, (2) transaction elimination, (3) calculating lean financial benefits, and (4) target costing.
$20,548 68% 21% 1% 10% $109.64 $17.41 $9.33
$15,000 71% 20% 0% 9% $38.13 $4.11 $7.20 $13.57
$3,000 65% 20% 5% 10% $8.35
$2,548 55% 24% 6% 15% $7.12 $4.42
Performance Measurement
Historical financial measures that focused on functional efficiency were no longer going to get the job done. Instead, the team sought to create a cohesive set of linked strategic objectives and goals, value stream goals and measures, and cell goals and measures. Figure 2 shows a subset of what the value stream team developed. The strategic objective of profitable growth links to the strategic goal of sales growth, which is a function of three value stream goals: economical processes, producing to customer demand, and perfect quality at the source. These three value stream goals link to on-time delivery, cost per unit, first-time through, and units-per-person measures. These value stream measures are improved by focusing on five critical success factors at the cell level, namely quality at the source, quick changeover, kanban and pull, effective machine usage, and standard work processes. Finally, the cell critical success factors link to the six cell goals and three cell measures as shown. Notice that all measures link to the company's strategic objectives. In addition, front-line workers monitor the cell measures throughout the day to enable real-time response, and the operations managers monitor the value stream measures daily and weekly to drive the continuous improvement process.
recorded by scanning bar codes rather than preparing receiving documents. As blanket purchase orders became more prevalent, the accountants authorized payment according to the terms of the purchase order when materials were received. This eliminated the need for accounts payable to perform the very time-consuming three-way match of purchase orders, invoices, and receiving documents that often required discrepancy investigation. MIP has reduced 18 labor categories to two, which is resulting in fewer errors and quicker processing. Furthermore, senior management is considering compensating its labor force on a salary basis, thereby eliminating the need to track labor hours altogether. Because manufacturing variance reporting has been eliminated and the value stream teams are using weekly value stream statements to make management decisions, MIP is considering closing the books on a quarterly basis rather than a monthly basis. Finally, as lean improvements have reduced inventory levels, cycle counts are becoming more accurate, and the time needed to perform these counts has declined. In fact, MIP believes it may be able to eliminate physical inventory counts altogether! Everything they need to verify inventory levels is readily in view.
Calculating Lean Financial Benefits

The team created two tools to quantify the financial benefits of lean production. The first is a report called a value stream cost analysis that spans all functions directly involved in responding to customer orders for a particular product family. The second is an income statement format that complements lean production. Value Stream Cost Analysis. Table 1 shows an example of a value stream cost analysis report. The top half of the report focuses on employees, and the bottom half focuses on machines. The table's top row shows employees' costs in total and for each link in the value stream. Employee time is broken
Transaction Elimination
MIP's accountants realized that lean thinking applies to the information management side of the business as well as to making products. Therefore, as operations began to streamline its processes, the accounting department found that it was able to eliminate many of its transactions. For example, as materials requirements planning (MRP) was replaced with point-of-use visual controls (also called kanbans), material receipts were
PROD. ENGINEERING
MFG. ENGINEERING
MACHINING PARTS
ASSEMBLY
SHIPPING
QUALITY
TOTALS
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down into four categories: productive, Table 2: THE LEAN INCOME STATEMENT FORMAT nonproductive, other, and available VALUE STREAM #1 VALUE STREAM #2 SUSTAINING COSTS TOTAL PLANT capacity. These four numbers sum to 100% Sales $1,500 $2,500 $4,000 Costs for each column. So in Assembly, 40% of Material purchases 700 1,200 $1,900 the employees' time is productively Personnel costs 100 200 125 425 deployed, 25% is nonproductive, 4% is Equipment-related costs 200 300 500 categorized as other, and 31% is currently Occupancy costs 75 125 50 250 Total Costs 1,075 1,825 175 3,075 idle. You interpret the data in the bottom Value stream profit before inventory change 425 675 (175925 portion of the table relating to the machines Decrease (Increase) in Inventory 50 75 125 in the same fashion. The average Value stream profit 375 600 (175800 Shipping costs 300 300 conversion cost shown at the bottom of Corporate allocation 75 75 each column is calculated by dividing the Net operating income $375 $600 $(550$425 total costs incurred as shown in each Return on sales 25% 24% 11% column by the total number of salable units * The numbers are assumed and are for illustrative purposes only. actually produced during the period. * The Shipping Department has not been entirely incorporated into the value streams at this point in time. You can add material costs to this calculation's numerator to provide an Income Statement Format. MIP's traditional absorption costing actual average total cost per unit produced. If a particular value income statement suffered from three limitations. First, it stream is characterized by product diversity, you can obscured the impact of changes in inventory on profits by differentiate the costs assigned to products based on product burying the inventory effect in cost of goods sold. Second, it features and characteristics. For simplicity, we won't explore included adjustments to income resulting from the use of this issue in detail. standard costing that confused non-accounting personnel. Third, it didn't depict costs from a value stream perspective. The The benefits of this report are that it: productvs. period-cost distinction satisfied financial reporting 1. Shows where and how productively costs are incurred; requirements, but it didn't offer useful insights to operations 2. Is easy to understand; personnel. 3. Highlights areas of waste; The lean income statement in Table 2 focuses on simplicity by attaching actual costs to each component of the value stream, 4. Shows actual costs rather than standard costs; isolating the impact of inventory fluctuations on profits, and 5. Identifies bottlenecks; and separating organization-sustaining costs (costs that can't be 6. Highlights opportunities to manage capacity more traced to specific value streams) and corporate allocations from effectively. value stream profitability. Arbitrary cost allocations are avoided For MIP, the value stream cost analysis highlighted the fact that except in the case of occupancy costs, which are allocated to the transition to lean production reduced waste and increased the value streams based on square footage to encourage the amount of idle capacity. Consistent with the philosophy of minimizing space occupied. The profit for the total plant lean thinking, MIP sought to redeploy its newfound idle capacity reconciles to the profit reported using an absorption format, but, to grow sales rather than to reduce available capacity by cutting unlike absorption costing, the underlying detail of the value heads. stream statement is understandable to non-accountants.
Figure 3: TARGET COSTING
1. Who is the customer? UNDERSTAND CUSTOMER NEEDS 2. Match customer needs to product features 3. Customer satisfaction 4. Specification to meet customer need UNDERSTAND 5. Customer value weighting CUSTOMER VALUE 6. Customer value of product and service 7. Value and features/characteristics TARGET COSTS 8. Target costs for product/service 9. Target costs for major components DRIVE TO
*Source: This figure was adapted from the model created by Brian H. Maskell and Br uce Baggale y in their 2004 book Practical Lean Accounting , Productivity Press, and is reproduced with their permission.
Target Costing
The lean team decided that traditional cost-plus pricing was no longer acceptable because it was based on the flawed assumption that customers would be willing to pay what MIP deemed appropriate based on its internal cost structure. MIP was taking its internal cost structure as a given and attempting to pass these costs on to customers rather than viewing its costs as a set of inputs that must be aligned profitably with the customer's expectations. Accordingly, the team turned its attention to target costing. The reason? Target costing is based on the premise that the pricing and continuous improvement
CUSTOMER VALUE
10. Match target cost to processes 11. Continuous improvement
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processes begin by understanding RESOURCES AT YOUR FINGERTIPS customer needs. RESOURCE DESCRIPTION As Figure 3 shows, MIP's target Lean Thinking by James Womack and Daniel Jones, Provides an in-depth look at lean principles and what it takes costing framework includes four main Free Press Publishing, 2003. to achieve a responsive, customer-focused organization. steps that break down into 11 smaller steps. The initial focus of the process Real Numbers: Management Accounting in a Lean Introduces lean accounting concepts and discusses Organization by Jean Cunningham and Orest Fiume, their impact on traditional reporting. clarifies customer needs and values Managing Times Press, 2003. followed by translating these insights Outlines step by step how to implement lean accounting, into target costs that can drive the Practical Lean Accounting by Brian Maskell and including a lean accounting assessment tool. Bruce Baggaley, Productivity Press, 2004. continuous improvement process. the experiences of a plant controller as he While MIP's transition to lean Who's Counting?: A Lean Accounting Business Chronicles gradually comes to understand why and how he and Novel by Jerrold Solomon, WCM Associates, 2003. accounting is certainly not complete, his department need to change. the accountants have initiated the The Complete Lean Enterprise: Value Stream Describes how value stream maps can be created and process of becoming a value-added Mapping for Administrative and Office Processes used to improve administrative and office processes. partner to the organization's by Beau Keyte and Drew Locher, Productivity Press, operations managers. The results of 2004. this partnership have been WHAT ABOUT SERVICE? impressive. By May 2004, inventory levels had declined by 52%, waste and rework had decreased by 41%, and the Lean thinking means identifying and eliminating waste in timeliness of customer deliveries had increased by 27%. Now, whatever form you find it. For manufacturers, such as MIP, it's instead of pleading with the accountants to move aside, the easy to visualize the sources of waste -- overproduction, message from the shop floor has changed to welcome aboard! waiting, defects, transportation, unnecessary inventory, unnecessary motion, and inappropriate processing. But how HOW DO I BEGIN? does waste manifest itself in a service business? The root Implementing lean thinking within the accounting function is a cause often resides in the same type of functionally organized journey that takes thoughtful consideration. Although changes batch-and-queue processes that plague manufacturing. in accounting can't outpace those in manufacturing, they should Hence, the logic of identifying value streams that span follow closely. The first step is to assess where in the lean functional boundaries, building work processes that mirror journey your facility resides. Has production converted to a onethose value streams, and using a pull approach to synchronize piece pull system? Good. Then it's time to review performance the level of output with customer demand is equally applicable metrics. Have you established value stream teams responsible to service businesses. for improvements? Good. Then it's time to look at value stream Functionally organized service companies often find that it reporting. To assess your lean implementation progress read takes a piece of paper numerous days to route through two Practical Lean Accounting by Brian H. Maskell and Bruce offices in the same building! The process view inherent in lean Baggaley. It outlines a logical maturity process that matches thinking is likely to reveal that this piece of paper could move accounting change with lean manufacturing changes (see a through the system in minutes rather than days if you eliminate complete citation for this and other resources in Resources at the time it spends sitting in somebody's inbox. Value stream Your Fingertips on p. 60). maps are particularly useful in this type of situation. A current The second step on the path to lean accounting is to fully state map can be created that defines the flow of the current understand the length of the journey. For example, what will process and its performance levels. Then a future state map your lean accounting income statement look like? What does can be created to depict the desired flow of the process and its your income statement look like now? What steps must you targeted performance levels. A modest number of specific take to make the transition? Who will be responsible for the improvement initiatives can be pinpointed on the future state change? What resources will be needed? Perform this analysis map. Then a three-to-five-day improvement project, known as a for each change in information accumulation and reporting. kaizen event, can be scheduled and executed for each specific Relentlessly ask yourself the questions: Is this transaction still improvement initiative to make the future state map a reality. needed? Whether you work in service or manufacturing, lean thinking Does it add value to our business? can help your company improve its operations. The accounting The third step is to schedule dates to review implementation function can either impede lean thinking by continuing to progress. The reviews should take place often enough to provide counterproductive information, or it can make the reinforce accountability and to communicate the importance of transition to lean accounting. If your company is making the the lean transformation -- and far enough apart to not drain lean transition, you can make the accounting department a part resources. Include all stakeholders in these meetings, including of the lean team. value stream and cell leaders as well as key employees from Frances A Kennedy is a professor of accounting in the School of purchasing, human resources, engineering, and accounting. Accountancy and Legal Studies at Clemson University and Peter C Keep all implementation team members informed and on Brewer is a professor of accounting in the Department of Accountancy at board. Miami University.
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Budget 2013-14 Highlights

Income Tax
o New slabs introduced for individuals (other than salaried individuals) and association of persons [AoP], accordingly the taxable income exceeding Rs. 6 million is now taxable @ 35% 6 new slabs introduced for salaried individuals thereby rationalizing the salary tax with the maximum tax rate of 30% on taxable income exceeding Rs. 7 million while marginal relief withdrawn Corporate tax rate reduced to 34% from 35% for the Tax Year 2014 for companies other than banking companies New slab rates introduced to tax rental income of individual & AoP and such income exceeding Rs. 4 million, with a maximum rate of 17.5% Dividend income in the hands of companies is once again brought under the final tax regime Benefit of set off of losses for the year is no more available against salary income Rate of initial allowance reduced from 50% to 25% on plant and machinery The scope of 'company' extended to include a co-operative society, finance society or any other society, a non-profit organization, and an entity or a body of persons established or constituted by or under any law for the time being in force The scope of unexplained income extended to the agricultural income which cannot be worked out on the basis of agricultural income tax paid under the provincial law Rate of minimum tax again enhanced to one percent, however, entitlement of carry forward of minimum tax extended to individuals and AoPs as well The builders of residential, commercial or other buildings proposed to be liable to pay minimum tax at the rate of Rs. 25 per square foot, as per the construction or site plan, sold or booked for sale during the year o o o Land developers on development and sale of residential, commercial or other plots are proposed to be liable to pay minimum tax at the rate of Rs. 50 per square yard, as per the lay out plan, sold or booked for sale during the year Members of Chamber of Commerce and Industry, trade or any business association, any market committee or any professional body including PEC, PMDC, Bar Councils, ICAP and ICMA Pakistan made liable to file return of income Written approval of the Commissioner made mandatory for revision of return Filing of wealth statement made mandatory for every person required file the return of total income. Every person other than company and AoP filing statement under final tax regime is now required to file wealth statement irrespective of the quantum of tax paid during the year Electronic filing of return of total income along with wealth statement made mandatory for salaried individuals having taxable salary of Rs. 500,000 or more in a tax year Requirement of filing of annual statement of deduction of income tax from salary done away with Powers of the Board withdrawn to make investment scheme with respect to undisclosed income representing any amount or investment made in movable or immovable assets Time limit for finality of provisional assessment order reduced to 45 days from 60 days An officer of Inland Revenue Service and a law graduate having 15 years of service in BS-17 and above can now be appointed as judicial member of Appellate Tribunal The adjustment of tax withheld under other sections of the Ordinance and tax credits admissible under section 61, 62, 63 and 64 during the tax year are no more available for adjustment at the time of deduction of tax at source Persons registered under the Sale Tax Act, 1990 are now covered as prescribed persons to withhold income tax under section 153 Scope of withholding income tax from payments of rent enhanced by introducing various classes of persons as 'prescribed person' i.e. charitable institution, private educational institution, boutique, beauty parlor, hospital, clinic, maternity home and the individuals or association of persons paying gross rent of Rs. 1.5 million and above in a year Certificate of deduction of tax no more covered as sufficient evidence of collection or deduction for purposes of allowing tax credit under section 168
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o Rs. 1 million to be collected as adjustable advance tax at the time of censoring or certifying foreign films; and Rs. 100,000 per episode to be collected as adjustable advance tax at the time of censoring or certifying foreign TV drama serial or play PEMRA to collect adjustable advance tax at varying tax rates at the time of issuance of license for distribution services or renewal of the license to the licensees The manufacturers and commercial importers of electronics, sugar, cement, iron and steel products, fertilizer, motorcycles, pesticides, cigarettes, glass, textile, beverages, paint or foam sector to collect adjustable advance tax @ 0.1% from the distributors, dealers and wholesalers The manufacturers, distributors, dealers, wholesalers or commercial importers of electronics, sugar, cement, iron and steel products, fertilizer, motorcycles, pesticides, cigarettes, glass, textile, beverages, paint or foam sector to collect adjustable advance tax at the rate of 0.5% from the retailers The educational institutions to collect adjustable advance tax at the rate of 5% if annual fee exceeds Rs. 200,000 for a year Market committees to collect adjustable advance tax at the time of issuance or renewal of licenses from dealers, commission agents or arhatis etc. at varying rates ranging from Rs. 5,000 to Rs. 10,000 Withholding tax at import stage enhanced to 5.5% in case of all taxpayers other than industrial undertakings and companies, which remain taxed at 5% Withholding tax rates enhanced for taxpayers other than companies, on sale of goods (from 3.5% to 4%), on rendering of services (from 6% to 7%) and on execution of contract (from 6% to 6.5%) Withholding tax rate on prize bonds or cross-puzzle increased from 10% to 15% Lump sum various rates from Rs. 7,500 to Rs. 80,000 of advance tax introduced for vehicle registration with engine capacity of 1000cc to 2000cc Rate of advance tax to be collected on cash withdrawals enhanced from 0.2% to 0.3% Advance tax on registration of new vehicles enhanced with engine capacity of 850cc to above 2000cc from Rs. 10,000 to Rs. 150,000 Rate of advance tax to be collected at the time of auction enhanced from 5% to 10%
o o The disclosure requirement in withholding statements under section 165 to override conflicting provisions contained under various laws i.e. the Protection of Economic Reforms Act, 1992, Banking Companies Ordinance, 1962, Foreign Exchange Regulations Act, 1947, and regulations made under the State Bank of Pakistan Act, 1956 Banks are required to make arrangements to provide the Board online access to their central database in prescribed form and manner Compensation for delayed refund to be computed from the date of issuance of refund order instead of the date of order passed under section 120 'Business connection' has been defined to include transfer of an asset or business in Pakistan by a non-resident person for the purpose of representative of a non-resident person in a tax year For selection of taxpayer for audit, powers of commissioner are proposed to be explained so as to be treated as independent from powers of the Board The Board is proposed to be empowered for allowing individuals to use their Computerized National Identity Card instead of National Tax Number Person deriving taxable income from business to display National Tax Number at a conspicuous place at every place of his business Penalties for non compliances to the requirements under the Ordinance are proposed to be enhanced significantly Parameters for selection of audit through computer balloting by the Board are proposed to remain confidential Cash reward scheme to be introduced for Inland Revenue officers and officials on detection of cases involving concealment or evasion of income tax; and to the informer for providing credible information leading to detection of taxes NCCPL's powers being enhanced to collect advance tax at the rate of 10% from margin financiers, trading financiers and lenders Persons being owner of goods transport vehicle are proposed to be taxed under NTR instead of under final tax regime Person arranging a function, in a marriage hall, marquee, hotel, restaurant, commercial lawn, club, a community place or any other place used for such purpose, to collect adjustable advance tax at the rate of 10%. Food, services or any other facility provided by any person also need to be subjected to collection of advance tax @ 10%
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o commencing from the Tax Year 2013 onwards While working out the net wealth liabilities will be allowed as deduction from movable assets if they relate to moveable assets; and in case the nature of assets to which liability relates are not determinable then deduction shall be allowed on proportionate basis of the immovable and movable assets of the individual The Officer of Inland Revenue as defined under the Ordinance shall be empowered to assess, raise and recover the levy under the provisions of the Ordinance Default surcharge at the rate of 16% per annum is chargeable on the amount not paid or paid in short The matters with respect to appeals, revisions and rectifications as per provisions of the Ordinance will apply Standard rate of sales tax increased from 16% to 17% with effect from 13 June 2013 Further tax at the rate of 2% reintroduced on supply of taxable goods in addition to standard rate of sales tax, if such supplies are made to a person not having registration number with effect from 13 June 2013 Sales tax on advance payments reintroduced through the Bill Extra sales tax at the rate of 5% is collectible through electricity or gas bills in addition to sales tax at standard rate from such unregistered commercial and industrial consumers of electricity and gas whose monthly bill in each case exceeds Rs. 15,000. Procedures for this new tax regime laid down under Sales Tax Special Procedure Rules, 2007 Expansion in list of items which are chargeable to sales tax on retail price with effect from 13 June 2013 inter-alia including lubricating oils, cement, fertilizers, tyres & tubes, batteries, tiles, biscuits & confectionary items, paints, varnishes, household electrical goods including air conditioners, finished articles of textile & leather, etc. Sales tax rate enhanced on specified finished products of five export sectors from 2% to 17% by virtue of amendments under SRO.1125(I)/2011 effective 13 June 2013 Zero-rating on cotton-seed oil withdrawn and standard rate of 17% applies with effect from 13 June 2013 Sales tax exemption on milk products withdrawn with effect from 13 June 2013 Scope of Withholding Sales Tax regime enhanced to require the companies to withhold sales tax at the applicable rate in respect of taxable purchases from unregistered persons
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Exemption of free or concessional passage provided to employees by the transporters and airlines is proposed to be withdrawn Exemption available to universities and educational institutions stands withdrawn Exemption on specie dividend stands withdrawn Tax holiday of 10 years proposed to be extended to Special economic zone Reduction in tax rates on import of hybrid cars proposed ranging from 25% to 100% depending upon the engine capacity of the car Reduction in tax liability withdrawn on Flying and sub marine allowance Reduction of 75% of tax liability available to full time teachers and researchers also stands withdrawn Reduction in minimum tax liability by 80% is proposed to be provided to all taxpayers engaged in the business of distribution of cigarettes manufactured in Pakistan Exemption from withholding tax withdrawn from DSCs, SSCs, saving accounts and TFCs where such deposits do not exceed Rs. 150,000 Hajj Group operators in respect of Hajj operations are proposed to be allowed to make cash payments, exemption from minimum tax and from withholding tax obligations from payments to non-residents subject to the condition income tax of Rs. 3,500 per Hajji for the Tax Year 2013 and Rs. 5,000 for Tax Year 2014 is paid. Exemption from withholding tax at import stage is proposed to be granted to an industrial undertaking subject to payment of tax during the year based on higher of preceding two years tax liability Dividend income from money market funds and income funds in the hands of banking company will be charged to tax at the rate of 25% from the Tax Year 2014 onwards. Income Support Levy has been levied on persons whose net movable wealth exceeds Rs. 1 million as per wealth statement, in order to provide financial resources for running income support fund for economically distressed persons or families of the Society The levy at the rate of 0.5% is payable for every tax year
Sales Tax
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o o Exemption to supplies against international tender is withdrawn with effect from 13 June 2013 Zero-rating regime applicable on specified dairy products, stationery articles, etc. substituted by exemption regime under SRO.549(I)/2008 with effect from 13 June 2013 Disallowing of input tax adjustment on the basis of discrepancies indicated by CREST or if purchases if not verifiable in the supply chain Records relating to gate passes, inward or outward and transport receipt form part of the list of prescribed records to be maintained by a registered person FBR to monitor or track manufacturing activities, sales, clearances, stocks or any other related activity through electronic or other means Provincial sales tax for the purpose of admissibility of input tax credit to be notified by the Federal Government through notification or laws relating to Islamabad Capital Territory Powers to block refunds or input tax adjustment given to FBR, the Commissioner or officer authorized by FBR against the fake or flying invoice, claiming fraudulent input tax or refunds etc. Commissioner (Appeal) empowered to grant stay for maximum period of 30 days against recovery proceeding in hardship cases Rectification powers of any mistake apparent from records brought in line with the income tax Ordinance Explanation added to clarify that the Commissioner or officer of Inland Revenue empowered to call for information from taxpayer for audit and to conduct the audit; and to have access to premises, stocks, accounts, records, etc to conduct audit irrespective of the provisions relating to computer balloting or parametric selection of cases for audit by the Board Concessionary notification in relation to 13 districts of Khyber Pakhtunkhwa, FATA and PATA stand withdrawn with immediate effect, as such standard sales tax rate 17% shall be applicable Cash reward scheme introduced for Inland Revenue officers and officials on deduction of cases involving concealment or evasion of sales tax; and to the informer for providing credible information which leads to detection of taxes Federal Government empowered to levy Further Duty at 2% of the value of excisable goods and services in addition to applicable rate of FED when such goods / services are supplied to persons not having registration number. Federal Excise Duty [FED] on aerated beverages increased from 6% to 9% of retail price with effect from 01 July 2013 Introduction of capacity based taxation on aerated waters Three tier structure of chargeability of FED on cigarettes is being replaced by a two tier specific rate structure with effect from 13 June 2013 FED @ 40 paisa per kg on imported oil seeds and Rs. 1 per kg on locally produced oil charged with effect from 13 June 2013 10% ad valorem FED is to be charged on motor vehicles of cylinder capacity of 1800cc and above with effect from 13 June 2013
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FED on financial services is being expanded by making all kinds of financial services chargeable to FED at the rate of 16% with effect from 13 June 2013, yet mark-up remains an exclusion from value of excisable financial services. Exemption of FED on hydraulic cement withdrawn with effect from 13 June 2013, as such FED shall apply at Rs.400 per metric ton. Services provided or rendered by Assets Management Companies brought in FED net with effect from 13 June 2013, however Provincial sales tax shall continue to apply on services of AMCs in Sindh and Punjab. Records relating to gate passes, inward or outward and transport receipt form part of the list of prescribed records to be maintained by a registered person Custom duty and other taxes on Hybrid Electric Vehicles are reduced from 25% to 100%, according to vehicle's engine capacity Duty free import of bio re-absorbable vascular scaffold (heart stents) proposed Exemption of duty on energy saving tubes on which presently duty is at 20% Reduction of customs duty on office and school supplies from 25% to 20% proposed Duty free import of solar submersible pumps presently dutiable at 20% Reduction of duty on water treatment & purifying machinery from 25% to 15% proposed Duty on betel nuts increased from 5% to 10% and on betel leaves from Rs 200 per kg to Rs 300 per kg proposed Reduction of duty on Medium Density Fiber (MDF) Board from 20% to 15% proposed Trans-shipment of goods proposed to be included in the definition of Goods Declaration Port authority, container freight station etc., to entertain the delay certified by the customs officer and to allow refund so received against demurrage charges on account of such delay Post-dated cheque no more acceptable for provisional assessment.
Courtesy: KPMG Taseer Hadi & Co. Budget 2013 Briefs
Customs
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Evaluation of Accounting Practices:

Some Insights from the Era of Hazarat Umer (RA)
By Muhammad Akhtar, FCMA & Irfan Ahmed
Abstract: The most important and persuasive thing that attracts our attention to make research about accounting journalism;
is the contradictory views of various accounting scholars about the development of accounting. The purpose of this study is to explore accounting's literature with the view to know how many years ago; the literature of accounting was developed? How accounting finds existing shape? Who had contributed in its development? What were former accountings procedures especially in the era of Hazarat Umer (RA). Did Islamic scholars have contributions in the evaluation of Accounting? The current study has keenly focused on development of accounting especially during the era of Omar Ibn Khatab (RA). The study also put some lights on the Accounting evaluation during the development of earlier Islamic states. The study concludes that accounting scholars from various countries have tried their best to refer the initial credit of development of accounting towards their own countries. The situation is different with respect to literature. The researchers have tried their best to express their opinion in the light of literature available.
Introduction
Rules of bookkeeping and reporting had been provided by Islam, as recording of monetary transactions is mandatory in Islamic literature. The 282 Aiah is largest Aiah in Quran named as Debt Aiah which contains all information of recording procedures. Islam is the second largest religion of the world. From Marcoo to Indonesia Islam ruled on the world. But due to under developed and limited penetration of world; Islam is seen by some as intolerance, terrorist and backward (Kung, 2007). Accounting and Islam have keen relationship. Accounting is an English word which is derived from word counting. The word Hesab (Account) comes more than eight times in various verses of Holy Quran (Askary & Clarke, 1997). Hesab (Account) relates to the responsibility of Muslims to their Allah on all issues of life for which all Muslims are accountable (Lewis, 2001). Islam is an Arabic word, means Peace. In early Muslim's states accounting was practiced in different perspectives, The terms accounting and accountants were not used in development period of Islamic States but the terms accountant and accounting were used which introduced through western culture. The word Al-Amel, Mubasher, Al-Kateb, or Kateb were familiar for accountant and bookkeeper but Al-Kateb became most famous word for accountant (Zaid, 2000, p.330). Al-Kharzmy, 1984 introduced the word Mhasba for accounting and Mohaseb for a person who maintain record (accountant). Accordingly religiously levy of zakah was real force for the development of accounting record and establishment of divan. Although establishment of divan and hence accounting record initially developed by Islamic states and therefore contribution of Muslims traders can't be ignored. Muslims traders were religiously motivated to maintain adequate records to facilitate in measurement and reporting of their businesses transactions. This religious motivation was especially aimed at the measurement of profit and capital for payment of zakah to Baitul Maal (public treasury). About Hesab (Account) Allah Tala says in the Holy Quran: Every Muslim has an account with Allah, in which is recorded all good and bad actions, an account which will continue until death, for Allah shows all people their accounts on their judgment day (S4:62).
Thus the fundamental relationship between Hesab in Islam and Accounting refer to accountability of all Muslims to fulfill their obligations mentioned in the Holy Quran. In the same way, in business institutions; management and contributor of capital are responsible for their business activities which they performed both inside and outside the organization (Lewis, 2001). Lewis further argued that Islam, Christen and Jews are linked because they are the follower of one God. Your observation will stumble on a point that one of the particular nature in which we have made comparisons presents a variety of accounting scholar's opinion from various distances and religions. We have reached on our conclusion by going through literature available on the evaluation of accounting. This research has made supplementary development in the history of accounting journalism. In this study we have introduced the concept of: Divan, History of Divan, and Practicalities of Divan
Views of Accounting Historians about Journalism of Accounting:

Lieber's (1968) opinion not seem to be separate from zaid's about literature of accounting that Italian traders got initially keen awareness about commerce and accounting from Muslim traders. Although Heap (1895), acerbate that translation of Muslim's written algebra was firstly done by Europeans but heaps also refer the credit of initial contribution in accounting to Arabs. It is also worth to mention here that people like Heap and Have (1976), are from people of Arabs. Moselmi acknowledge that both Arabs and Non Arab have strong contribution in accounting and commerce (Moselmi & Nikseresht, 2001). Scorgie (1990) has slightly different opinion from Muslims scholars, who claim that he met some documents which evidenced that Indian adopt record maintaining procedure from Mangolians (whom they defeats in the war of middle sixteenth centaury). But Scorgie (1990) finally conclude accounting modus practiced by Indians was migrated from Arab. Napier (2009) affirms that history of accounting is only initially
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emerged with English language source. De Rove (1956) documents that he met some documents and conclude that double entry was developed by medieval Italy. Chatfield, (1977) completely ignore, Arabs by referring credit of bookkeeping to ancient Indians. Zaid, (2000) asserts that Islamic accounting has influence on Italian accounting which can be seen from the importance of Journal (in Arabic Jridah) in late medieval Italian accounting. By defending the opinion of De Rover (1956), Nobes (2001) proclaimed that double entry was developed by Italians. He rejects the Zaid opinion about double entry system by saying that Zaid has code of few Islamic accounting practices and neglect all other evidence. David, 2010 asserts that early Islamic states has vital role in the development of accounting. of Islam (Hoernle, 1900). Writing of Holy Quran is also an example of bookkeeping which became possible after invention of paper. Establishment of Islamic government in Medina in 622 A.D. promotes the spirit of brotherhood and peace. Trade extended beyond Arab peninsula to some continent of Europe, Africa and East (Moselmi & Niksersht, 2011). According to Elkland (1990) five year from 700 to 1200 Islam was progressing well and was at the peak of power. After Mohammad (SAM) era of khilafat started and Hazrat Abu Baqr Siddique (RA) was appointed as first caliph of Islam. He (RA) made untiring effort for the up left of Islam and died in 13 A.D. In 13 A.D Hazrat Omar (RA) was elected as the second caliph. This priod gives birth to the (Merdiban Methhod ) of accounting. This method continuously practiced from 8th to 19th century (Guvemli & Guvemli, 2007). The Caliphate has vital role and is important component of religion influence in the history of Islam. It was an important era in the history of Islam for development.
Literature Review
West accounting scholars claim that there is no appraisable role of Islamic states in the growth of accounting. This particular group of accounting scholar prefers to overlap some privilege places like Austraila, Canada, UK, U.S.A, Newzeland and some Europeans countries such as France, Spain and Italy and also some privilege person who are the citizen of these countries. The people who make first contribution in accounting literature are completely overlooked. On the other hand these privilege people are about 20% of the population of the world rest of the population is not taken into consideration. There has been keen observation in Japanese accounting, Chinese accounting, However historical research in Islamic accounting is only beginning to emerge in English language sources (Napier, 2009). Islam has dynamic role in the prevailing trend of accounting and commerce. The arrival of religion of Islam in the world takes place through the revelation of Quran to Mohammad (SAM) in Mecca (Addahab and Taha, 2002, p. 649). At that time people of Arab were living in peninsula and there were no written official constitution in operation except the law of chieftain (Moselmi & Nikseresht, 2001). The first event of bookkeeping in the history of the world is Mesaq-E-Medina, which was signed under the supervision of Holy Prophet (SAM) in 622 A.D. Today America constitution is known as brief constitution of the world which consists of only 7000 words but it would be astonishing for the world that the first written constitution of the world which was provided by Prophet Muhammad (SAM) before 1400 year was so much brief consisting 730 words as compare to American constitution (Qadri, 2000,P.16). Constitution of Medina has owed this unique quality that is first written constitution of the world in the history of world (Qadri, 2000,P.50).. Important points in the constitution of Medina were: Constitution Document, Constitution subject of state, Formation of constitutional nationality, Indiscrimination law of rule and justice for all communities, Islam is best code of life, Guarantee of freedom of religion for both Muslims as well as non Muslims (Qadri, 2002, P.50,51) Great event of bookkeeping (Constitution of Medina) create awareness about bookkeeping and further development of accounting and audit. Incoming of Islam explore, awareness of recording (Ambary, 1986).After development of recording system another resolution in accounting was the invention of paper. Paper act as the replacement of palm-leaves which was the development
Development of Accounting in Era of Hazrat Omar-e- Farooq (RA)

The Caliphate has vital role and is important component of religion influenced in administration in the history of Islam. It was an important era in the history of Islam for development of accounting and commerce. Origin of state accounting under the era of second caliph (Omar R.A) describe by Ibn Khaldun, (1332) as base to the history of accounting known as the Muqaddimah. Ibn Khaldun notes that how Omar (RA) developed divan (the Turkish equivalent is divan) this term is used to explore the meaning of handwritten record of revenues and expenses (particularly those due to soldiers), in the office where those accountable for bookkeeping was located. Ibn Khaldun describes how divan was applicable in the lands conquered by the Arab in the year after the Prophet's death. Divan originally used; local languages-Persian in the former territories of the Sassanid Persian Empire and Greek in lands formerly under the control of the Byzantine Empire. Arabic was introduced as language in which record was kept by the Umayyad caliph Abd alMalik around 700. Declaration of Zakat as religious obligation is also one reason for development of accounting and audit (Sukoharsono, 1998). Distribution of mall-e-ganimat among needy people leads towards accounting procedures (Akhtar & Zada, 2012). During era of Hazrat Omar (RA) government developed and promoted accounting through obligatory registration procedure (Moselmi & Niksersht, 2011). This procedure was used for general as well as certain purpose.
Origin of Divan
One day some people were working and each of them was making their own financial calculations and they were looking as they are conversating with each other. By perceiving them busy someone said that they are Divanas (Persian language). From that time a building where the calculation practices were done called Divan, and the person who performed this task was known as Divani. (Ibn Khaldun, p: 335). Hazrat Omar (RA) was the first person who introduced the department of Divan in his epoch. Here are the references about
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persons who give the concept of formation of Divan to Hazrat Omar (RA), (Ibn Khaldun). Firstly things which brought by Abu Huraira (RA) were so much that their distribution was unfeasible at that moment in time and considered it foremost priority to count the things and distribute them in further parts at that moment Hazrat Khalid Bin Waleed give the suggestion of formation of Divan. At that time system of Divan was in practice in Egypt. Secondly when Harmz observe that Omar (RA) send solders without recording their names in register (Divan), He suggested how we can discover if someone left. To remove the said deficiency in the system he gave the proposal of formation of Divan. Hazrat Omar (RA) asked what is Divan because he had no awareness about concept of Divan. This mechanism was achieved by the Sahaby (Prophet's companion) Al-Waleed Bin Hisham Al-Mughierah (As Saleh, 1982, p.339). The Sahaby recommended the establishment of record to account for state revenues and expenses. This recommendation was made to Umar Bin Alkhitab (RA) who appreciated the idea and established divan. Then idea was put into practice. Iqeel Bin Ibi Talib, Makharma Bin Nofal, and Jabeer Bin Mutam (RA) were accountant (Katib) at that time and they made register with the title of Asakar E Islam. Saeed Ibn Maseeb says that Divan O Army started from 10 Hijry and remains same after that era. For instance the register of Iraq government was in Persian language and Egypt was in Roman language and accountants were also Roomy and Persian. (Ibn Khaldun, p:336). According to Ibn Khaldun; divan constitutes a large part of royal authorities. In fact it was third of its basic pillars. Royal require soldiers, money and means to communicate with those who are absent. The ruler, therefore, need a person to help him in the matter concerned with the sword, the pen and finances (Ibn Khaldun, 2005, p:199). The concept of Bat-ul-Maal was introduced by Omar (RA) before this; there was no concept of Bat-ul- Maal. When process of collection of zakat completed at the same time it was distributed among needy people. During the last days of Prophet's life eight lakh; dirham; (a coin made of silver) were brought from Bahrain and distributed in one session. The specific reason was the absence of Bat-ul- Maal (Al Jibri,1989, p:11). By the establishment of Bat- ulMaal proper recording of expenses and income started in the era of Omar (RA) (Akhtar & Zada, 2012). Imam Kansani (587H) claims in his book that there were four types of things kept in Bait Ul Mal for budget: 1. Revenue from taxes imposed on Muslims traders, Zakat on grazing cattle's, and Usher comes under first type. 2. Natural resources and mal-e-ganemat were second source. 3. Kharaj, Jazia and such other things were third source of revenue and were consumed on salaries of solider, judges and common interests and also on the construction of bridges, Mosques, Dams and canals. 4. Wealth left by diseased person who has no representative was also source of revenue and consume on welfare of baggers, medicines of diseased, fine for murders and orphan (Imam Kasani,587H,Volume 2, P:68).
Bin Afan (RA) was news reporter but the obligation of news reporter was not performed by any specific person. According to some people Omar (RA) was judge in the era of Hazrat Abu Baqr Siddique (RA) (Tibri, p: 203) Vol. No.2). This is also strong evidence to support the existence of bookkeeping in the epoch of Hazrat Abu Baqr Siddique (RA).
Administrative Reforms of Omar (RA)

Hazrat Omar (RA) introduced office system first time in the history of Islamic government and made register write down the name of people with their villages' names and assigned scholarship to them. Jabeet Bin Hawarees Bin Naqeed described that Hazrat Omar (RA) also consulted with other Muslims about preparation of registers and establishment of Offices. (Tibri, P.231, Vol. 3). Ibn E Khaldun proclaimed that many reforms were made by Omar (RA) to regulate the government. He (RA) divided occupied areas into following provinces 1 Medina 2 Makah 3 Kofa 4 Basra 5 Philistine 6 Syria 7 Jazzier This system is pioneered by Omar (RA) first time in the history of Islam. Every province has six higher authorities to run and control the administration of Province (Ibn E Khaldun, p:308) S. No. Positions 1 Chief Accountant of province 2 Account officer of soldiers 3 Board of revenue officer 4 Police officer 5 Finance officer 6 Judges and soldiers Omar (RA) introduced proper recording system, Ibn E Khaldun also assert that some Omar (RA) himself countdown cattle's received as Zakat and order to write them down including with their colour, shape and age (Ibn E Khaldun,P.313). Contribution of Omar (RA) in existing administrative work can't be neglected; all following reforms were made during the era of Omar (RA). S.No. Reforms and Developments 1 Islamic Hijri Calendar 2 Bait-ul-Mall 3 Establishment of court and appointment of judges 4 Concept of measurement of Land 5 Concept of provinces 6 Concept of Salaries Before this era there was no concept of salary and proper bookkeeping system, people prefer to work without salary. This was Omar (RA) who firstly introduced proper rules and regulation to maintain written record of all departments of government (Ibn E
Administrative Reforms of Hazrat Abu Baqr Siddique (RA)

In the era of Hazrat Abu Baqr Siddique (RA) Zaid Bin Sabit (RA) was accountant (Katib) of Hazrat Abu Baqr Siddique (RA) and Usman
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Khaldun, p:316). The payment of zakah as religious levy did not require the assessment of individual by state as the case is today with regards to different types of taxes. The Ulmah and Muslims scholar are of the opinion that zakah is liability entrusted to Muslims. It is received from those who pay it freely; those who don't pay it are followed by Allah. (Bin Jafar, 1981, p.241). ,Matbua Dar Ul Bairoot). In this verse of Holy Quran Allah evidently point out many rules of trade which are in practice in todays life. Holy Quran has introduced these many years before. The importance of recordkeeping in businesses can be estimated by verse that how briefly and comprehensively Allah define the rules of trade and it is also important for the sense of security and transparency of businesses. In this verse of Holy Quran Allah Tala says to his honest people to uphold documentation of your credit transactions for the reason that by doing so you and witnesses will be proficient to memorize the amount and maturity period of amount. To borrowed money is also justified by this verse. According to some accounting historian bookkeeping has come into practiced in 1400 by Luca Paccoli. But according to following evidences book keeping has came into existence and also in practice much before than Luca Paccioli. The Prophet came to Medina and the people used to pay in advance the price of dates to be delivered within two or three years. He said (to them), "Whoever pays in advance the price of a thing to be delivered later should pay it for a specified measure at specified weight for a specified period." (Sahih Bukhari, Vol.3 ,P. 503). It is also mentioned in tafseer of this Verse that monetary transaction should be recorded irrespective of fact that either transactions are material or immaterial (Ibn-Kaseer,482). Although this event which we are indicating is concerned with earlier nation (Bani Israeal) when there was no concept of witnesses and record keeping but mention the period of maturity. It means that record keeping did not exist in former nations. We are going to inform about a nation, who has no awareness about bookkeeping and all monetary transaction existed orally. (Ibn-e-kaseer). It means that before Prophet (SAM) there was no proper system for recording monetary transactions. This can be truly verified as before presenting this event Ibn-e-kaseer clearly describe that this event which we are presenting belongs to a nation who have no proper awareness about bookkeeping of monetary transactions. (Vol. 3, Book 37, Number 488h). The Prophet said, Narrated by Abu Huraira, (RA) An Israeli man asked another Israeli to lend him one thousand Dinars. The second man required witnesses. The former replied, 'Allah is sufficient as a witness.' The second said, 'I want a surety.' The former replied, 'Allah is sufficient as a surety.' The second said, 'You are right, and lent him the money for a certain period. The debtor went across the sea. When he finished his job, he searched for a conveyance so that he might reach in time for the repayment of the debt, but he could not find any. So, he took a piece of wood and made a hole in it, inserted in it one thousand Dinars and a letter to the lender and then closed (i.e. sealed) the hole tightly. He took the piece of wood to the sea and said. 'O Allah! You know well that I took a loan of one thousand Dinars from so and so. He demanded a surety from me but I told him that Allah's Guarantee was sufficient and he accepted Your guarantee. He then asked for a witness and I told him that Allah was sufficient as a Witness, and he accepted You as a Witness. No doubt, I tried hard to find a conveyance so that I could pay his money but could not find, so I hand over this money to You.' Saying that, he threw the piece of wood into the sea till it went out far into it, and then he went away. Meanwhile he started searching for a conveyance in order to reach the creditor's country. One day the lender came out of his house to see whether a ship had arrived bringing his money, and all of a sudden he saw the piece of
Book Keeping and Internal Control Systems | in the Era of Omar (RA)
The effectiveness of internal control during the era of Omar (RA) can be estimated by these two events. First was the shortage of one Dirham in Baitul Maal (Public treasury). This shortage of one Dirham in public treasury discovered by (Prophet's Companion) Amer Bin Al-Jarah and informed to Omar (RA) about shortage by written him a post (Lasheem, 1973, p.13). This shows the effectiveness of internal control which was in operation in all divan. Second was omission of recording less expense which also refers to loss. At that time plenty of 1300 Dinar was imposed due to omission in maintaining of monetary events. At the end of financial period when the books of account were correlated with all other books maintain in Divan, the unrecorded expenses were uncovered (Lasheen, 1973, p.13). That event also indicates the auditing procedure practiced after the formation of Islamic state in 622 A.D. When Hazrat Omar (RA) ordered Zakat collector to submit the documentation of the assets owned by them then they prepared the written record of their assets and submitted to Hazrat Omar (RA) (Ibn-e-Saad.P.79.Vol.2).
Evidences of Bookkeeping from Quran and Hadees

Holy Quran has introduced the concept of bookkeeping 1400 year ago and divert our attention towards maintaining record of monetary transactions, when there was no existence of concept of record keeping and paper in the world and all businesses of world was on the foundation of verbal dealings. By introducing the concept bookkeeping Allah Tala Says in Holy Quran; Ye who believer, When Ye deal with each other, In transaction involving Future obligations In a fixed period of time, Reduce them to writing. Let a scribe write them faithfully as between the parties: let not the scribe Refuse to write. as Allah Has taught him, So let him write. Let him who incurs the liability dictate, But let him fear His Lord Allah, And not diminish Aught of what he owes, If the party liable Is mentally deficient, Or weak or unable Himself to dictate, Let his guardian Dictate faithfully. And get two witnesses, out of your men, and if there are not two men, then a men and two women, Such as Ye choose, For witnesses, So that if one of them errs, The other can remind her. The witnesses should not refuse when they are called on (For evidence). Disdain not to reduce To Writing (Your contract) For a Future period, whether it be small or big: it is justur in the sight of Allah, More suitable as evidence, And more convenient to prevent doubt among yourselves. But if it be transaction Which Ye carries out on the spot among yourselves, there is no blame on you If Ye reduces it not to writing. But take witnesses whenever Ye make A commercial contract; And let neither scribe Nor witnesses suffer harm. If Ye do (such harm), It would be wickedness In You. So Fear Allah; For it is Allah That teaches You. And Allah is well acquainted With all things. (Al_Baqrah:282). Abu Ubaida said that this is last Ayah of Holy Quran and it is called Debt Ayah (Sanan Kubra Al_Behki, Jild Volume 6,Page No 18
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wood in which his money had been deposited. He took it home to use for fire. When he sawed it, he found his money and the letter inside it. Shortly after that, the debtor came bringing one thousand Dinars to him and said, 'By Allah, I had been trying hard to get a boat so that I could bring you your money, but failed to get one before the one I have come by. The lender asked, 'Have you sent something to me?' The debtor replied, 'I have told you I could not get a boat other than the one I have come by.' The lender said, 'Allah has delivered on your behalf the money you sent in the piece of wood. So, you may keep your one thousand Dinars and depart guided on the right path.' (BUKHARI Volume 3 P.514,515).
Ekelund, J., R., Robert, B. and Herbert, R., F. (1990). A History of Economics Theory and Method. MacGraw Hill Inc. Guvemli, O. & Guvemli, B. (2007). The Birth and Development of Accounting Method in the Middle East (Merdiban Method). The Fifth Accounting History International Conference, Banff, Canada, 9-11 August 2007. Gambling, T. and Karim, R. (1991). Business and Accounting Ethics in Islam. London : Mansell Publishing Limited. Goitein, A. (1967). The Jewish Communities of the Arab World as Portrayed in the Documents of the Cairo Geniza. Berkeley: University of California Press, Vol. 1. P. 243. Have, O. (1976). The History of Accounting. California: Bay Books. Heaps, L., W. (1985). The Antiquity of Bookkeeping: An Historical Sketch. London: Gee and Co. Hoernle, A., (1900). An epigraphical note on palm-Leaf, Paper and Birch-Bark; Journal of the Asiatic Society of Bengal pp:93-134. Imam al Bayhaqi, (Al-Baihaqi, Al-Sunan al-Kubra, vol. 5, p. 352). Ibn Saad, Mohammad Saad bin Manee Al-Mashoorbe Kteb Al-Wakidy, 1377H (1957), Al-tabakat Al-Kubra (Beirut House for Printing and Publishing. Kasani, Alla_O_Din Abu Baqr (587, H). Beda Ul Sana Bairoot, Labnan: Dar Ul Kitab Arabia, 1932. Kung, H. (2007). Islam: Past, Present and Future. Oxford: One world Lasheen Mahmood Al-Mursy (1973). At-Tandheem Ai_Muhasaby Lil Amwal AlAmmah Fil-Islam, M. A. Lewis, K,. M. (2001). Islam and Accounting. Black Well Publisher Ltd Volume.25, No.2. Lieber, A., E. (1968). Eastern Business Practices and Medieval Europeans Commerce. Economic History Review, 2nd series. Vol.21, No.2, pp:23043. Littleton, A,. C.(1933). Accounting Evolution to 1900, (New Yark: American Institution Publishing Co. Inc. Mokaddamat Ibn Khaldun, Urdu Translation (Hakeem Ahmed Husain (2003). Nafees Academy Urdu Bazaar Karachi. Mokaddamat Ibn Khaldun Urdu Translation (Hakeem Ahmed Husain (2004). Al Faisal Kitab Ghar Lahore. Napier, C. (2009). Defining Islamic Accounting: Current Issues, Past roots. Nobes, C., W. (2001). Were Islamic Record Precursors to Accounting Books Based On the Italians Method?: A Comment. Accounting Historian Journal,Vol.28, No.2, pp.207-14 Qadri, T. (2000). Constitution Of Madina The First written Constitution of the world. Minhaj_Ul_Quran Publications.365.M.Model Town Lahore. SAHIH BUKHARI VOLUME,3. English Translation (M. Muhsin Khan, 2009). SAHIH MUSLIM VOLUME, 3. English Translation (Abd-al-Hamid Siddiqui, 2009) . Sanan kubra_AL_Behki,Volume Page No18, Matbua Dar Ul Bairoot. Seyfallah, M., and Mohsen, N. (2011). A Survey of Accounting System in Islam. Scorgie, M. E. (1990). Indian Imitation or Invention of Cash book and Aljebra Double entry, Abacus,Vol. 26. No.1, pp.63-70. Sukoharsono, E., G. (1998). Accounting in a Historical Transition: A Shifting Dominant Belief From Hindu to Islamic Administration in Indoneshia. The Second Asia Pacific Interdisciplinary Research on Accounting Confrence, Osaka July 1998. Tabqat Ibn E Saadat, 230 Hijri,Urdu Translation Allama Abdullah Almadi Nafees Accademy Urdu Bazar Karachi. Tafseer Ibn E Kaseer (Urdu Translation). (2004). Zia Ul Islam Publications Lahore, Karachi Pakistan. Tareekh E Tibri, 310 Hijri,Urdu Translation Dr Muhammad Siddique Hashmi (2004), Nafees Accademy Urdu Bazar Karachi. Zaid O., A. (2004). Accounting System and Recording Procedure in the Early Islamic States. Accounting Historian Journal. Zaid O., A. (2000). Were Islamic Record Precursors to Accounting Books Based On the Itilian Method? Accounting Historian Journal, Vol.27, No.1, pp.7390. Zaid O., A. (2000). The Appointment Qualification of Muslim Accountants in the Middle Ages. Accounting Education, Vol. 9, No. 4: 329-342.
Conclusion
The current study is an effort to give readers the second phase of the concept of evaluation of accounting. Islam and Accounting (Akhtar and Zada, 2012) was the first effort in this regard which gives the insight regarding bookkeeping procedures in the early Islamic states? Now evaluation of accounting practices: some insights from the era of Hazarat Umer (RA) with the aim to give insight on the development of accounting procedures regarding how Divan existed and who initiated and who was Katib (Accountant). We can't proclaim that it should be considered as last article which will wind up the discussion about accounting journalism but we expect the current study will be a comprehensive study and will erase many misconceptions about the history of accounting literature. The Caliphate has vital role and is important component of religion influenced in administration in the history of Islam. It was an important era in the history of Islam for development of accounting and commerce. Divan was applicable in the lands conquered by the Arab in the year after the Prophet's death. Divan originally used; local languages-Persian in the former territories of the Sassanid Persian Empire and Greek in lands formerly under the control of the Byzantine Empire. Arabic was introduced as language in which record was kept by the Umayyad caliph Abd alMalik around 700. Muslims scholars were the first who introduce and practice accounting in their daily lives as responsibility to Allah on all issues of their lives. References:
Addahab. A, & Taha, A., (2002), Islamic Dictionary, (Cario:Dar Ash-Hhorook) Abu-Addahab, Ashraf. T., (2002), Islamic Dictionary Akhtar, M. & Zada, N. (2012). Islam and Accounting. Management Accountant of Institute of Cost and Management Accountants of Pakistan 21.3 I MayJune, 2012. Al-Khawarizmy, Mohammad bin Ahmad bin Yousuf (1984), Mafatieh Al-Uloom, (Beirut: The House of the Arabic Book). Ambary, H. M., (1986). Epigraphically data from17th to 19th century Muslims Graves in East Java, Cultural Cotactanh Texiual Interpretation (ED). Grijns and Robson; Holland: Foris. Askary, S., & Clarke, F. (1997). Accounting in the Koranic Verses, Proceedings of International Conference, 'The vehicle for exploring and Implementing Shariah'iab in Accounting, Commerce and Finance'. University of Western Sydney :Macarthur Bin, J., K. (1981). Al-Kharaj was Wa Sina at AL-Kitabah, Commentry by Dr. Mohammad Hussain Al-Zibet (Bagdad:Dar Ar-Rasheed Publishing). Chatfield, M. (1977). A History of Accounting Thoughts, revised edition. Huntington, NY: Robert E, Krieger. Christopher, W., N. (2001). Were Islamic Records Precursors to Accounting Books Based on the Italian Method? A comment. Accounting Historians Journal Vol. 2. De., Rover, (1956). The Development of Accounting Prior to Luca Pacioli According to Accountant-books of Medieval Merchants, Studies in the History Of Accounting. London: Sweet & Maxwell, pp.114-74.
About the Author: Mr. Muhammad Akhtar, FCMA, APA, SAS, MS (Finance), PGD is Assistant Professor and In charge Industrial Liaison and MBA 1.5 Graduate program at Riphah School of Leadership, Riphah International University, Sector I14, Islamabad, Pakistan and Mr. rfan Ahmed is Student of Riphah School of Leadership, Riphah International University, Sector I-14, Islamabad. Pakistan.
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Heads of Government Enterprises and Autonomous Bodies

The newly elected government has positively taken the request of intellectuals in general and ICMA Pakistan's Research & Publications Department's specific proposals for 100-days Priority Agenda of new Government and Budget Proposal 2013-14 in particular to consider induction of professionals to run government enterprises and autonomous bodies. In response, the government so far advertised 62 positions of heads of government enterprises and autonomous bodies including Chairman, CEOs / Managing Directors, etc. The Institute's members i.e., ACMAs and FCMAs are eligible for all these positions, however, where our qualification was not specified, the Corporate Relations Department of the Institute took up the matter with concerned ministries / organizations and the Institute has been informed that for all below-mentioned positions, members of ICMA Pakistan are also eligible and will be considered. For your convenience to apply for these positions, the Institute has compiled all 62 advertised positions. Following is the summary of Heads of Government Enterprises and Autonomous Bodies positions so far advertised:
Sr. Positions
1 2 3 4 5 6 7 8 9 Managing Director Managing Director Director General Commissioner / Chairman President President / Chief Executive Officer Member (Finance) Member (Compliance) and Enforcement Managing Director
Name of Organization
National Investment Trust Limited (NITL) House Building Finance Corporation Limited (HSBCL) Central Directorate of National Saving (CDNS) Securities and Exchange Commission of Pakistan (SECP) First Women Bank Limited (FWBL) SME Bank Limited Pakistan Telecommunication Authority (PTA) Pakistan Telecommunication Authority (PTA) Pakistan Electric Power Company (Pvt.) Limited (PEPCO) National Power Construction Company (NPCC) National Transmission & Dispatch Company (NTDC) Limited Alternative Energy Development Board (AEDB) Trade Development Authority of Pakistan (TDAP) State Life Insurance Corporation (SLIC) Sui Southern Gas Company Limited (SSGC) Pakistan International Airlines (PIA) Utility Stores Corporation (USC) Pakistan Institute of Technical Assistance (PITAC) National Productivity Organization (NPO) National Fertilizer Corporation (NFC) Pakistan Institute of Management (PIM) Engineering Development Board (EDB) National Fertilizer Marketing Limited (NFML) Export Processing Zone Authority (EPZA) Small & Medium Enterprises Development Authority (SMEDA)
Name of the Ministry / Organization

Finance Division, GoP Finance Division, GoP Finance Division, GoP Finance Division, GoP Finance Division, GoP Finance Division, GoP Cabinet Division, GoP Cabinet Division, GoP Ministry of Information, Broad Casting and National Heritage Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry SSGC Ministry of Info., Broad Casting and National Heritage Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry
Date of Adv.
11-Jun-13 11-Jun-13 11-Jun-13 11-Jun-13 11-Jun-13 11-Jun-13 13-Jun-13 13-Jun-13 14-Jun-13
Newspaper
Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers
10 Managing Director Chief Executive Officer / Managing Director 12 Chief Executive Officer 13 Chief Executive 14 Chairman 15 Company Secretary 16 Managing Director 17 Head / Chief Executive Officer 18 Head / Chief Executive Officer 19 Head / Chief Executive Officer 20 Head / Chief Executive Officer 21 Head / Chief Executive Officer 22 Head / Chief Executive Officer 23 Head / Chief Executive Officer 24 Head / Chief Executive Officer 25 Head / Chief Executive Officer 11
14-Jun-13 14-Jun-13 14-Jun-13 15-Jun-13 15-Jun-13 18-Jun-13 21-Jun-13 22-Jun-13 22-Jun-13 22-Jun-13 22-Jun-13 22-Jun-13 22-Jun-13 22-Jun-13 22-Jun-13 22-Jun-13
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Sr. Positions 26 Managing Director / Chief Executive Officer 27 Managing Director / Chief Executive Officer 28 Managing Director / Chief Executive Officer 29 Managing Director / Chief Executive Officer 30 Managing Director / Chief Executive Officer 31 Managing Director / Chief Executive Officer 32 Managing Director / Chief Executive Officer 33 Managing Director / Chief Executive Officer 34 Managing Director / Chief Executive Officer 35 Managing Director / Chief Executive Officer 36 Managing Director / Chief Executive Officer 37 Chief Executive Officer 38 Managing Director 39 Chairman 40 Managing Director 41 Chief Executive Officer 42 Managing Director 43 Managing Director 44 Managing Director 45 Chief Executive Officer 46 Chief Executive Officer 47 Chief Executive Officer 48 Chief Executive Officer 49 Chief Executive Officer 50 Chief Executive Officer 51 Chief Executive Officer 52 Chief Executive Officer 53 Chief Executive Officer 54 Chief Executive Officer 55 Chief Executive Officer 56 Chairperson 57 Chairperson 58 Chairman 59 Chief Executive Officer 60 Chief Executive Officer 61 Chief Executive Officer 62 Chief Executive Officer Name of Organization Sui Northern Gas Pipelines Limited (SNGPL) Sui Southern Gas Company Limited (SSGCL) Pakistan Petroleum Limited (PPL) Hydrocarbon Development Institute of Pakistan (HDIP) Pakistan State Oil Company Limited (PSOCL) Oil and Gas Development Company (OGDCL) Government Holding (Pvt.) Limited (GHPL) Inter State Gas Systems Limited (ISGSL) Lakhra Coal Development Company (LCDC) Pakistan Mineral Development Company (Pvt.) Limited (PMDC) Saindak Metals Limited (SML) Pakistan Industrial Development Corporation (PIDC) Pakistan Engineering Company (PECO) State Engineering Corporation (SEC) Heavy Electrical Complex (HEC) Pakistan Steel Mills (PSM) ENAR Petrotech (Pvt.) Limited Pakistan Machine Tool Factory (PMTF) Heavy Mechanical Complex (HMC) Aik Hunar Aik Nagar (AHAN) Ceramic Development Training Complex (CDTC) Furniture Pakistan Gujranwala Tool Dies Mould Centre (GTDMC) National Industrial Parks Development & Management Co. (NIP) Pakistan Gems and Jewellery Development Company Pakistan Hunting and Sporting Arms Development Company (PHSADC) Pakistan Stone Development Company (PASDEC) Technology Upgradation Skills Development Company (TUSDEC) Karachi Tool Dies Mould Centre (KTDMC) Punjab Land Development Company (PLDC) Punjab Privatization Board Industries Commerce & Investment Development (TEVTA) The Punjab Information Technology Board (PITB) Punjab Livestock & Dairy Development National Insurance Company Limited Pakistan Reinsurance Company Limited Pakistan Horticulture Development & Export Company Name of the Ministry / Organization Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Same as above Ministry Government of Punjab Government of Punjab Government of Punjab Government of Punjab Government of Punjab Ministry of Information, Broad Casting and National Heritage Same as above Ministry Same as above Ministry Date of Adv. 28-Jun-13 28-Jun-13 28-Jun-13 28-Jun-13 28-Jun-13 28-Jun-13 28-Jun-13 28-Jun-13 28-Jun-13 28-Jun-13 28-Jun-13 29-Jun-13 29-Jun-13 29-Jun-13 29-Jun-13 29-Jun-13 29-Jun-13 29-Jun-13 29-Jun-13 29-Jun-13 30-Jun-13 30-Jun-13 30-Jun-13 30-Jun-13 30-Jun-13 30-Jun-13 30-Jun-13 30-Jun-13 30-Jun-13 02-Jul-13 02-Jul-13 02-Jul-13 02-Jul-13 02-Jul-13 02-Jul-13 02-Jul-13 02-Jul-13 Newspaper Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers Dawn & other newspapers
Corporate Relations Department, ICMA Pakistan Email: crc@icmap.com.pk
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THE GAZETTE OF PAKISTAN EXTRAORDINARY PUBLISHED BY COMMISSION
ISLAMABAD 2013
Part II Statutory Notifications (S.R.O.)
SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN

NOTIFICATION Islamabad, the April 23, 2013
S.R.O. 343 /2013. The following draft of Pharmaceuticals Industry (Cost Accounting Records) Order, 2013 which is proposed to be made in exercise of powers conferred by clause (e) of sub-section (1) of section 230 and clause (o) of sub section (4) of section 20 of the Securities and Exchange Commission of Pakistan Act, 1997 (XLII of 1997) is hereby published for the information of all persons 1ike1y to be affected thereby and notice is hereby given that the draft will be taken into consideration after thirty days of its publication in the Official Gazette. Any objection or suggestion which may be received from any person in respect of the said draft before the expiry of the said date shall be considered by the Securities and Exchange Commission of Pakistan.
PHARMACEUTICALS INDUSTRY (COST ACCOUNTING RECORDS) ORDER, 2013

1. Short title, application and commencement. - (1) This Order shall be called the Pharmaceutical Industry (Cost Accounting Records) Order, 2013. (2) This Order shall apply to every company, including a foreign company as defined under section 450 of the Companies Ordinance, 1984, which is engaged in the production, processing and manufacturing of pharmaceuticals products. (3) It shall come into force with effect from July 1st 2013. 2. Maintenance of records.- (1) Every company to which this Order applies shall, in respect of each financial year commencing on or after the commencement of this Order, keep cost accounting records, containing, inter-alia, the particulars specified in Schedule I, II and III to this Order. (2) The cost accounting records referred to in sub-paragraph (1) shall be kept in such a way as to make it possible to calculate from the particualrs entered thererin the cost of production and cost of sales of each of the formulation products referred to in subpara (2) of para 1, during a financial year. (3) Where a company is manufacturing any other product in addition to those referred to in sub- para (2) of para 1, the particulars relating to the utilization of materials, labour and other items of cost in so far as they are applicable to such other product shall not be included in the cost of product referred to in that para. (4) It shall be the duty of every person referred to in sub-section (7) of section 230 of the Companies Ordinance, 1984 (XL VII of 1984), to comply with the provisions of sub-paragraph (1) to (3) in the same manner as they are liable to maintain financial accounts required under section 230 of the said Ordinance. 3. Penalty If a company contravenes the provisions of paragraph 3 the company and every officer thereof who is in default, including the persons referred to in sub-paragraphs (4) of paragraph 2 shall be punishable under sub-section (7) of section 230 of the companies Ordinance, 1984 (XL VII of 1984)
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SCHEDULE 1
(See paragraph 2)
1. MATERIALS
(1) Direct Materials.(a) Adequate records shall be maintained showing receipts, issues and balances, both in quantities and values of each item of direct materials such as basic for manufacture, semi-basic manufacture, excipients, and pharmaceutical aids etc, required for manufacture of different types of formulations batch-wise. The basis on which the value of receipts, and issues have been calculated shall be clearly indicated in the cost records maintained or if so desired by the company in a separate manual of procedures, if any, maintained by the company or in footnotes or separate explanatory notes to the cost statements for the relevant period. Such basis shall be applied consistently throughout the relevant period. The values shall include all direct charges upto works such as excise duty, sales tax, transport, freight, handling and transit insurance premium incurred for local materials. In case of imported materials, custom duty, sales tax, port charges, inland freight charges, sea freight and insurance charges, and any other levies and charges, and any other levies and charges payable at the time of import shall be shown separately and included to work out the landed cost. Separate record shall be maintained for imports of basic drugs from the parent company or third party suppliers in foreign country alongwith transfer prices. (b) In case basic manufactures and semi-basic manufactures used as direct materials in the manufacture of formulations, which are being produced or processed by the company itself proper cost records shall be maintained so as to arrive at the cost of each such item. Consumption reflected in cost records should correspond to the date recorded in the manufacturing records under the same nomenclature as maintained under the Drugs Rules, 1976. All issues of production and packing materials shall be reconciled with figures shown in Annexes of Schedule III, or in any other form as thereto as possible. Any losses/surpluses arising as a result of physical verification of inventories and adjustments thereof shall be clearly indicated in the cost records. Record of purchase/supply contracts entered into with local and foreign suppliers including principals shall be maintained showing the rates at which various quantities of materials are to be acquired. The records shall indicate principal features of each contract particularly conditions relating to quantity, quality, price, and period of delivery, discount for transit loss and terms of payment including cash discounts. In case of basic drugs and chemicals, the chemical specifications, strength and technical contents should also be clearly indicated. Where some of the direct materials apart from basic manufactures and semi-basic manufactures are being produced or processed by the Company, separate records showing the cost of producing/processing such direct materials shall be maintained in such detail as may enable the company to provide particulars required in the annexes of Schedule III.
(c) (d)
(e)
(f)
(g) Any abnormal wastage of material whether in transit, storage or for any other reason shall be recorded separately indicating the stage at which such losses occurred and reasons thereof. The method of dealing with such losses in the calculation of costs shall also be indicated in the cost records. Normal wastage will be absorbed by the remaining material in itself. Realizable value of any waste material recovered or sale proceeds of any process material shall be credited to the cost of such process to arrive at the net cost of formulation produced. (h) If the quantity and value of materials consumed in a company are determined on any basis other than actuals for example at standards, the method adopted shall be mentioned in cost records and followed consistently. The overall reconciliation of such quantities and values of materials with the actuals shall be made at the end of the financial year explaining the reasons of variances. The treatment of such variances in determining the cost of items referred to in sub-para (2) of paragraph V shall be indicated in the cost records. The records shall be maintained in such details as may enable the company to readily provide data required in the various Annexes of Schedule III, in a verifiable state.
(h) (2)
Consumable Stores/Spares/Operating Supplies.(a) Record of each item of consumable stores/spares/operating supplies shall be maintained so as to show receipts, issues and balances, both in quantities and values, required or actually used for the relevant cost centres. In case of consumable stores and small tools cost of which is insignificant, the company may if it so desires maintain such records for main group of such items. Cost of consumable stores shall include all direct charges incidental to procurement of each item up to the factory. The cost of such stores/spares/operating supplies consumed shall be charged to relevant cost centre on the basis of actual consumption.
(b)
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The items issued for capital expenditure, such as additions to plant and machinery shall be shown under relevant heads and not in the cost statements of formulation. (c) Wastage of consumable stores, whether in transit, storage or at any other point, shall be quantified and shown separately. Method of dealing with such losses in costing shall also be indicated in the cost records.
II.
SALARIES AND WAGES
(1) Adequate record shall be maintained to show the attendance of workers employed by the company whether on regular, temporary, piece-rate basis or on contract basis, as the case may be, proper records shall also be maintained in respect of payment made for overtime work and production incentives whether in the shape of production bonus or incentives based on output given to the workers. Payment of any production bonus or incentive based on output given to the workers. Payment of any retirement benefits including pension, provident fund, gratuity, old age benefits and any identifiable labour related expenses shall also be included in the labour cost of beneficiary cost centre/department. This will be done in a manner that labour cost is available for each cost centre and for each formulation and batch so that all particulars required to fill in the Annexes of Schedule III are readily available and verifiable. (2) Fair and reasonable allocation shall be made for wages paid to such direct labour as has been utilized in more than one department, between the various departments or cost centres and the basis of such allocation shall be consistently followed. Any wages paid for additions to plant and machinery or other fixed assets shall be capitalized and excluded from the cost statements. (3) Benefits paid to the employees other than covered in (a) above shall be worked out separately and shown in the cost statement department-wise.
III.
SERVICE DEPARTMENTS
Adequate records shall be maintained showing expenses incurred for each Service Department, such as laboratory, testing house, animal house, transport, and quality control, these expenses have to be apportioned to other cost centres including service departments on an equitable basis. Where these service departments serve other products other than formulations suitable bases should be worked out so that the share apportioned to formulations is worked out and applied consistently.
IV.
UTILITIES
Adequate record shall be maintained showing the quantity and cost of the following utilities and services both purchased/produced and utilized by different cost centres: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) Power Treated Water/Deionized water Refrigeration Compressed Air (if installed separately) Effluent treatment Oxygen/Nitrogen Plants. Air Conditioning LPG Quality Control Department. Others (to be specified).
The records shall be so maintained as to enable assessment of consumption or utilization of services by different departments, cost centres or manufacturing units. Allocation of cost shall be on the basis of actual consumption, or utilization, if possible, or on the basis of technical estimates in the absence of actual measurement. In the case of fixed charges or fuel adjustment surcharges for electricity claimed by the utility company irrespective of the actual power consumed and if the amount payable as per actual consumption falls below the contractual minimum, the difference between the contractual minimum and the actual amount shall be treated as fixed period cost and transferred to relevant Annexes of Schedule III. Cost of service including power consumed in and chargeable to non-manufacturing departments, if significant, shall be shown separately. Note. - In case of self generation quantity of power generated and reasons for any under utilization of power generated capacity, shall be specified and the relevant cost should be treated as fixed / period cost.
V.
REPAIRS AND MAINTENANCE
Adequate records showing expenditure incurred on workshop facilities for repairs and maintenance of plant and machinery in different departments and cost centres shall be maintained on permanent basis. Details of costs incurred and the basis of allocation of repairs and
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maintenance expenditure to different departments or manufacturing units or cost centres shall be indicated. Cost of work of capital nature, of heavy repairs, and overhaul cost, benefit of which is likely to be spread over a period longer than the financial year, shall be shown separately. (i) If a separate maintenance team is working for a particular department the salaries, wages, cost of consumables, spares and tools should be charged as direct expense of that department.
(ii) If the maintenance services are utilized for other products such as basic manufactures and semi-manufactures also, the portion utilized for them should be segregated and charged thereto.
VI.
MULTIPURPOSE VESSELS AND MACHINES
When same vessels and machines are used for manufacturing of different formulations/drugs, formulations-wise and batch-wise cost incurred may be charged accordingly. When composite machine hour rates are used for allocation of conversion costs, overheads and equipment usage, adequate records for machine hours utilization for different formulations and batches should be kept for proper apportionment of cost. The variances between the actuals and the amount charged on the basis of predetermined standard rates shall be adjusted or arriving at the actual cost of production periodically and the year end.
VII.
DEPRECIATION
(1) Adequate records shall be maintained showing values and other particulars of fixed assets in respect of which depreciation is to be provided. The records shall, inter-alia, indicate the cost of each item of asset, the date of its acquisition, amount of depreciation charged for the relevant period, accumulated depreciation and the written down value of the assets. (2) Basis on which depreciation is calculated and allocated to the various departments and or products/formulation shall be clearly indicated in the records. (3) Amount of depreciation chargeable to different departments, manufacturing units or cost centres, for the financial year shall be measured and disclosed in accordance with the in accordance with the companys policy which shall be consistent with the Accounting and Financial Reporting Standards as applicable in Pakistan and shall relate to the plant and machinery and other fixed assets utilized in such departments or units or cost centres. The method once adopted shall be applied consistently.
VII.
INSURANCE
(1) Record shall be maintained showing insurance premium paid for the various risks covered for the assets and other interests of the Company. (2) Method of allocating insurance cost to the various cost centers shall be indicated in the cost records and followed consistently. (3) Amount of depreciation chargeable to different, manufacturing units or cost centres, for the financial year shall be in accordance with the provisions of the Fourth Schedule of the Companies Ordinance 1984, and shall relate to the plant and machinery and other fixed assets utilized in such departments or units or cost centres. The method once adopted shall be applied consistently.
IX. ROYALTY/TECHNOLOGY TRANSFER FEE

Adequate record including technical agreements shall be maintained in respect of fee paid to the collaborators or technology suppliers on recurring or non-recurring basis, party-wise. The basis of charging such amounts to the beneficiating formulations shall be indicated in the cost records.
X.
OTHER OVERHEADS
Adequate records showing the amounts comprising the manufacturing overhead expenses other than those already mentioned and details of apportionment thereof to the various departments or processes or cost centres, shall be maintained. The factory overheads shall include, among other items, indirect labour cost alongwith share of labour related cost such as fringe benefits, other labour and staff welfare expenses, and establishment expenses of manufacturing of items referred in paragraph 2. If products other than formulations are also being produced in the factory, adequate bases should be developed to apportion the overhead cost equitably.
X.
CONVERSION COST
Adequate record shall be maintained for bifurcating conversion cost for each formulation batch-wise into fixed and variable factors for compiling the different Annexes of Schedule III.
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X. QUALITY CONTROL EXPENSES
In case certain formulations require continuous or periodic checks by the quality control department, as to the formula strength conforming to the standards laid down by the Government or industry, necessary records shall be maintained so that the expenses incurred on the quality control department are prorated to the formulations/batches concerned. Adequate records shall be maintained of rejected formulation/batches. Expenses incurred on quality control built in within the cost of a certain department shall be charged as direct departmental expense.
X.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses incurred by the research and development department shall be broken down by the nature and activity, e.g., development of new products, improvement of manufacturing processes, design and development of new plant facilities, market research for existing and new products shall be maintained separately. The benefit of some of these expenses might extend to more than one accounting cycle in which case these expenses shall be treated in accordance with the Accounting and Financial Reporting Standards as applicable in Pakistan. In other case the bases of pro-ration of the expenses to the formulations, batch-wise shall be indicated in the cost records.
X.
INTER-DEPARTMENTAL TRANSFERS
Proper records shall be maintained showing the quantity and cost of formulation transferred to other departments/units of the company for further processing, mixing or self-consumption. Such transfers shall ordinarily be affected at cost and shall be disclosed in the cost records. If however, the transfer of formulation to other departments/units is made at a valuation other than cost, profit or loss arising out of such transfer shall be disclosed in the records.
X.
WORK-IN-PROCESS AND FINISHED GOODS INVENTORIES.
The method of valuation of work-in-process and the finished goods inventories shall be indicated in the cost records so as to reveal the cost elements, which have been taken into account in such computation. The cost elements shall be related to the items referred to in the relevant annexes of Schedule III. The costing method adopted shall be consistently followed. Treatment of differences, if any, on physical verification of stocks with book balances, shall also be indicated in the cost records.
X.
PACKING
Adequate records shall be maintained showing all the receipts, issues and balances both in quantities and cost of various packing materials such as strips, ampoules, vials, bottles, cartons, boxes, labels, and literature for each item separately. Adequate records shall also be maintained for wages and other expenses incurred in respect of different size of packs adopted for marketing of formulations separately. The details of various packing materials actually used and spoiled shall be maintained in respect of each formulation. Where any formulation is repacked due to defective packing, details of such repacking for each pack shall be determined if repacking cost is significant. In case any packing materials are produced by the company, proper record showing the cost and manufacture of such items shall be maintained. In case of export packing, separate records and additional packing cost shall be maintained.
X.
EXPORT INCENTIVE/EXPENSES
Proper record of export incentive received from the Government and any additional expenses incurred will be accounted for suitably.
XVIII.
COST STATEMENTS
Export of formulations (if any) authorized shall be shown separately in cost statements for sale in the local market.
XIX.
ADJUSTMENT OF COST VARIANCE
When the company maintains cost records on any basis other than actuals, such as standard costing, the records shall indicate the procedure followed by the company in working out the actual cost of product under such system. The method followed for adjusting the cost variances in determining the actual cost of the product shall be indicated clearly in the cost records. The cost variances shall be shown against the relevant heads in the respective annexes of Schedule III. The reasons for variances in respect of materials shall inter-alia are furnished separately for major materials. Variance analysis shall be made at least monthly/quarterly during the financial year and also at the year-end. The reasons for variances shall be given in the cost reports.
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XX. SELLING AND DISTRIBUTION EXPENSES
Administration and selling and distribution expenses shall be recorded separately and bases developed for their apportionment to different formulations, and/or products.
XXI.
STATISTICAL STATEMENTS AND OTHER RECORDS
Companies may develop and adopt appropriate standards for use as a basis to evaluate performance. Alternatively formats/procedures adopted by the industry in general should be maintained.
XXII.
RECONCILIATION OF COST AND FINANCIAL ACCOUNTS
(1) The cost records shall be periodically reconciled with the financial accounts to ensure accuracy if integrated accounts are not maintained. Variations, if any, shall be clearly indicated and explained. (2) The reconciliation shall be done in such a manner that the profitability of the different products, as per cost statements, is correctly judged and reconciled with the overall profits of the company from all of its activities. (c) Adequate cost records shall be maintained in a manner so that the cost statements can be compiled.
SCHEDULE II GENERAL INFORMATION

1. 2. 3. 4. 5. Name of Company: _______________________________________________________________________________________ Address: ________________________________________________________________________________________________ Location of the Factory(s). (if more than one unit state the formulation/activities being manufactured/engaged in by each separately). Date of Registration with the Central Licencing Board under the Drugs Act, 1976 (Act No. XXI of 1976) and Drugs (Licencing and Advertising) Rules, 1976 {Rule No. 3(iii)} Capacity of manufacturing: Equipment: (i) Tablets Current Year Previous Year
(ii) Capsules (iii) Syrups (iv) Suspension (v) Injections (vi) Ointments (vii) Creams (viii) Powders (ix) Others (Please specify) 6. 7. 8. Affiliation with foreign manufacturers, if any. Please state if basic, semi-basic and Generic drugs which are also being manufactured. Research and Development activity, if any.
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SCHEDULE III
STATEMENT OF GOODS MANUFACTURED, PACKED AND SOLD FOR THE YEAR ENDED____________
Particulars Tablets Capsules Syrup Suspension Powder Ampoules Vials Ointment Cream Others (Pls. Specify)
Quantity Data Batch Size No. of Batch mfgd. Qty mfgd. Qty Packed. Qty Sold. ....................................................................................................................................................................................................................... Cost Data: Direct Raw Materials: Local Imported Own mfgd. Total Material Cost Conversion Cost/Gen. Overheads Direct Labour Factory Overhead: Fixed Variable Total conversion cost Inventory adjustment-WIP Total Cost of Goods Mfgd. Unit Cost Packing cost Aluminum Paper Cellophane Blister Strips Vials Capsules Bottles Tips Total Cost of Mfgd. /Packed Finished goods Inventory Adjustment Cost of Goods sold Total Profit /(Loss) Unit profit/ (Loss)
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Annexure I
Name of the Company : ________________________________________________________________________________________ Name & Address of the Factory: __________________________________________________________________________________
Statement Showing Conversion and Primary Packing Cost for Various Operations/Cost Centers for the Product.
Production Cost Center
S. No. 1 Particulars Weighing and Proportion Filtration Mixing of Raw of Materials Solutions 3 4 5 Homogenization Final Filtration 7 Storage Quality Control 9 R&D Others (to be specified) 11 Total
10
12
Conversion Cost/Packing Charges (Rs). 1. Wages & Salaries 2. Consumable Stores/ Operating Supplies 3. Utilities (a) Water (b) Steam (c) Power (d) Demineralised Water (e) Others (to be specified) 4. Other Direct Expenses (to be specified) 5. Repairs & Maintenance 6. Depreciation 7. Other Works Overhead 8. Adjustment for opening & Closing W.I.P 9. Adjustment for cost variance 10. Total (a) Fixed (b) Variable 1. Machine Hours/ Direct labour hours (a) Available (b) Worked 2. Cost per Machine/ Direct labour hours worked (a) Fixed (b) Variable (c) Total 3. Cost per machine/direct labour hour worked previous year (a) Fixed (b) Variable (c) Total
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Primary Packing Cost Center
Washing of Bottles and ______ 13 Filling Sealing & Labeling 14 Cartoning Boxing Others (to be specified) 17 Total Grand Total of Production and packing cost centers 19
15
16
18
Notes: 1. 2. 3. 4. 5. Cost Centers are illustrative only. Item A 9 Applicable to companies maintaining cost records on standard costing. Bonus to employees other than incentive bonus, provision for statutory gratuity or actual payment of the same during the period and interest charges on borrowings including debentures may be shown as annexures. Actual direct labour/machine hours utilised for each type and size of pack of formulation shall be recorded batchwise. Where special machines, such as high speed, automatic etc. are used for a particular process of manufacture, separate cost centers shall be opened for each such machine or group of such machines.
Annexure II
Name of Company_____________________________________________________________________________________________ Name & address of the factory ___________________________________________________________________________________ Statement Showing the Cost of Production of Formulation for the year ended__________________________________________ 1. 2. 3. 4. 5. 6. 7. 8. Name of the formulation___________________________________________________________________________________ Type of formulation_______________________________________________________________________________________ (Plain/coated tablet, soft/hard/printed/capsules without/with band, sterile/Non-sterile liquid/powder/Ointment/cream etc., Type of packing__________________________________________________________________________________________ (Aluminum/paper/cellophane/blister, strips/vials/ampule/bottle/tin/and etc. Size of pack______________________________________________________________________________________________ (1mg, 2mg/10s, 100s, etc., 1ml/2ml/10ml etc) Batch size_______________________________________________________________________________________________ No. of batches charged____________________________________________________________________________________ No. of batches produced___________________________________________________________________________________ Production Standard Actual Normal Qty % a. Current year b. Previous year Packed production a. Current year b. Previous year Loss Abnormal Qty %
9.
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S.No. Particulars Unit Qty Theoretical Over-ages, Qty.per if Any Batch (2) (1) A.1. Raw material cost (cash item to be specified) (a) Imported (1) (2) (3) etc. (b) indigenous-purchased (1) (2) (3) etc (c) Own manufactured (1) (2) (3) etc (4) Less waste/rejects (qty. to be specified) 2. B Primary Packing Materials [1] Aluminum/PVC/Cellophane/ blister foil front. [2] _________do___________ [3] Bottle/Container/Tube [4] Ampoule/vials [5] Caps/Seals etc. [6] Leaflets [7] Cartons [8] Others to be specified [9] Less rejects / waste (Qty. to be specified) [10] Total primary packing mterial cost C. Total Material Cost (A +B) D. (a) Conversion cost (1) Weighting & Mixing Variable Fixed (2) Sifting Variable Fixed (3) Tablet coating Variable (4) Fixed (c) Packing Cost/Charges Total (3) Rate Rs Amount Rs. Cost / unit Cy Rs. Py Rs.
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(1) Strip Making Variable Fixed (2) Washing / sterilizing of bottles Variable Fixed (3) Filling & sealing Variable Fixed (4) Cartoning (5) Others (to be specified) Total Packing Cost (c) Other Expenses (1) Inspection Variable Fixed (2) Quality Control Variable (3) Testing Variable Fixed (4) R & D Variable Fixed 4. Storage Variable Fixed 5. Others (to be specified) Total other expenses G.1. Total cost [D(a) +D(c)] 2. Adjustment for opening & closing work in process 3. Adjustment for cost variances (a) Raw material (b) Packing material (c) Conversion & packing charges (d) Total 4. Total Cost of Production. Notes: 1. 2. 3. 4. 5. 6. 7. 8. This annexure shall be prepared for each type and size of packing (1 mg. 2mg./10s 1000s etc. 1ml./2ml./10ml.etc 5gm./ 10 gms etc. plain/ coated tablet soft / hard/ printed capsules, sterile/non sterile liquid/ powder, ointment/cream etc. in different packing of aluminum / paper / blister/strip vials/ampoule bottle/tin/jar etc. formulations separately. The impact of foreign exchange gain/loss on the purchase of raw material from a foreign country or any other transaction may be disclosed separately, if the impact of such gain or loss is 5% of total material cost; The impact of subsidy/grant/incentive received shall be incorporated and disclosed separately. Separate statement shall be prepared as above for export packing: Item No.G.3 is applicable for companies following standard costing. The cost of raw material and packing material shall be based on actual consumption for each size and type of formulation. The abnormal loss, if nay, both in quantity and cost shall be own in a separate statement indicating the reason therefore. CY-Current year. PY- Previous year.
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Annexure III
Name of the company: _________________________________________________________________________________________ Name & address of the factory: __________________________________________________________________________________
Statement Showing Cost of Packed Product for the Year Ended ____________________________
1. 2. 3. 4. 5. Name of the formulation Type of formulation (Plain/coated tablet, soft/hard/printed/capsules without/with band, sterile/Non-sterile liquid/powder/Ointment/cream etc., Type of packing (Aluminium/paper/cellophane/blisterstrips/vials/ampoule/bottle/tin jar, with / without dropper/cutting blade, catch cover etc). Size of pack (10s 100s etc/1ml, 2ml/10ml, etc/ 5gms /10 gms etc) Production Current Previous year (a) Qty. produced (b) Qty packed (c) Number of packs (d) Qty. & Number of packs sold Particulars Unit Qty. Rate Amount Rs. Cost/Unit Cy Rs. Py Rs.
S.No.
A. B
Transferred from annexure II Secondary packing materials 1. Cartons 2. Leaflets 1. Dropper 2. Boxes 3. Gum Tapes 4. Others (to be specified) 5. Less rejects/waste (qty. to be specified) 6. Total secondary packing material cost C. Packing Cost/ Charges 1. Cartoning 2. Boxing 3. Total Packing Cost D.1. Cost of packed product (A=B=C) 2. Less: Adjustment for cost variances 3. Total cost of packed product 4. Less qty. transferred for clinical/Samples/trial 5. Add: Opening packed stock 6. Less closing packed stock 7. Cost of goods Sold (a) Domestic Sale (b) Exports (c) Total Notes:
1. 2. 3. 4. 5. 6. This annexure shall be prepared for each type and size of packing (1mg., 2mg., 10s, etc, 1ml./10ml/ etc 5gm/ 10gm etc. plain/ coated tablet soft/ hard/printed capsules, sterile / nonsterile, liquid/ powder, ointment/ cream etc. in different, packing of aluminium/paper/1-litery/strip, vials/ ampoule, bottle/ tin/jar etc. of formulations separately. Separate statement shall be prepared s above for export packing: Bonus to employees other than incentive bonus, provision for statutory gratuity or annual, payment during the period and interest charges on borrowings including debentures shall be exhibited in annexure. Item No.D-2 is applicable for companies following standard costing. The cost of raw material and packing material shall be based on actual consumption for each size and type of formulation. CY = Current Years and PY = Previous Years.
(Bushra Aslam)
No. 230(2) RCP/1994 Secretary to the Commission
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The Gazette of Pakistan
Securities and Exchange Commission of Pakistan

Notification
Islamabad, the 8th March 2012 S.R.O. /I/2012.- In exercise of powers conferred by clause (e) of sub-section (1) of section 230 read with section 246 of the Companies Ordinance, 1984 (XLVII of 1984), and section 40B of the Securities and Exchange Commission of Pakistan Act, 1997 (XLII of 1997), the Securities and Exchange Commission of Pakistan is pleased to make the following Order, namely:-
Chemical Fertilizer Industry (Cost Accounting Records) Order, 2012

1. Short title, extent, commencement and application- (1) This Order shall be called the Chemical Fertilizer Industry (Cost Accounting Records) Order, 2012. (2) It shall come into force with effect from July 1, 2012. (3) This Order shall apply to every company engaged in production, processing and manufacturing of Chemical Fertilizers. 2. Maintenance of records: (1) Every company to which this Order applies shall, in respect of each financial year commencing on or after the commencement of this Order, keep cost accounting records, containing, inter-alia, the particulars specified in Schedule I, II and III to this Order. (2) The cost accounting records referred to in sub-paragraph (1) shall be kept in such a way as to make it possible to calculate from the particulars entered therein the cost of production and cost of sales of each of the formulation products referred to in sub- para (3) of para 1, during a financial year. (3) Where a company is manufacturing any other product in addition to those referred to in sub- para (3) of para 1, the particulars relating to the utilization of materials, labour and other items of cost insofar as they are applicable to such other product shall not be included in the cost of product referred to in that para. (4) It shall be the duty of every person referred to in sub-section (7) and (8) of section 230 of the Companies Ordinance, 1984 (XLVII of 1984), to comply with the provisions of sub-paragraph (1) to (3) in the same manner as they are liable to maintain financial accounts required under section 230 of the said Ordinance. 3. Penalty:- If a company fails to comply with any of the requirements of this section, every director, including chief executive and chief accountant, of the company who has knowingly by his act or omission been the cause of such default shall be punishable under subsection (7) of section 230 of the companies Ordinance, 1984 (XL VII of 1984)
SCHEDULE 1 (See paragraph2) I.

(1) Direct Material.(a) Adequate records shall be maintained showing receipts, issues and balances, both in quantities and values of each item of direct material required for production of chemical fertilizer of any type. The basis on which the value of receipts, and issues have been calculated shall be clearly indicated in the cost records maintained or if so desired by the company in a separate manual of procedures, if any, maintained by the company or in foot-notes or separate explanatory notes to the cost statements for the relevant period. Such basis shall be applied consistently throughout the relevant period. The values shall include all direct charges up to works such as excise duty, haulage, transport, freight, handling and insurance. In case of imported material, custom duty, Iqra surcharge, port charges, inland freight charges, freight and insurance charges, sales tax and any other levies payable at the time of import shall be shown separately and included to work out landed cost. (b) If the value of direct material consumed is determined on a basis other than actual, the method adopted for such valuation as well as the method for reconciliation of such consumption with actual and the method for dealing with variations, if any, shall be disclosed in the cost records or indicated by way of footnotes or in any other suitable manner. (c) All issues of production materials shall be reconciled with figures shown in Annexes of Schedule III, or in any other form as thereto as possible. Any losses/surpluses arising as a result of physical verification of inventories and adjustments thereof shall be clearly indicated in the cost records.
MATERIAL
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(d) Record of purchase/supply contracts entered into with local and foreign suppliers as the case may be shall be maintained showing the rate at which various quantities of materials are to be acquired. The records shall indicate principal features of each contract particularly conditions relating to quantity, quality and, in case of catalysts showing their life, and in case of chemicals their strength and technical contents, price, period of delivery, discount for transit loss and terms of payment including cash discounts. (e) Any abnormal wastage of material whether in transit, storage or for any other reason, shall be recorded separately indicating the stage at which such losses occur and reasons thereof. Method of dealing with such losses in the calculation of cost shall be indicated in the records. Normal wastages/losses due to shrinkage or evaporation etc. and gain due to elongation or absorption of moisture etc. will be absorbed by the remaining material itself. (f) Realizable value of any waste material, by-product or intermediary product recovered or sale proceeds of any process material or intermediary product shall be credited to the cost of such process to arrive at the net cost of that particular process and finally that of the fertilizer produced.
(g) The method adopted for the quantity and value of materials consumed in a company, if determined on a basis other than actual, shall be mentioned in cost records and it shall be followed consistently. The overall reconciliation of such quantities and values of materials with the actual shall be made at least quarterly during the financial year explaining the reasons for variances. The treatment of such variances in determining the cost of items referred to in paragraph 3 shall be indicated in the cost records. (h) Where a material is acquired in exchange for other material or services supplied, the cost of material acquired is taken as the cost of material supplied or services provided plus other applicable cost such as freight. (i) (j) The forex component of imported material is converted at the rate on the date of the transaction. Any subsequent change in the exchange rate till payment or otherwise will not form part of the material cost. Self manufactured materials are valued at cost including Direct Material Cost, Direct Employee Cost, Factory overheads and share of administrative overheads relating to production. Share of other administrative overheads, finance cost and marketing overheads are excluded.
(k) The records shall be maintained in such detail as may enable the company to readily provide data as required in the various Cost Statements prescribed in this Order in a verifiable state. (2) Catalysts, Other Chemicals, Consumable Stores/Spares, etc: (a) Adequate record of each item of catalysts, chemicals, consumable stores/spares shall be maintained to show receipts, issues and balances, both in quantities and values, required for production of chemical fertilizer and/or actually used for the relevant cost centers. (b) Cost of catalysts, chemicals, consumable stores and spare parts shall include all direct charges incidental to procurement of each item up to the factory. The cost of such chemicals, stores/spares etc. consumed shall be charged to relevant cost centers on the basis of actual consumption as recorded in the Cost Statements. The items issued for capital expenditure, viz. as additions to plant and machinery shall be shown under relevant heads and not in the cost statements of chemical fertilizer. Cost of catalysts which are relatable to production over a period of time, is amortized over the production units benefited by such cost. Cost of material with life exceeding one year is included in the cost over useful life of the material. (c) The basis of valuation of receipt and consumption of each item shall be indicated in the cost records and shall be consistently followed. (d) Wastage of chemicals, consumable stores, spares whether in transit, storage or at any other point shall be quantified and shown separately. Method of dealing with such losses in costing shall also be indicated in the cost records.
II.
SALARIES AND WAGES
(1) Adequate record shall be maintained to show the attendance of workers employed by the company whether on regular, temporary, or on contract basis, as the case may be. Proper record shall also be maintained in respect of payment made for overtime work and production incentives whether in the shape of production bonus or incentives based on out-put given to the workers. Payment of any retirement benefits including pension, provident fund, gratuity, old age benefits and any welfare expenses shall also be included in the labour or factory overhead cost of beneficiary cost center/department. This will be done in a manner that labour cost is available for each cost center or department and for each product whether intermediary, by-product or main product so that different Cost Statements are filled properly and easily. (2) Fair and reasonable allocation shall be made for wages paid to such direct labour as has been utilised in more than one department, between the various departments or cost centers and the basis of such allocation shall be consistently followed. Any wages paid for additions to plant and machinery or other capitalised assets shall be capitalized and excluded from the cost statements of chemical fertilizer.
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III. UTILITIES
(1) Adequate records shall be maintained showing the quantity and cost of various utilities and services both purchased and produced as detailed below and consumed and utilised by different cost centers: (a) (b) (c) (d) (e) Power Steam De-mineralised Water Compressed Air Others (to be specified)
(3) The records shall be maintained so as to enable assessment of consumption or utilization of services by different departments, cost centers or manufacturing units. Allocation of cost of utilization shall be on the basis of actual consumption, if possible, or on the basis of technical estimates in the absence of actual measurement. In the case of fixed charges or fuel adjustment surcharge for electricity claimed by the utility company, irrespective of the actual power consumed and if the amount payable as per actual consumption falls below the contractual minimum, the difference between the contractual minimum and the actual amount shall be treated as fixed or period cost and transferred to relevant Cost Statement. Cost of service including power and gas consumed in and chargeable to nonmanufacturing departments, if significant, shall be shown separately. Note: - In case of self generation quantity and reasons for underutilization shall be specified and the relevant cost should be treated as fixed/period cost. In case of natural gas separate records shall be maintained for use of gas as direct material and use of gas in utility services or for supply to housing colonies, if any. Moreover, Cost of utilities generated for sale to outside parties is arrived as Cost of self generated utilities plus distribution cost plus share of administrative overheads plus marketing overheads.
IV.
REPAIRS AND MAINTENANCE
Adequate records showing expenditure incurred on workshop facilities for repairs and maintenance of plant and machinery in different departments and cost centers shall be maintained on permanent basis. Details of cost determination and the basis of allocation of repairs and maintenance expenditure to different departments or manufacturing units or cost centers shall be indicated. Cost of work of capital nature, of heavy repairs, and overhaul cost, benefit of which is likely to be spread over a period longer than one financial year, shall be shown separately. If a separate maintenance team is working for a particular department the salaries, wages, cost of consumables, spares and tools should be charged as direct expense of that department. If the maintenance services are utilised for other products, the portion utilised for them shall be segregated and charged thereto.
V.
DEPRECIATION
(1) Adequate records shall be maintained showing values and other particulars of fixed assets in respect of which depreciation is to be provided. The records shall inter-alia indicate the cost of each item of asset, details of revaluation of assets, if any, the date of its acquisition, accumulated depreciation, the rate of depreciation and the depreciation charge, for the relevant period. (2) Basis on which depreciation is calculated and allocated to the various departments and products shall be clearly indicated in the records. (3) Where small value items are written off fully at the time of purchase in financial accounts, the same may be generally adopted for cost accounts.
VI.
INSURANCE
(1) Record shall be maintained showing insurance premium paid for the various risks covered on the assets and other interests of the company. (2) Method of allocating insurance cost to the various cost centers shall be indicated in the cost records and followed consistently.
VII.
ROYALTY/TECHNOLOGY TRANSFER FEE
Adequate record including technical agreements shall be maintained in respect of fee paid to the collaborators or technology suppliers on recurring or non-recurring basis, party-wise. The basis of charging such amounts to the beneficiating formulations shall be indicated in the cost records.
VIII. OTHER OVERHEADS

Adequate records showing the amounts comprising the manufacturing overhead expenses other than those already mentioned and details of apportionment thereof to the various departments or processes or cost centers, shall be maintained. The factory overheads shall include, among other items, indirect labour cost along with share of labour related cost such as fringe benefits, other labour and staff welfare expenses, and establishment expenses of manufacturing of items referred to in paragraph 2. If products other than chemical fertilizers including salable by-products are also being produced in the factory, adequate bases should be developed to apportion the overhead cost equitably.
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IX. QUALITY CONTROL EXPENSES
In case certain chemical fertilizers require periodic checks by the quality control department, as to the chemical strength conforming to standards laid down by the Government or industry, necessary records shall be maintained so that the expenses incurred on the quality control department are collected and charged to the different products. Adequate records shall be maintained of rejected fertilizers, intermediary products and by-products. Expenses incurred on quality control built-in within a certain department shall be charged as direct departmental expense.
X. JOINT PRODUCTS
When more than one product arises from a process, the cost shall be allocated to the different products on some reasonable basis which shall be consistently applied during the relevant period. The basis on which such joint costs are allocated to the different products arising from a process shall be indicated in the cost records.
XI. XII.
TRANSFER TO THE NEXT PROCESS
The costs incurred in an intermediary process will be transferred proportionate to the quantity transferred to the next process.
WORK-IN-PROCESS AND FINISHED GOODS INVENTORIES
The method of valuation of work-in-process and the finished goods inventories shall be indicated in the cost records so as to reveal the cost elements which have been taken into account in such computation. The cost elements shall be related to the items referred to in the relevant Cost Statement. The costing method adopted shall be consistently followed. Treatment of differences, if any, on physical verification of stocks with book balances, shall also be indicated in the cost records.
XIII.
PACKING
Adequate records shall be maintained showing all the receipts, issues and balances both in quantities and cost of various packing materials such as strips, ampoules, vials, bottles, cartons, boxes, labels, and literature for each item separately. Adequate records shall also be maintained for wages and other expenses incurred in respect of different size of packs adopted for marketing of formulations separately. The details of various packing materials actually used and spoiled shall be maintained in respect of each formulation. Where any formulation is repacked due to defective packing, details of such repacking for each pack shall be determined if repacking cost is significant. In case any packing materials are produced by the company, proper record showing the cost and manufacture of such items shall be maintained. In case of export packing, separate records and additional packing cost shall be maintained.
XIV. COST STATEMENTS

Detailed and adequate cost statements shall be prepared for each type of fertilizer product, intermediary product and by-product separately, as required vides Schedule III.
XV.
ADJUSTMENT OF COST VARIANCE
(1) When the company maintains cost records on any basis other than actual, such as standard costing, the records shall indicate the procedure followed by the company in working out the actual cost of product under such system. The method followed for adjusting the cost variances in determining the actual cost of the product shall be indicated clearly in the cost records. The cost variances shall be shown against the relevant heads in the respective Cost Statement. (2) The reasons for variances in respect of materials shall inter-alia be furnished separately for major materials. Variance analysis shall be made quarterly during the financial year and also at the year-end. The reasons for variances shall be given in the cost records.
XVI.
ADMINISTRATIVE EXPENSES
Administrative expenses may be split up on the basis of total factory cost of each salable product and/or cost of imported fertilizers if sold by the company or any other basis adopted by the company. Such basis shall be clearly indicated in the cost records.
XVII.
SELLING AND DISTRIBUTION EXPENSES
(1) Selling and distribution expenses in respect of fertilizer shall be apportioned to different final products and salable by-products and Intermediary-products on the basis of sales revenue or some other equitable basis which shall be indicated in the cost records and shall be followed consistently. (2) If imported fertilizers are also sold by the Company, selling expenses shall be allocated on the basis of sales revenue or any other acceptable basis that the company may adopt. However, the basis of allocation shall be consistently followed.
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XVIII. SELLING AND DISTRIBUTION EXPENSES
(1) A common cost is the cost of operating a common facility, activity or service or that is shared by two or more cost objects. (2) The common cost is generally lower than the stand-alone individual cost to each cost object, had the facility not shared. (3) Common cost is therefore allocated to each cost object based on the individual costs of the cost object.
XIX.
STATISTICAL STATEMENTS AND OTHER RECORDS
Companies may develop appropriate standards for use as a basis to evaluate performance. Alternately formats/procedures adopted by the industry in general should be maintained.
XX.
RECONCILIATION OF COST AND FINANCIAL ACCOUNTS
(1) The cost records shall be periodically reconciled with the financial accounts to ensure accuracy if integrated accounts are not maintained. Variations, if any, shall be clearly indicated and explained. (2) The reconciliation shall be done in such a manner that the profitability of the different products, as per cost statements, is correctly judged and reconciled with the overall profits of the company from all of its activities. (3) Adequate cost records shall be maintained in a manner that the cost statements can be compiled.

1 2 3 4 5 6 7 8 9 Name of the Company. Date of Incorporation. Date of Board Meeting where Cost Statements were approved Name, qualification and designation of the officer heading the cost accounting section. Location of Registered Office. Location of Factory/Factories. Type/Types of Fertilizers being produced. Any salable by-products and mid-products. Any imported fertilizers being sold by the company. Per Day M.Tonnes Per Year M.Tonnes
10 Intermediary products: Designed Capacity Installed Capacity Capacity Utilized No. of Days in the year on which capacity is calculated 11 Main products: Designed Capacity Installed Capacity Capacity Utilised No. of Days in the year on which capacity is calculated 12 Foreign Technical Collaboration: Name of the Process/Inventor/Patent holder.
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SCHEDULE III Annexure 1
[see para 2(1)]
INTERMEDIARY PRODUCT COST STATEMENT FOR THE YEAR ENDED _________

Intermediary Product Name:- ________________________
QUANTITATIVE DATA THIS YEAR (Tonnes)
1. Opening Stock 2. Produced During the Period 3. Transferred/Purchased from other Plants/Suppliers 4. Closing Stock 5. Intermediary Product Transferred to the Next Process
LAST YEAR (Tonnes)
CURRENT YEAR S.No 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 PARTICULARS 2

Ra Materials (i) (ii) (iii) Chemicals, Resins Catalysts Spent Maintenance Spares Repairs and Maintenance Salaries, Wages & Other Benefits Rent, Rates & Taxes Royalties Depreciation Other Overheads Emoluments to Foreign Engineers & Technicians UTILITIES ALLOCATED Power (kwh) (Annexure-4) Steam (Cubic Meter) (Annexure-8) Compressed Air (Cubic Meter) (Annexure-9) Demineralized Water (Liter) (Annexure-10) ALLOCATED COST Plant Engineering Department Cost Plant Technical Department Cost Factory Management Department Cost Add: Opening Stock Transferred in from Previous Process/ Purchased from Other Suppliers Less: Transfers to Saleable By-product Closing Stock Cost of Intermediary Product Transferred to Next Process
PREVIOUS YEAR TOTAL COST Rs 5 COST PER TONNE Rs 6
TOTAL COST Rs 3
COST PER TONNE Rs 4
Note:- Separate statements shall be prepared for each intermediary product.
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Annexure 2 MAIN PRODUCT STATEMENT SHOWING COST TO MAKE AND SELL FOR THE YEAR ENDED __________
Main Product Name:- ________________________
QUANTITATIVE DATA THIS YEAR (Tonnes)
1. Opening Stock 2. Transferred in 3. Closing Stock 4. Main Product transferred to Handling and Storage
LAST YEAR (Tonnes)
CURRENT YEAR S.No 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 PARTICULARS 2

Cost of Intermediary product Transferred in COST INCURRED BY THE DEPARTMENT Raw Materials (i) (ii) (iii) Chemicals, Resins Catalysts Spent Maintenance Spares Repairs and Maintenance Salaries, Wages & Other Benefits Rent, Rates & Taxes Royalties Depreciation Other Overheads Payments to Foreign Engineers & Technicians UTILITIES ALLOCATED Power (kwh) (Annexure-4) Steam (Cubic Meter) (Annexure-5) Compressed Air (Cubic Meter) (Annexure-6) Demineralized Water (Litre) (Annexure-7) ALLOCATED COST Plant Engineering Department Cost Plant Technical Department Cost Factory Management Department Cost Packing, Handling and Storage Cost Total Cost of Production Add: Cost of Opening Stock Less: Value of Closing Stock Total available for Sale Add: Administrative Expenses Financial Expenses Selling & Distribution Expenses Total Cost to Make & Sell
PREVIOUS YEAR TOTAL COST Rs 5 COST PER TONNE Rs 6
TOTAL COST Rs 3
COST PER TONNE Rs 4
Note:- Separate statement shall be prepared for each main product and saleable by-product requiring further treatment.
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Annexure 3 PACKING, HANDLING AND STORAGE COST STATEMENT FOR THE YEAR ENDED _______
TOTAL COST S.No 1 PARTICULARS 2 Current Year Rs 3 Previous Year Rs 4 RAILWAY SIDING Current Year Rs 5 Previous Year Rs 6
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Raw Materials /Purchases (i) (ii) (iii) Loading & Stacking of Fertilizers Maintenance Stores and Spares Salaries, Wages & Benefits Depreciation Other Overheads UTILITIES ALLOCATED Power (kwh) Other Specify ALLOCATED COST Plant Engineering Department Cost Factory Management Department Cost Total Cost Add: Railway Sliding Cost Total Packing, Handling and Storage Cost Transferred to Products: A B C
TOTAL AS PER ITEM 15 ABOVE (Annexure -2)
Note: a. ONLY TO BE COMPLETED IF TOTAL PACKING, HANDLING AND STORAGE COST IS 10% OR MORE OF THE TOTAL COST OF PRODUCTION MENTIONED AT ANNEXURE-2 SERIAL NO. 24.
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Annexure-4 STATEMENT SHOWING THE COST OF POWER GENERATED/PURCHASED & CONSUMED FOR THE YEAR ENDED ________
Current Year
(1) Installed Capacity kwh (2) No. of Units Generated (kwh) (3) No. of Units Purchased (kwh) (4) Total (2 + 3) (5) Self Consumption in Power House and other Losses (6) Net Units Consumed (4 5) (7) Percentage of losses to total power generated and purchased. 5/4 * 100 (8) Percentage of power generated to installed capacity 2/1 * 100
Previous Year
Variance
No 1
PARTICULARS 2
Quantity Rate per (Units) If any unit (Rs) 3 4
Total Cost Current Year Rs. 5
Cost per Unit of Power Generated & Purchased Current Year Previous Year Rs Rs 6 7
1 (a) Fuel Oil/Natural Gas

(b) Other Materials (specify) Consumable Stores Other Direct Charges Salaries, Wages & Benefits Repairs & Maintenance Other Overheads Depreciation UTILITIES ALLOCATED 8 i) Specify ALLOCATED COST 9 Plant Engineering Department Cost (6.4) 10 Factory Management Department Cost (6.6)
2 3 4 5 6 7
11 Total 12 Less: i) Supplies to other units of the Company

Producing saleable By-products ii) Sale to outside agencies.
13 Net Cost of Power Generated 14 Purchased Power 15 Total Cost of Power Consumed
Cost per Unit Average Consumed in (i) (ii) (iii) (iv) (v) (vi) TOTAL AS PER ITEM 15 ABOVE-Aneexure-2
Notes:
a. b. c. d. ONLY TO BE COMPLETED IF POWER GENERATED/PURCHASED & CONSUMED ARE 10% OR MORE OF THE TOTAL COST OF UTILITIES . Cost per unit generated should be worked out with reference to net quantity of power available after deducting consumption in the power house and other losses. When meters are not installed consumption by different cost centers shall be assessed on a reasonable basis and applied consistently. Net realisation if any by sale of power to outside agencies shall be shown separately against item No. 12(ii).
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Annexure-5 STATEMENT SHOWING THE COST OF STEAM RAISED AND CONSUMED FOR THE YEAR ENDED ________
S.NO PARTICULARS
Types of steam boilers used
UNIT
CURRENT YEAR PREVIOUS YEAR
VARIANCE
(1) (2) (3) (4)
No. of Days Worked Installed Capacity (Steam in cubic meters) Utilised capacity (steam in cubic meters) Percentage of capacity utilisation 3/2 * 100
NO 1 1 Water 2 Fuel
PARTICULARS 2
QUANTITY UNITS 3
RATE Rs. 4
TOTAL COST CURRENT YEAR Rs. 5
COST PER CUBIC METER OF STEAM RAISED CURRENT PREVIOUS YEAR Rs YEAR Rs 6 7
(a) Fuel Oil/Natural Gas (b) Others (to be specified) 3 Consumable Stores 4 Salaries, Wages & Benefits 5 Repairs & Maintenance 6 Other Overheads 7 Depreciation UTILITIES ALLOCATED 8 i) Power (kwh) (6.7) ALLOCATED COST 9 Plant Engineering Department Cost (6.4) 10 Factory Management Department Cost (6.6)
11 Total 12 Credits (if any) 13 Net quantity and value of live steam
Consumed for : (i) (ii) (iii) (iv) (v) (vi) TOTAL AS PER ITEM 13 ABOVE Annexure-2
Notes : a. b. c. d. ONLY TO BE COMPLETED IF COST OF STEAM RAISED AND CONSUMED IS 10% OR MORE OF THE TOTAL COST OF UTILITIES. If steam is supplied to any other outside party, necessary credits for recovery shall be given against S. No. 12. Bases adopted for valuation of steam at different pressures should also be indicated in the records. Abnormal loss if any, both in quantity and cost shall be shown in a separate statement indicating thereof.
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Annexure-6 AIR COMPRESSING AND APPORTIONMENT EXPENSES FOR THE YEAR ENDED _____
CURRENT YEAR
No. of Days Worked Installed Capacity (in Cubic Meters) Actual Production Percentage of Compressed Air produced and to actual production 3/2 * 100
PREVIOUS YEAR
VARIANCE
S.No
COST OF AIR COMPRESSED
Current Year Rs
Previous Year Rs
COST OF PER CUBIC METER AIR COMPRESSED This Year Rs Last Year Rs
(1) (2) (3) (4) (5)
Salaries, Wages & Benefits Stores & Spares Power Consumption (6.7) Depreciation Other Overheads ALLOCATED COST
(6) Plant Engineering Department Cost (6.4) (7) Factory Management Department Cost (6.6) (8) Repairs & Maintenance 9
Total Cost of Compressed Air
APPORTIONMENT DEPARTMENTS
(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x)
FOR THE YEAR Basis Amount Rs Basis
LAST YEAR Amount Rs
TOTAL AS PER ITEM 9 ABOVE- Annexure-2
Note:a. b. ONLY TO BE COMPLETED IF COST OF AIR COMPRESSING IS 10% OR MORE OF THE TOTAL COST OF UTILITIES. Abnormal loss if any, both in quantity and cost shall be shown in separate statement indicating reasons thereof.
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Annexure-7 STATEMENT SHOWING THE COST OF DE-MINERALIZED WATER AND APPORTIONMENT TO USER DEPARTMENTS/ COST CENTRES FOR THE YEAR ENDED ________
Unit (Liters)
(1) No. of Days Worked (2) Installed Capacity (Liters) (3) Actual Production (utilised capacity) (4) Percentage of capacity utilisation 3/2 * 100
Current Year
Previous Year
Variance
S.No 1 1
PARTICULARS 2
Minerals/Chemicals (i) (ii) (iii) (iv) Consumable Stores Salaries/ Wages & Benefits Repairs And Maintenance Other Overheads Depreciation UTILITIES ALLOCATED Power (kwh) (6.7) Steam (Cubic Meters) (6.8) Water (Liters) ALLOCATED COST Plant Engineering Department Cost (6.4) Factory Management Department Cost (6.6) Total Expenses Credits, if any Net Total Apportioned to: (i) (ii) (iii) TOTAL AS PER ITEM 11 ABOVE Annexure-2
QUANTITY 3
RATE PER UNIT Rs. 4
TOTAL COST CURRENT YEAR Rs. 5
COST PER LITRE CURRENT YEAR Rs 6 PREVIOUS YEAR Rs 7
2 3 4 5 6
8 9 10
Note:a. b. ONLY TO BE COMPLETED IF COST OF AIR COMPRESSING IS 10% OR MORE THAN THE TOTAL COST OF UTILITIES. Abnormal loss if any, both in quantity and cost shall be shown in a separate statement indicating reasons thereof.
Nazir Ahmed Shaheen

Executive Director (C&C) File No. EMD/Misc/756/D-II/2011
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THE GAZETTE OF PAKISTAN SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN
NOTIFICATION
Islamabad, the 26th March, 2012
S.R.O. 302-(I)/2012.- The following draft of Electric Power Generation Industry (Cost Accounting Records) Order, 2012 which is proposed to be made in exercise of powers conferred by clause (e) of sub-section (1) of section 230 read with section 246 of the Companies Ordinance, 1984 (XLVII of 1984), and section 40B of the Securities and Exchange Commission of Pakistan Act, 1997 (XLII of 1997) is hereby published for the information of all persons 1ike1y to be affected thereby and notice is hereby given that the draft will be taken into consideration after thirty days of its publication in the Official Gazette. Any objection or suggestion which may be received from any person in respect of the said draft before the expiry of the said date will be considered by the Securities and Exchange Commission of Pakistan.
ELECTRIC POWER GENERATION INDUSTRY (COST ACCOUNTING RECORDS) ORDER, 2012

1. Short title, extent, commencement and application.- (1) This Order shall be called the Electric Power Generation Industry (Cost Accounting Records) Order, 2012. (2) It shall come into force with effect from July 1, 2012. (3) This Order shall apply to every company engaged wholly or partially in Generation of Electric Power Energy in Pakistan under the license(s) granted by the National Electric Power Regulatory Authority (NEPRA) of Pakistan. 2. Maintenance of records and independent auditors assurance.- (1) Every company to which this Order applies shall, in respect of each financial year commencing on or after the commencement of this Order, keep cost accounting records, containing, inter-alia, the particulars specified in Schedule I, II and III to this Order. (2) The cost accounting records referred to in sub-paragraph (1) shall be kept in such a way as to make it possible to calculate from the particulars entered therein the cost of generation and cost of sales of each of the generation facility licensed by NEPRA referred to in sub-para (3) of para (1), during a financial year. (3) Where a company is engaged in any other business(es) in addition to those referred to in sub- para (3) of para (1), the particulars relating to the utilization of materials, labour and other items of cost in so far as they are applicable to such other product shall not be included in the cost of product referred to in that para. (4) It shall be the duty of every person referred to in sub-section (7) of section 230 of the Companies Ordinance, 1984 (XL VII of 1984), to comply with the provisions of sub-paragraph (1) to (3) in the same manner as they are liable to maintain financial accounts required under section 230 of the said Ordinance. 3. Penalty.- If a company contravenes the provisions of para 2 of this Order, every director, including chief executive and chief accountant, of the company who has knowingly by his act or omission been the cause of such default shall be punishable under subsection (7) of section 230 of the companies Ordinance, 1984 (XL VII of 1984)
(Nazir Ahmed Shaheen)

Executive Director (C&C)
UPDATE
SCHEDULE 1
(See paragraph2)
I. MATERIAL
(1) Direct Material.(a) Following raw/direct materials are considered as prime sources of energy in their respective Electric Power Generation process: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Furnace Oil; Diesel Oil; Gas; Coal; Water; Wind; Steam; and Others (to be specified)
(b) Adequate records shall be maintained for above material where applicable for receipt, issue and balances both in quantities and values. The basis on which the value of receipt and issue has been calculated shall be indicated clearly in the cost records maintained or if so desired by the company in a separate manual of procedures, if any maintained by the company or in footnotes or separate explanatory notes to the cost statements for the relevant period. Such basis shall be applied consistently, throughout the relevant period. (c) The values shall include all direct charges upto plant site such as excise duty, haulage charges, transport, freight, handling and transit insurance premium incurred for local procurement. (d) In case of imported materials/sources of energy such as oils or coal, all import charges, custom duty, port dues, ocean/air freight, inland freight, marine insurance and all other charges leviable and payable at the time of import, shall be shown separately and included to work out the landed cost of oils or coal. (e) Where coal is raised from mines owned or taken on lease by the company, separate record showing the cost of raising shall be maintained in such detail as may enable the company to establish proper cost of the above referred material in cost records. (f) Adequate records shall be maintained to establish the correct quantities or volume of gas used. For ascertainment of value of gas, all the expenses incurred (all Government dues local or central, and all other expenses necessary to fetch the gas to plant site) for the procurement of gas at plant site, shall be shown separately and included to work out the cost of gas actually consumed during the process. Proper records shall be maintained showing the quantity and value of wastage, spoilage, rejection and losses of input material/fuels and consumables stores whether in transit, storage, operations or at any other stage. The method followed for adjusting the above losses as well as income derived from disposal of rejected and waste material including spoilage, if any, in determining the cost of activities shall be indicated in cost records.
(g)
(h) Realizable value of waste or by-product, if any, shall be credited to arrive at the net cost of power produced (i) Records shall be maintained in such detail to enable the company to readily provide data required in the various Cost Statements prescribed in this Order in a verifiable state.
(2) Lubrication oil consumption in engines and turbines.- Adequate records shall be maintained in respect of all receipts, issues and balances, both in quantities and values. Separate record for regular consumption and routine oil change at standard hours of run shall be maintained in the cost statement as prescribed in this Order so that cost and quantities may be verified with standards. (3) Consumable stores, small tools, machinery spare parts, etc (a) Adequate records shall be maintained to show the receipts, issues and balances, both in quantities and cost of each item of consumable stores, small tools, machinery spares. (b) The cost of issue of consumable stores, small tools and machinery spares shall be charged to the relevant heads of accounts such as repairs to plant and machinery or repairs to building. Material consumed on capital works such as addition to buildings, plant and machinery and other assets shall be shown under the relevant capital heads and not in the cost statements of electric power generating companies.
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(c) Wastage of any consumable stores whether in transit, storage or in any other plant activity shall be quantified and shown separately. Method of dealing with such losses in costing shall also be indicated in the cost records. 4
II. INVENTORY
(1) The inventories shall be measured at the lower of cost and net realisable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. (2) It shall also be disclosed that the cost of inventories shall be assigned by using the first-in, first-out (FIFO) or weighted average cost formula. An entity shall use the same cost formula for all inventories having a similar nature and use to the entity. For inventories with a different nature or use, different cost formulas may be justified. However, the cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects shall be assigned by using specific identification of their individual costs.
III. SALARIES AND WAGES

(1) Adequate records shall be maintained to show the attendance of workers employed by the company whether on regular, temporary or on contract basis, as the case may be. (2) Adequate record shall be maintained in respect of payments made for over time in such manner that labour cost is available for each cost center. (3) Proper record shall be maintained in respect of earnings of all the employees, function or activity-wise, and the works on which they are employed. The record shall also indicate the following separately for each such function or activity.(a) Direct wages and salaries (i) Regular salaries/wages (ii) Contract salaries/wages (iii) Piece rate wages (b) Indirect salaries and wages (i) Incentives (ii) Bonuses (iii) Scheme based earnings (iv) Overtime (v) Gratuity or statutory dues (4) Fair and reasonable allocation shall be made for wages paid to such labour as has been utilized in various departments or cost centers and the basis of such allocation shall be followed constantly. (5) Reasons for idle time or layoff payments shall be recorded separately and their treatment in the calculations of cost of power produced/generated shall be indicated in the cost statements. (6) Any wages paid for addition to plant and machinery or other fixed assets shall be capitalized and excluded from the cost of power produced/generated. (7) Benefits paid to the employees other than covered in above paragraphs shall be worked out separately and shown in cost statements, department-wise or cost center wise.
IV. SERVICE DEPARTMENT

Adequate records shall be maintained showing expenses incurred for each service department e.g. workshop, laboratory, transport and testing house etc. These expenses shall be apportioned to other cost centers including service departments on an equitable basis. Where these service departments serve other departments such as steam department or furnace oil handling department, suitable basis shall be worked out so that the apportionment to other departments or to saleable products, is duly worked out and applied consistently.
V. UTILITIES
(1) Adequate records shall be maintained showing the quantity and cost of various utilities consumed and utilized by different departments and cost centers.
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(2) Records shall be maintained to enable the assessment of consumption or utilization by service departments. Allocation of cost shall be made on the basis of actual consumption or on basis of technical estimates in the absence of actual measurement. (3) Details shall be available to determine the actual consumption by the power house. The cost of power consumed by the company shall be shown separately in cost statements. (4) Appropriate records shall be maintained of pumping, storage and distribution of water to determine the actual cost of water used by the different cost centers e.g. cooling towers, purifiers and by other service departments. Basis of allocating the cost of water amongst the different cost centers shall also be indicated in the records. 6 (5) Adequate records of cost of compressed air shall be maintained. The allocation of cost of compressed air to differ ent departments shall be indicated in the cost records.
VI. REPAIR AND MAINTENANCE / WORKSHOP CHARGES

(1) Adequate records of expenditure incurred on workshop facilities provided for repair and maintenance of plant and machinery in cost centers shall be maintained. (2) Record of repair and maintenance contracts shall be maintained separately. The basis of allocation of repairs and maintenance to different cost centers shall be indicated in the cost records. Cost of work of capital nature and/or of heavy repairs and overhauls, benefits of which are likely to spread over a longer period, shall be capitalized. (3) If a separate team is working for the maintenance of a particular cost centre, the salaries/wages and cost of consumables, spare parts and tools shall be charged as direct expense of that cost centre. (4) If maintenance services are utilized by other saleable items like waste, heat energy, the portion utilized for them should be segregated and charged thereto.
VII. DEPRECIATION
(1) Adequate records shall be maintained showing values and other particulars of fixed assets in respect of which depreciation is to be provided. The record shall inter-alia indicate the cost of, accumulated depreciation, rate of depreciation and the amount of depreciation charged for the relevant period. (2) The basis on which the depreciation is calculated and allocated to various cost centers and product(s) shall be indicated in the records.
VIII. INSURANCE
(1) Adequate records shall be maintained showing the insurance premium paid for the various risks covered for the assets and other interests of the company. (2) Insurance costs shall be allocated to different cost centers and methods allocating such cost shall be indicated in the cost records.
IX. ROYALTY OR TECHNICAL KNOW HOW/SERVICE FEE

Adequate records including technical agreements shall be maintained party wise in respect of fee paid to the collaborators or technology suppliers on recurring or nonrecurring basis.
X. OTHER OVERHEADS
(1) Adequate records showing the expenditure incurred as power generation overheads, other than those specified, shall be maintained and method of allocation to different cost centers shall be stated in the cost records/ statements for the relevant pe riod. (2) If other saleable products like steam are produced, suitable basis shall be adopted to apportion the cost equitably.
XI. DISTRIBUTION EXPENSES

(1) Power distribution shall be considered a separate line of activity in power sector. Adequate record shall be maintained for the expenditure incurred on distribution lines, gauging installations, repair and maintenance and extension of distribution network.
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(2) Record shall be maintained for all those expenses which are incurred on activities that can be reasonably and fairly be attributed to distribution services.
XII. ENERGY LOSSES

Adequate record shall be maintained to evaluate the cost of energy losses as expenses and it would be clearly indicated whether these are normal or abnormal losses, in case allocated to different cost centers, adequate justification for the allocation shall be given. In case of abnormal losses these shall be separately disclosed. Where energy losses exceed the normal limits, the reasons shall also be disclosed in the cost records.
XIII. RESEARCH AND DEVELOPMENT EXPENDITURE

Adequate record shall be maintained and kept for research and development separately and proper basis shall be established for charging to different cost centers and saleable products. 8
XIV. ADMINISTRATION OVERHEADS

Administration overheads shall be recorded separately and proper basis shall be established for charging to different cost centers and saleable products.
XV. ADJUSTMENT OF COST VARIANCE

(1) Where a company maintains records on the basis other than actual cost, such as standard costing, the record shall indicate the procedure followed by the company to work out the actual cost of power produced under such system. The method followed for adjusting the cost variances in determining the actual cost of the power produced as well as the reasons for variances shall be indicated in the cost records.
(2) The reasons for variances in material, labour, overheads cost and sales should be disclosed separately while preparing the reconciliation of profit arrived.
XVI. COST STATEMENTS

Cost statements shall be prepared as prescribed in this Order, by the power generating companies regularly on periodic basis and on the basis of reviews made on those cost statements, corrective action taken shall be stated along with reasons.
XVII. STATISTICAL STATEMENTS AND OTHER RECORDS

(1) The companies shall develop appropriate internal Key Performance Indicators (KPIs) for use as basis to evaluate actual performance with the standards/benchmarks prescribed by the NEPRA and other Government and Regulatory Authorities. (2) Adequate record of generation and hours run shall be maintained engine wise and generation shall be recorded so as to make available information for the compilation of the cost records.
XVIII. RECONCILIATION OF COST AND FINANCIAL ACCOUNTS

(1) The cost records shall be reconciled with the audited financial accounts of the corresponding period to ensure accuracy if integrated accounts are not maintained. Variations, if any, shall be clearly indicated and explained. (2) The reconciliation shall be done in such a manner that the profitability of the different products, as per cost statements, is correctly judged and reconciled with the overall profits of the company from all of its activities. (3) Adequate cost records shall be maintained in a manner that the cost statements can be compiled.
XIX. COMPARATIVE FIGURES

Wherever possible corresponding figures for the previous year shall be arranged, grouped and provided in cost statements.
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1. General Information (a) Name of the company (b) Registered office address of the company 2. Corporate Information (a) Status of the company whether public limited (listed or non-listed), private limited or Single Member Company. (b) Companys financial year for which audit is being conducted. (c) Date of Board of Directors meeting where Cost Statements were approved.
(d) Name, qualification and designation of the officer heading the cost accounting section 3. Technical Information (a) Location of plant Site (i) Location of plant site (ii) Location of mines, if any (b) Capacity of Power Generation (i) Installed capacity. (ii) Licensed capacity. (iii) Utilized capacity (iv) Normal capacity (c) Date of commencement of commercial operation (d) Type of Project. (IPP/WAPDA subsidiary/other) (e) Type of raw/direct material used for producing power 4. Detail of distribution network (a) Local arrangements (b) Export (c) Sale to WAPDA and other distribution companies
(d) Sale at bulk to other customers (to be specified) 5. Tariff (a) Period of application (b) Notification No. and date approving the tariff (c) 6. Other important features of tariff approved
Applicability of Tax laws (a) Application of tax laws (b) Any exemption available from excise and other levies.
7.
Cost Accounting System (a) Brief description of the system (b) Major accounting policies
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Annexure 1 SCHEDULE III [see para 2(1)] STATEMENT OF CAPACITY FOR THE YEAR ENDED__________
Current Year
No. of Generators Installed *** Capacity of Each Generator** Nature of Capacity A B C D E F Licensed Capacity Installed Capacity Normal Capacity Standby Capacity (if any) Planned Capacity = (C-D) Utilized Capacity
Previous Year
Mega Watts (MW)
Percentage 100 % of Licensed Capacity ( A) % of Installed Capacity ( B) % of Normal Capacity ( C) % of Normal Capacity ( C) % of Normal Capacity ( C) % of Normal Capacity ( C)
Mega Watts (MW)
Percentage 100 % of Licensed Capacity ( A) % of Installed Capacity ( B) % of Normal Capacity ( C) % of Normal Capacity ( C) % of Normal Capacity ( C) % of Normal Capacity ( C)
*G Over or Under Utilized of Capacity
* ** ***
Reasons for over/under utilization of capacity to be disclosed Make or Model of generation facilities along with new or old description Type of generation
Annexure -2 STATEMENT OF QUANTITY OF POWER PRODUCED AND SOLD FOR THE YEAR ENDED____________
Current Year Qty Mega Watts (MW)
A Units Generated (MW) (i) By furnace/diesel oil (ii) By Coal (iii) By Gas (iv) By any other (to be specified) Less: Losses during generation of power Units Delivered = (A-B) Line Losses Consumption in Power House Units available for sale [C-(D+E)]
Previous Year Qty Mega Watts (MW) Percentage
Percentage
B C D E F
% of total units generated ( A) %of total units generated ( A) %of units Delivered ( C) %of units Delivered ( C) %of units Delivered ( C) %of units generated ( A)
%of total units generated ( A) %of total units generated ( A) %of units Delivered ( C) %of units Delivered ( C) %of units Delivered ( C) %of units generated ( A)
G Sales Made
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Annexure -3 STATEMENT SHOWING COST OF POWER PRODUCED AND SOLD FOR THE YEAR ENDED _______
S.No Particulars Current Year Amount (Rs.) Cost Per Unit (Rs.) Previous Year Amount (Rs.) Cost Per Unit (Rs.)
A B
No. of units generated Mega Watts (MW) Raw Direct Materials (i) Furnace Oil/Diesel Oil Consumed (Annexure-4) (ii) Coal Consumed (Annexure-5) (iii) Gas Consumed (Annexure-6) (iv) Any other material consumed (to be specified)
C D E F G H I J K L M
Transportation charges Lubrication of Lube oil (Annexure-7) Salaries, Wages , other Benefits (Annexure-8) Manufacturing Overheads (Annexure-9) Total Cost of Electric Power Generated =B+C+D+E+F Administrative Overheads (Annexure-10) Selling & Distribution Overheads (Annexure-11) Financial Overheads Total Cost to Make = G+H+I+J Abnormal Losses Total Cost to Sell = K+L
Annexure -4 STATEMENT OF CONSUMPTION OF FURNACE OIL/ DIESEL OIL AND VARIANCE IN CONSUMPTION FOR YEAR ENDED _______
CURRENT YEAR Qty Price Value (tons)
A B C D E F H I J K Opening Furnace/Diesel Oil Furnace Oil/Diesel Oil Purchased Total Furnace Oil/Diesel Oil Available (A+B) Closing Balance Gross Consumption (C-D) Shortage/Wastage Net Consumption (E-F-G) Electric Power Generated (KW) : (Annexure-2) Grammage / unit (Gm per kwh) (H/I) Cost / Unit (Rs. per kwh) (H/I) (Annexure-3)
PREVOIUS YEAR Qty Price Value (tons)
Qty (tons)
VARIANCE Price Value (Rs.)
G Sludge Extracted
Reasons for variances, if any, to be explained separately
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Annexure -5 STATEMENT SHOWING CONSUMPTION OF COAL AND VARIANCE IN CONSUMPTION FOR THE YEAR ENDED _______
CURRENT YEAR Qty (tons)
A B C Opening Stock Purchased during the year In case of coal mines owned or taken on lease by the company: Amortization (Nature to be specified) Total cost D E F Total Available for consumption (A+B+C) Wastage Closing Balance
PREVOIUS YEAR Qty (tons) Price (Rs.) Value Qty (tons)
VARIANCE Price (Rs.) Total
Price (Rs.)
Value
G Total Coal combusted (D-E-F) H Electric Power Generated (KWH) : (Annexure-2) I Cost/Unit (G/H) (Annexure-3)
Annexure -6 STATEMENT SHOWING CONSUMPTION OF GAS FOR THE YEAR ENDED _______
Current Year
A B C D E F Total Gas combusted (MMBTU) Total Heat Equivalent of Gas Combusted Price Value of Gas Combusted (A x C) Electric Power Generated (KWH) : Heat Rate (E / B)
Previous Year
G Cost/Unit (D / E) (Annexure -3)
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Annexure -7 STATEMENT SHOWING CONSUMPTION OF LUBE OIL AND VARIANCE IN CONSUMPTION FOR THE YEAR ENDED _______
Current Month Qty Price Value (Liters)
A B C D E F H I J K Opening Stock Lube Oil Purchased Total Oil Available (A+B) Wastage Closing Balance Gross Consumption (C-D-E) Net Consumption (F+G) Electric Power Generated (KWH) : Grammage / Unit (H/I) Cost/Unit (H/I) (Annexure-3)
Qty (Liters)
For the Year Price Value
Qty (Liters)
Variance Price (Rs.)
Total
G Routine Oil Change
Annexure -8 STATEMENT SHOWING SALARIES, WAGES AND OTHER BENEFITS FOR THE YEAR ENDED______________
S.No 1 (i) (ii) (iii) 2 (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) 3 4 Particulars
Total Power Generated (Watts) Salaries and Wages: Officers and Permanent Staff Labour on Contract and Daily basis Bonuses Benefits: Medical Expenses Canteen Expenses Welfare, Recreation Transport and Traveling Educational Cess/ Expenses Group Insurance/Workmen Compensation Provident Fund (Employers Contribution) Gratuity/Pension/Retiring Benefits Other Benefits (if any) Total (1+2) Less allocated to(a) Admin Overheads (b) Selling & Distribution Overheads. (c) Any Other (Specify)
Current Year
Previous Year
Balance Transferred to Generation Process (3-4) (Annexure-3)
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Annexure-9 STATEMENT OF MANUFACTURING OVERHEADS FOR THE YEAR ENDED _______
S.No. 1 2 3 4 5 6 7 8 9 10
Repair and maintenance Utilities Insurance Lubrication oil Rent Rates & Taxes Office Supplies Other Overheads (to be specified) Depreciation Total (Annexure-3)
PARTICULARS
Consumable stores and spare parts
CURRENT YEAR
PREVIOUS YEAR
Annexure -10 STATEMENT OF ADMINISTRATIVE OVERHEADS FOR THE YEAR ENDED _______
Current Year
1. 2. 3. 4. 5. 6. 7. Salaries Wages & Other Benefits (Annexure-8) Directors Remuneration Directors Traveling Staff Traveling Vehicle Running Expenses Communication Expenses Repair & Maintenance i) ii) 8. 9. Office Equipments Furniture & Fixtures
Previous Year
Building others (to be specified) Advertisement
10. Utilities 11. Rent, Rates & Taxes 12. Printing & Stationary 13. Legal & Professional Expenses 14. Entertainment 15. Insurance Costs 16. Charity & Donation 17. Others to be specified 18. Depreciation Total - (Annexure-3)
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Annexure-11
STATEMENT OF SELLING, DISTRIBUTION AND TRANSMISSION EXPENSES FOR THE YEAR ENDED _____ Current Year (Rs.)
Salaries, Wages & Other Benefits (Annexure-8) Stores & Spares Loose Tools Depreciation Insurance Line Losses (normal) Other Overheads (to be specified) Total - (Annexure-3)
Previous Year (Rs.)
Annexure-12
STATEMENT OF FIXED ASSETS AND ALLOCATION OF DEPRECIATION FOR THE YEAR ENDED ______
Cost Opening
Generation Generation System (Engine Room) Building Plant & Machinery Electrical Installations Furniture & Fixtures Transferred from other Departments TOTAL (Annexure-9) Electrical Department Building Plant & Machinery Electrical Installations Furniture & Fixtures TOTAL (Annexure-9) Workshop Building Tools & Equipment Furniture & Fixtures TOTAL (Annexure-9) Stores & Allied Facilities Building Storage Tanks Furniture & Fixtures TOTAL (Annexure 9) Distribution System Meters Distribution Lines Grids & Transformers TOTAL (Annexure -11) Administrative Building Office Equipment Vehicles Furniture & Fixtures Electrical Appliances TOTAL (Annexure-10)
Cost Additions/ Deletions
Cost Closing
Rate %
Total Depreciation Written Down Depreciation Acc. Dep Charge Acc. Value Opening for the Dep Year Closing
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SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN NOTIFICATION

Islamabad, the December 21, 2012
S.R.O. /I/2012.- In exercise of powers conferred by clause (e) of sub-section (1) of section 230 and clause (o) of sub section (4) of section 20 of the Securities and Exchange Commission of Pakistan Act, 1997 (XLII of 1997), the Securities and Exchange Commission of Pakistan is pleased to make the following Order, namely:-
SYNTHETIC AND RAYON COMPANIES (COST ACCOUNTING RECORDS) ORDER 2012

1. Short title, extent and commencement- (1) This Order shall be called the Synthetic and Rayon Companies (Cost Accounting Records) Order, 2012.
(2) It shall come into force with effect from July 1, 2013. (3) This Order shall apply to every company engaged in production, processing and manufacturing of following products:(a) Synthetic fibre and yarn in all forms including but not limited to ; i. ii. iii. Polyester Fibre. Polyester Filament Yarn. Polyester chips
(b) Rayon (c) Viscose tyre yarn/cord. 2. Maintenance of Records:-(1) Every company to which this order applies shall, in respect of each financial year commencing on or after the commencement of this Order, keep cost accounting records, containing, inter alia, the particulars referred in Schedules I, II and III (Annexure A to K) annexed to this Order. (2) Where a company is manufacturing any other product in addition to those referred to in sub paragraph (3) of paragraph 1, the particulars relating to utilization of materials, labour and other items of cost in so far as they are applicable to such other product shall not be included in the cost of products referred in that product. (3) The cost accounting records referred to in sub-paragraph (1) shall be kept in such a way as to make it possible to calculate from the particulars entered therein the total and unit wise cost of production and cost of sales of each of the products referred to paragraph 1 during a financial year. (4) It shall be the duty of every person referred to in sub-section (7) of Section 230 of Companies Ordinance, 1984 (XLVII of 1984) to comply with the provisions of sub-paragraphs (1) and (3) of this Order. 3. Penalty. If a company contravenes the provisions of rule 2, the company and directors including chief executive and chief accountant who is in default including the persons referred in sub-rule (4), shall be punishable under sub-section (7) of section 230 of Companies Ordinance, 1984 (XLVII of 1984).
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SCHEDULE I
(See Paragraph 2)
I.
(1) Raw Material.
Materials:
(a) Proper records shall be maintained showing separately the quantity and cost of each raw material used for manufacture of synthetic fibre and yarn in all forms. (b) Proper records shall be maintained showing separately the quantity and cost of Rayon Grade Pulp. Caustic Soda and other materials used in the manufacture of Tyre Yarn. Where Rayon Grade Pulp is obtained from different sources, the records shall be maintained in such a manner that the cost of Rayon Grade Pulp obtained from imported and indigenous sources are available. If Rayon Grade Pulp is manufactured by the company, detailed records indicating the breakup of raw materials consumed for its production and conversion cost shall be maintained in such details as to enable ascertainment of the cost of the Rayon Grade Pulp including charges incurred upto the rayon factory. (c) The records shall also indicate the proportion of different kinds of pulp used from different sources for the manufacture of the different rayon products. (d) Proper records shall also be maintained showing the quantity and cost of packing and other items received along with different raw materials, which are either re-used or sold. Credits for such items shall be afforded to the respective raw materials as far as possible. Otherwise the credits should be allocated to different products on an equitable basis. (e) Proper records shall be maintained to arrive at the cost of Rayon Grade Pulp purchased by the company inclusive of all direct charges such as freight, insurance, octroi, etc., incurred unto works. The records shall show the receipts, issues and balances both in quantity and cost of Rayon Grade Pulp separately by sources of purchase and for different qualities. (f) Similar records as detailed in paras (i) to (iv) above shall be maintained in respect of cotton linters of different grades used in the manufacture of acetate yarn/fibre. These records shall show the receipts, issues and balances both in quantity and cost of cotton linters of different grades like second cut linters, defibrated linters and mill run linters.
(2) Process Materials. - Proper records shall be maintained to show the receipts, issues and balance both in quantities and cost of each item of process materials used for the manufacture of product mentioned in paragraph (1) of the Order. In case of certain chemicals used as catalysts having longer life of more than a year, the costs of such items should be deferred on appropriate basis. The costs shall include all direct charges upto and including the works wherever specially incurred. The issues shall be properly identified with the departments, cost centers and products manufactured. Where these process materials are produced by the company, separate records showing the cost of manufacture of each such materials indicating the breakup of raw materials consumed for their production and conversion cost shall be maintained in such details as may enable the company to determine the cost of such process materials produced. In case caustic soda is manufactured proper records of the same shall be maintained. Where any of the plants for process chemicals are used for processing such chemicals on behalf of outsiders, proper records about the quantities so processed, the details of the costs incurred therefore and the amounts recovered as conversion charges shall also be maintained. (3) Consumable Stores, Small Tools, Machinery Spares, etc. (a) Proper records shall be maintained to show the receipts, issues and balances both in quantities and cost of each item of consumable stores, small tools and machinery spares. The costs shown shall include all direct charges unto works, wherever specifically incurred.
(b) In the case of consumable stores and small tools, the cost of which are insignificant, the company may, if it so desires, maintain such records for the main groups of such items, (c) The cost of consumable stores, small stools and machinery spares, issued shall be charged to the relevant heads of account such as production, repairs to plant and machinery, repairs to buildings. Materials consumed on capital works such as addition to buildings, plant and machinery and other assets shall be shown under the relevant capital leads.
(4) Wastages, Spoilages, Rejections, Losses, etc. of Materials. (a) Proper records shall be maintained showing the quantity and cost of wastages, spoilages, rejections and losses of raw materials, process materials, consumable stores, small tools and machinery spares, whether in transit; storage, manufacture of for any other reasons. Threshold for recording abnormal losses is 5% and above.
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(b) The total waste in terms of cellulosic content of pulp made up from wastes in different department like viscose, spinning, bleaching, coning and reeling shall also be recorded separately to enable control of such losses and identifying the realization therefore. Separate records of different types of wastes like clean, oily and other waste fibres obtained in the process of conversion of viscose staple into tops either through own unit or through outside combing units shall also be kept indicating the respective quantities and sales realization. The method followed for adjusting the above losses as well as the income derived from the disposal of rejected and waste materials including scrap, if any, shall be indicated in the cost records.
II.
(1)
Salaries and Wages:
Proper records shall be maintained to show the attendance and earnings of all employees and the departments or units or cost centers and the work on which they are employed. The records shall also indicate separately: (a) (b) (c) (d) Overtime wages earned. Piece-rate wages earned. Incentive wages earned, either individually or collectively as production bonus or under any other scheme based on output. Earnings of casual labour.
(2) Any wages and salaries allocable to capital works such as addition or heavy repair works to plant and machinery, buildings or other fixed assets shall be accounted for under relevant capital heads.
III.
Service Department Expenses:
Detailed records shall be maintained to indicate expenses incurred for each service Department or cost center like water supply, laboratory, air-conditioning, welfare etc. These expenses shall be apportioned to other service and production departments on an equitable basis and applied consistently.
IV.
Utilities:
(1) Water. Proper records showing the quantity and cost of water treated consumed for the manufacture of synthetic & rayon in different departments/cost centers etc. shall be maintained in such details as may enable the company to furnish the necessary particulars in Annexure Ito this Schedule. The cost of water allocated shall be on reasonable basis and applied consistently. (2) Steam. Where steam is raised by the company proper records showing the quantity and cost of steam raised and consumed for the production of Rayon in different departments or cost centers shall be maintained in such detail as may enable the company to furnish the necessary particulars in Annexure (ii) to this Schedule. Adequate records shall be maintained to show the quantity and cost of steam purchased, if any. The cost of the steam consumed by the Rayon factory and other units of the company shall be calculated on reasonable basis and applied consistently. (3) Power and Gas (a) When power is generated by the company, proper records showing the quantity and cost of power generated and consumed for the production of product mentioned at Sub Paragraph (3) of paragraph 1 of the Order in different departments or cost centers as the case may be shall be maintained in such details as may enable the company to furnish the necessary particulars in Annexure E to this Schedule. Adequate records shall also be maintained to show the quantity and cost of power purchased. (b) Where power is generated and supplied by another unit of the company to the factory, adequate records shall be maintained to assess the quantity and cost of power so supplied. The rate charged by that unit shall be on a reasonable basis. Necessary records shall also be maintained to show the consumption of power by various departments or cost centers, as the case may be . The cost of power allocated to production shall be on a reasonable basis and applied consistently. V. Workshop Repairs and Maintenance:
Proper records showing the expenditure incurred by the workshop under different basis and on repairs and maintenance by the various departments and cost centers shall be maintained. The records shall also indicate the basis of charging the workshop expenses to different departments, cost centers and units. Expenditure on major works from which benefit is likely to accrue for more than one financial year shall be shown separately in the cost records indicating the method of its accounting in determining the cost of Rayon manufactured during the relevant period. Expenditure incurred on works of capital nature shall be capitalized. The cost of such jobs shall include the expenditure on material, labour and a share of the overheads. The jobs carried out by the workshop of any other unit of the company to the Rayon Factory and vice versa / created on a reasonable basis and applied consistently.
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VI. Depreciation:
(1) Adequate records shall be maintained showing values and other particulars of the fixed assets in respect of which depreciation is to be provided. The records shall inter alia indicate the cost of each item of asset, the date of its acquisition and the rate of depreciation. (2) Basis on which depreciation is calculated and allocated to the various departments and products shall be clearly indicated in the records.
(3) Amount of depreciation chargeable to the different departments, manufacturing units or cost centers, for the financial year shall be in accordance with the provisions of Clause F of Part II of the Fourth Schedule of the Companies Ordinance, 1984 and shall relate to the plant and machinery and other fixed assets utilized in such departments or units or cost centers. The method once adopted shall be applied consistently.
VII.
Insurance:
(1) Records shall be maintained showing the Insurance premium paid for various risks covered on the assets and other Interests of the Company. (2) Method of allocating insurance cost to the various cost centers shall be indicated in the cost records and followed consistently.
VIII. Other Overheads:

(1) Proper records shall be maintained showing the various items of expenses comprising overheads. These expenses shall be analyzed, classified and grouped in the works, administration and selling and distribution overheads. Where the company is engaged in the manufacture of any other products in addition to rayon products, the records shall clearly indicate the basis followed for apportionment of the common overheads including head-office expenses of the company to different rayon activities and other activities. (2) Overheads allocable to capital works shall be indicated separately in the cost records. The methods followed for the levy and absorption of the above categories of overheads to the products shall be indicated in the cost records. The basis followed for levy and absorption of the overheads shall be equitable and applied consistently. In case any expense included in the above categories of overheads can be identified with a particular activity/product, such expenses shall be segregated and charged to the relevant activity/product at the first instance and thereafter the remaining common expenses under the above categories of overheads shall be allocated on a reasonable and equitable basis and applied consistently.
IX.
Expense on Export:
Records showing expenses incurred on export of Rayon products if any, shall be separately maintained, so that the cost of export sales can be determined correctly. The expenses incurred on export, as well as any export incentive earned shall be reflected in the cost statements relating to export sales.
X.
By-Products:
Proper records shall be maintained for each item of by-product derived showing the receipts, issues and balances both in quantity and value. The basis adopted for valuation of the by-products shall be equitable and consistent. Records indicating the expenses incurred on further processing of by-products like glauber salt into sodium sulphate as well as the actual sales realization of the ultimate by-product i.e. sodium sulphate shall be maintained. Credit afforded for the quantity of glauber salt got converted into sodium sulphate shall be reasonable.
XI.
Research and Development Expense:
(1) Adequate records showing the details of expenses incurred by the company for the development of existing products or new products or processes, if any, shall be maintained separately. Such records shall indicate the expenses incurred on genenic research and brand promotion separately. Expenses incurred on brand promotion shall be excluded from costs and charged to profit directly. If the research and development department is also engaged in the design and development of plant facilities, the appropriate share thereof shall be capitalized. The method of charging research and development expenses to the cost of production shall be indicated in the cost records and such expenses shall be charged to viscose staple fibre of different enduses, viscose filament yarn and viscose tyre
UPDATE
yarn on a reasonable basis. However, the research and development cost must be measured and disclosed in line with the International Financial reporting Standards as applicable in Pakistan. (2) Expenses incurred by the Research & Development Department for furnishing technical know-how to outsiders shall be recorded separately and excluded from the cost of products referred to in paragraph (3) of paragraph 1 of this Order. The amounts recovered for providing technical know-how to outsiders shall also be indicated separately.
XII.
Products for self-consumption:
Proper records shall be maintained showing the quantity and cost of each item of rayon products transferred to another department/unit of the company for self-consumption. The rates at which such transfers are affected shall be disclosed in the cost statement.
XIII.
Packing:
(1) Proper records shall be maintained showing the quantities and cost of various packing materials such as polythene sheets, kraft paper. jute packing sheets, hoofs, mild steel wires, cones and wages and other expenses incurred in respect of different types and sizes of packages adopted for marketing of Rayon products. Where the expenses are incurred in common the basis of apportioning such expenses amongst different types of Rayon products shall be equitable and clearly indicated in the records and applied consistently. (2) The quantity and cost of packing materials recovered from purchased raw materials and that re-used in packing shall be maintained. The basis of valuation adopted for such materials shall be reasonable. (3) Detailed records of the expenses incurred on export packing shall also be kept separately and exhibited in the relevant cost statements for exports.
XIV.
Work-in-process and finished goods:
The method followed for determining the cost of work-in-process and finished goods stock shall be indicated in the cost records so as to reveal the cost elements that have been taken into account in such computation. The method adopted shall be followed consistently.
XV.
Cost Statement:
Cost statement showing the cost of production and cost of sales of products mentioned in sub para 3 of para 1 of this Order shall be prepared by the management.
XVI.
Reconciliation of Cost and Financial Accounts:
(1) The cost records shall be reconciled periodically with the financial books of account so as the ensure accuracy. Variations, if any, shall be clearly indicated and explained. The period for which such reconciliation is effected shall not exceed the period of the financial year of the Company. The reconciliation shall be done in such a manner that the profitability of the product under reference can be correctly adjudged and reconciled with the overall profits of the company. (2) A statement showing the total expenses incurred and the income received by the company and the share applicable to Rayon products shall be maintained in Annexure G duly reconciled with the financial accounts.
XVII
Adjustment of Cost Variances:
Where the company maintains cost records on any basis other than actual, such as standard cost, the records shall indicate the procedures followed by the company in working out the cost of the products under such a system. The method followed for adjusting the cost variances in determining the actual cost of the product shall be indicated clearly in the cost records. The cost variances shall be shown against the relevant heads in the respective Annexure of Schedule II. The reasons for the variances shall be detailed in the cost records.
XVIII. Records of Physical Verification:

Records of physical verification shall be maintained in respect of all items held in stock such as raw materials, process materials, packing materials, consumable stores, machinery spares, chemicals, fuels, finished goods and fixed assets. Reasons for shortage/surpluses arising out of such verification and method followed for adjusting the same in the cost of the products shall be indicated in the records.
UPDATE
XIX. Statistical Records:
Statistical and other records maintained in accordance with the provisions of this Order shall be such as to enable the company to exercise, as far as possible, control over the various operations and costs with a view to achieve optimum economies in costs and to provide the necessary data required by the cost auditor to suitably report on all the points referred to in the Companies (Audit of Cost Accounts) Rules, 1998,

1 2 3 4 5 6 7 8 9 Name of the Company. Date of Incorporation. Date of Board Meeting where Cost Statements were approved Name, designation and qualification of the officer heading the cost accounting section. Location of Registered Office or other office where Books of Account are maintained. Location of Factory/Factories. Type/Types of synthetic & rayon being produced. Any salable by-products and mid-products. Intermediary products: Per Day M. Per Year Tonnes M. Tonnes
(a) Designed Capacity (b) Installed Capacity (c) Capacity Utilized (d) No. of Days in the year on which capacity is calculated 10 Main products: (a) Designed Capacity (b) Installed Capacity (c) Capacity Utilized
(d) No. of Days in the year on which capacity is calculated 11 Foreign Technical Collaboration: Name of the Process/Inventor/Patent holder.
UPDATE
Annexure A Schedule III
(See Paragraph 2)
Name of Company : ____________________________________________________________________
Name & address of Rayon/Polyester Factory : ____________________________________________________________________
Statement Showing the Cost of Product _____ Manufactured During the year ending __________________
Processing (1) Type (2) Description (3) Quality (4) Denier (5) Production (6) Total dry cellulose content of wood pulp consumed (7) Total dry cellulose content of output (8) Waste percentage : : : : : : : Processing Steeping/Slurry/other process Staple length of Fibre Current year Previous year Tonnes Tonnes Tonnes
Particulars (1)
1. Raw Materials purchased/ transferred in from previous department (a) ________________________ (b) (c) (d) (e) 2. ________________________ ________________________ ________________________ -
Quantity (Units) (2)
Rate per unit (Rs) (3)
Total Cost (Rs) (4)
Cost per Kg Current year Previous year (5) (6)
Process Chemicals (a) ________________________ (b) (c) (d) (e) (f) (g) ________________________ ________________________ ________________________ ________________________ ________________________ ________________________
3. 4.
Direct Salaries & Wages (Annexure G) Utilities (a) (b) (c) (d) Power (Annexure E) Nitrogen (Annexure C) Steam (Annexure D) Air-Conditioning (Annexure F)
UPDATE
(1)
5. 6. 7. 8. 9. Repairs & Maintenance. Stores and spares Insurance Manufacturing Overheads (Annexure I) Other works overheads
(2)
(3)
(4)
(5)
(6)
10. Packing cost (a) (b) (c) (d) (e) ________________________ ________________________ ________________________ ________________________ ________________________
11. Research & Development expenses 12. Depreciation 13. Share of administrative Overheads (Annexure H) Total 14. Less credit for (a) (b) (c) ________________________ ________________________ ________________________
15. Adjustment for opening and closing balance of Work-in-process 16. Stock adjustment Add opening stock Less closing stock 17. Total cost of product ___________________ 18. Transferred to the other department 19. Selling & Distribution expenses (Annexure J) 20. Net sales realization
UPDATE
Annexure B
Name of Company : ____________________________________________________________________
Statement Showing the Cost of Goods Sold During the Year ending _________________
Product Add Opening Less Closing Add packing Cost of sales Cost of Less Total Cost Add Opening Less Closing Finished material and Finished Goods realizable WIP of Goods WIP Federal goods goods Inventory value of by manufactured inventory excise and product sales tax
A B C D
Annexure C
Name of Company : __________________________________________________________________ __________________________________________________________________ Name & address of Rayon/Polyester Factory :
Statement showing the Cost of Nitrogen Produced and Consumed During the year ending _______________
No of units produced No of units purchased Consumption including other losses Net units consumed : : : : ________________________________________________________________ ________________________________________________________________ _________________________________________________________________ ________________________________________________________________
Particulars (1)
1. (a) Ammonia (b) activated aluminum (c ) Molecular sieves (d) others Consumable stores Other services (a) Power (Annexure E) (b) Compressed air (c) Water Salaries & Wages (Annexure G) Repair & maintenance Sub total Overheads Deprecation Total Nitrogen purchased Total Less recoveries if, any Net Total(purchased and produced)
(Units) (2)
Rate (Rs) (3)
Quantity (4)
(Amount) (5)
2. 3.
4. 5. 6. 7. 8.
9.
Apportionment: i) Polymerization plant ii) Polyester fibre plant iii) Polyester filament yarn plant
No. of Units
Amount (Rs)
UPDATE
Annexure D
Name of Company : ____________________________________________________________________
Statement showing the Cost of Steam Raised/ Consumed During the Year ending___________
Installed steam generation capacity Kg/hr at Kg/Cmg Quantity of steam raised Cost per tonne of steam raised Particulars (1)
1. 2. Water Fuels: (a) Coal (b) Fuel Oil (c) Electricity (d) Other fuels, if any (to be specified) 3. Other Direct Expenses (such as Boiler inspection fees) 4. Consumables Stores 5. Salaries and wages (Annexure G) 6. Repair & maintenance 7. Other overheads 8. Deprecation Total 9. Less credits for coal Ash, Condensate and other credits, if any 10. Less (a) cost of steam used by power house (b) other units of the company 11. Quantity and cost of Balance steam
: : :
_____________________________ _____________________________ Tonnes Pressure-Kg/Cmg _____________________________ Quantity (units) (2) Rate (Rs) (3) (Amount) (Rs) (4)
Apportionment: i) ii) iii) iv) Polymerization plant Polyester filament yarn Polyester fibre spinning plant Other units of the company
Units
Pressure Kg/Cmg
Amount
Notes: 1. 2. If steam is supplied to any other outside party, necessary credit for recoveries made shall be given against item 10. Where metres are not installed, consumption of steam shall be assessed on a reasonable basis and applied consistently.
UPDATE
Annexure E
Name of Company : ____________________________________________________________________
Statement Showing the Cost Of Power Generated/Purchased and Consumed During the Year Ending ___________
Installed generation capacity No of Units generated No of Units Purchased Consumption in power house Net units consumed MW KWH KWH KWH KWH
Particulars (1)
1. (a) steam (as per Annexure D/purchased) (b) other materials, if any, (to be specified) 2. Consumables Stores 3. Other direct charges (such as Electricity duty etc) 4. Salaries and wages (Annexure G) 5. Repair & maintenance 6. Other overheads 7. Deprecation Sub total Power purchased Gross Total Less recoveries if any Total Cost per unit (purchased and generated)
: : : : :
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________

Quantity (units) (2) Rate (Rs) (3) (Amount) (Rs) (4)
Apportionment: i. ii. iii. iv. v. vi. Nitrogen plant Steam generation Air Conditioning Polyester chip plant Polyester fibre/filament yarn plant Other units of the company
Quantity
Rate (Rs)
Amount (Rs)
Notes: 1. 2. 3. Cost per units shall be worked out with reference to the Net units of power available for use after deducting consumption in the power house and other losses. Where meters are not installed, consumption of power shall be assessed on a reasonable basis and applied consistently. Bonus to employees other than incentive bonus, provisions for statutory gratuity and interest charges shall be shown in Annexure D and F only and not in any other annexure.
UPDATE
Annexure F
Name of Company : ____________________________________________________________________
Statement Showing the Cost of Air-Conditioning During the Year ending___________

Installed capacity Average operating load No of hours operation during the year
Particulars (1)
(1) (2) (3) (a) (b) (4) (5) (6) (7) Chemicals Salaries and wages (Annexure G) Power and other services power Water Consumable Stores Repair & Maintenance Works overhead Depreciation Total cost
Thermal units/hr
Quantity (units) (2) Rate (Rs) (3) (Amount) (Rs) (4)
Apportionment: 1. Polyester fibre (a) Polymerization (b) Spinning (c) Finishing (d) ____________ (e) ____________ (f) Others Polyester filament yarn (a) Polymerization (b) Spinning (c) Coning (d) ____________ (e) ____________ (f) others
No. of Units
Amount (Rs)
2.
Note: 1. 2. The apportionment of Air-Conditioning cost to the different departments and cost centers shall be done on scientific and reasonable manner and applied consistently. Bonus to employees other than incentive bonus, provision for statutory gratuity and interest charges shall be shown in Annexure D and F only and not in any other Proforma.
UPDATE
Annexure G
Name of Company : ____________________________________________________________________
Statement Showing the Cost of salaries, Wages and Other Benefits for the Year Ended______________
S.No 1 (i) (ii) (iii) 2 (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix)
Salaries and Wages: Officers and Permanent Staff Labour on Contract and Daily basis Bonuses Benefits: Medical Expenses Canteen Expenses Welfare, Recreation Transport and Traveling Educational Cess/ Expenses Group Insurance/Workmen Compensation Provident Fund (Employers Contribution) Gratuity/Pension/Retiring Benefits Other Benefits (if any)
Particulars
Current Year
Previous Year
Total
Apportionment i. ii. iii. iv. v. vi. vii. Nitrogen (Annexure C) Power (Annexure E) Steam generation (Annexure D) Air Conditioning (Annexure F) Product A ________________ Product B ________________ Product C ________________
UPDATE
Annexure H
Name of Company : ____________________________________________________________________
Statement showing the Cost of Administrative Overheads for the Year Ended ______________
Current Year
1. Salaries Wages & Other Benefits (Annexure G) 2. Directors Remuneration 3. Directors Traveling 4. Staff Traveling 5. Vehicle Running Expenses 6. Communication Expenses 7. Repair & Maintenance i) Office Equipments ii) Furniture & Fixtures 8. Building others (to be specified) 9. Advertisement 10. Utilities 11. Rent, Rates & Taxes 12. Printing & Stationary 13. Legal & Professional Expenses 14. Entertainment 15. Insurance Costs 16. Charity & Donation 17. Others to be specified 18. Depreciation Total Apportionment i. ii. iii. iv. v. vi. vii. Nitrogen (Annexure C) Power (Annexure E) Steam generation (Annexure D) Air Conditioning (Annexure F) Product A ______________ Product B ______________ Product C ______________
Previous Year
UPDATE
Annexure I
Name of Company : ____________________________________________________________________ Name & address of Rayon/Polyester Factory : ____________________________________________________________________
Statement showing the Cost of Manufacturing Overheads for the Year Ended __________
PARTICULARS 1 2 3 4 5 6 7 8 9 10
Consumable stores and spare parts Repair and maintenance Utilities Insurance Lubrication oil Rent Rates & Taxes Office Supplies Other Overheads (to be specified) Depreciation Apportionment i. ii. iii. iv. v. vi. vii. Nitrogen (Annexure C) Power (Annexure E) Steam generation (Annexure D) Air Conditioning (Annexure F) Product A ________________ Product B ________________ Product C ________________
CURRENT YEAR
PREVIOUS YEAR
Annexure J
Name of Company : ____________________________________________________________________ Name & address of Rayon/Polyester Factory : ____________________________________________________________________
Statement Showing the Cost of Selling, Distribution for the Year Ended _____________
Current Year (Rs.)
Salaries, Wages & Other Benefits (Annexure G) Commission to Selling agents Freight and transport charges less recoveries from customers Loading and unloading charges Godown rent Retail sales office expenses such as + rent etc., if any Other expenses Share of Administration Overheads Stores & Spares Loose Tools Depreciation Insurance Other Overheads Total Apportionment i. ii. iii. iv. v. vi. vii. Nitrogen (Annexure C) Power (Annexure E) Steam generation (Annexure D) Air Conditioning (Annexure F) Product A ___________ Product B ___________ Product C ____________
Previous Year (Rs.)
UPDATE
Annexure K
Name of Company : ____________________________________________________________________
Statement of Fixed Assets and Allocation of Depreciation for the Year Ended _________
Cost Cost Opening
Production Building Plant & Machinery Electrical Installations Furniture & Fixtures Transferred from other Departments TOTAL Electrical Department Building Plant & Machinery Electrical Installations Furniture & Fixtures TOTAL Workshop Building Tools & Equipment Furniture & Fixtures TOTAL Stores & Allied Facilities Building Storage Tanks Furniture & Fixtures TOTAL Administrative Building Office Equipment Vehicles Furniture & Fixtures Electrical Appliances TOTAL
Depreciation Acc. Dep Opening
Additions/ Cost Rate % Deletions Closing
Written Total Down Depreciation Charge Acc. Dep Value
for the Closing Year
(Bushra Aslam)
Secretary to the Commission
No. CLD NO 230(8) RCP/2002

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From the Holy Qur-n

In the Name of ALLAH, the Most Magnificent, the Most Merciful.

Surah: 86 - Surah At-Tariq; verses 1 to 17

National Council 2012-14

Institute of Cost and Management Accountants of Pakistan

Research & Publications Committee

Members - Government Nominees

Deputy Auditor General (APR&SD) C/o Auditor General of Pakistan

Mr. Muhammad Haroon Rasheed

Volume : 22.3 l May-June, 2013

Role Models Success Story

Cost Competitiveness - the Sustainable Business Strategy

Mr. Tahir Mahmood

11 An Exclusive Interview with

Mr. Muhammad Abdul Aleem

Secretary General, Overseas Investors Chamber of Commerce & Industry (OICCI)

36 63 Heads of Government Enterprises and Autonomous Bodies 65

Our Next Issue

Pakistan Economy and Corporatization

From the Desk of

President and Chief Executive

4 | Management Accountant, May-June, 2013

From the Desk of

Shahzad Ahmad Awan, FCMA

Management Accountant, May-June, 2013

Success Story Mr. Khurshid Ahmad

Mr. Khurshid Ahmad, FCMA (F-10) was born at

6 | Management Accountant, May-June, 2013

Any suggestions on the teaching activities of the Institute.

What do you think of our efforts to combat corruption?

Management Accountant, May-June, 2013

An exclusive interview with

Mr. Tahir Mahmood

8 | Management Accountant, May-June, 2013

Vegetable Ghee and Cooking Oil Industry:

What is your message to the Management Accountants in Pakistan?

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An exclusive interview with

Mr. Muhammad Abdul Aleem

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What message would like to give to the Management Accountants

Management Accountant, May-June, 2013

Cost Accountants' Role in Economic Growth of Pakistan

Setting up a 'Cost and Efficiency Department' to keep check on Inflation

Reviving the Inefficient Public Sector Organizations (PSEs)

Performing Cost Audits of PSDP Projects for Performance Evaluation

Assisting the CCP in identifying Predatory and Transfer Pricing Cases

Introducing Cost Accounting Sub-Systems in Local Bodies

Assisting government in implementing budgets based on cost strategic plans

By Wasful Ha ssan Siddiqi, FCMA

Invisible / Hidden Losses

Cost Audit Versus Financial Audit

Cost and Management Accountants have an Edge Over Chartered Accountants

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Scope of Cost Audit

Features of Cost Audit

Objectives of Cost Audit

Circulation and Distribution of Reports

Cost Audit SECP Notifications

Conditions Applicable to Firms of Chartered Accountants for Appointment as Cost Auditors

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Effective Date Application

Special Orders (SROs) Issued by SECP.