LAHORE SCHOOL OF

ECONOMICS

MANAGERIAL ACCOUNTING

MBA 2
SECTION: A

NAMES
Saad Shakeel
Sidr Mehmood
Ammar Naqvi

Date: 5th April 2016

Day: Tuesday

SUBMITTED TO: MS. Nadia Hassan

FINAL PROJECT
MAPLE LEAF
Table of Contents
Executive Summary

The Kohinoor Maple Leaf Group was born from the trifurcation of the Saigol group of companies and
is a reputable and leading manufacturer of textiles and cement. KMLG comprises of Kohinoor Textile
Mills limited (KTML) and Maple Leaf Cement factory limited (MLCF). Both companies are
incorporated in Pakistan and are listed on stock exchange.
Maple Leaf Cement is the third largest cement factory in Pakistan. It was set up in 1956 as a joint
collaboration between the West Pakistan Industrial Development Corporation and the government of
Canada. The two products are OPC and White cement.
The report covers an extensive analysis of income statement of maple cement and the cost of goods
sold. The report covers the application of activity based costing and the break even analysis and future
furcating of the manufacturing company.
Lastly an extensive conclusion and recommendation for the entire analysis has also been provided.
Introduction
Company Background
The Kohinoor Maple Leaf Group was born from the trifurcation of the Saigol group of companies and
is a reputable and leading manufacturer of textiles and cement. KMLG comprises of Kohinoor Textile
Mills limited (KTML) and Maple Leaf Cement factory limited (MLCF). Both companies are
incorporated in Pakistan and are listed on three stock exchanges of the country.

History of Maple Leaf:

1956, MLCFL was established by the West Pakistan Industrial Development Corporation (WPIDC)
and incorporated as Maple Leaf Cement Factory Limited. The capacity of the plant was 300,000
tons clinker per annum.

1967, a company with the name of White Cement Industries Limited (WCIL) was established with
the clinker capacity of 15,000 tons per annum.

1974, under the WPIDC Transfer of Projects and the Companies Act, 1913, the management of two
companies namely, MLCFL and WCIL were transferred to the newly established State Cement
Corporation of Pakistan (SCCP).

1983, SCCP expanded WCILs white cement plant by adding another unit of the same capacity
parallel to the existing one; it increased total capacity to 30,000 tons clinker per annum.

1986, SCCP set up another production unit of grey cement under the name of Pak Cement Company
Limited (PCCL) with a capacity of 180,000 tons per annum.

1992, MLCFL, WCIL and PCCL were privatized and transferred to the KMLG. All three companies
were merged into Maple Leaf Cement Factory Limited on July 01, 1992.

1994, the Company was listed on all Stock Exchanges in Pakistan.

1998, a separate production line for grey Portland cement of 990,000 tons per annum clinker capacity
based on most modern dry process technology was installed.
2000, Maple Leaf Electric Company Limited (MLEC), a power generation unit, was merged into the
Company.

2004, the coal conversion project at new dry

2005, dry process plant capacity was increased from 3,300 tpd to 4,000 tpd through debottlenecking
and up-gradation of equipment and necessary adjustments in operational parameters.

2006, a project to convert the existing wet process line to a fuel efficient dry process white cement
line commenced its commercial production. Profit after tax was reported PKR 1,059 million.

2007, the Company undertook another expansion project of 6,700 tpd grey clinker capacity which
commenced its commercial production on November 01, 2007.

2008, two existing lines of white cement 50 tpd each clinker capacity converted into oil well cement
plant which started its commercial production.

2011, the Company successfully started Waste Heat Recovery Boiler Plant.

2012, the Company started earning profit and recorded PKR 496 million profit after tax.

2013, the Company earned the highest ever record profit after tax of PKR 3,225 million.

2014, the Company and Pakistan Railway signed an agreement to transport coal and cement from
Karachi to Daudkhel and vice - versa.

2015, the Company recorded the highest ever turnover of PKR 20,720 million as well as profit after
tax of PKR 3,454 million. The Company reduced its debt burden by 46% as compared with last year.
The Company has proposed a final cash dividend of 10% in addition to interim cash dividend of 10%
which has already been paid.

Capacity
At the time of privatization in 1992, the capacity of Maple Leaf to produce Ordinary Portland Cement
(OPC) was 1000 tons per day (tpd). A second plant of 4000 tpd was commissioned in 1998 and a third
plant of 6700 tpd came into production in 2006. At present total capacity to OPC is 10700 tpd. The
capacity of White Cement has also increased from 100 tpd to 500tpd with the addition of a new plant.
This plant also has provisions for doubling the capacity to 1000tpd. Presently Maple Leaf cement has
8% of the market share of OPC and is a leading brand in Pakistan with a diverse customer base. It is
also the largest producer of White Cement in the country with more than 90% of market share.

Technology
The plants of 4000 tpd, 6700 tpd and of White Cement are state of the art and have been supplied by
FLSmidth in Denmark. In order to ensure the highest efficiency and process control the plants
comprise of equipment with the latest design and technology. To maintain the highest quality
standards a laboratory has also been set up at site for the testing of raw materials and cement. All
Maple Leaf plants comply with National Environment Control standards.

Company Vision and Values

Vision
In order to remain competitive in the market the management at Maple Leaf continuously reevaluates
its business strategies. With the increase of furnace OIL PRICES the company adopted coal as a more
cost efficient and environmentally friendly fuel for kiln firing. Today the management believes that
the future lies in exploring the possibilities of alternative and cheaper fuels such as waste firing. This
would further reduce production costs whilst promoting a culture of environmental awareness, health
and safety.
Values
Maple Leaf Cement is committed to run an efficient and profitable business and therefore aims to
employs cutting edge technology to ensure energy efficiency and the optimum use of natural
resources. The visionary and experienced management drives the company to set goals that position
Maple Leaf ahead of the competition and as a key player in the cement industry.

Product
Cement
Maple Leaf Cement is the third largest cement factory in Pakistan. It was set up in 1956 as a joint
collaboration between the West Pakistan Industrial Development Corporation and the government of
Canada. It is strategically located at Daudkhel (District Mianwali) in Northern Pakistan, which is an
area rich in raw materials required for the production of cement. Kohinoor acquired the
ownership and management of Maple Leaf Cement under the privatization policy
of the government of Pakistan in 1992. Presently Kohinoor Textile Mills is the
holding company for Maple Leaf cement.
The two main products of Maple Leaf Cement factory are:
OPC (Ordinary Portland cement). With a capacity of 10700 tons per day.
White Cement. The present capacity is 500tpd.

The Kohinoor Maple Leaf Group having a vast vision of human resources of
management emphasizes on the policies related to the employees and workers.
There are a number of policies that are working active and are popular among
the working individuals and accepted whole heartedly as no one is left behind in
the rules and regulations. Every individual gets the calculated part of benefit
according to his or her positions in the Kohinoor Group.

Benefits of Managerial Accounting

Price Setting:
The prices of product can only be fixed by the company if they determine the cost correctly. In case of
incorrect cost estimation, a high price may lead to incompletion of orders and in case of low price it
will lead to a loss. Therefore its the managerial accounting that helps in right price setting thus leads
towards profits.
Prevents Losses:

It helps prevent losses. For example, a company product may suffer not because of its cost of
production or price but because of the output not matching the capacity. Such information is only
obtained from cost accounting.
Classification and Subdivision of Costs

In the contrast to a single profit or loss figure supplied by general accounting, the cost
accounting classifies costs and income by every conceivable subdivision of the business
enterprise. In a good costing system data regarding costs by departments, processes, functions,
products, orders, jobs, contracts and services can easily computed.

Profitable or Unprofitable:

It tells about the activities that are profitable and that are unprofitable. This will decrease costs that
are unnecessary and also decrease additional expenses. This will ultimately increase the efficiency
of the product.

Budgeting:

In a good cost accounting system, preparation of various budgets periods in advance of actual
production and sale of goods is necessary. These budgets include budgeted statement of profit,
budgeted cost of production, budgeted cash receipts and payments, and so forth, showing the plans
of the management for future periods and they reflect the expected results of these plans
 Measurement and improvement of efficiency:

It tells about how efficiency can be increased and when it declines. For example if a price of
Product A was 50 and its price now is 65, than the efficiency of the product has declined.
This can be tracked through the cost if the cost has increased due to increase in prices of raw
material or some other reason. The reason can then be eliminated or improved to increase
the efficiency.

Planning and Control:

The right cost can help in planning various activities of the product. Also the management
will be able to control the materials being used for the product. The control and planning of
material will allow them to avoid any spoilage of materials and will allow information for re
order point of materials so there is no idle time in production period.
Reliable Check on General Accounting

Finally, an efficient and proper system of cost accounting is a most reliable and
independent check on the accuracy of the financial accounts. This check made effective
through reconciliation of the balance of profit or loss shown by the costing profit and
loss account and the balance of profit of profit or loss revealed by the general
accounting profit and loss account
Thus we can conclude that cost accounting helps in:
Measuring performance
Reducing or managing costs
Determining the fees or prices for goods and services
Deciding to authorize, modify or discontinue a program or activity
It reveals profitable and unprofitable activities.
It helps in controlling costs with special techniques like standard costing and budgetary
control
It helps in deciding the selling prices, particularly during depression period when prices
may have to be fixed below cost
It helps in inventory control
Cost audit system which is a part of cost accountancy helps in preventing manipulation
and frauds and thus reliable cost can be furnished to management

Page | 9
Cost Accumulation Method Used
Stores, spare parts and loose tools are valued at weighted average cost except for items in
transit which are stated at cost incurred up to the balance sheet date. For items which are
slow moving and/ or identified as surplus to the Company's requirements, adequate
provision is made for any excess book value over estimated net realizable value. The
Company reviews the carrying amount of stores, spare parts and loose tools on a regular
basis and provision is made for obsolescence
Stocks of raw materials, work in process and finished goods are valued at the lower of
weighted average cost and net realizable value. Cost of work in process and finished goods
comprises of direct materials, labor and appropriate manufacturing overheads. Net realizable
value signifies estimated selling price less costs necessary to be incurred to make such sale.
Markup bearing borrowings are recognized initially at cost, less attributable transaction
costs. Subsequent to initial recognition, markup bearing borrowings are stated at original
cost less subsequent repayments, while the difference between the original recognized
amounts (as reduced by periodic payments) and redemption value is recognized in the profit
and loss account over the period of borrowings on an effective rate basis. The borrowing
cost on qualifying asset is included in the cost of related asset.
Liabilities for trade and other amounts payable are carried at cost, which is the fair value of
the consideration to be paid in future for goods and services received, whether or not billed
to the Company.
Moreover if talk about the process of costing, There are two types of cost accumulation
method used by different manufacturing firms; job costing and process costing. Maple leaf
has adopted process costing method since it tends to manufacture relatively similar product
on large scale. Process costing requires careful assessment of demand and costing. In a
nutshell, forecasting is crucial to determine the demand and costing requirement for the
future. Besides facilitating in having accurate track of inventory, through process costing
managers of maple leaf are able to ascertain the consistency in term of qualities in entire
departments and compare performance over time. Generally at maple leaf the overhead is
based on the prevailing financial position of the company. Management at maple leaf strives
to minimize the forecasting error by comparing actual results with the budgeted ones.

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Analysis of Income Statement
Horizontal analysis:
Items 2013 2014 2015
Sale-net 100%% 109% 119%
Cos of sales 100% 110% 117%
Gross profit 100% 108% 124%
Distribution 100% 132% 165%
Admin expense 100% 117% 150%
Other charges 100% 118% 157%
Other income 100% 195% 112%
Profit from operation 100% 104% 115%
Finance cost 100% 86% 64%
Profit before tax 100% 114% 142%
Taxation 100% 1225% 1686%
Profit after tax 100% 99% 111%

Horizontal Analysis - Profit & Loss Account

Turnover increased over the years from 2013 to 2015; due to increase in sales prices and
sales quantities except for the years 2010 and 2011 where turnover was low due to low sales
prices and depressed demand. Gross Profit has been remarkably increased from the year
2013 to 2015 i.e. overall 24% increase as compared to year 2013, due to increase in margins
on account of better sale prices, low coal prices and low power cost due to WHRP
installation. Moreover, in current year gross profit increased by 16% due to increase in price
and other cost reduction measures. Profit from Operations exhibited increasing trend from
year 2013 to year 2015 mainly due to better margins. There is a robust growth in operating

Page | 11
earnings emanated mainly from better cement prices and efficient running of Waste Heat
Recovery Plant along with other cost reduction measures adopted by the Company.
Administration costs and other operating expenses were effectively controlled during the
current period. Finance Cost was the highest in year 2009, mainly due to high gearing of the
company on account of plant expansion. Moreover, it reduced sharply in year 2010 due to
rescheduling of major loans of the Company. However, finance cost has shown reducing
trend from year 2013 till year 2015 mainly due to low gearing of MLCF on account of debt
repayments, reduction in KIBOR rates and appreciation of Pak Rupee. Since last three years
overall Profit before Taxation improved on account of increased margins and decrease in
finance cost. Profit after Taxation decreased in current year as compared to previous year
mainly due to application of Alternate Corporate Tax (ACT) in current year and due to
related deferred tax provision.

Thus we can conclude:

The climb of turnover of the Company since 2013 continued this year as well. Despite sales
price remaining relatively stable throughout the year, sales in rupee terms were higher,
which is a very positive sign.
The Company has almost doubled its achievement of increase in Gross Profit from last year
as the increase is 14.9% compared to 8% last year. This increase in gross profit was quite
substantial in 2012 and 2013 owing to cement industry benefiting from increase in prices.
The major contribution this year has been the decline in coal prices, reduction in HFO cost
and other cost reduction measures adopted by the Company.
Due to the above steep movement in gross profit, profit from operations also exhibited a
substantial upward jump reaching a new high point in the history of the Company.

Vertical analysis:

Items 2013 2014 2015

Sale-net 100%% 100% 100%
Cos of sales 65% 65.6% 63.82%
Gross profit 34% 34.39% 36.18%
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Distribution 4.67% 5.56% 6.34%
Admin expense 1.46% 1.56% 1.84%
Other charges 0.96% 1.04% 1.27%
Other income 0.24% 0.42% 0.22%
Profit from operation 28.04% 26.65% 26.95%
Finance cost 9.82% 7.72% 5.23%
Profit before tax 18.22% 18.93% 21.72%
Taxation 0.36% 4.01% 2.05%
Profit after tax 17.86% 14.92% 16.67%

Gross profit percentage increased to 36% in year 2015 which was lowest in year 2013 i.e.
34%. This growth over the years was mainly due to increase in sales prices of cement,
effective mix of local and export sales and various cost reduction factors to cater other
inflationary factors. Operating profits of the Company has decreased from 28 in year 2013 to
27% in year 2015 due to increased in distribution costs as with the increase in production
units, production increases thus the distribution cost due to huge export dispatches. Profit
after Tax started improving from year 2012 and highest net profit percentage was 19% in
year 2013. However, in year 2014 and 2015, net profit percentage declined due to provision
of Alternate Corporate Tax and deferred taxation. Gas and Power tariff hike along with
massive load shedding of natural gas and electricity have unfavorably impacted profitability
during the period. However, the Company is efficiently utilizing its Waste Heat Recovery
Plant along with use of alternative fuels to counter this. The Company also benefited from
lower prices of imported coal.
Thus we conclude that due to reduced power and coal rates variable cost decline and coupled
with other cost reduction measures ,the gross profit margin was higher than that of large year
,36% , with an increase of 2 %operating profits remain somewhat stable as the distribution
costs were higher than the last year this is due to increase in distribution cost due to more
shipments and increase in admin expenses ,however compared to the 2010 these costs are
much lower due to better mix of local and export sales. The company has continued its
trends of breaking landmarks by beating last years net profit before tax; this has been
possible by better sales and reduced finance cost.

Profit and loss account:

Page | 13
Items 2013 2014 2015
Sale-net 17,357,376
18,968,547 20,720,054

Cos of sales (11,312,341) (12,445,562) (13,224,431)

Gross profit 6,045,035 6,522,985 7,495,623

Distribution (797,751) (1,054,336) (1,313,696)

Admin expense (254,065) (296,689) (381,363)

Other charges (167,239) (197,372) (263,187)

Other income 41,287 46,173
80,585

Profit from operation 4,867,267 5,055,173 5,583,550

Finance cost (1,704,652) (1,464,772) (1,082,639)
Profit before tax 3,162,615 3,590,401 4,500,911

Taxation 62,080 (760,227) (1,046,616)

Profit after tax 3,224,695 2,830,174 3,454,295

Graphical representation:
P&L 2015 P&L
2014

Page | 14
 P&L-22015

P & L- 2014

Decline in commodity prices, particularly coal prices, during the period resulted in lower
fuel cost. Power cost also reduced due to fall in electricity charges on the back of fuel price
adjustments following declining oil prices. Moreover, during the 3rd quarter of the current
period, the Company has fully operated its Furnace Oil based engines due to improved
viability owing to low furnace oil prices. However, during the year under review, increase in
packing material costs has slightly depleted margins. However, the Company is efficiently
utilizing its Waste Heat Recovery Plant along with the use of alternative fuels to counter this
which resulted in lowering the weighted average cost of power. The Company is also
continuously benefiting from lower inland transportation costs through haulage via the

Page | 15
railway network resulting in reasonable savings.

Keeping in view the above factors, gross profit rose by Rs. 973 million to Rs. 7,496 million
in the current period, compared to Rs. 6,523 million in the corresponding year this
depicts better operational performance than last year.

Due to efficient monitoring and development of operating procedures, administration

and other operating expenses have been kept in check. Operating profits rose by
Rs.529 million to Rs. 5,584 million during the period, compared to Rs. 5,055
million in the corresponding period last year.

Page | 16
 Projected Income Statement
Items 2013 Inc/dec 2014 Inc/dec 2015 Avg 2016
growt
h rate
Sale-net 17,357,3 9.2% 9% 22638325.
9.3% 18,968,547 20,720,0
76 54 47

Cos of sales (11,312,3 10.0% (12,445,562) 6.3% (13,224,43 8% (1430062

1) 0.04)
41)

Gross profit 6,045,03 7.9% 6,522,9 14.9% 7,495,623 11% 8337705.4

5 85 3

Distribution (797,751) 32.2% (1,054,336) 24.6% (1,313,69 28% (1686542.

6) 06)

Admin expense (254,065) 16.8% (296,689) 28.5% (381,36 23% (467773.1

3) 0)

Other charges (167,239) 18.0% (197,372) 33.3% (263,187) 26% (330778.1

4)

Other income 41,287 95.2% - 46,173 26% 58288.74

80,585 42.7%

Profit from operation 4,867,26 3.9% 5,055,173 10.5% 5,583,550 7% 5,910,90

7 0.87

Finance cost (1,704,65 - (1,464,772) - (1,082,639) -20% (865243.4

2) 14.1% 26.1% 4)

Profit before tax 3,162,61 13.5% 3,590,401 25.4% 4,500,91 19% 5045657.4
5 1 3

Taxation 62,080 1124. (760,227) 37.7% (1,046,616) 20% (1059588.

6% 06)

Profit after tax 3,224,695 - 2,830,174 22.1% 3,454,295 5% 3986069.3

Page | 17
 12.2% 7

We have calculated the growth rate from 2013-2014 and 2014-2015 in the above table. After
that the average growth rate of these two time periods has been calculated. This average
growth rates are our assumption for the future budget. We have grown some components of
the income statement like sales, CGS, and all the expenses using the average growth rates
and then the gross profit, operating profit and net profit has been calculated. We will use the
same growth assumptions in the further analysis.

Analysis of Cost of Goods Sold

We start by tracking the flow of all the cost that made up cost of goods sold. So for this, we
have to find direct material used in 2015, direct manufacturing labor cost, manufacturing
overhead, beginning and ending work in process inventories, beginning and ending
inventories of finished goods. For this, we did the analysis; here all numbers are expressed
in Rs.

Step 1: Cost of direct material used in 2015. We included raw material, packaging material,
stores consumed, and cement stock write off, fuel, water and power expenses in direct
material used to produce finished goods. This comes out to be Rs. 10,347,118

Page | 18
Step 1:

Direct material Rs:000

789,966
Raw material consumed

1,026,194
Stores consumed

1,352,557
Packaging material consumed
7109716
Fuel and power

10,278,433
Total direct material used

Step 2: Total manufacturing cost incurred in 2015. It refers to all direct manufacturing costs
and manufacturing overhead costs incurred in 2015 for all goods worked on during the year.
We classify then into three categories.

Direct material used

Direct manufacturing labor
Manufacturing overhead

Total direct manufacturing labor cost calculated as:

Step 2:

Page | 19
 Direct manufacturing labor Rs:000
cost
561,940
Salaries, wages and other
benefits

Total manufacturing labor 561940

cost

Total indirect manufacturing overhead cost calculated as:

Indirect material Rs 000

381,607
Repair and maintenance

135,643
Other expenses

27,163
Rents, rates and taxes

55,964
Insurance

1,743,560
Depreciation

0
Amortization

83,882
Vehicles maintenance and running

68,685
Cement stock write off
2,496,504
Manufacturing overheads cost

All the costs are indentified and calculated. Now add all the three classified costs to get total
manufacturing costs incurred in the accounting year 2015.

Step 2:

10,278,433
Total direct material used

Page | 20
Total manufacturing. Labor cost 561940
2,496,504
Manufacturing overhead cost

13,336,877
Total manufacturing cost incurred 2015

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Step 3: Cost of goods manufactured in 2015. This refers to the cost of goods
brought to completion, whether they were started before or during the
current accounting period. Here, some of the inventory was already
company had, some was incurred in this accounting period and some was
kept as ending inventory. We calculated Cost of goods manufactured as:

Step 3:

Rs 000

Beginning W.I.P inventory ,July 697,455

1,2014
13,336,877
Total manufacturing cost incurred in
2015
14,034,332
Total manufacturing cost to account
for

Ending W.I.P inventory, June (697,357)

30,2015
13,336,975
Cost of goods manufactured

Step 4: Cost of goods sold in 2015. The cost of goods sold is the cost of finished goods
inventory sold to customers during the current accounting period. We calculated COGS as:
Step 4:

Rs 000

Beg inventory of finished good July 1 2014 284,566

Cost of goods manufactured 13,336,975

Provision against slow moving finished good 0

Ending inventory of finished goods (397,110)

13,224,431
COGS

Page | 22
This cost of goods sold is and expense that is matched against revenues.
Total cost of goods sold calculated as: Rs. 13, 224, 431. (In thousands)

Page | 23
Application of Activity Based
Costing
Activity based costing is one of the best tools for refining a costing system. ABC refines a
costing system by identifying individual activities as the fundamental cost objects. Here, and
activity is a task or unit of work with specific purpose. To make strategic decisions, ABC
systems identify activities in all functions of the value chain, calculate costs of individual
activities, and assign costs to costs objects such as products and services on the basis of the
mix of activities needed to produce each product or service. Managers choose the level of
detail to use in a costing system by evaluation the expected costs of the system against the
expected benefits that result from better decisions. Costs can be classified as direct and
indirect based on its traceability.

Direct Costs: Some costs are direct costs because they can be traced and are directly
involved in producing the product.
Indirect Costs: Some costs are easily traced down. Each of the activity related cost
is homogenous. This, each activity cost pool includes only those narrow and focused
sets of costs that have the same cost driver. We have identified 9 indirect costs that
are mentioned below.
Cost-allocation bases: For each activity cost pool, we use the cost driver as a cost-
allocation base. These cost allocation bases that we identified are as follow:

Indirect costs Cost 2015 2014 2013

Drivers
% % %
Fuel and Power Machine 710971 56.7% 733598 61.9% 670945 63.97
Hours 6 9 1 %
Rent, rates and Factory 27163 0.2% 31121 0.3% 1027 0.01%
taxes square
footage
(space)
Stores and Machine 102619 8.2% 795578 6.7% 561542 5.35%
spares Hours 4
Depreciation Machine 174365 13.9% 166488 14.0% 161498 15.40
Hours 0 3 3 %
Amortization Usage 0 0.0% 0 0.0% 8797 0.08%
Salaries, wages Labor Hours 561940 4.5% 486219 4.1% 437077 4.17%
and benefits
Repairs and Machine 381607 3.0% 189905 1.6% 67686 0.65%
maintenance Hours

Page | 24
 Provision for slow Machine 0 0.0% 0 0.0% 36033 0.34%
moving and Hours
obsolete stores
Distribution Labor Hours 131369 10.5% 105433 8.9% 797751 7.61%
Expenses 6 6
Administrative Labor Hours 381363 3.0% 296689 2.5% 254065 2.42%
Expenses
Total Indirect 125452 100.0% 118547 100.0% 104884 100.00
Costs 39 20 12 %

We have identifies certain indirect costs and their cost drivers. Cost driver for fuel, power,
stores, spares, depreciation, repair and maintenance, obsolete stores is machine hours
whereas cost driver for salaries, wages, distribution and administrative expenses is labor
hours. Cost Drivers for rent and amortization are factory square footage and usage
respectively. Their percentages according to their activity have been calculated from the total
indirect cost. The higher percentage is for fuel and power in the past three years for the
company.

Machine Labor hours Factory usage

hours Salaries, wages square foot amortization
fuel and power and benefits
stores and spares Administration Rent, rates and
depriciation distribution taxes
expense
repair and
maintaince
provision for slow
moving

Page | 25
Breakeven Analysis

20720054
Revenue

4589188
Variable cost
16130866
Contribution margin

11335827
Fixed manufacturing costs

5862390
Operating income

78%
Contribution margin%

13189830
Breakeven revenue
5.44
Selling price
2420732.051
Breakeven no. of units

Thus based on the breakeven revenue and breakeven cost per unit we come up with the fact
that for breakeven the number of units to be sold are 2420732 that are less than that of
actually sold in 2015.

Costing and Pricing

Page | 26
Lets discuss the costs that are use for budgeting and prices that are budgeted.

Price Selling price per unit

DM, DL
Costs MOH
COGS

Price:

Selling price of 2014 = Rs. 6.998834

Selling price of 2015 = Rs. 6.920552
From this we calculated selling price of 2016 to be = Rs. 6.959693
As the production decreases in this year from previous year, so there is a change of further
decrease in production in coming year.
Costs:

Manufacturing overhead costs calculated to be as: Rs. 2,496,504

Manufacturing labor cost budgeted as: Rs. 561940
Direct material used for manufacturing in 2016 will be Rs. 10,278,433
Cost of goods sold calculated as Rs. 13,224,431

These costs are used to make budget for next year that is 2016. We used the amounts of
2013,2014 and 2015 we use the average growth rate of the last three years thus calculated
the budgeted revenues and costs for the 2016.

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Budgeting:
2015 2014 2013

3,005 2,7 2,7

Quantity Produced (M Tons) ,456 53,142 15,643
2,960 2,7 2,6
Quantity Sold (M Tons) ,501 40,901 87,911
4
Finished Goods Inventory 4,955 12,241 27,732

25,393 23,2 20,6

Gross Sales ('000) ,341 63,584 71,865

Price 8.58 8.49 7.69

Revenue Budget
The revenue for 2016 has been grown by using the assumption of average growth rate of 9%. The
price has been increased using the inflation rate of 4%. Using these assumptions, the revenue budget
has been calculated in terms of units. The budget indicates that the revenue for the year 2016 has
increased due to the increase in the price.
REVENUE BUDGET
Units Selling Price Total Revenue
Cement 2,564,648 8.83 22,638,325

Production Budget
The production budget for 2016 has been calculated in the above table. Budgeted units in sales have
been taken from the revenue budget and using the past trends, finished goods inventory has been
assumed to calculate the total required units. Beginning finished goods inventory, which was the
ending for the previous year has been subtracted to calculate the units of finished goods to be
produced.
PRODUCTION BUDGET Cement
Budgeted Units Sales 2,564,648
Target Finish Good Inventory 25,000
Total Required Units 2,589,648
Beg, Finished Goods Inventory 12,241
Units of Finished Goods to be Produced 2,577,407
Direct Material Purchase Budget
The direct material purchase budget has been calculated based on the budgeted direct materials to be
used, the beginning inventory of direct materials and the target ending inventory of direct materials.

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 Targeted ending inventory is added to the direct material used and then beginning inventory has been
subtracted from the value to get the purchases for the year.
DM Usage Budget in Rupees Material
Beg, DM for cement 56085
Purchases to be made 917520

Ending DM for Cement 60000

Direct Material Consumed 913605

DM Purchase Budget
DM used 913,605
Target Ending Inventory of DM 60,000
Beg Inventory of DM 56,085

DM to be Purchased 917,520

Manufacturing Overhead Cost Budget

VARIABLE COST
Raw materials consumed 913,605
Packing materials consumed 1,548,162
Stores and spares parts 1,388,772
Repairs and maintenance 918,745
Work in Process (167)
Finished Goods (1,712,246)

TOTAL VARIABLE COST 3,056,871

FIXED COST
Fuel and Power 7,332,027
Other expenses 127,527

TOTAL FIXED COST 7,459,554

TOTAL MANUFACTURING OVERHEAD COST 10,516,425

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 Conclusion and Recommendation
After thoroughly analyzing the cost behavior and cost structure of Maple Leaf for the past
three years, it is important for the company to consider the following four elements to
improve its performance in the future:
Increase in Demand:

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Increase in demand of cement may result in increase in market price of bag which will
contribute towards better profitability and Earning per Share (EPS), which will ultimately
increase the share price.

Increase in Variable Cost:

Any Increase in variable cost (Mainly includes Coal, Power and Raw Material cost) may
badly effect the gross margins and will resultantly fall in the profitability and fall in EPS.
This may badly affect the market price of the share downward.

Increase in Fixed Cost:

Fixed cost which mainly consists of Financial Charges, Exchange losses, and other
overheads. If SBP discount rate goes up, rupee devaluation occurs and increase in inflation
happens than net profitability of the company will be affected and will have negative effect
on the EPS which results into fall in share prices. If the said factors happen on the positive
sides than share price will improve.

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References

http://www.kmlg.com/mlcf_annual_report_2013.pdf
http://www.kmlg.com/mlcf_annual_report_2014.pdf
https://www.boundless.com/accounting/textbooks/boundless-accounting-
textbook/valuation-and-reporting-of-investments-in-other-corporations-8/debt-held-to-
maturity-56/amortized-cost-method-275-3720/
http://www.investopedia.com/

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