Advance cost and management Accounting ABC costing

ACMA TRADITIONAL & ABC COSTING
M.COM 2A Atlas Honda & Nishat Mills Annual Reports and Costing Techniques 1
Project of Advanced Cost & Management Accounting
Dated 7th
March, 2015
Presented to: Prof. Aziz-ur-Rehman

Group Members
Serial # Name Reg. #
01 Umair Mohsin 05
02 Umair Saeed 10
03 Sadaqat Ali 11
04 Mohsin Sohail 09
05 Usman zaka 08

Acknowledgement
First of all we would like to thank the Almighty Allah for giving us the
strength and the aptitude to complete this Project within due time. We
are deeply indebted to our course teacher Prof. Aziz-ur-Rehman for
assigning us such an interesting topic named “Comparison of
Traditional and ABC costing in Pakistani companies”. We also
express the depth of our appreciation to our honorable course teacher for
his suggestions and guidelines, which helped us in completing this
project.

Executive Summary
This project helped us a lot to understand the costing systems prevailing
in the current era. We learnt about the absorption costing system and
ABC costing system in our subject of advanced cost and management
accounting. We applied these systems to the top Pakistani companies of
“Atlas Honda” and “ Nishat Mills” and experience the practical life
working in this regard.
We are sure that this project will help us in future in computation of cost
of products and we can apply this practice for our preparation of final
exams also. At the end we will say that overall very interesting and real
life experience it was.

Vision
Market leader in the motorcycle industry, emerging as a global competitive center
of production and exports.
Mission
A dynamic growth oriented company through market leadership, excellent in
quality and service and maximizing export, ensuring attractive returns to equity
holders, rewarding associates according to their ability and performance, fostering
a network of engineers and researchers ensuing unique contribution to the
development of the industry, customer satisfaction and protection of the
environment by producing emission friendly green products as a good corporate
citizen fulfilling its social responsibilities in all respects.
Corporate Goals:
Customers
Our Customers are the reason and the source of our business. It is our joint aim
with our dealers to ensure that the customers enjoy the highest level of satisfaction
from use of Honda motorcycles.

Quality
To ensure that our products and services meet the set standards of excellence.
Local Manufacturing
To be the industry leader in indigenization of motorcycle parts.
Technology
To develop and maintain distinct business advantages through continuous
induction of improved hard and soft technologies.
Shareholders
To ensure health and viability of business and thus safeguarding shareholders’
interest by maximizing profit. Payment of regular satisfactory dividends and
adding value to the shares.
Employees
To enhance and continuously update each member’s capabilities and education and
to provide an environment which encourages practical expression of the individual
potential in goal directed team efforts and compensate them attractively according
to their abilities and performance.
Corporate Citizen
To comply with all Government laws, rules and regulations and to maintain a high
standard of ethics in all operations and to act as a responsible member of the
society.
Quality Policy:
 Commitment to provide high quality motorcycles and parts.
 Right work in first attempt and on time.
 Maintain and continuously improve quality.
 Training of manpower and acquisition of latest technology.
 Safe, clean and healthy environment.
 Market leadership and prosperity for all.

Traditional costing system of Atlas Honda Pakistan:
All this data is taken from the financial statements of Honda.
Details CD 70 CG 125
Units produced 40000/per month 35000/per month
Production run 10 run of 4000 units 5 run of 5000 units
Manufacturing Overhead Annual=38,056,043 (in thousands) Rs.
For one month=38,056,043/12 =3,171,337 Rs.
Atlas Honda currently using direct labor hours as a single allocation base.
Direct labor hours per
unit
3 4
Total hours 120000 140000
Allocation rate = 3,171,337/260000 = 12.19 Rs. Per labor hours
Direct material cost per month = 2,639,655 Rs
55% material is used by CG 125
45% material is used by CD 70
55% of 2,639,655 is 1,451,810
45% of 2,639,655 is 1,187,845
Direct material per unit cost:
CD 70 = 1,187,845/40000 = 29.69 Rs.
CG 125 = 1,451,810/35000 = 41.48 Rs.
Direct labor cost per unit:
Direct labor cost per month = 58,446 RS.
40% of labor is used by CD 70

60% of labor cost is used by CG 125
40% of 58446 = 23,378
60% of 58446 = 35068
CD 70 = 23,378/40000 = 0.58
CG 125 = 35,068/35000 = 1.00
Costing according to Traditional Costing Method:
Manufacturing
overhead
12.19(3) = 36.57 12.19(4) = 48.76
Direct material 29.69 41.48
Direct labor 0.58 1.00
Total 66.84 91.24
In thousands 66.84= 66,840 Rs.
In thousands 91.24 = 91,240 Rs.

Atlas Honda costing according to ABC costing:
In atlas Honda following cost pools and cost drivers can be made:
Cost Pool Cost Drivers Costs assigned
Inspection cost No. of Inspections 223,989
Machinery cost Machine hours 1,500,000
Set up cost No. of production run 747,348
Engineering cost No. of engineering
transactions
700,000
Total = 3,171,337
Machinery cost pool:
Machine hours = CD 70 = 2.00/unit
Machine hours = CG 125 = 2.50/unit
Machinery cost = 1500000/80000+87500 = 8.95 Rs. Per hour
CD 70 = (8.95) (2.00) = 17.90
CG 125 = (8.95) (2.50) = 22.375
Engineering cost pool:
40% of engineering cost = CD 70
60% of engineering cost = CG 125
CD 70 = 700000*40/100 = 280000/40000 = 7 Rs./unit
CG 125 = 700000*60/100 = 420000/35000 = 12 RS./unit
Set up Cost:
Set up cost = 747348/15 = 49,823Rs.
CD 70 = 49823/40000 = 1.24Rs./unit
CG 125 = 49823/35000 = 1.42Rs./unit

Inspection cost:
45% of inspection cost is used by CD 70
55% of inspection cost is used by CG 125
CD 70 = 223989*45/100 = 100795/40000 = 2.52Rs./unit
CG 125 = 223989*55/100 = 123194/35000 = 3.52Rs./unit
Cost according to ABC costing:
Direct material 29.69 41.48
Direct labor 0.58 1.00
Machinery cost 17.90 22.375
Set up cost 1.24 1.42
Engineering cost 7.00 12.00
Inspection cost 2.52 3.52
Total 58.93 81.795
Conclusion:
According to traditional costing system the per unit cost of both products is high
and according to ABC costing the per unit cost is low and the difference between
costs of both products are 7.91 and 9.44 respectively. So, ABC costing allocates
costs accurately and it lowers the costs of the company.

Vision Statement
To transform the Company into a modern and dynamic yarn, cloth and processed
cloth and finished product manufacturing Company that is fully equipped to play a
meaningful role on sustainable basis in the economy of Pakistan. To transform the
Company into a modern and dynamic power generating Company that is fully
equipped to play a meaningful role on sustainable basis in the economy of
Pakistan.
Mission Statement
To provide quality products to customers and explore new markets to
promote/expand sales of the Company through good governance and foster a sound
and dynamic team, so as to achieve optimum prices of products of the Company
for sustainable and equitable growth and prosperity of the Company.
Company Profile
Nishat Mills Limited is the flagship company of Nishat Group. It was established
in 1951. It is one of the most modern, largest vertically integrated textile company
in Pakistan. Nishat Mills Limited has 198,120 spindles, 655 Toyota air jet looms.
The Company also has the most modern textile dyeing and processing units, 2
stitching units for home textile, one stitching unit for garments and Power
Generation facilities with a capacity of 89 MW. The Company’s total export for

the year 2011 was Rs. 36.015 billion (US$ 416 million). Due to the application of
prudent management policies, consolidation of operations, a strong balance sheet
and an effective marketing strategy, the growth trend is expected to continue in the
years to come. The Company's production facilities comprise of spinning, weaving,
processing, stitching and power generation.
The Group
Nishat group of companies is a premier business house of Pakistan. The group has
presence in all major sectors including Textiles, Cement, Banking, Insurance,
Power Generation, Hotel Business, Agriculture, Dairy and Paper Products. Today,
Nishat Group is considered to be at par with multinationals operating locally in
terms of its quality products and management skills.
Comparison of Traditional & ABC costing System in Nishat
Textiles:
Traditional costing system approach:
We have assumed two products famous products of nishat textiles:
 Men Jeans
 Women Jeans
Total manufacturing overhead of Nishat according to financial statements of the
year 2013 = 55,746,958Rs. Annual
Per month overheads = 4,645,580Rs.
Details Men Jeans Women Jeans
Units produced per
month
120000 110000
Direct labor hours/unit 4 3
Total hours per unit 480000 330000

Single allocation base is direct labor hours = 810000
Manufacturing overhead rate = 4645580/810000 = 5.73Rs./direct labor hour
Direct Material:
Total direct material cost per annum = 2,532,221
Per month = 2110185Rs.
55% of material is used by men jeans = 1160602Rs.
45% of material is used by women jeans = 949583Rs.
Direct material rate for men jeans = 1160602/120000 = 9.67
Rate for women jeans = 949583/110000 = 8.63
Direct labor cost:
Direct labor rate for both men and women jeans is = 20Rs./unit
Direct labor cost men jeans = 20*4 = 80
Direct labor cost women jeans = 20*3 = 60
Direct material cost 9.67 8.63
Direct labor cost 80 60
Manufacturing
overhead
22.92 17.19
Total 112.59 85.82

Activity Based Costing Method approach at Nishat Mills:
In activity based costing, after understanding of the whole manufacturing process
we can assume the following cost drivers and cost pools:
Cost pools Cost drivers Costs assigned
Machining cost No. machine hours 2034240
Set up cost No. set ups 1260320
Purchase cost No. purchase orders 745900
Shipping cost No. shipments 605120
Total = 4645580Rs.
Machining cost:
No. of machine hours for men jeans = 6 hours/unit
Machine hours for women jeans = 5 hours/unit
Rate for 120000 men jeans = 120000*6 = 720000
Rate for 110000 women jeans = 110000*5 = 550000
Rate = 2034240/1270000 = 1.60
Set up cost:
No. of set ups for men jeans = 250
No. of set ups for women jeans = 200
Set up cost rate = 1260320/450 = 2800Rs.
Purchase cost:
No. of purchase orders for men jeans = 500
No. of purchase orders for women jeans = 450

Purchase cost rate = 745900/950 = 785.16Rs.
Shipping cost:
No. of shipments for men jeans = 400
No. of shipments for women jeans = 350
Shipping cost rate = 605120/750 = 806.83Rs.
Costing under ABC Method:
Direct material cost 9.67 8.63
Direct labor 80 60
Machining cost 1.60*720000 =
1152000/120000 = 9.60
1.60*550000 =
880000/110000 = 8.00
Set up cost 2800*250 =
700000/120000 = 5.83
2800*200 =
560000/110000 = 5.09
Purchase cost 785.16*500 =
392580/120000 = 3.27
785.16*450 =
353322/110000 = 3.21
Shipping cost 806.83*400 =
322732/120000 = 2.69
806.83*350 =
282390.5/110000 = 2.56
Total 111.06 87.49
Conclusion:
In this whole procedure in traditional costing the cost men jeans is 112.59 but in
ABC costing method its price is 111.06 and similarly the cost of women jeans is
85.82 in traditional costing but in ABC costing its price is 87.49 so it is argued that
in ABC costing there is correct allocation of costs on the basis of their drivers so
the company must apply that method although it is difficult but it gives true results.

CONCLUSIONS AND FINDINGS
Globalization and the increasing complexity of business, together with high-
powered computing technology, have contributed to the development of new
management accounting techniques all over the world. The present study shows
that the survey result of the present practices of management accounting in listed
manufacturing sector reveals the state of use of the sophisticated technique like
Activity Based Costing in Pakistan is not satisfactory.
There are several reasons behind it. First of all in many local offices still they are
practicing manual techniques and since the financial officers or chief accountant or
top managers are quite old and hence they are quite back dated in some cases.
They don’t adopt new technologies and techniques, as they feel happy with their
old techniques. This situation is gradually changing when the new blood is entering
into the company or they see the practice in other foreign company. In many
offices the processes are not well defined and as a result there is no dedicated cost
center for a particular operation or the fixed cost and variable cost is defined. Due
to have lack of defined process it become difficult in many cases to implement a
costing model like ABC. That is why in spite of being well aware of the ABC or
such modern cost model many companies couldn’t implement it because it requires
changing their whole process, which is little, complicated. Another problem in
Pakistan is lack of using software/tools in the different operations. Although new
generation guys are well computer educated but the previous generation are not
well computer literate and even if they know how to use it, in many cases they are
reluctant to use those tools.
To keep pace with the world changing management accounting environment,
Pakistani firms should use the newly developed techniques. A well-balanced
practice of such techniques irrespective of the sectors may be enhanced through
compulsory enactment of cost and management accounting audit in Pakistan .

Advance cost and management Accounting ABC costing

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