du cost accounting

7/31/2019 DU Cost Accounting

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Introduction

The importance of cost accounting and cost accounting information is being increased day by

day. It is not only help to reduce cost but also in all kind of decision making. Without analysis of

cost accounting information no manager can make effective decision. The cost accounting

collects the data, analyze those data and help the managers to make better decision. In

accordance with development of new tools and techniques of cost accounting the use of cost

accounting information is changing. Managers need to use the cost accounting information in

different way from traditional method to evaluate the performance.

Developing and accepting the JIT, TQM and other contemporary costing techniques force to

manager to change the performance evaluation techniques and requires different cost accounting

information unlike traditional labor based information now a days which become obsolete.

Primarily this report is concerned with cost accounting information by an organization in

decision making as well as corporate reporting, the tools and techniques used by organizations

and the implications of these in the organization.

We select Beximco Pharma to examine the use of cost accounting information and cost

accounting tools and techniques used by the company. We emphasize on the implication of using

information and technique and examine whether Beximco Pharma use or not that particular

techniques and the reason of following or not following based on our queries to respective

authority of the company.


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Cost Accounting Information:

In a broad aspect, cost accounting refers to the measurement, analysis, and reporting financial

and nonfinancial information relating to the cost of acquiring or using resources in an

organization. So cost accounting can be defined as the information obtained from cost

accounting activities. For example, calculating the cost of product is a cost accounting function

that answers managers decision making needs (such as choosing products to offer). Modern cost

accounting takes the perspective that collecting cost information is a function of the management

decision being made. Cost accounting information helps the manager in short-run and long-run

planning and control decisions that increase value for the customers and lower the costs of

products and services. For example, managers make decisions regarding the amounts and kinds

of material being used, changes in plant processes, and changes in product designs.

2.4 Cost Accounting Information in Corporate Reporting:

The main purpose of cost accounting information is to help managers in decision making. Such

information is provided for the internal purpose only. There are some guided rules and

regulations about the information in the reports. According to IAS 1 (Presentation of Financial

Statements), paragraph 117,

An entity shall disclose in the summary of significant accounting policies:

(a) the measurement basis (or bases) used in preparing the financial statements, and

(b) the other accounting policies used that are relevant to an understanding of

the financial statements.

It is important for an entity to inform users of the measurement basis or bases used in the

financial statements (for example, historical cost, current cost, net realizable value, fair value or

recoverable amount) because the basis on which an entity prepares the financial statements

significantly affects users analysis. When an entity uses more than one measurement basis in the


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financial statements, for example when particular classes of assets are revalued, it is sufficient to

provide an indication of the categories of assets and liabilities to which each measurement basis

is applied.

According to paragraph 125 of the same IAS,

An entity shall disclose information about the assumptions it makes about the future, and other

major sources of estimation uncertainty at the end of the reporting period, that have a

significant risk of resulting in a material adjustment to the carrying amounts of assets and

liabilities within the next financial year. In respect of those assets and liabilities, the notes shall

include details of:

(a) their nature, and

(b) their carrying amount as at the end of the reporting period.

An entity presents the disclosures in paragraph 125 in a manner that helps users of financial

statements to understand the judgements that management makes about the future and about

other sources of estimation uncertainty. The nature and extent of the information provided vary

according to the nature of the assumption and other circumstances. Examples of the types of

disclosures an entity makes are:

(a) the nature of the assumption or other estimation uncertainty;

(b) the sensitivity of carrying amounts to the methods, assumptions and estimates underlying

their calculation, including the reasons for the sensitivity;

(c) the expected resolution of an uncertainty and the range of reasonably possible outcomes

within the next financial year in respect of the carrying amounts of the assets and liabilitiesaffected; and

(d) an explanation of changes made to past assumptions concerning those assets and liabilities, if

the uncertainty remains unresolved.

Other IFRSs require the disclosure of some of the assumptions that would otherwise be required

in accordance with paragraph 125. For example, IAS 37 requires disclosure, in specified


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circumstances, of major assumptions concerning future events affecting classes of provisions.

IFRS 7 requires disclosure of significant assumptions the entity uses in estimating the fair values

of financial assets and financial liabilities that are carried at fair value. IAS 16 requires disclosure

of significant assumptions that the entity uses in estimating the fair values of revalued items of

property, plant and equipment.

There are also some guidelines for reporting cost accounting information in IAS 2: Inventories.

The objective of this Standard is to prescribe the accounting treatment for inventories. A primary

issue in accounting for inventories is the amount of cost to be recognised as an asset and carried

forward until the related revenues are recognised. This Standard provides guidance on the

determination of cost and its subsequent recognition as an expense, including any write-down to

net realizable value. It also provides guidance on the cost formulas that are used to assign costs

to inventories.

Measurement of inventories

Inventories shall be measured at the lower of cost and net realisable value.

Cost of inventories

The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs

incurred in bringing the inventories to their present location and condition.

Costs of purchase

The costs of purchase of inventories comprise the purchase price, import duties and other taxes(other than those subsequently recoverable by the entity from the taxing authorities), and

transport, handling and other costs directly attributable to the acquisition of finished goods,

materials and services. Trade discounts, rebates and other similar items are deducted in

determining the costs of purchase.


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Costs of conversion

The costs of conversion of inventories include costs directly related to the units of production,

such as direct labour. They also include a systematic allocation of fixed and variable production

overheads that are incurred in converting materials into finished goods. Fixed production

overheads are those indirect costs of production that remain relatively constant regardless of the

volume of production, such as depreciation and maintenance of factory buildings and equipment,

and the cost of factory management and administration. Variable production overheads are those

indirect costs of production that vary directly, or nearly directly, with the volume of production,

such as indirect materials and indirect labour.

The allocation of fixed production overheads to the costs of conversion is based on the normal

capacity of the production facilities. Normal capacity is the production expected to be achieved

on average over a number of periods or seasons under normal circumstances, taking into account

the loss of capacity resulting from planned maintenance. The actual level of production may be

used if it approximates normal capacity. The amount of fixed overhead allocated to each unit of

production is not increased as a consequence of low production or idle plant. Unallocated

overheads are recognised as an expense in the period in which they are incurred. In periods of

abnormally high production, the amount of fixed overhead allocated to each unit of production is

decreased so that inventories are not measured above cost. Variable production overheads are

allocated to each unit of production on the basis of the actual use of the production facilities.

A production process may result in more than one product being produced simultaneously. This

is the case, for example, when joint products are produced or when there is a main product and a

by-product. When the costs of conversion of each product are not separately identifiable, they

are allocated between the products on a rational and consistent basis. The allocation may bebased, for example, on the relative sales value of each product either at the stage in the

production process when the products become separately identifiable, or at the completion of

production. Most by-products, by their nature, are immaterial. When this is the case, they are

often measured at net realisable value and this value is deducted from the cost of the main


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product. As a result, the carrying amount of the main product is not materially different from its

cost.

Disclosure of Inventory in Financial Statesments

The financial statements shall disclose:

(a) the accounting policies adopted in measuring inventories, including the cost formula used;

(b) the total carrying amount of inventories and the carrying amount in classifications

appropriate to the entity;

(c) the carrying amount of inventories carried at fair value less costs to sell;

(d) the amount of inventories recognised as an expense during the period;

(e) the amount of any write-down of inventories recognised as an expense in the period in

accordance with paragraph 34;

(f) the amount of any reversal of any write-down that is recognised as a reduction in the amount

of inventories recognised as expense in the period in accordance with paragraph 34;

(g) the circumstances or events that led to the reversal of a write-down of inventories in

accordance with paragraph 34; and

(h) the carrying amount of inventories pledged as security for liabilities.

Information about the carrying amounts held in different classifications of inventories and the

extent of the changes in these assets is useful to financial statement users. Common

classifications of inventories are merchandise, production supplies, materials, work in progress

and finished goods. The inventories of a service provider may be described as work in progress.

The amount of inventories recognised as an expense during the period, which is often referred toas cost of sales, consists of those costs previously included in the measurement of inventory that

has now been sold and unallocated production overheads and abnormal amounts of production

costs of inventories. The circumstances of the entity may also warrant the inclusion of other

amounts, such as distribution costs.


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An overview of Reneta

Renata Limited started its operations as Pfizer (Bangladesh) Limited in 1972. For the next two

decades it continued as a highly successful subsidiary of Pfizer Corporation. However, by the

late 1990s the focus of Pfizer had shifted from formulations to research. In accordance with this

transformation, Pfizer divested its interests in many countries, including Bangladesh.

Specifically, in 1993 Pfizer transferred the ownership of its Bangladesh operations to local

shareholders, and the name of the company was changed to Renata Limited. Main Business of

this company is Manufacture and Marketing of Human Pharmaceuticals and Animal

Therapeutics. They have two production sites. The Mirpur Site is 12 Acres and Rajendrapur Site

is 17 Acres. Their current numbers of employees are 2213. Their Alliance-Partners are as

follows:

Novartis Vaccines (Rabipur, Vaxem HiB, and Agrippal)

BASF, Germany (Animal Nutrition Products)

InterVax, Canada (Meningococcal Vaccine)

Evans Vanodine, UK (Disinfectant)

Zinpro, USA (Metal Amino Acid Complexes)

Biomin Laboratories, Singapore (Mycotoxin Binders and Nutraceuticals)

Their vision is to establish Renata permanently among the best of innovative branded generic

companies. Also they are willing to provide maximum value to their customers, shareholders,

colleagues, and communities.


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Nature of the organization

Renata pharmaceuticals is a listed public limited. It mainly deals with manufacturing, marketing

& distribution of human pharmaceuticals ,animal health medicines, nutritionals, and vaccines.

Production systems

Renatas production systems is totally automated. Most of its production is done without human

interactions. The machines are monitored and controlled by the efficient workers. Renata can

accommodate a broad range of standards because it keeps multiple lots of various

pharmaceutical product raw materials on hand. In order to take advantage of our experience and

achievements in handling pharmaceutical products over many years so that we can procure high-

quality raw materials in a stable manner, we visit local sites to conduct meticulous production

and raw material surveys. Theyre working to develop a traceability system that offers

comprehensive quality control so that They can maintain and improve quality. To ensure their

ability to provide a stable supply of products, they operate their raw materials warehouse and

strive to lower the risk of key raw materials running out under difficult-to-obtain conditions.


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Cost Accounting System of the company

The company primarily uses batch costing method in their costing system. As a pharmaceuticals

manufacturing company they need to produce huge amount of product so here batch costing is

appropriate for the company. Here it is cost effective and easy to calculation. Batch costing has

the several advantages over other methods in regard of the providing following information:

-the analysis and the cost control at each cost generator;

-the operative management of each place generator of costs, the specification of the

production and of the predicted costs and their control and realization;

-the correct assessment of the produced stocks;

-determination of the efficiency obtained by the taken decisions.

The company uses weighted average method in time of inventory valuation. They believe that it

gives more accurate and clear picture of inventory. In this method it is very hard to manipulate

and easy to calculate though it has a limitation that it sometimes cant represent inflation.

Valuation of Inventories:

Inventories are carried at the lower of cost and net realizable value as prescribed by IAS 2:

Inventories. Cost is determined on weighted average cost basis. The cost of inventories

comprises of expenditure incurred in the normal course of business in bringing the inventories to

their present location and condition. Net realizable value is based on estimated selling price less

any further costs expected to be incurred to make the sale.

Cost included for the local raw materials purchased are

Procurement Cost.

Transportation Cost


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Bank Charge

Cost included for the imported raw materials are

Procurement Cost

Bank Charge for Opening L/C

Insurance

Clearing from the Port and

Transportation Cost.


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Contemporary cost accounting methods and techniques used by Rena

Renata Ltd is a leading company in our country. To compete with the other companies in the

industry, Renata uses several contemporary methods and techniques. Mass production of a

mature product with known characteristics and a stable technology was the basis of traditional

cost accounting models. Anyway, Renata, with automation, lessened the labor content in

manufacturing process while the other costs in the company are increased.

Flexible manufacturing system:

Flexible manufacturing systems use computer controlled production processes, including

CAD/CAM programmable machine tools. Because flexible manufacturing reduces setup or

changeover times, companies can efficiently manufacture a wide variety of products in small

batches. Though Renata can adopt flexible manufacturing system, it merely reduces the size of

the batch.

Total quality management:

Total Quality Management refers (TQM) to the process of continuous improvement to achieve

the full customer satisfaction. Rather than waiting to inspect items at the end of the production

line or striving to stay within acceptable tolerance limit, TQMs goal is eliminating all waste. In

Renata, quality is maintained with great care. As it is a pharmaceutical company, it is mandatory

to keep up with the quality level with the other companies. As a result, they have received GMP

Clearance from Therapeutic Goods Administration (TGA) of Australia and from Gulf Central

Committee for Drug Registration, Executive Board of the Health Ministers' Council for GulfCooperation Council (GCC) states (representing Saudi Arabia, Kuwait, Bahrain, United Arab

Emirates, Qatar and Oman). The company is also in the process of obtaining approvals from

several other regulatory authorities including National Health Surveillance Agency (ANVISA) of

Brazil, Medicine and Healthcare Regulatory Agency of United Kingdom (UK MHRA), US FDA

etc.


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du cost accounting

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