LUCKY CEMENT LIMITED

Managerial Accounting

Submitted to:

Dr. Nayyer Zaidi

Submitted by:

Muhammad Areeb

Faizan Yasin

MBA 2 SEC-C1

LAHORE SCHOOL OF ECONOMICS

Table of Contents
Executive Summary.....................................................................................................................................3
Introduction.................................................................................................................................................4
Benefits of Cost Accounting.........................................................................................................................4
Cost Accumulation Method Used:...............................................................................................................6
Income Statement Analysis:........................................................................................................................6
1. Common Size Analysis:..................................................................................................................8
2. Horizontal Analysis:........................................................................................................................9
Analysis of Cost of Goods Sold:..................................................................................................................10
Application of Activity Based Costing:.......................................................................................................12
Breakeven Analysis:...................................................................................................................................15
Budgeting:.................................................................................................................................................16
Executive Summary
Cost accounting techniques that are practiced in a manufacturing organization are evaluated in
detail under this project. Lucky cement was chosen for this purpose and in depth analyses was
conducted on all the cost accounting techniques and the processes that were being followed in
that company. The accumulation of cost at each and every step of manufacturing process pretty
sums depicts and explains the involvement of cost analysis technique.

Topics like 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 and Budgeting and variance analysis were thoroughly examined and applied in this
project and most of all tried to cover all the topics covered by Dr. Zaidi in class.
Introduction

Lucky Cement:
Lucky cement was founded in 1996 by Abdur Razak Tabba and since then it continues to be one
of the leading manufacturers of cement in Pakistan. It has a state of art machinery which helps in
achieving low cost of production as compared to their competitors. It not only has domestic
customer base but also global customer base as well which include Iraq and Congo.
Energy conservation concept was led by Lucky cement in the industry and has taken many steps
to reduce carbon emissions. It is the first company in Pakistan that shifted their power plants
from furnace oil to natural gas. Lucky cement has also set up two power plants in Karachi with
the generation capacity of 20.5 MW and 25.20 MW.
The only company that owns art logistics terminal at Karachi port is Lucky cement. The existing
capacity of the terminal is 24,000 tons. Moreover, it has the advanced quality control system that
enables it to manufacture premium quality cement.

Vision:
We as a company are fully committed to expand our business operations locally and
internationally and to identify diversification opportunities in order to grow our business. We
remain committed to be socially responsible in all spheres of our operations.
Mission:
Our mission is to achieve a sustained growth along with providing premium quality cement at
lower cost of production by using state of the art production facilities. We are committed to
provide our human resources an environment to nurture their skills so that they can contribute to
achieve our long term goals.

Benefits of Cost Accounting

Profitable and unprofitable activities disclosure:

Cost accounting helps in calculating minutely the selling price and profitability of product, cost
associated and lastly separate activities that are profitable/unprofitable, so it becomes easy.
Guidance for future production policies:
This assist to plan the future depending upon the cost department given data of different
activities and processes.

Periodical determination of profit and losses:

This helps to find out the product loss and profits periodically.

To find out exact cause of decrease or increase in profit:

Factors that increase or decreases profit can be exactly determined by cost accounting with in the
organization. These factors could be selling price(lower), cost of product(higher) or because of
capacity that is unused and activities that are unproductive.
Control over material and supplies:
It helps in learning and preparing various accounts comprising of units of production, processes,
services and material cost or supplies depending upon the perspective department.
Relative efficiency of different workers:
Different plan could help be incorporated regarding incentives, reward and wages for
organization employees and worker.
Reliable comparison:
Reliable comparison could be taken in consideration of the product and services available in
market that are within organization’s or outside. Product low level cost could be attained by
using the high-level operation efficiency.
To find out adequate selling price:
Through cost accounting optimum level product selling price can be identified in robust market
conditions.
Decision on manufacturing or purchasing from outside:
Management could decide whether to go for in house production of product or getting it from
outside can be determined on the basis of costing data. This would assist in to cater with heavy
loses.

Cost Accumulation Method Used:

There are two types of cost accumulation method; job costing and process costing. Job costing is
used when company is producing unique and distinct products whereas process costing is used
when the cost object is masses of identical or similar units of a product or service. Lucky cement
has adopted process costing as it is manufacturing similar units. Lucky cement tends to divide
the total cost by the number of units produced in order to obtain per unit cost. All the costs are
accumulated department wise rather than product wise in job costing.

Income Statement Analysis:

Income statement of Lucky Cement

  2017 2018 2019
  Rupees in '000' Rupees in '000' Rupees in '000'
       
Gross sales 53,919,310 55,923,115 61,601,934
Less: Sales tax and excise duty 8,487,245 10,086,623 15,227,058
Rebates and commission 670,758 701,455 687,833
10,788,07
  9,158,003 8 15,914,891
Net sales 44,761,307 45,135,037 45,687,043
       
(24,578,219 (23,389,268 (24,388,760
Cost of sales ) ) )
Gross profit 20,183,088 21,745,769 21,298,283
       
Distribution cost (3,127,018) (2,018,376) (1,703,785)
(1,021,69
Administrative expenses (917,635) (1,107,527) 4)
Other charges (1,442,341) (1,640,105) (1,788,023)
Other income 1,241,450 1,420,461 1,993,472
 Finance cost (25,750)
Profit before taxation 15,911,794 18,400,222 18,778,253
       
Taxation      
(5,015,84 (5,032,19
Current (2,942,130) 4) 6)
Deferred (538,066) (440,193) (53,808)
  (3,480,196) (5,456,037) (5,086,004)

12,944,18 13,692,24
Profit after taxation 12,431,598 5 9

Income statement of Lucky Cement shows that net sales increased slightly over the three years
period whereas CGS declined in 2018 but increased again in 2019 which may be due to the
increase in raw material and fuel prices. Distribution cost on the other hand decreased
significantly over the three years period because of the decrease in logistics related charges
which may be due to the ease in government taxes on transportation. Administrative expenses
have shown an increase in 2018 because of the increase in salaries and benefits and also due to
the increase in maintenance cost whereas in 2019 it decreased slightly due to the significant
decrease in salaries and maintenance cost. Moreover, overall profitability increased from 12.4
million in 2017 to 13.6 million in 2019.

1. Common Size Analysis:

2019 2018 2017

     
Net sales 100.0% 100.0% 100.0%
Cost of sales -53.4% -51.8% -54.9%
Gross profit 46.6% 48.2% 45.1%
Distribution cost -3.7% -4.5% -7.0%
Administrative expenses -2.2% -2.5% -2.1%
Other charges -3.9% -3.6% -3.2%
Other income 4.4% 3.1% 2.8%
Finance Cost   0.0% -0.1%
Profit before taxation 41.1% 40.8% 35.5%
    0.0% 0.0%
Taxation   0.0% 0.0%
Current -11.0% -11.1% -6.6%
Deferred -0.1% -1.0% -1.2%
  -11.1% -12.1% -7.8%
    0.0% 0.0%
Profit After Taxation 30.0% 28.7% 27.8%

The CGS has the highest percentage as compared to other expenses however it slightly decreased
in 2018 which may be due to the decrease in coal prices. Coal is one of the major sources of fuel
to run the factory. Distribution cost as a percentage of sales decreased from 7 % in 2017 to 3.7 %
in 2019 which is due to the adoption of efficient means of transportation and also reduction in
diesel prices over the subsequent years. However, administration expenses remained constant.
Moreover, Profit before tax increased over the years due to the decrease in operating expenses.

2. Horizontal Analysis:

  2019 2018 2017

       
Gross Sales 114% 104% 100%
Less : sales tax and excise
duty 179% 119% 100%
Rebates and commissions 103% 105% 100%
       
Net Sales 102% 101% 100%
       
Cost of Sales 99% 95% 100%
       
Gross Profit 106% 108% 100%
       
Distribution Cost 54% 65% 100%
Administrative cost 111% 121% 100%
Other charges 124% 114% 100%
Other income 161% 114% 100%
Finance cost     100%
       
Profit before taxation 118% 116% 100%
       
Taxation      
Current 171% 170% 100%
Deferred 10% 82% 100%
  146% 157% 100%
Profit After Taxation 110% 104% 100%
       

In this analysis, 2017 is taken as a base year and change in percentage of all the items with
respect to 2017 is calculated. Gross sales increased up to 14 % in 2019 whereas net sales
remained constant because sales tax and excise duty also increased over the years which resulted
in slight increase in net sales as compared to the base year. However, CGS showed a slight
decline over the three years period. However, Distribution cost decreased to 54 % in 2019
whereas administration cost increased by 11 % in 2019 as compared to base year. Profit after
taxation increased by 10 % with respect to 2017.

Analysis of Cost of Goods Sold:

           
% %
Chang Chang
  2019 e 2018 e 2017
Salaries, wages and benefits 1,813,121 5% 1,719,233 -2% 1,751,070
Raw material consumed 1,347,185 -2% 1,379,713 5% 1,310,576
Packing material 2,206,013 -18% 2,681,104 -13% 3,076,061
14,746,45 12,679,26 13,598,10
Fuel and power 16% -7%
6 4 5
Stores and spares consumed 1,818,567 -1% 1,829,863 -13% 2,097,793
Repairs and maintenance 370,843 -2% 380,090 131% 164,210
Depreciation 2,290,019 2% 2,250,787 17% 1,929,062
Amortization 10,008   0 0% 0
Insurance 87,052 -4% 90,496 11% 81,628
Provision for slow moving packing
0% -100%
material 0 0 30,000
Provision for slow moving spares 0 0% 0 -100% 25,000
Earth moving machinery 204,487 -21% 258,088 15% 224,473
Vehicle running and maintenance 28,040 -17% 33,806 -37% 53,966
Communication 13,251 4% 12,773 -8% 13,953
Mess subsidy 21,739 5% 20,746 -56% 47,507
Transportation 26,267 -41% 44,835 82% 24,652
Traveling and conveyance 2,738 -19% 3,393 -41% 5,730
Inspection fee for electrical installation 0 -100% 2,568 101% 1,279
Rent, rates and taxes 6,708 -75% 27,358 718% 3,345
Printing and stationery 1,661 -9% 1,832 20% 1,523
Other manufacturing expenses 151,738 23% 123,108 14% 107,874
25,145,89 23,539,05 24,547,80
  7% -4%
3 7 7
Work in process:          
Opening 886,973 44% 614,095 -2% 628,533
-
Closing 58% 44%
1,401,759 -886,973 -614,096
-
  89%
-514,786 -272,878 1990% 14,437
24,631,10 23,266,17 24,562,24
Cost of Goods Manufactured 6% -5%
7 9 4
           
Finished goods:          
Opening 316,794 -28% 439,883 -4% 455,858
Purchases          
Closing -559,141 76% -316,794 -28% -439,883
  -242,347 -297% 123,089 671% 15,975
24,388,76 23,389,26 24,578,21
Cost of Goods Sold 4% -5%
0 8 9

Cost of sales is defined as the direct cost attributable to the production of certain goods. It
includes direct material, direct labor and other expenses necessary for production.
The major components of CGS include raw material, fuel and electricity, packing material and
stores and spares. Raw material consumed increased by 5 % in 2017 which is due to the increase
in the prices of raw material in international market. However, it slightly decreased by 2 % in
year 2019. Moreover, there is a drastic decrease in the cost of packing material which decrease
by 13 % in 2018 and 18 % in 2019 whereas fuel and power cost increased by 16 % in 2018
which is due to the increase in prices of coal. Furthermore, cost of electricity and diesel also
increased which resulted in increase in energy and fuel prices. Stores and spares declined by 13
% in 2018 whereas it only declined by 1 % in 2019. Stores include mainly coal in transit.
Depreciation is another major component of cost of sales which increased by 17 % in 2018 as the
machinery getting older.

Application of Activity Based Costing:

Activity-based costing (ABC) is an accounting method that identifies the activities that firm
performs and then assigns indirect costs to activities. An ABC system recognize a relationship
between costs, activities and products and through this relationship, it assigns indirect costs to
products. We have to first identify the activities that company performs and then select the most
significant activities. The production process of the lucky cement is as follows:

Production Processes:
The production of cement takes place with several steps:

 Quarrying of limestone and shale

 Dredging the ocean floor for shells
 Digging for clay and marl
 Grinding
 Blending of components
 Fine grinding
 Burning
 Finish grinding
  Packaging and/or shipping

The main activities in the production process are taken into account and each activity is further
categorized into cost hierarchy such as output unit level, batch level, product sustaining etc.
Indirect cost is then allocated to each activity based on the knowledge of the operations. We have
assigned overheads cost based on our knowledge of operations and the information we got from
the management. Then cost driver is selected for each activity. The main criteria for selecting a
cost driver is that there must be cause and effect relationship between cost driver and indirect
cost related to that activity. Hence, Quantity of material is selected as a cost driver for limestone
quarry activity whereas for crushing, raw mill, kiln and grinding activities, machine hours are
chosen as cost driver. Delivery hours are cost driver for transportation and no of bags is for
packaging and storage. Quantity of the cost drivers are obtained from the management. After
calculating the budgeted overhead rate, we multiplied the overhead rate by the quantity of cost
driver allocated to each activity for our cost object. By doing this total cost is calculated which is
then divided by the no of units that is 123,031 to calculate cost per unit which is Rs 151.65 per
unit.

Budgeted
Cost Budgeted Cost Overhead Indirect
Activities hierarchy Cost Driver driver quantity allocated cost rate
           
Limestone Batch Quantity of 1,120,000 tons
Quarry Level material material 2,184,164.20 19.50
Transportati Batch Delivery
on Level hours 1500 Delivery Hours 1,528,914.94 764.46
Batch Machine 12000 machine
Crushing Level hours hours 2,620,997.04 218.42
Machine 15,000 machine
Raw mill unit Level hours hours 5,460,410.50 364.03
Machine 17,000 machine
Kiln unit Level hours hours 3,931,495.56 231.26
Machine 10,000 machine
Grinding Batch level hours hours 2,839,413.46 283.94
Packing and Product No of bags 22,000 machine
Storage sustaining hours 3,276,246.30 182.01

Indirect cost allocated to the product:

Overheads
Activities Cost pool rate cost driver quantity Allocated
       

Limestone Quarry 19.50 500,000 9,750,733.04

Transportation 764.46 1500 1,146,686.21

Crushing 218.42 7000 1,528,914.94

Raw mill 364.03 10000 3,640,273.67

Kiln 231.26 5000 1,156,322.22

Grinding 283.94 3000 851,824.04

Packing and Storage 182.01 3200 582,443.79

Cost per unit based on 123,031 units

Direct Cost Total cost per unit

Direct Material cost 6,417,682 52.16

Direct Labor cost 5,498,235 44.69

     
Indirect cost    

Limestone Quarry 9,750,733.04 79.25

Transportation 1,146,686.21 9.32

Crushing 1,528,914.94 12.43

Raw mill 3,640,273.67 29.59

Kiln 1,156,322.22 9.40

Grinding 851,824.04 6.92

Packing and Storage 582,443.79 4.73

     

    233.00

Breakeven Analysis:
Breakeven point analysis is a way to calculate when a project will be profitable by comparing
total revenues with total expenses. The formula of breakeven point is as follows
 Fixed cost/ CM per unit
 Fixed cost/ CM % age
Contribution margin is calculated by subtracting revenues from variable cost. It tells us how
much amount is available to cover a fixed cost. There is a steady increase in the contribution
margin from 2017 to 2019. This is due to the greater increase in sales as compared to variable
cost. Moreover, fixed cost slightly decreased in 2018 but increased later. Breakeven sales on the
other hand increased in 2018 because of a sharp increase in fixed cost in 2018 but in 2019 it
decreased slightly because fixed costs decreased whereas contribution margin increased
drastically which led to decline in breakeven sales. Breakeven point in units is calculated by
dividing fixed cost with CM per unit. Breakeven point in units has increased in 2018 to 14,847
units but later declined to 14,063 units. It means In order to earn profits; company must sell units
more than 14,063 otherwise it will incur a loss.

  2019 2018 2017

Sales in rupees 61,601,934 55,923,115 53,919,310
Variable cost 23,317,644 22,019,847 24,724,465
Contribution Margin 38,284,290 33,903,268 29,194,845
Fixed Cost 4,369,784 4,500,415 3,579,685
Operating Profit 33,914,506 29,402,853 25,615,160
       
contribution margin 62% 61% 54%

Break Even Sales 7,031,269.11 7,423,391.33 6,611,240.62

       
units sold 123203.868 111846.23 107838.62
Variable cost per unit 189.26 196.88 229.27
       
Breakeven point in
units 14,063 14,847 13,222

Budgeting:
A budget represents a quantitative expression of a propose plan of action by management for a
specified period and an aid to coordinating what needs to be done to implement the plan.

Sales Budget:
As the information provided by the management, we calculated budgeted sales of 2019 by
increasing the actual sales of 2018 by 10 % according to the past trends. Moreover, multiplying
budgeted sales by selling price per unit, total revenue comes out to be Rs 67,667,050.

Sales Budget 2019 2018 2017

       
111,000. 113,350.
Budgeted Sales 123,031
00 00
Selling Price 550 480 450
       
 67,667,0 53,280,0 51,007,5
Total revenues
50 00 00
       

Production Budget:
In production budget, desired ending inventory is added into budgeted sales to calculate
production required. Desired inventory is assumed to be 5 % of the budgeted sales whereas
information about the beginning inventory is obtained from the management. By subtracting
beginning inventory from the production required, units to be produced are calculated.

Production Budget 2019 2018 2017

       
Budgeted sales
123,031 111,000 113,350
Add : Desired Inventory
6,152 5,550 5,668
Production required
129,183 116,550 119,018
Less: Beginning Inventory
7,000 5,000 4,000
       
Units to be produced
122,183 111,550 115,018

Direct Materials Budget:

According to the information obtained from the management, material per unit is approximately
50 kg which is then multiplied with production in units to calculate total material required for
production. Desired ending inventory is assumed to be 5 % of the production needs whereas
beginning inventory information is obtained from the management. By adding desired ending
inventory in the production needs and subtracting beginning inventory, materials to be purchased
is calculated.
 Direct Materials Budget 2019 2018 2017
       
Production in units
122,813 111,550 115,018
material per unit
50 50 50
Production needs
6,140,650 5,577,500 5,750,875
Add: Desired Inventory
307,033 278,875 287,544
Total needed
6,447,683 5,856,375 6,038,419
Less: Beg Inventory
30,000 22,000 18,000
       
Materials to be purchased
6,417,683 5,834,375 6,020,419

Direct Labor Budget:

As per the management, labor is paid Rs 60 per hour for the 8 hours shift whereas each unit
requires 0.75 labor hours. By multiplying labor hour required for each unit with production
required, total labor hours needed is calculated. Then total labor hours are multiplied with wage
rate to calculate total budgeted labor cost for the year 2019.

Direct Labor Budget 2019 2018 2017

       
Production in units
122,183 111,550 115,018
Labor hour
0.75 0.75 0.75
Total labor hours needed
91,637.25 83,662.50 86,263.13
Rate
60.00 55.00 50.00
       
Labor Cost
5,498,235 4,601,438 4,313,156

Overheads Budget:
Overheads budget for 2019 is calculated by looking at the trends of various components of cost
of sales over the past years. Information obtained from the management is also used in
estimating the overheads budget.

Overheads Budget 2019 2018 2017

       
Fuel and Power
13,313,227 14,278,010 15,571,911
       
Insurance
94,116 84,893 71,398
Maintenance
492,536 259,629 181,273
Depreciation
2,453,358 2,102,678 1,908,076
Travelling & conveyance
2,375 4,011 5,451
Transportation
53,802 29,582 20,435
Rent, rate and taxes
115,177 10,737 15,485
Mess subsidy
15,352 35,155 29,240
Inspection fee for electrical  
installation 1,279 1,279
Printing and stationery
1,924 1,599 3,524
Other manufacturing expenses
146,499 128,370 118,225
Communication
12,518 13,674 13,078
Earth moving machinery
250,345 217,739 206,643
Distribution
1,614,701 2,501,614 2,705,725
Administrative expense
996,774 825,872 684,242
       
       
 
19,562,704 20,494,843 21,535,984

Budgeted COGM:
All the values in the COGM are obtained from the previous budgets whereas beginning
inventory in WIP is obtained from last year financial statement. Moreover, ending inventory in
WIP is 20 % increase in the previous year ending WIP. Furthermore, beginning finished goods
inventory is the last year’s ending inventory and ending finished goods inventory is 15 %
increase in the last year finished goods inventory.

Budgeted COGM 2019 2018 2017

Beginning Material Inventory 30,000 22,000 18,000

Add: Materials Purchased 6,417,683 5,834,375 6,020,419

Material available for use 6,447,683 5,856,375 6,038,419

307,
Less: Ending material inventory 032 278,875 287,544
6,140,6
Direct material used 51 5,577,500 5,750,875

Direct labor used 5,498,235 4,601,438 4,313,156

Manufacturing Overhead 19,562,704 20,494,843 21,535,984

31,201,5
Total manufacturing costs 90 30,673,781 31,600,015
675,5
Add: Beginning work-in-process inventory 05 524,309 419,098
     
1,066,7
Less: Ending work-in-process inventory 68 1,000,200 980,000
30,810,3
Cost of Goods Manufactured 26 30,197,890 31,039,113
395,8
Add: Beginning Finished goods inventory 95 370,298 299,192
31,206,2
Cost of goods available for sale 21 30,568,188 31,338,305
364,3
Less: Ending Finished goods inventory 13 329,109 257,109
30,841,9
Cost of Goods Sold 08 30,239,079 31,081,196

Budgeted COGS:
The COGS budget is prepared by using material, labor and cost of goods manufactured budget.
Moreover, beginning finished goods inventory is obtained from last year’s financial statement
whereas ending finished goods inventory is 15 % more than the last year finished goods
inventory.

Budgeted COGS 2019 2018 2017

       
Cost of Goods Manufactured 30,810,326 30,197,890 31,039,113
395,894.
Add: Beginning Finished goods inventory 70 370,298 299,192
31,206,221.
Cost of goods available for sale 15 30,568,188 31,338,305
364,313.
Less: Ending Finished goods inventory 10 329,109 257,109
30,841,908.
Cost of Goods Sold 05 30,239,079 31,081,196

Budgeted Income Statement:

The budgeted income statement comprised of budgeted sales that we obtained from sales budget
and cost of sales budget. By subtracting budgeted sales from budgeted cost of sales, budgeted
gross profit is calculated. Operating expenses such as distribution and administrative expense are
assumed using the information provided by the management and by looking at the past trends.
Distribution cost is 15 % than the last year distribution cost whereas administrative expense are
assumed to be 10 % more as compared to the last years expenses. Tax is assumed to be same as
of last year.

Budgeted Income Statement 2019 2018 2017

51,007,5
Sales 67,667,050 53,280,000 00
(30,841,908 (31,081,1
Cost of Sales ) (30,239,078) 96)
19,926,3
Gross Profit 36,825,142 23,040,922 04
1,565,1
Distribution Cost 1,715,620 1,625,100 82
 1,009,2
Administrative Expenses 1,218,280 1,109,726 87
1,654,7
Other Operating Expenses 1,820,517 1,726,891 82
4,229,2
  4,754,416 4,461,717 51
32,070,7 15,697,0
Operating Loss (Income) 26 18,579,205 53
1,245,7
Other Operating Income 1,704,553 1,698,272 26
16,942,7
Profit/(Loss) from Operations 33,775,279 20,277,477 79
Finance Cost      
16,942,7
Profit/(Loss) before Taxation 33,775,279 20,277,477 79
(5,456,037 (5,456,03
Taxation ) (5,456,037) 7)
11,486,7
Profit/(Loss) after Taxation 28,319,242 14,821,440 42