BEST WAY CEMENT LTD

Submitted by:

Abdur Rehman BakhshiAtta ur Rehman khanKhurram Yar Javed

Submitted to:Ms. Nadia Ibn Hassan

Section- C

Executive summary:

This project is about evaluating the cost accounting techniques that are practiced in a manufacturing organization. For this purpose Bestway cement Limited was chosen to analyze all the cost accountings techniques and procedures that are being followed in the company. The cost analysis techniques involve how the cost is accumulated during each stage of the manufacturing process. All the relevant concepts studied during the course of the class were applied in this project.

These include benefits of cost accounting, cost accumulation method used, analysis of income statement, analysis of cost of goods sold, application of activity based costing, break even analysis, Budgeting and variance analysis.

Then in the end of the report, there are conclusions of the whole project and then some recommendations are given to Bestway cement Limited.

Introduction:

Bestway Cement Limited is part of the Bestway Group of the United Kingdom. Bestway Group was founded by Sir Mohammed Anwar Pervez nearly thirty three years ago on what could be best described as one man’s vision and passion. Since then it has translated into a unique and successful group of businesses spread across the globe with the help of committed, professional and hardworking management and staff, together with loyal customers and suppliers. The Group has a well diversified portfolio incorporating within its folds cement manufacturing, global banking, wholesale cash & carry business, a string of retail outlets, real estate investment, ethnic food and beverage import and distribution and milling of rice. Recently the group has embarked upon a large power generation project in Pakistan thus further diversifying its operations and revenue base.

Bestway Group is an example of a dynamic enterprise. Over the last three decades the Group has achieved remarkable success and positioned itself amongst United Kingdom’s top 10 privately owned companies.

Bestway is U.K’s second largest cash and carry operator in terms of turnover with group annual turnover in excess of US Dollars 3.6 billion and profits in excess of US Dollars 135 million; the second largest cement producer in Pakistan and joint owner of Pakistan’s third largest bank, United Bank Limited. Its rice milling facilities are one of the largest of its kind in the country. The group is the largest overseas Pakistani investor with investments in excess of US Dollars 1 billion and a global workforce of over 22,000 people spread over four continents.

In response to successive governments’ efforts to attract foreign investment in the country Bestway Group has invested heavily in Pakistan. In just over a decade Bestway’s cement production capacity is set to more than quadruple to over 6.0 million tonnes per annum, making Bestway the second largest cement producer in the country.

In early 1992 when the Group decided to set up its first cement plant it faced multiple challenges mainly due to a lack of credibility as a business due to the absence of a track record in Pakistan. The domestic economy was highly inhospitable characterized by high interest rates, high inflation and low liquidity leading to a general economic and political inertia. It has however successfully exhibited its managerial dynamism and technical excellence in setting up and managing the manufacturing facilities and achieving market dominance through its diversification strategy by investing in the local cement industry and continues to be bullish about Pakistan.

Even during the period of economic slowdown and recession in the country in the late 1990’s which adversely affected the profitability of the industry Bestway was able to record pre tax

profits even at 60% capacity utilization. The Company has been amongst the leaders in the recent market boom, operating at above 100% of its installed capacity.

Bestway Cement Hattar

In 1994 work was started on the cement plant in the under developed area of Hattar, Haripur in the North West Frontier Province, Pakistan. This was an initial investment of US$120 million. The contract for the supply of main plant was signed with Mitsubishi Corporation of Japan in June 1995. The suppliers sub contracted some of the equipment to other international manufacturers, namely the crushers to FAM of Germany, Cement mill to Fuller of USA and electrical and instrumentation to ABB of Switzerland and Siemens of Germany. Civil works started in January 1996 and the Kiln was fired in April 1998, which is a record in itself.

Plant Conversion to Gas

Prior to 2001 production at Bestway Cement was being carried out using furnace oil as fuel. The management’s proactive decision in anticipation of a further hike in oil prices lead to modification of its plant to operate on natural gas. These were the first steps in achieving a cost efficient production process and ultimately the production process was converted to coal with a further investment of approximately US$10 million.

Plant Conversion to Coal

The machinery for coal conversion was procured from IPPR Engineering of China while some of the fabrication and erection work was done locally. The whole project was supervised by a highly skilful team of Chinese engineers alongside the Company’s own engineers. The entire project from signing the agreement to commissioning was completed within a record period of 10 months. The Company has also set up its own coal testing and analysis laboratory, which is equipped with the most up-to-date equipment to ensure that only quality coal is used in the process to prevent undesired operational and environmental effects. Conversion to natural gas and then to coal has significantly reduced the energy cost component, which at times constituted about 65% of the total production cost.

Capacity Enhancement

Bestway’s proactive management has kept the Company one step ahead of its competitors. The timely and strategic decisions of the management have enabled the Company to maintain its current market share of around 8% and its position as the lead exporter.

Hattar plant’s initial capacity was 1.0 million tonnes per annum. In 2002, at a cost of US$20 million, plant capacity was enhanced to 1.15 million tonnes per annum to meet the ever increasing demand for quality cement.

Owing to the management’s insight on growing market demand and the potential to export, in 2004 the plant’s capacity was further upgraded to 1.25 million tonnes of clinker production.

Listing on KSE

Despite all the challenges the cement plant, since it’s commissioning in October 1998, has been generating positive cash flows. Bestway Cement was listed on the Karachi Stock Exchange in February 2001 and since listing its market capitalisation has grown by approximately 850% making Bestway Cement one of the largest companies by market capitalization. Bestway Cement Hattar continues to play a key role in the local economy, providing direct employment to over 600 people with a further 1,500 jobs being created in the transportation of cement from the plant. Due to its prudent policies and professional management Bestway has been one of the most profitable entities in the industry since it commenced commercial operations in 1998 making substantial contributions to the public exchequer through direct and indirect taxes.

Exports

The Company has been able to maintain its status as a market leader due to superior product quality, effective marketing, customer focus and staff dedication. Prior to the commissioning of Chakwal-I and Mustehkam Cement, Bestway enjoyed more than 8% of the market share of the domestic market. Successful introduction of its brand in Afghanistan and more recently in India, Africa and Middle East has made Bestway one of the largest exporters of cement in Pakistan.

Bestway Cement Chakwal-I

In February 2004 owing to the growth in market demand, Bestway Group took the strategic decision of expanding its operations through the setting up of a 1.8 million tonnes per annum cement plant near Village Tatral of District Chakwal, Punjab Province, Pakistan. This is the Group’s second Greenfield development project at a cost of US$ 140 million.

The Company started its land acquisition in June 2004 and civil constructions in January 2005. The plant specifications were compiled by Bestway’s own engineers selecting the best equipments available. The raw-mill and coal-mill has been supplied by Loesche, fans by Venti, gear boxes by Flender, Switch Gear by ABB, Bucket Elevators by Aumund, Motors, Motor Control Systems and Automation by Siemens of Germany.

In April 2005, the Prime Minister of Pakistan, Mr Shaukat Aziz performed the groundbreaking ceremony for the plant. Civil works for Bestway Chakwal were initiated in January 2005, the Kiln was fired in May 2006 and the plant went into production in June 2006 which is an industry record. During the planning and construction phase the company took all the necessary steps to

guarantee that the plant and machinery not only met the local and international environmental standards but also exceeded them.

Bestway Cement Chakwal-I has led to the direct and indirect creation of jobs for more than 2,000 jobs - injecting a new lease of life in one of the most economically dispossessed parts of Pakistan.

Mustehkam Cement

To further extend its presence in the cement industry, Bestway decided to bid for 85.29% of equity of Mustehkam Cement Limited a 0.6 million tonnes per annum capacity plant, following an offering by the Privatisation Commission, Government of Pakistan. The company’s bid of approximately US$70.0 million was accepted in September 2005. Mustehkam’s plant is in close vicinity of our existing operations in Hattar, District Haripur, NWFP. Though the production of the enterprise had been discontinued in 1999, due to the hard work and dedication of our local staff and management, Mustehkam started production in December 2005 – one month after acquisition.

Capacity Enhancement and Modernisation

Mustehkam Cement has a glorious past with the company winning best performance awards from the local stock exchanges. Through increased investments in capacity and plant upgradation Bestway seeks to return past glory to Mustehkam Cement.

Recently, Bestway has embarked upon a major upgradation and modernization of Mustehkam. In the initial phase, one of the process lines at Mustehkam is being upgraded to a capacity of 0.9 million tonnes per annum at an estimated cost of US Dollars 50 million. This enhancement is being carried out mainly with the assistance of FL Smidth and will take the total production capacity at Mustehkam to above 1.2 million tonnes per annum of clinker. Planning is already in progress to upgrade and enhance the remaining production lines also.

Bestway Cement Chakwal-II

In May 2006 the Group announced plans for the establishment of a second 1.8 million tonnes per annum capacity plant adjacent to our existing operations in Chakwal at a cost of US$180.0 million. This would be Bestway’s third Greenfield cement plant in Pakistan. This would be an identical plant to the existing Line-1, having 1.8 million tonnes capacity.

By the end of the first quarter of 2008, through these investments, the Group’s cement manufacturing capacity is set to exceed 6.0 million tonnes per annum, making Bestway the second largest cement producer in the country.

Environment a top Priority

Bestway’s plants are environmentally friendly with emission standards that far exceed prevailing acceptable standards, both local and international. The plants’ emission levels are 50 microns whereas the Government of Pakistan’s acceptable standards are 300 microns and international standards are 100 microns per cubic meter of air at NTP.

Quality Assurance

Bestway Cement is driven by high standards of efficiency and quality. Strict quality control procedures are applied to ensure that these aims are achieved. The best quality control equipment in Pakistan is in use at its plants. Apart from the usual equipment, Bestway’s laboratories are equipped with state-of-the-art X-ray Fluorescent Analyzer and Diffractometer technology. Bestway Group was a pioneer in introducing this technology in Pakistan for the first time. By virtue of this equipment, the Company has been able to consistently produce better quality cement than is currently available in the country. Since inception, Bestway has been producing Portland cement of specifications far superior to the Pakistani, Indian, British and American istandards.

Benefits of Cost Accounting

Cost accounting is a process of accumulating, measuring, analyzing, interpreting and reporting cost information that is both useful and relevant to the internal and external stakeholders of a business entity. External stakeholders are those who have a vested financial interest in a business or company. For example banks (loans), financial houses (mortgages), investors (investments), etc. Internal stakeholders are the business or company directors, managers, division heads, etc.

One of the many benefits of cost accounting is that it turns data into information, knowledge and wisdom about a business entity’s operations that is useful for:

• 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

Another benefit is that information on the costs programs and activities may be used as a basis to estimate future costs in preparing and reviewing budget requests. Once budgets are approved and executed, cost information serves as a useful feedback on performance. Moreover, costs may be compared to known or assumed benefits to identify value-added and non-value added activities

Reliable information on the cost of programs and activities is crucial for the effective management of a business entity’s operations. Cost accounting is especially important for fulfilling the objective of assessing operational performance. The objective is to improve the efficiency and effectiveness of operations by furnishing program managers and others with timely and relevant cost-based performance information to allow for continuous improvement in delivering outputs and outcomes to stakeholders

Other benefits of COST ACCOUNTING include:

• It reveals profitable and unprofitable activities.

• It helps in controlling costs with special techniques like standard costing and budgetary control

• It supplies suitable cost data and other related information for managerial decision making such as introduction of a new product, replacement of machinery with an automatic plant etc

• 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

• It helps in the introduction of a cost reduction program and finding out new and improved ways to reduce costs

• 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

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 upto 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 realisable value. Cost of work in process and finished goods comprises of direct materials, labour and appropriate manufacturing overheads. Net realisable 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.

Analysis of Income Statement

Rupees

2011 2010 2009

Revenue/ Net Sales 14,814,797,196.0 7,487,162,751.0 5,649,378,012.0

Cost of goods sold 10,044,450,173.0 6 ,478,902,770 4,636,508,040.0

Gross Profit 4,770,347,023.0 1,008,259,981.0 1,012,869,972.0

Selling and Distribution Cost

140,138,550.0 1 19,917,940 1 03,121,152

Administration Expense

1,395,877,311.0 300,827,927.0 3 8,278,894

Operating Profit 327,972,309.0 (229,490,785.0) (396,632,200.0)

Other Income - - -

Other Operating Expense

71,506,461.0 - -

Finance Cost 2,286,086,256.0 1,236,140,238.0 1,211,745,924.0

Workers' Profit Participation Fund

- - -

Profit For The Year Before Taxation

1,204,710,754.0 (419,135,339.0) 56,356,202.0

Taxation (230,686,768.0) 587,716,818.0 4,817,471.0

Profit After Taxation 974,023,986.0 168,581,479.0 51,538,731.0

Income statements show the Sales, the CGS, the Operating Profit and the Profit before and after Tax for the company at the end of each year for the five years. As we can see from the table above, an increasing trend is seen for the sales of the company. Similarly, CGS has also increased proportionately. Distribution and Administration Costs have also increased. Profit before Taxation was negative in year 2010, and then it increased in 2011.

Analysis of Profit Margin Ratios

Profit Margins 2011 2010 2009

Gross Profit 4,770,347,023.0 1,008,259,981.0 1,012,869,972.0

Revenue/ Net Sales 14,814,797,196.0 7,487,162,751.0 5,649,378,012.0

Gross Profit Margin 32.20% 13.47% 17.93%

EBIT 3,490,797,010.0 (419,135,339.0) 56,356,202.0

Revenue/ Net Sales 14,814,797,196.0 7,487,162,751.0 5,649,378,012.0

Operating Profit Margin

23.56% -5.60% 1.00%

Profit After Taxation 974,023,986.0 168,581,479.0 51,538,731.0

Revenue/ Net Sales 14,814,797,196.0 7,487,162,751.0 5,649,378,012.0

Net Profit Margin 6.57% 2.25% 0.91%

The first ratio that has been calculated is the Gross Profit Margin. The formula for this is Gross Profit/Sales Turnover. This ratio basically tells us what percentage of Sales is the GP. The higher the ratio is, the better the profitability. Bestway has a higher GP margin as compared to the industry which shows it has a lower cost of goods sold as compared to the industry.

The second ratio is the Operating Profit Margin. This has been calculated as Operating Profit (EBIT)/Sales Turnover. Operating Profit for Bestway Cement includes Other Income and Other Charges have been deducted for its calculations. This decline can majorly be attributed to the increase in Other Charges in 2008-9. Bestway has better results in all the years as compared to the industry average.

The third ratio is the Net Profit Margin. It has been calculated as [Net Profit (profit after tax)/Sales Turnover]. This ratio tells us what percentage of Sales is the Net Profit. The higher this is, the better the profitability. The trend in this ratio has been the same as the Operating Profit Margins. Net profit margin for Bestway also has a better figure as compared to the industry which shows that Bestway is doing quite well in the market.

Analysis of cost of goods sold

2011 2010

Application of Activity Based Costing

Activity-based costing (ABC) is a special costing model that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing models.

Implementation of Activity based costing:

1) Identify the products that are chosen object

In Bestway Cement Company we have selected cement as our cost object.

2) Identify the direct cost of the product

2011

Direct material 7,642,459,375 Direct labour 1,342,218,590 Total direct cost 8,984,677,965

3) Select the activities and cost allocation bases to use for allocating indirect costs to the product

Activity Cost Hierarchy Cost Driver Cost Driver Quantity

Lime stone Quarry

Batch Level No. of Materials 1,179,863 tons material

Transportation Batch Level Delivery Time 3,000 delivery hoursCrushing Batch Level Machine Hours 16,500 machine hoursRaw Mill Unit Level Machine Hours 24,378 machine hoursKiln Unit Level Machine Hours 14,667 machine hoursGrinding Batch Level Machine Hours 12,350 machine hoursPackaging & Storage

Product Sustaining

No. of Bags 119508 bags of 50 kg

4) Identify the indirect costs associated with each cost allocation base

Activity Indirect Cost Allocated

Lime stone Quarry 250,578,000Transportation 192,311,000Crushing 110,931,000Raw Mill 1,011,350,000Kiln 4,015,975,000Grinding 4,934,503,000Packaging & Storage 5,151,270,000

5) Compute the rate per unit of each cost allocation base

Activity Cost Pool Rate

Lime stone Quarry 212.37 per ton materialTransportation 64103.66 per delivery hourCrushing 6723.09 per machine hourRaw Mill 41486.17 per machine hourKiln 273810.25 per machine hourGrinding 399554.89 per machine hourPackaging & Storage 43103.97 per bag

6) Compute the indirect costs allocated to the products

Activity Cost Pool Rate

Cost Driver Quantity

Indirect Cost Allocated

Activity Cost Pool Rate

Lime stone Quarry 212.37 943890 tons material

235973 tons material

200453919 50113586

Transportation 64103.66 3,000 delivery hours

1000 delivery hours

192310980 64103660

Crushing 6723.09 16,500 machine hours

3300 machine hours

110930985 22186197

Raw Mill 41486.17 24,378 machine hours

4876 machine hours

1011349852 202286565

Kiln 273810.25 14,667 machine hours

2933 machine hours

4015974937 803085464

Grinding 399554.89 12,350 machine hours

2470 machine hours

4934502892 986900578

Pack &Storage 43103.97 119508 bags of 50 kg

23902 bags of 50 kg

5151269247 1030271091

7) Compute the total cost of the product by adding all direct and indirect costs assigned to the product

Cost Description

Total Per Unit Total Cost Description Total

Direct Costs Direct CostsDirect material cost

512367200 359.58 128091800 Direct material cost

512367200

Direct labour cost

113631072 79.75 28407768 Direct labour cost

113631072

Total Direct 625998272 439.32 156499568 Total Direct Cost 625998272

Cost

Indirect Cost of Activities

Indirect Cost of Activities

Lime stone Quarry

200453919 140.68 50113586 Lime stone Quarry

200453919

Transportation

192310980 134.96 64103660 Transportation 192310980

Crushing 110930985 77.85 22186197 Crushing 110930985Raw Mill 1011349852 709.76 202286565 Raw Mill 1011349852Kiln 4015974937 2818.40 803085464 Kiln 4015974937Grinding 4934502892 3463.02 986900578 Grinding 4934502892Packaging & Storage

5151269247 3615.15 1030271091 Packaging & Storage

5151269247

Total Indirect Cost

15616792812 10959.82 3158947141 Total Indirect Cost

15616792812

Total Cost 16242791084 11399.15 3315446709 Total Cost 16242791084

As you can from the above table that Activity based costing have identified individual activities as the cost object then allocated indirect cost to each product ‘activities. In this way it has provided the cost description of each activity and given us enough information to make better decisions on cost allocation. It will also help in pricing and product mix decisions, cost reduction and process improvement decisions and planning and managing activities. Activity based costing equally allocates the cost, as it gives us clear picture of a cost structure we can reduce our cost where possible and operate more efficiently.

We can look at each activity cost of the product in order to reduce the cost and sell it at a lower price to compete with other companies by offering lower price and high quality product which would be their competitive advantage and they would increase their market share by doing so.

Breakeven Analysis

It is that quantity of output sold at which total revenues equal total costs and which results in Rs.0 of operating income. Breakeven point tells the managers that how much output they must sell to avoid a loss.

Particulars 2011

Total Per unitSales 14,814,797,196 4277.61Variable Cost 10,477,594,872 2858.50Contribution Margin 4,337,202,324 1419.12Fixed Cost 4,009,230,015 747.25Operating Profits 327,972,309 671.87Contribution Ratio 0.2927636  Breakeven point 13,694,427,911 2,825,152

The above table tells us that the company should produce minimum 2,825,152 units to breakeven and avoid the loss, if the company will produce fewer units than it will incur loss and if it will produce more units then it will earn profits. So the company should produce more than 2,825,152 units to earn profits. On the other hand the company’s sale should be more than 13,694,427,911 to earn profit or it should breakeven exact at this amount, and if it will have less sales than this than it would incur loss.

BudgetingBudgeting is done by Bestway in each department. Each department forecast sales for their own department and then in annual meeting these forecasts are aligned. Each department prepares its own budget for quarter but it is aligned once a year. Usually keeping in view the demand and growth prospects of cement industry sales target are estimated. Last year sales target was 115%. It is elaborated in the table below.

2011 2011 (Budgeted)

Sales (15% increase) 14,814,797,196 17,037,016,775.4 Sales (15% increase)

Cost of goods sold(12.5%) 10,044,450,173 11,300,006,444.6 Cost of goods sold

G/P (32.2% of sales) 4,770,347,023 5,737,010,331 G/P (25.24% of sales)

Expenses (14.03% Sales) 2,074,071,607 2,385,182,348 Expenses (14.03% Sales)

Net Income 2,696,275,415 3,351,827,982 Net Income

In this way expenses are estimated. The cash disbursement budget is prepared on daily basis to pay trade creditors of the company. Bestway uses OD for facilitating the process of cash handling. This cash handling is forecasted on the basis of cash collection and

forecasting the previous year cash budget. In this way budget for company is prepared by matching revenue and expenditure.

Variance Analysis

Bestway cement Ltd forecasts sales on rupee basis rather than volume basis. However percentage volume of product is determined on historical basis. It is difficult to prepare flexible budget in our case because of high volatility in prices and contribution margin varying from customer to customer. However variance analysis has been done using actual and budgeted figures. These are presented in table below.(2011) Actual Variance Budgeted

Sales 14,814,797,196 2,222,219,579(F) 17,037,016,775

Cost of goods sold 10,044,450,173 1.255,556,271(F) 11,300,006,444

G/P 4,770,347,023 966,663,308(F) 5,737,010,331

Expenses 2,074,071,607 311,110,741(F) 2,385,182,348

Net Income 2,696,275,415 655,552,567(F) 3,351,827,982

Bestway has not been able to attain its forecasted sales. Reason behind underperformance is because of change in sales volume mix. On the other hand the overall deterioration of the economy and the energy crisis has affected the anticipated growth in sales. Most businesses related to the cement industry have been hit badly by the above mentioned crisis and as a result cement industry had to bear these circumstances. Adding more, unfavorable increase in expenses resulted in overall unfavorable deviations.

Conclusion & Recommendation

The reports conclude that Bestway has simple yet effective accounting system. It provides all the information necessary for decision making. This system also has some loop holes e.g. Bestway does not apply activity based accounting system which will result in lowering costs further. Secondly, Bestway needs to put more effort to sell products with high margin usually white cement. The method being used for budgeting is quite straight forward and it needs to be modified and made at individual product level for more accurate sales volume budgeting.

Concluding the discussion Bestway should upgrade its accounting system to SAP. This will help easy tracking of funds, budgeting, and forecasting and expense management. Quantity forecasts would enable Bestway to buy raw material at cheap prices and boost profit margins. These margins can also boost by shifting business entirely to foreign market to prevent from competition.

References:

http:// www.bestway.com.pk http://www.kse.com.pk/