Final Project Report of Cost Accounting

Abstract

This report is basically based on cost management and accounting. In this report
we select a cement manufacturing company. First of all we identified its business
process and departments. Further the flow of cost was determined. After
identifying the final cost of a product we determine its selling price considering
reasonable markup. Finally we compare the results of our company with the
results of an existing company which shows that our company has better cost
management and for this reason the profitability is high.

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Final Project Report of Cost Accounting

Introduction

Nature of the Business

At present there are 29 cement plants in the country with an installed capacity of
around 39 million tons per annum. All the cement plants are now in the private
sector. The average capacity utilization of cement plants during the fiscal years
2005-06, 2006-07 remained around 84% and 75 % respectively. Production
during 2007-08 is around 30 million tons at capacity utilization of around 80%.
The cement sector posted a growth rate of 4.71 percent during July-March 2008-
09.
Export of cement is allowed via land and sea routes. The export of cement
(including clinker) during fiscal year 2006-07 was recorded at 3.2 million tons.
Export during 2007-08 is around 7.7 million tons. While in year 2008-09 exports
recorded are 8.9 million tones. Presently Pakistan’s cement is being exported to
Afghanistan, India, Africa, and Middle East. For export of cement to India, the
cross border movement of Railway Wagons is in practice.
The import of cement and coal used as fuel for the cement plants is allowed at 0
% customs duty and 16 % sales tax. As per investment policy of the government
the import of plant machinery & equipment for manufacturing sector is allowed at
5% customs duty.

Why we selected this Business?

Presently, cement industry is rapidly growing, driven by growing construction
demand at home and abroad, as presently South East Asia region is facing huge
shortage of cement. However, Pakistan's cement sector is fully enjoying this
supply and demand gap, by getting tremendous export orders from Gulf
countries and India. Therefore, local cement sector has also attracted huge
foreign investment, which is expected to further rise in the upcoming months.

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Final Project Report of Cost Accounting

Improved infrastructure, cheapest labor and easy availability of raw material for
cement making are some chief reason behind the increasing foreign investment.
Some other reasons to select this business are:-
• High population growth rate demands housing facilities
• Foreign investment is attracted
• Growth rate of 31% in fiscal year 2007-08

Significance of this Business in Pakistan

Pakistan cement factories continue to make significant progress in cement
exports. Now Pakistan is ranked 5th in the world’s cement exports after a huge
increase of 47 percent in exports during last fiscal year.
According to the Global cement report, China maintained first position with 26
million tones in exports, while Japan got second position by exporting 12.6 million
tones of cement. Third largest cement exporter in world is Thailand with around
12 million tones, followed by Turkey which exported 11.6 million tonnes of
cement. Pakistan now at 5th position has left Germany behind by exporting 11
million tones of cement during last fiscal year. Germany now stands at 6th
position with 9 million tones exports.
Cement market experts told that Pakistan secured 5th position because of high
demand of cement in nearby countries and by capturing new markets such as
African countries, Qatar & Iraq. Pakistan could achieve the mark of 13 to 14
million tones exports by the end of the fiscal year keeping in view Indian market
which has once again started importing cement from Pakistan. The export of
cement from Pakistan to India showed a sharp decline after Mumbai attacks.
Cement Pakistan Company is actively contributing towards export of cement
from Pakistan.
According to the All Pakistan Cement Manufacturers Association (APCMA), local
dispatches were 19.3 million tonnes (down 14 percent YoY) however exports
showed an encouraging increase of 47 percent (YoY to 11.3 million tonnes)
during the last fiscal year.

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Final Project Report of Cost Accounting

According to experts, important factors contributing towards growth of cement

sector are “Record Public Sector Development Programme allocation (Rs. 621
billion) in the budget FY10, reduction in excise duty by Rs. 10 per bag and
declining interest rate scenario.
Local demand of cement in Pakistan will remain on high side due to the
reconstruction activities of devastated homes, shops and schools in Swat and
Malakand after Military operation. Overall Pakistan cement industry dispatches
are likely to grow 7 percent in July 2009. The growth in cement dispatches is
solely attributable to rising export volumes as domestic demand remained
depressed on every comparable time period.
Overall cement plants of Pakistan operated at 80 percent capacity utilization as
compared with 81 percent utilization in the same month of last year. Although
Fauji Cement has claimed 100% utilization during last year. Cement exports of
Pakistan continue to show healthy and positive growth trend and recorded 45
percent growth on Y-o-Y basis. However, on M-o-M basis, cement exports
represented a decline of 3 percent.
Weight of sea based cement exports during the month was recorded at 68
percent in overall cement exports as compared to 63 percent in July 2008. It is
important to note that cement exports to India during the month were recorded at
63,000 tonnes, which is lower when compared with the initial monthly average of
100,000 tonnes.

Objectives of the Study

One of the main objectives of this study is to excel in cost management and
accounting. It requires complete understanding about the industry, its practices
and policies. Also we should know about the regulatory authorities of this
industry.
Some other objectives are:-
• To know about the manufacturing process of the company and the flow of
process.
• To know about the flow of cost.

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Final Project Report of Cost Accounting

• To examine and evaluate the cost and sales price of the product.
• To prepare and analyze the financial statements of the selected company.
• To compare this analysis of selected company with existing company
financial statements.
• Lastly to get better understanding about the cost accounting procedures.

Methodology

Identification of Manufacturing Business

We want to start a cement business with the name “Saba & brothers Cement”.
In our business we manufacture the cement to sale in the market. Our Cement
industry typically produces Portland cement. Portland cement is a fine, typically
grey powder comprised of dicalcium silicate, tricalcium silicate, tricalcium
aluminate, and tetracalcium aluminoferrite, with the addition of forms of calcium
sulfate. Different types of Portland cements are created based on the use and
chemical and physical properties desired. Portland cement plants can operate
continuously for long time periods (i.e., 6 months) with minimal shut down time
for maintenance.
Stages of Cement Production
Following are the stages of cement production at a portland cement plant:
1. Procurement of raw materials
2. Raw Milling - preparation of raw materials for the pyroprocessing system
3. Pyroprocessing - pyroprocessing raw materials to form portland cement clinker
4. Cooling of Portland cement clinker
5. Storage of Portland cement clinker
6. Finish Milling
7. Packing and loading

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Final Project Report of Cost Accounting

Flow of Process

1
Raw
2
Material
Raw
Acquisitio
Milling
n

7 3
Packing
Pyro-
and
processing
Loading

6 4
Finish Clinker
Milling Cooler

5
Clinker
Storage

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Final Project Report of Cost Accounting

1. Raw Material Acquisition

Most of the raw materials used are extracted from the earth through mining and
quarrying and can be divided into the following groups: lime (calcareous), silica
(siliceous), alumina (argillaceous), and iron (ferriferous). Since a form of calcium
carbonate, usually limestone, is the predominant raw material, most plants are
situated near a limestone quarry or receive this material from a source via
inexpensive transportation. The plant must minimize the transportation cost since
one third of the limestone is converted to CO2 during the pyroprocessing and is
subsequently lost. Quarry operations consist of drilling, blasting, excavating,
handling, loading, hauling, crushing, screening, stockpiling, and storing.
2. Raw Milling
Raw milling involves mixing the extracted raw materials to obtain the correct
chemical configuration, and grinding them to achieve the proper particle-size to
ensure optimal fuel efficiency in the cement kiln and strength in the final concrete
product. Three types of processes may be used:
• the dry process,
• the wet process, or
• the semidry process.
If the dry process is used, the raw materials are dried using impact dryers, drum
dryers, paddle-equipped, rapid dryers, air separators, or autogenous mills, before
grinding, or in the grinding process itself. In the wet process, water is added
during grinding. In the semidry process the materials are formed into pellets with
the addition of water in a pelletizing device.
3. Pyroprocessing
In pyroprocessing, the raw mix is heated to produce Portland cement clinkers.
Clinkers are hard, grey, spherical nodules with diameters ranging from 0.32 - 5.0
cm (1/8 - 2") created from the chemical reactions between the raw materials.
The pyroprocessing system involves three steps:
• drying or preheating,
• calcining (a heating process in which calcium oxide is formed), and

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Final Project Report of Cost Accounting

• burning (sintering).
The pyroprocessing takes place in the burning/kiln department. The raw mix is
supplied to the system as a slurry (wet process), a powder (dry process), or as
moist pellets (semidry process). All systems use a rotary kiln and contain the
burning stage and all or part of the calcining stage. For the wet and dry
processes, all pyroprocessing operations take place in the rotary kiln, while
drying and preheating and some of the calcination are performed outside the kiln
on moving grates supplied with hot kiln gases.
4. Clinker Cooling
The clinker cooling operation recovers up to 30% of kiln system heat, preserves
the ideal product qualities. The most common types of clinker coolers are
reciprocating grate, planetary, and rotary. Air sent through the clinker to cool it is
directed to the rotary kiln where it nourishes fuel combustion. The fairly coarse
dust collected from clinker coolers is comprised of cement minerals and is
restored to the operation. Based on the cooling efficiency and desired cooled
temperature, the amount of air used in this cooling process is approximately 1-2
kg/kg of clinker. The amount of gas to be cleaned following the cooling process is
decreased when a portion of the gas is used for other processes such as coal
drying.
5. Clinker Storage
Although clinker storage capacity is based on the state of the market, a plant can
normally store 5 - 25% of its annual clinker production capacity. Equipment such
as conveyors and bucket elevators is used to transfer the clinkers from coolers to
storage areas and to the finish mill. Gravity drops and transfer points typically are
vented to dust collectors.
6. Finish Milling
During the final stage of Portland cement production known as finish milling, the
clinker is ground with other materials (which impart special characteristics to the
finished product) into a fine powder. Up to 5% gypsum and/or natural anhydrite
are added to regulate the setting time of the cement. Other chemicals, such as
those which regulate flow ability or air entrainment, may also be added. Many

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Final Project Report of Cost Accounting

plants use a roll crusher to achieve a preliminary size reduction of the clinker and
gypsum. These materials are then sent through ball or tube mills (rotating,
horizontal steel cylinders containing steel alloy balls) which perform the
remaining grinding. The grinding process occurs in a closed system with an air
separator that divides the cement particles according to size. Material that has
not been completely ground is sent through the system again.
7. Packing and Loading
Once the production of portland cement is complete, the finished product is
transferred using bucket elevators and conveyors to large, storage silos in the
shipping department. Most of the Portland cement is transported in bulk by
railway, truck, or barge, or in 43 kg (94 pound) multiwalled paper bags. Bags are
used primarily to package masonry cement. Once the cement leaves the plant,
distribution terminals are sometimes used as an intermediary holding location
prior to customer distribution. The same types of conveyor systems used at the
plant are used to load cement at distribution terminals.

Selection of Cost Accumulation Procedure

When a company takes different orders of the same product then company will
follow the job order costing procedure. As this company has to deal with different
departments but we selected the cement as a product, our company takes the
order of the same product so; we will apply the process costing procedure over
here.

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Final Project Report of Cost Accounting

Results

COST OF PRODUCTION REPORT

Cost of Production Report (Department 1)

Quantity schedule: Units Units

Units started 3, 50,000

Transfer to finish goods 3, 25,000
WIP 15, 000

(Complete as to mat: 50%, as to C.C: 60%)

Normal Loss 10,000
3, 50,000

Cost charged by the department: Cost Units P.U

Material 17,622,500 332,500 53

Direct labor 6,680,000 334,000 20
FOH 9,018,000 334,000 27
Total 33,320,500 100

Cost Accounted for as follows:

Transfer and complete (325000*100) 32,500,000
WIP:
Material (7500*53) 397,500
Direct labor (9000*20) 180,000
FOH (9000*27) 243,000
Total 33,320,500

Equivalent production units:

Material Labor FOH
Transferred out: 325,000 325,000 325,000
WIP 7,500 9,000 9,000
Total 332,500 334,000 334,000

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Final Project Report of Cost Accounting

Cost of production report (For Department 2)

Quantity schedule:
Units Received from previous Dept 3, 25,000
Transfer to finish goods 275,000
WIP 35, 000 (Complete as to C.C 40%)
Abnormal Spoilage 15,000 (Complete as to C.C 60%)
325,000

Cost charged by the department: Cost Units P.U

Cost From Preceding Dept 32,500,000 325,000 100
Cost Charged By Dept
Direct labor 5,960,000 298,000 20
FOH 7,748,000 298,000 26
Total 46,208,000 146

Cost Accounted for as follows:

Transfer and complete (275,000*146) 40,150,000
WIP
Cost from Preceding Dept (35,000*100) 3,500,000
Direct labor (14,000*20) 280,000
FOH (14,000*26) 364,000
Abnormal loss
Cost from preceding Dept (15,000*100) 1,500,000
Direct labor (9,000*20) 180,000
FOH (9,000*26) 234,000
Total 46,208,000

Equivalent production units:

Labor FOH
Transferred out 275,000 275,000
WIP 14,000 14,000
Abnormal loss 9,000 9,000
Total 298,000 298,000

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Final Project Report of Cost Accounting

Cost of production report (For Department 3)

Quantity schedule:
Units Received from previous Dept 275,000
Transfer to finish goods 205,000
WIP 50, 000 (Complete as to Mat 55% & C.C 70%)
Normal 20,000
275,000

Cost charged by the department: Cost Units P.U

Cost From Preceding Dept 40,150,000 275,000 146
Cost Charged By Dept
Direct Material 6,045,000 232,500 26
Direct labor 2,880,000240,000 12
FOH 3,840,000 240,000 16
Total 52,915,000 200
Adjustment for Normal Loss 11.4509
Adjusted cost Charged by Dept 211.4509

Cost accountants for as follows:

Transfer and complete (205,000*211.4509) 43,347,435
WIP
Cost from Preceding Dept (50,000*157.4509) 7,872,545
Direct Material (27500*26) 715,000
Direct labor (35,000*12) 420,000
FOH (35,000*16) 560,000
Total 52,914,980

Equivalent production units:

Material Labor FOH
Transferred out 205,000 205,000 205,000
WIP 27,500 35,000 35,000
Total 232,500 240,000 240,000

SELLING PRICE DETERMINATION

Sales = cost of good sold + markup

250 = 211.4509 + 38.5491

100% = 84.5803% + 15.41964%

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Final Project Report of Cost Accounting

COST OF GOOD SOLD STATEMENT

Cost Of Goods Sold Statement

Opening Inventory 4,392,364

Cost of Purchases:

Purchases 15,717,583

Add trans Exp 2,500,483

Cost of Purchases 18,218,066

Material available for use 22,610,430

Less closing material 856,950

Material used 21,753,480

Direct labor 15,520,000

FOH applied 20,606,000 36,126,000

Total manufacturing cost 57,879,480

Less WIP closing 14,532,045

Cost of good manufactured & available for sale 43,347,435

Less FG ending 3,171,764

Cost of Good Sold 40,175,671

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Final Project Report of Cost Accounting

INCOME STATEMENT

Saba & Brothers Cement Company

Summarized Income Statements
For month November ,2009
Rs. Millions
Sales – Net 47,500,000
Cost of Sales 40,175,671
Gross Profit 7,324,329
Administrative Overheads 886,123
Marketing Overheads 1,006,492
Financial Overheads 840,931
Total Overheads 2,733,546
Net Profit 4,590,783

Profitability Ratio of our Company

=9.66
Profitability of Kohat Company
=0.80

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Final Project Report of Cost Accounting

Conclusion

Saba & Brothers Cement Company having better cost management and well
devised policies regarding its business processes and flow of cost form these
processes will eventually result in high profitability.

The product is finalized after going through different three departments. After
concluding our analysis on the flow of cost from these 3 departments we found
out that the company does not add further material in department 2. The reason
we found is that the company will not purchase raw material while the product is
under process and in department 2 there is no need of raw material to be added.

Final cost of goods sold statement and income statement shows that the
company is achieving high profits and is going along nicely. When compared to
that of Kohat Company, Saba & Brothers Cement Company has high profitability
ratio of 9.66% while that of Kohat Cement Company is 0.80%. Being a new
company the sales volume of Saba & Brothers Cement Company is not that
much as compared to Kohat Cement Company.

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Final Project Report of Cost Accounting

Appendix

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Final Project Report of Cost Accounting

References

Websites
• http://www.cement.com.pk/latest-developments/112-pakistan-5th-cement-
exporter.html
• http://www.highbeam.com/doc/1G1-18750930.html
• http://www.scribd.com/doc/15185144/Strategic-Financial-Management-
Pakistan-Cement-Industry
• www.inece.org/mmcourse/chapt6.pdf
• http://www.companiesandmarkets.com/Summary-Company-
Financials/kohat-cement-company-96863.aspx
•
Address

The Company Secretary, Kohat Cement Company Limited, Rawalpindi Road,

Kohat.
Tel: 0922 - 560 - 990
Fax: 0922 - 560 - 405

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