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Assignment on management accounting
1. Management Accounting Report on
ABC implementation on
ACME Pharmaceuticals Ltd. and
BIOPHARMA Pharmaceuticals Ltd.
2. ABC Implementation Page 2
Management Accounting Report on
ABC implementation on
ACME Pharmaceuticals Ltd. and
BIOPHARMA Pharmaceuticals Ltd.
Prepared for:
Course Instructor: Md. Shahriar Parvez
Course Code: ACT 502
Course Title: Management accounting
Prepared by:
Name ID
Moshfiqur Rahaman 13233367
MD. Mohiduzzaman 141357001
Abdul Matin 141357004
Abul Bashar 13233204
Kharul Bashar 141357003
Md. Aktar Hossain 13233216
Submission date: 30 January 2015
3. ABC Implementation Page 3
30 January 2015
Md. Shahriar Parvez
Assistant Professor
Department of Business Administration
Banani, Dhaka.
Dear Sir,
With due respect here I present my term paper on ABC Implementation In ACME
Pharmaceuticals Ltd & Biopharma Laboratories Ltd Ltd. This paper focuses on the
organizational structure on Activity-Based Costing (ABC) success in ACME
Pharmaceuticals Ltd and Traditional Costing process in Biopharma Laboratories
Ltd.
I would like to thank you for your guidance and support.
I have tried my best in preparing this paper. In spite our lack of experience in this
field of work, I hope that we have been able to present a realistic and substantial
report.
We will be glad to clarify any queries you may have regarding this paper.
Sincerely
Moshfiqur Rahman
On behalf of the Team
City University
4. ABC Implementation Page 4
Acknowledgement:
I would like to express my gratitude to all those who gave me the possibility to
complete this report.
I am deeply indebted to our course instructor Md. Shahriar Parvez, whose help,
stimulating suggestions, knowledge and encouragement helped me in all the times of
study and analysis of the assignment in the pre and post research period. I am also
grateful to my seniors who helped me at a great extent to prepare this paper.
Most especially to my classmates and friends and Specially to The Almighty Allah,
who made all things possible.
5. ABC Implementation Page 5
Executive Summary:
This paper aims to investigate the effect of corporate culture and
organizational structure on Activity-Based Costing (ABC) success in ACME
Pharmaceuticals Ltd and Traditional Costing process in Biopharma Laboratories
Ltd. Data were collected by survey questionnaire and their website as well as
using internet. The results indicate that ACME achieved a moderate level of
ABC success and Biopharma Laboratories doesn’t follow ABC for their
limitations. We found to affect the ABC success implementation significantly in
ACME Pharmaceuticals Ltd and identify their limitations of Romania Biopharma
Laboratories Ltd.. The culture factors of outcome orientation and attention to
details were significantly associated with ABC success. The results also show
that organizational culture factors were more strongly associated with ABC
success implementation than organizational structure factors.
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Contents:
Introduction: ................................................................................................................................. 07
Problem Statement:...................................................................................................................... 07
Purpose of the study: ....................................................................................................................07
Objectives of the study:................................................................................................................. 08
Methodologies of the study: ..........................................................................................................08
Limitations of the study: ................................................................................................................09
ACME Laboratories Ltd.:
Inception ........................................................................................................................................09
Vision Statement............................................................................................................................09
Mission Statement: ........................................................................................................................09
Objectives of ACME:.......................................................................................................................10
Traditional Product Costing System:..............................................................................................10
Comparison of traditional costing and ABC:..................................................................................11
Sample of existing batch costing system: ......................................................................................12
Conclusion:.....................................................................................................................................14
Biopharma Laboratories Ltd ..............................................................................................................
Research & Development (R&D):...................................................................................................15
Quality Assurance (QA: ..................................................................................................................15
Production:.....................................................................................................................................15
Mission:..........................................................................................................................................16
Vision:.............................................................................................................................................16
Costing system: ..............................................................................................................................16
Advantages & Disadvantages of Traditional Costing
Easy to Apply:.................................................................................................................................16
Ability to Distort.............................................................................................................................17
Outdated:.......................................................................................................................................17
Activity-Based Costing: ..................................................................................................................17
Conclusion:.....................................................................................................................................17
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Introduction:
The report has been prepared for term paper with a view to stipulate the
learning outcomes by conducting methodical research.
As I worked mostly at cost accounting department during the period of survey,
I hunted for problem areas in product costing and allocation of cost elements,
if any. Being one of the leading pharmaceutical manufacturers, dealing with
thousands of products ACME also face difficulties while determining actual
product costs especially in allocating the overhead costs. I walked through the
problems in depth and tried to approach appropriate solutions. Hence, this
report is the outcome of action research throughout the organization.
Problem Statement:
The problem statement is as follows, “problems with traditional costing
system and how to overcome these by implementing more forward looking
costing approach”.
Purpose of the study:
The purpose of this study is to investigate which are the practical problems in
traditional costing system and supremacy of Activity Based Costing (ABC) in
controlling cost and improving profitability. Moreover, this will shed the light
on the procedure for implementing ABC system within companies that handle
everyday transactions through operational and financial information systems.
ABC provides the tool with which to go beyond gross margins and penetrate
the real economics of all aspects of cost and profitability, including that of
servicing customers. Implementation of ABC in a manufacturing setting can
provide solutions to many of the critical business issues the pharmaceuticals
industry is currently facing.
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Objectives of the study:
I segregated the purpose on further pieces and hence defined the objectives of
the study.
The objectives of the report have been given bellow.
• To analyze the existing cost accounting system.
• Identify the shortcomings in existing system.
• To develop the product costing on the basis of ABC
• To analyses Internal control system.
• To analyses accounting information systems as well as Profitability
analysis on the basis of cost objects, i.e.; product based, geographic location.
Methodologies of the study:
This study started from completing a questionnaire by the respondents later,
gathered information was made more detailed in the interview sessions of
corresponding individuals; the information was also extended with problems
which was beyond the scope of the questionnaire .The interviews were
conducted with people employed in operational and accounts divisions; most
of the time was given to people responsible for functioning of the activity-
based costing system. To verify and extend the collected information, the
interviews were followed by telephone conversations and e-mail messages.
Gathered information was confidential and for that reason, the interviews
were not recorded.
Following methodologies are used for conducting the study:
• Primary data: On job observation and learning. Personal interviews and
discussion with concerned personnel
• Secondary data: The study based on secondary data. Data required for the
study were collected from financial manual, inventory control manual,
procurement manual, audit reports, financial press, web site of ACME and
other texts book.
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Limitations of the study:
The major limitations that I have encountered during the study and
preparation of the report are as follows:
• Restrictions as per the organizational policies to disclose some of the
internal information and financial data in public.
• The study based on the manual and other management reports within
ACME.
• Vastness of the accounting and cost accounting procedures of a big
organization like ACME, which is really difficult to understand in such
a short span of time.
• Lack of adequate information and data.
• Had to rely on some published information
• cost constraints
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Definition of Management Accounting
Management accounting or managerial accounting is the process of
identifying, analyzing, recording and presenting financial information that is
used for internally by the management for planning, decision making and
control.
In contrast to financial accounting, managerial accounting is concerned with
providing helpful information and reports to internal users such as managers
and entrepreneurs etc. so that they can control and plan the business
activities.
NATURE OF MANAGEMENT ACCOUNTING
Nature of management accounting guides to know main characteristics of
management accounting. Following are main points which show the nature of
management accounting:
• No Fixed Norms Followed: In financial accounting, we follow different
norms and rules for creating ledgers and other account books. But there
is no need to follow fixed norms in management accounting.
Management accounting tool may be different from one organization to
other organization.
• Increase in Efficiency: It is the nature of management accounting that it
is used for increasing in the efficiency of organization. It scans the points
of inefficiency through analysis of accounting information.
• Supplies Information not Decisions: Management accountant supplies
accounting facts and information and also provides interpretation, but
decision making is fully dependent on higher authorities. Management
accounting is just guide.
• Concerned with Forecasting :It is the temperament of management
accounting that it is fully concerned with forecasting. In management
accounting, historical accounting information is analyzed through
common size financial statement, ratio analysis, fund flow analysis and
accounting data tendency for knowing the probability of next fact.
11. ABC Implementation Page 11
FUNCTIONS OF MANAGEMENT ACCOUNTING
The functions of managerial accounting include:
Margin analysis: Determining the amount of profit or cash flow that a business
generates from a specific product, product line, customer, store, or region.
Breakeven analysis: Calculating the mix of contribution margin and unit
volume at which a business exactly break even, which is useful for determining
price points for products and services.
Constraint analysis: Understanding where the principle bottlenecks are in a
company, and how they impact the ability of the business to earn revenues
and profits.
Target costing: Assisting in the design of new products by accumulating the
costs of new designs, comparing them to target cost levels, and reporting this
information to management.
Difference Between Financial & Management Accounting
Financial Accounting Management Accounting
Format: Financial accounts are supposed to be in
accordance with a specific format by IAS
so that financial accounts of different
organizations can be easily compared.
No specific format is designed for
management accounting systems.
Planning
and control:
Financial accounting helps in
making investment decision,
incredit rating.
Management Accounting helps
management to record, plan and control
activities to aid decision-making
process.
External Vs.
Internal:
A financial accounting system produces
information that is used by parties
external to the organization, such as
shareholders, bank and creditors.
A management accounting
systemproduces information that is
used within an organization, by
managers and employees.
Focus: Financial accounting focuses on history. Management accounting focuses on
future.
Users: Financial accounting reports are
primarily used by external users, such as
shareholders, bank and creditors.
Management accounting reports are
exclusively used by internal users viz.
managers and employees.
department: Preparing financial accounting is the
work of finance department.
Managerial accounting is not specific
task of particular department. Co-
ordination of all departments creates
management accounting.
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Management Accounting USE as a tool FOR DECISION MAKING
Management accounting is fundamental in strategic planning. When a
business is looking to make a strategic decision, for example, whether to
develop a new product line, acquire another business or expand into other
countries, the CIMA trained management accountant can provide advice. They
can use a number of tools to assist decision-making. These include ratio
analysis, budgets and forecasts (such as cash flow and variances).
13. ABC Implementation Page 13
ACME Laboratories Ltd.
Inception:
ACME Laboratories Limited is leading Pharmaceuticals Company in Bangladesh
established in the year 1954. The company has a very big manufacturing plant
located at Dhamrai, 40 kilometer away from the central of Dhaka city. The
company produces various types of dosages’ forms which include tablets,
capsules, oral liquids, ampoules, dry powder vials, powder for suspension,
nasal Drops, eye drops, infusion, injection etc.
Since its inception, ACME has been lunching and innovate products in order to
fulfill unmet demand of the medical community. The focus has to bring more
new technologically advanced molecules to this country.
The company operates in a single industry segment, it has its own
manufacturing facilities, and the principal activities of the company are
formulation, manufacturing and sales drugs in home and aboard.
Vision Statement:
Our vision to ensure Health, Vigour and Happiness for all and is on a Perpetual
quest for excellence.
Mission Statement:
Our holistic approach is to ensure Health, Vigour and Happiness for all by
manufacturing ethical medicines of the highest quality at affordable prices and
expanding in the local and global market. We view ourselves as partners with
the doctors, healthcare professional, all other customers, our employees and
harmonize with environmental issue.
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Objectives of ACME:
• ACME wants to discover, develop and successfully market innovative
products to cure diseases, to ease suffering and to enhance the quality of life.
• It wants to be recognized for having a positive impact on people’s lives with
our products, meeting needs and even surpassing external expectations.
• It strives to create sustainable earning growth. Ranking in the top quartile of
the industry and securing long-term business success.
• It wants to build a reputation for an exacting workplace in which people can
realize their professional ambitions.
• ACME strives for a motivating environment where the creativity and
effectiveness are encouraged and where cutting-edge technologies are
applied.
Traditional Product Costing System:
Under existing system, factory overhead cost is not included in product batch
cost. Product costs are determined on the basis of direct raw materials and
packing Materials cost. Under the traditional costing system, direct labor and
factory overhead could not be ascertained to product directly. As
consequence, these costs were apportioned as a percentage (%) of material
cost for the product, which didn’t really allocate the true cost for producing
that particular product, i.e. did not consider the cost drivers.
As a result, costs for some products were over charged and some were under
charged and accordingly priced without reflecting true cost for particular
product, pursuing suboptimal decisions. Moreover, decisions making for
contract sales under spare capacity were not appropriate because of failure to
identify true production costs for relevant product.
In this persistent risk of taking suboptimal decision, the company’s divisional
head
(accounts & finance) formed a team to look for more forward looking costing
system which will facilitate true allocation of cost, thereby ensure optimal
decisions regarding production mix or subcontracting sales. After
comprehensive analysis of the problems, literature review and group
discussion including me, it was proposed to introduce Activity Based Costing
(ABC) to address this issue.
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Comparison of traditional costing and ABC:
According to AICPA (2004:2), the basic distinction between traditional cost
accounting and ABC is as follows: traditional cost accounting techniques
allocate costs to products based on attributes of a single unit. Typical
attributes include the number of direct labor hours required to manufacture
unit, purchase cost of merchandise resold or the number of days occupied.
Allocations, therefore, vary directly according to the volume of units produced,
the cost of merchandise sold or the days occupied by the customer. In
contrast, ABC systems focus on activities required to produce each product or
provide each service based on each product or service’s consumption of the
activities. Using ABC, overhead costs are traced to products and services by
identifying the resources, activities and their costs and quantities to produce
output. A unit or output (a driver) is used to calculate the cost of each activity
consumed during any given period of time.
An ABC system can be viewed in two different ways. The cost assignment view
provides information about resources, activities and cost objects. The process
view provides operational (often non-financial) information about cost drivers,
activities and performance.
The traditional method of costing system usually allocates costs based on a
single volume measure, such as direct labor hours or machine hours. While
using such a simplistic volume measure to allocate overheads as an overall cost
driver, this approach seldom meets the cause-and-effect criteria desired in
accurate cost allocation. This method of costing become increasingly
inaccurate as the relative proportion of overhead costs rises.
This distortion of costs can result in inappropriate decision-making.
ABC is therefore an alternative approach to the traditional method or arbitrary
allocation of overheads to product, services and customers.
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Traditionally, direct labor and factory overhead were allocated as a percentage
of material costs,
i.e.; 25% of material cost.
Production cost per unit= Tk 12.01 + 25% of 12.01
=Tk 15.01
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Conclusion:
One of the most important decisions that a manufacturing company should
make is to determine the product mix that will maximize profits. Given that a
company has capacity constraints, it may not be able to produce every unit of
product demanded by the market.
The best action to take in this case is to focus on the most profitable products
for the company and to use all the existing resources of the company to
produce these products. In this way the company can increase its profitability
because it will use its existing resources to produce the most profitable
products. It is also clearly apparent in ACME laboratories ltd. that production
and selling of most profitable products can impact net profit substantially given
the same revenue. That is how ABC contributes in value creation process under
constraining factors.
With regard to the empirical study conducted, all the respondents categorically
stated that ABC is more accurate and complete as it encompasses the entire
value chain as opposed to traditional costing methods such as standard
costing, which excludes taking the product through the value chain. Traditional
overhead costs are allocated to products and services by volume, therefore
penalizing high volume products and subsidizing low margin/high cost
products. ABC cost allocation is driven by volume and other relevant cost
drivers, for example setups, number of orders, number of batches, process
time etcetera. Identifying and understanding the cost drivers, lead to better
management decisions and controls.
In competitive environments, managers require better information, not only
about their products and services cost, but also about the cost of the different
activities needed to create these products or services. Traditional accounting
systems do not provide this information. The activity-based management
approach allows everyone in the organization to understand where costs are
being incurred, why they are being incurred and how these activities
contribute to a higher value added to customers. Additionally, ABC seeks to
identify activities that can be eliminated or improved. It can also be added
that, if all company employees follow the activity-based approach,
communications improve and changes are easier to make.
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Biopharma Laboratories Ltd
Biopharma is one of the fast growing pharmaceutical companies in
Bangladesh. It is now manufacturing more than 250 products including
lifesaving drugs at affordable cost and committed to serving the need of ailing
community with products of excellent quality, safety and efficacy complying
the guideline of regulatory requirements of WHO cGMP and Quality
Management System.
Research & Development (R&D)
Our R & D activities are based on the motto striving for the timely
development of products that responds to and satisfies the customer's needs.
Our R & D capabilities not only allow us to provide you with what you need
today, but also provide us with anticipation and innovation to provide you with
what you need tomorrow. You can trust our products as we guarantee them.
Quality Assurance (QA):
A Department consists of highly skilled and well trained personnel always
follow the guideline of WHO cGMP in all areas of operations to ensure highest
quality products. It is well equipped with most modern and sophisticated
equipments. In order to ensure highest quality in every sector, QA Department
carries out periodical inspection either internal (to all section related to
manufacturing) and external (to raw material manufacturer). The Department
also monitors the quality of finished products during the shelf life after its
marketing.
Production:
Our production lines are designed to meet the local and global demands. We
are now manufacturing products of almost all the therapeutic groups in
different dosage forms such as tablets, capsules, syrup¸ suspension, dry
powder for suspension, cream, ointment and injectables. We combine
machine technology and skilled human resources to produce highest quality
products. The production lines are well equipped with high tech machinery. All
machines are operated by well trained persons and supervised by our experts.
These machines are also maintained and upgraded periodically by our trained
and experienced engineering team to ensure good running condition.
20. ABC Implementation Page 20
Mission:
To serve mankind
To build customer's trust as a trusted company both in products and services.
To ensure healthy and sustainable growth of each concern.
To maintain the quality in all areas of operation by continuous development of
human resources.
To build strength carefully in important areas that offers the resources for
tomorrow's business opportunities.
Vision:
The vision of Biopharma is to play the leading role in pharmaceuticals sector of
the country by providing safe, effective and finest quality products which will
bring benefit to people improving quality of life.
Costing system:
Biopharma Laboratories Ltd use traditional costing system. They use costing
methods to allocate costs to various products and services. They add up all
costs of manufacturing a product in order to assign a total cost to it. This
includes direct costs, such as labor cost, and overhead costs, such as
depreciation on machinery. They use traditional system because it is easy to
prepare and low costing.
Advantages&DisadvantagesofTraditionalCosting
Easy to Apply:
Traditional costing is relatively easy to apply. It's easy for managers to trace all
direct costs associated with a product, including labor and direct material
costs. It's more tricky to assign overhead costs to different products. In a
traditional manufacturing environment, direct labor hours were a simple way
to apportion overhead costs. At the time traditional costing methods were
developed, direct labor was typically the biggest cost of production. Therefore,
it was used as a proxy to allocate overheads too, with managers assigning
higher overheads to products with higher direct labor hours.
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Ability to Distort:
For a business that manufactures a large volume of a few products, traditional
costing could provide a good idea of the costs of manufacturing a product.
However, as the level of diversity in output rises, traditional costing becomes
less reliable. Firms that have a lot of overhead expenses need a more reliable
method to allocate the overhead costs to different products. If a business uses
incorrect costing to allocate costs, it could price its products incorrectly. This
might affect its competitive position.
Outdated:
The manufacturing environment has changed in the decades since traditional
costing methods were developed. Machines and computers are used more
often. Technological developments have led to a decreased need for labor in
manufacturing processes. This means that a system that uses direct labor as a
proxy for allocating different overheads is outdated. This has led to the
development of alternatives, such as activity-based costing.
Activity-Based Costing:
One more recent way of allocating overhead costs is the activity-based costing
method. In this method, the business finds out what all of the different
activities are related to manufacturing its products. It then assigns costs to
different activities, such as ordering materials. Then it allocates a share of this
activity cost to different products or services based on the share of the activity
that each product or service uses.
Conclusion:
As the part of our study, we have selected to analyze the problems with
existing costing system and how to overcome these by using activity based
costing-as tool of cost control and improved profitability. ABC is a practical tool
that can be used by companies of all sizes not only to better determine the
cost of their products, but also to better understand why they cost what they
do. But successful implementation largely depends on top management’s
commitment, well-trained team, software support and crucially identifying
accurate cost drivers.