Certification

We hereby certify that the material presented in this report is original and no other persons
work or ideas have been used without acknowledgement.

Student Reg. No

Name

MF/2012/3481

A.G.S.Prathibha

MF/2012/3485

D.C.Malalagama

MF/2012/3500

R.P.T.Madushani

MF/2012/3512

P.P.H.Lunuvila

MF/2012/3516

M.L.T.Jayamali

MF/2012/3520

K.P.Warshamana

MF/2012/3527

D.H.M.Dissanayake

MF/2012/3533

P.G.C.Sadiranga

Signatures

Acknowledgements

This assignment could not have been written without the guidance of our post coordinator
Mrs. M.S Nanayakkara. Her guidance had been a source of encouragement at all time and we
would like to express our gratitude to her.
We wish to special thank to the chairmen Mr. Lal Keerthi Amarasiri Gunawardhane and staff
of accountancy of Lucky Lanka Milk processing co ltd .
Lastly we would like to thank our family and friends for the support and encouragement
provided throughout this assignment. And also we would like to express our gratitude to all
those who a were not mentioned here for giving us.

Contents
01. Introduction of the assignment ....................................................................................................... 4

02. History of Lucky Lanka Milk Processing Company Limited ............................................................... 5

03Analyze the overhead allocation system ............................................................................................ 6

04. Evaluate The Appropriateness Of Existing System ........................................................................ 10

05. Barriers and Opportunities of Alternative method (ABC Method) ................................................. 12

05.1 Barrios and opertuties of ABC Method ..................................................................................... 12

05.1 .I Barrios ................................................................................................................................ 12

05.1.II Opportunities ..................................................................................................................... 13

06. Outcomes of the report writing ....................................................................................................... 18

07. Conclusion ...................................................................................................................................... 19

07.References ....................................................................................................................................... 20

08. Appendices ...................................................................................................................................... 21

08.I certify letter of the company ................................................................................................. 21

01. Introduction of the assignment

According to the Activity Based Costing system (ABC System) topic in Cost and
Management Accounting Subject, the assignment that was given to us to analyze the costing
system which is using the selected company and introduce the alternative methods to the
selected company. Therefore the company our group is selected for that is the Lucky Lanka
Milk Processing Com ltd.
For this evaluation activity we are used two costing methods. Those are traditional method
and Activity Based Costing (ABC) method. According to the Lucky Lanka Milk Processing
co ltd, they are currently using a traditional method for their costing system. But it is not the
pure traditional method that we are learned. The Chairman Mr. Lal Keerthi Amarasiri
Gunawardhane who is the owner of the company, add some secret value or percentage for
their each unit cost of production.
In this assignment we are expected to evaluate the existing method (traditional method) and
alternative method (Activity Based Costing system) for Lucky Lanka Milk Processing Co Ltd
to compute their unit cost effectively and most accurately.

02. History of Lucky Lanka Milk Processing Company Limited

Lucky Lanka Milk Processing Company Limited was started the journey back in 1991 as
small scale business by Mr. Lal Keerthi Amarasiri Gunawardhane which is located in a
remote village like Kamburupitiya of Matara district in Southern province where far from the
Capital City of the country.
The small business started with a single household cow, has been sprouted throughout the
country with the involvement of thousands of milk farmers, hundreds of employees and many
of suppliers up to a national enterprise by now. Milk considered to be of high nutritional
value food material is processed and further developed so that the nutritional value & taste is
enhanced and presented in a different form to the customers. Not only yoghurt is a high
nutritional food but also it consists of medicinal value too. Traditional Sri Lankan Hospitality
blended with international sophisticated food technology well packed in Lucky Yoghurt in
order to optimize customer hospitality, Lucky seven flavors are presented in an attractive
Ready to Serve and single serving package system. Well-qualified Staff ensures the quality of
incoming raw materials and the final products through continuous inspection, monitoring and
laboratory testing including chemical & microbiological testing of each batch. Product
quality is maintained according to the Sri Lankan Quality Standards [SLS] 824 right
throughout the manufacturing process.
They expected to be a national industry, which makes the path towards the prosperity of the
country, their major objective is to make social & economic enhancement of their
stakeholders.
The Vision and Mission of Lucky Lanka Milk Processing Company Limited is;
Vision
2020 Global Lucky
Mission
Creation of healthy generation towards prosperous future in Sri Lanka

03Analyze the overhead allocation system

There are two method for allocate overhead cost. They are,

1. Traditional Method
2. Activity Based Costing System Method

Lucky Lanka Milk Processing Co. Ltd used traditional method to allocate overhead cost. If
Lucky Lanka Milk Processing Co.Ltd used traditional method to allocate overhead cost, some
occasion they follow conventional method of owner. Then company owner get direct
impartial to allocate overhead cost. According to that we can identify that the Lucky Lanka
company implements a special method based on traditional method to allocate overhead cost
for each products.

The Lucky Lanka Milk Processing Co.Ltd produces 27 products. According to traditional
method we selected 6 products of Lucky Lanka and calculate overhead cost and cost per unit
are followed.

Yogurt

Direct Material

25 00000

Direct Labor

98 000

Overhead cost

13029325

Total cost

15627325

Cost per unit

15627325
1500000
10.42 Rs

Kalkiri Bottle
Direct Material

= 617 120

Direct Labor

Overhead cost =

= (4291.40*200)

Total cost

Cost per unit

62 000

= 85 8280
= 1 537 400

=
= 50.57

Keerasa Bottle
Direct Material

= 8 190 000

Direct Labor

40 000

858 280

Overhead cost =

(4291.40*200)

Total cost
Cost per unit

= 9 088 280
= 9 088 280
300 000
= 30.29

UHT Packet
Direct Material

= 3 187 500

Direct Labor

Overhead cost =

(4291.40*140)

Total cost
Cost per unit

40 000

= 600 796
= 3 828 296

= 3 828 296
250 000
= 15.31

RTS Vanila Bottle

Direct Material

= 1 455 168

Direct Labor

Overhead cost =

(4291.40*84)

Total cost

Cost per unit

40 000

= 360 477.6
= 1 855 645.6

= 1 855 645.6
62 400
= 29.74

RTS Chocolate Bottle

Direct Material

= 1 499 660

Direct Labor

Overhead cost =

(4291.40*84)

Total cost
Cost per unit

40 000

= 360 477.6
= 1 900 137.6

= 1 900 137.6
62 400
= 30.45

Although we calculate to use traditional method they said that they used conventional method
to allocate overhead cost. According to company rules and regulation they dont present their
conventional method to external parties.
So the owner hasnt enough knowledge about other alternatives method they continue the
overhead cost in traditional method since a long time.
The owner of Lucky Lanka has decided to use congruent method than currently existing
method for allocate overhead cost of their products. For that he has handover to account
section to do about that.
According to traditional method which used currently existing hasnt certain base for their
products. Therefore they cant allocate overhead cost of each product. Then also they cant
correctly recognize profit and loss of each product.

04. Evaluate The Appropriateness Of Existing System

( Tradtional Method )
Lucky Lanka Milk Processing co. Ltd use traditional methods to evaluate overhead cost and
endemic methods to evaluate cost. Those are indicated in their financial statements according
to evaluation. Though Lucky Lanka is using traditional methods it is different with the
answer whatever they gained. Because, of their addition of endemic evaluations.
There are many advantages and disadvantages they gained from evaluating overhead cost
under traditional method of 27 items of Lucky Lanka company though they substitute some
value according to their endemic method.
In here, in very large scale companies, they calculate total cost and overhead cost of new
products according to Activity Based Costing system. So when they get the difference
between cost of product

according to activity based system that mean, the answer would

larger they give up from those products. But, In Lucky Lanka company they would get some
advantages though they substitute some values according to traditional method. So, they
expand their network of products by starting new items and they have gained ability of
conducting this company successfully.
Although above companies do not use this method to calculate overhead cost when
evaluating total cost. They use Activities Based system method and they obtain correct
answer with this method according to international standards. So that, Lucky Lanka company
could not compete with international companies and they will face disadvantages instants.
That mean, they cannot go forward with them by competing.
It is essential to protect from income tax, producing tax and other different taxes Lucky
Lanka company because of using this traditional method and their substitutions. Because,
through this method it shows profit margin in lower place. But these valuations completely
wrong in financial statements and accuracy too decries in those. Therefore the decisions of
Lucky Lanka company are decrease in accuracy so it will barrier for conducting and going
forward. Also, have to face many difficulties when getting decisions .The way of evaluating
overhead cost according to traditional method is; dividing total overhead cost by total item of
products. But Lucky Lanka substituted some value to that answer secretly.

10

So it is very comfortable to study data according to calculations. But, these are wrong in
accuracy. Therefore never expect to get successful audit report.
It is advantage for Lucky Lanka company using this method. Because there are no anymore
other cost, and cost of other calculation. And also little time will spend for this calculation.
As a result, accounts section can obtain cost evaluation in short period.
In traditional method we can calculate overhead cost of products in one rate. It will be direct
labors (Rs) or direct labor hours. Because direct labor is the main factor of product items.
But, there are rates according to Activity Based System when calculating cost. So it will give
correct answer than other methods.
The decision takers that mean, internal and external parties can easily point out decisions
through studying the valuations under traditional method. So there is no any unnecessary time
spreading.
Although when we getting answer according to traditional method, it does not give pure
answer for company and we can see disadvantageous instants.
Therefore, it is optimal solution and very good decision to use Activity Based Costing system
to evaluate cost of Lucky Lanka company. So we can indicate that then they could gain the
vision and go forward by successful evaluations. That mean this is the method that they
should use is our decision.
An advantage of using traditional-based costing is that it aligns with Generally Accepted
Accounting Principles, or GAAP. Easy implementation for companies that provide one
product also is a plus. However, traditional costing is an outdated costing system in Lucky
Lanka Milk processing Co Ltd because those this company now use machines and computers
for much of their production. Computers and machines make the system outdated because it
often uses direct labor hours to calculate cost. Cost is not appropriately assigned because
direct labor hours is not the best cost driver to use. Traditional costing negates other cost
drivers that may contribute to the cost of an item. Another disadvantage of solely using the
traditional costing system is that it can lead to bad management decisions because it excludes
certain nonmanufacturing costs.

11

05. Barriers and Opportunities of Alternative method (ABC Method)

Even though person Lucky Lanka company used the traditional method system to calculate
the overhead cost to overcome. Barrios of in that system and to calculate the overhead cost
accurately. Activity based costing system can be used As well as both advantages and
disadvantages can be generated in the organization by using Activity based system.

05.1 Barrios and opertuties of ABC Method

05.1 .I Barrios

Activity Based Costing system is very complex method. Therefore a huge cost have
spent to calculate the each product cost by using Activity based costing system then
traditional system.

When implementing the Activity Based Costing system the company have to pay
more tax rate than traditional method.

By now new technics are introduce to allocate the overhead cost. Therefore it is not
suitable using Activity Based Costing system. (Computer system)

Owners dont have enough knowledge about Activity Based Costing system to
implement it.

Unless present worker know about Activity Based Costing system new employees
have to recruited who have a wide knowledge about the Activity Based Costing
system.

A primary disadvantage of Activity Based Costing is that it is not possible to divide

some overhead costs such as the chief executives salary on a per products basic.

Too much attention to detail and control might obscure the bigger picture or make the
firm lose sight of strategic objectives in a quest for small savings making the firm.

12

05.1.II Opportunities

Lucky Lanka (pvt) Ltd company is a large scale company, because it have to spend
large amount of expenses for their productions. Therefore the most overhead cost is
appropriate method to allocate overhead cost is Activity Based costing method than
traditional method.

As well as Lucky Lanka (pvt) company manufacturing 27 products in large scale.

Allocating overhead cost according to the Activity Based Costing system method is
most effective to reach economic scale to the company.

As implement overhead cost according to the Activity Based costing system it is very
helpful to identify severally. Therefor proprietor can make decisions in accurately.

Activity Based Costing system is a special method for campaign with international
companies, Because it is implement according to the international standards.

As allocate individual overhead cost for each product, company can identify overhead
cost from owner to lowest employer and other external parties directly. Therefore
company can make decision accurately and efficiently. As well as company can
identify indirect cost for each unit of products distinctly.

Likewise the owner can determine the accurate decisions about the production and
profit. Therefore the company able to decide whether they can reach their vision or
not. If they cannot reach their vision successfully, they can use Activity Based
Costing method to efficacious their vision and other activities.

Using the Activity Based Costing method Lucky Lanka (pvt) Ltd Company can
increase their productivity, efficiency and effectiveness.

Lucky Lanka (pvt) Company fixation of selling price for multi products under
Activity Based Costing is fair and correct because overheads are allocated on the
basis of relevant cost drivers.

Fair the allocations of overhead occupy a considerable portion in the total cost
components. It is advantages of implement Activity Based costing method to Lucky
Lanka (pvt) company.

13

Greater costing accuracy is the primary benefit of activity-based costing. The Company
assign cost only to the products that require the activity for production. This method
eliminates allocating irrelevant costs to a product. Other advantages of activity-based costing
include an easy interpretation of cost for internal management, the ability to enable
benchmarking and a greater understanding of overhead costs. Implementing an activity-based
costing system within a company requires substantial resources. This can prove a
disadvantage for companies with limited funds. Another disadvantage of using activity-based
costing is that it is easily misinterpreted by some users.

14

Yogurt Traditional Method

Direct Material
Direct Labor

2 500 000

98 000

Over Head

Total Cost

13 029 325
15 627 325

15 627 325

Cost Per Unit

1 500 000 (Units)

10.42 RS

ABC Method (Yogurt)

Direct Material

2500 000

2 500 000

Direct

98 000

98 000

Electricity
Total Electricity Cost * 1000
Machine Hours
2202702 * 1000 = 1 134 244

1 134 244

1942

Salary
Total Salary Cost * 1500
Direct Labor Hours

3139062 *1500 = 1 928 170

1 928 170

2442
15

Depreciation
Total Depreciation cost * 1000
Machine hours
717 738
1393849 *1000 =717738
1942

Raw material others

Total Raw Material Others

* 1 500 000

No of Production Run Units

1038963*1500 = 492041

492 041

4167300

Fuel
Total Fuel Cost * 1000
Machine Hours

518745 * 1000 =267119

267 119

1942

Others

Others Cost

* 1500

Direct Labor Hours

4736004 *1500 = 2909094

2 909 094

2442
TOTAL COST

10 046 406
16

Cost Per Unit

Total Cost
No of Production

10046406
1500000
6.7 Rs

According to the given information for yoghurt product from Lucky Lanka (pvt) Ltd
company their traditional method cost per unit is Rs10.42.As well as Activity Based Costing
system method cost per unit is Rs.6.70. According to our opinion Activity Based Costing
system method is more profitability to Lucky Lanka (pvt) Ltd Company based on this
information. Yoghurt product is over cost than Activity Based Costing system method.
Therefore Lucky Lanka (pvt) Ltd Company should applied Activity Based Costing system to
determine the yoghurt cost per unit for more accurate accounting. As not given accurate
information we use direct labor hours as cost drives for compute the Activity Based Costing
system method. Therefore we cannot certify this result is not accurate.

17

06. Outcomes of the report writing

We selected the lucky Lanka Pvt Ltd manufacturing firm to study its overhead allocation
system because they are Production Company in Matara area. Firstly we got an opportunity
to meet the owner in the financial department and got great ideas with an experience
regarding the overhead allocation.
They explain about their Over Head allocation system and they discuss with us about their
system. But they did not use standard method for allocate their Over Head and these days he
had assigned for studding a new method allocating overhead cost to the accounting
department. But he said that the result was pending yet. Finance Manager discuss with us
about the system clarifications and suggestion. We give our ideas and our knowledge about
Over Head allocation method. We emphasized barriers of their existing overhead allocation
method related traditional method.
Owner of the company give the chance to us do their overhead allocation in their factory as a
one day workshop. We calculate overhead cost of the company through using Activity base
costing method. Its had a great chance to use our theoretical method to use in practical
purpose. All member of our team had a great chance to increase practical knowledge doing
this work in that day.
And also we face lots of difficulties to doing that theoretical part using as a practical usage.
All our members solve that problem discuss with Factory Manager of Lucky Lanka milk
processing co.Ltd. All members of our team got a great experience doing this theoretical
things as a practically in the company.
This is larger scale manufacturing company in Sri Lanka. Therefor we face lots difficulties to
allocate various type of Over head cost in that company. We identify various type of cost that
company and allocate that cost using our Activity Base Costing Method.
All members of our group successfully involve to their programme and get a great idea about
practically usage of Activity Base Costing method and Traditional Method .

18

07. Conclusion
According to our assignment requirements, we select Lucky Lanka Milk processing Co.Ltd
as a company. First we discussed with owner of the company about their Overhead cost
allocation method. According to their information they use Traditional Method for their
overhead allocation.. But it is not the pure traditional method that we are learned. The
Chairman Mr. Lal Keerthi Amarasiri Gunawardhane who is the owner of the company, add
some secret value or percentage for their each unit cost of production.
In this assignment we are expected to evaluate the existing method (traditional method) and
alternative method (Activity Based Costing system) for Lucky Lanka pvt ltd Company to
compute their unit cost effectively and most accurately. An then we represent outcomes of
doing this type of assignment.
According to our team members opinion Lucky Lanka milk processing co.Ltd want to use
new overhead allocation method to their company because existing allocation method will
directly badly affect to company.

19

07.References

T.Lucy (TL) ,Management Accounting ,5 th edition, Book Power, Landon 2003

www.luckylankamilkproceessing.lk

20

08. Appendices

08.I certify letter of the company

21