A REPROT SUBMITTED TO
ALLAMA IQBAL OPEN UNIVERSITY ISLAMABAD

COST & MANAGEMENT ACCOUNTING”
Course Code (5538)


By


MUHAMMAD IRFAN
AD-514234
MBA (IT) 3rd Semester


Supervised By

MR. AHSAN

October 2009

ACKNOWLEDGMENTS
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I am heartily thankful to my supervisor Mr. Ahsan, whose encouragement, guidance and support from the initial to the level enabled me to develop an understanding of the subject.
I am also thankful to Business Manager Mr. Gulzar Ahmad
and to all of colleagues from KBK Electronics (Pvt.) Limited (Former SB Electronics Engineering & Control (Pvt.) Limited) who supported and helped me in writing this report.

Lastly, I offer my regards and blessings to all of those who supported me in any respect during the completion of the report.













ABSTRACT
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This report is concerned about Comparison of budgets and standards of a Manufacturing and Non-Manufacturing Organization of Pakistan. A necessary planning component is budgeting. Budgets outline the financial plans for an organization. There are various types of budgets.
Operating Budgets - A plan must provide definition of the anticipated revenues and expenses of an organization and more. These operating budgets can become fairly detailed, to the level of mapping specific inventory purchases, staffing plans, and so forth. The budgets, oftentimes, delineate allowable levels of expenditures for various departments.
Capital Budgets - Operating budgets will also reveal the need for capital expenditures relating to new facilities and equipment. These longer-term expenditure decisions must be evaluated logically to determine whether an investment can be justified and what rate and duration of payback is likely to occur.
Financial Budgets - A company must assess financing needs, including an evaluation of potential cash shortages. These tools enable companies to meet with lenders and demonstrate why and when additional support may be needed.
The budget process is quite important (no matter how painful the process may seem) to the viability of an organization. Several of the subsequent chapters are devoted to helping you better understand the nature and elements of sound budgeting.

TABLE OF CONTENTS
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Title ………………………………………… ………………………………………… ……….….... 1
Acknowledgment ………………………………………… ………………………………………… ………....2
Abstract ………………………………………… ………………………………………… …….…………..….3
Table of contents ………………………………………… …………………………..…………… .……….…4
Chapter I: Introduction
Brief History ………………………………………… ……………….……………………….. ….….5
Significance of Issue ………………………………………… ……….………….……….....………... 6
Significance of Issue ………………………………………… …………………………………7
Chapter II: Organizational Study & Data Collection
Organizational history and structure ………………………………………… …8
Data Collection ………………………………………… ………………………………………9
Information and Issue ………………………………………… …………………………………10
Chapter III: SWOT Analysis
Strengths ………………………………………… …………………………………………1 4
Weaknesses ………………………………………… ……………………………………14
Opportunities ………………………………………… …………………………………14
Threats ………………………………………… …………………………………………1 5
Chapter IV: Conclusion ………………………………………… ……………………………....16
References ………………………………….……… ………………………………………… 17
Annexes ……………………………...………… ………………………………………… ……18

CHAPTER 1:
INTRODUCTION
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Brief History:
The constant "beep, beep, beep" of bar codes being scanned at a check-out lane represents a pillar of modern inventory management systems: stock tracking.
In the earliest days of shop keeping, merchants wrote down purchases, or they looked at how many units were gone at the day's end and then did their best to forecast future needs. Experience and intuition were key skills, but it remained an inexact method, even when applied to operations that were quite small by today's standards.
After the Industrial Revolution, efficiency and mass production became the main goals of businesses, along with an improved customer experience at the point of sale. A team at Harvard University designed the first modern check-out system in the early 1930s. It used punch cards that corresponded with catalog items. A computer would read the punch cards and pass the information to the storeroom, which would then bring the item up front to the waiting customer. Because of the automated system, the machines could also generate billing records and manage inventory. The system proved to be too expensive to use, but a version of it is in use today in some stores, where merchants place cards with product information on the aisle for customers to select and bring to the checkout line. This usually applies to items that are expensive or large and to controlled items, such as medicines.
Merchants knew they needed a better system, and researchers created the forerunner of the modern bar-coding system in the late 1940s and early 1950s. It used ultraviolet light-sensitive ink and a reader to mark items for sale. Again, the system was too cumbersome and lacked the computing power needed to make it work. Technology had yet to catch up with their ideas.
The development of affordable laser technology in the 1960s revived the concept. Lasers allowed smaller, faster and cheaper readers or scanners. The modern bar code, or the Universal Product Code (UPC), was born and caught on just before the 1970s. As computing power became better, the power of UPC codes to help track and manage inventory improved exponentially.
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image002.jpg[/IMG]
Photo courtesy Dreamstime
Bar codes help retailers and vendors track inventory.

During the mid to late 1990s, retailers began implementing modern inventory management systems, made possible in large part by advances in computer and software technology. The systems work in a circular process, from purchase tracking to inventory monitoring to re-ordering and back around again.
In recent years, another promising technology for tracking inventory has also has made its way into stores, warehouses and factories. Radio frequency identification, or RFID, uses a microchip to transmit product information -- such as type, manufacturer and serial number -- to a scanner or other data collection device. It's superior to bar codes in several ways. For instance, a scanner reads the information from an RFID from several yards away, making it ideal for tracking items stacked on high shelves in warehouses. It also can encode more data than a bar code and in some systems tell merchants if an item is out of place in the store, providing excellent anti-theft characteristics.
Another popular means of automated inventory control is vendor-managed inventory. In this arrangement, the vendor is responsible for keeping its products stocked on a store's shelf. The vendor and retailer work closely together and share proprietary information.
This system also has many advantages for vendors. It allows them to ensure their products are properly displayed and available, and it also puts them in close contact with the retailer and its sales data. The feedback the vendor receives can play an important role in its marketing, research and development.

Significance of Issue:
what are the criteria for when a firm can record that a sale has taken place? The same criteria are important when thinking about inventory. An item is included in inventory (that is, no sale is booked) until the risk and rewards of ownership pass to another party. Consider the intention of the parties, legal title, possession, terms of contract, etc.
Goods in transit
Include in inventory of seller until title passes to buyer either at f.o.b. shipping point or f.o.b. destination.
Consignment goods
Include in consignor’s inventory until sold by consignee.
Goods sold with buyback guarantees
Include in inventory of seller because the seller is obligated to repurchase inventory in the future for some price.
Sales with a high rate of return (Conditional sales)
Include in the inventory of seller until the amount of sales returns can be reasonably estimated.
Sales on installment
Include in inventory of seller until the bad debts can be reasonably estimated.


CHAPTER 2:
ORGANIZATIONAL STUDY & DATA COLLECTION
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Organizational history and structure:
At ICI Pakistan we have, and continue to develop, a portfolio of businesses that are major players within their respective industries, bringing together outstanding knowledge of customer needs with leading edge technology platforms to provide superior products to our customers. Through these attributes, we aim to create superior value for our customers and shareholders, without compromising our commitment to Health, Safety, Environment and Security (HSE&S) and the communities in which we operate.
Our five diverse businesses are:
· Paints
· Soda Ash
· Polyester
· Chemicals
· Life Sciences
ICI Pakistan today: looking ahead to tomorrow
ICI Pakistan Limited was set up as a public limited company in Pakistan in 1952.
On January 2, 2008 ICI Plc, the parent company of ICI Pakistan was formally acquired by AkzoNobel; the acquisition was approved by the shareholders of both companies as well as regulatory authorities, and the take-over process was completed, making AkzoNobel our ultimate holding company.
AkzoNobel, a Fortune 500 company based in Amsterdam, is the world’s largest global producer of paints and coatings as well as one of the major manufacturers and suppliers of specialty chemicals. AkzoNobel is Chemicals industry leader on the Dow Jones Sustainability Indexes as well as being included on the FTSE4Good Index, and employs over 50,000 people in locations spread over 80 countries.

Our five businesses, Polyester, Soda Ash, Paints, Chemicals and Life Sciences, manufacture and sell a wide range of industrial and consumer products. These include:

· Polyester Staple Fibres,
· POY Chips,
· Light and Dense Soda Ash,
· Sodium Bicarbonate, Paints for the Decorative, Automotive, Refinish segments
· Specialty Chemicals
· Polyurethanes
· Adhesives
· A wide range of Pharmaceutical and Animal Health products manufactured on a toll basis.
We also market Seeds, and in addition are engaged in trading in various specialized chemicals for use in industries across Pakistan.
We are known for consistently developing new and innovative areas of business since the formation of ICI Plc in December 1926, by the merger of four of the largest chemical companies in the UK.

ICI today is of course, a part of AkzoNobel, and the coming together of these two great companies ensures one strongly led, technologically sophisticated company with healthy and sustainable long-term growth prospects.
ICI Pakistan Limited was set up as a public limited company in Pakistan in 1952. Our presence in this part of the world, however, predates the formation of the public limited company and indeed, Pakistan itself. The Khewra Soda Ash Company, a predecessor of ICI Pakistan Limited, set up a soda ash manufacturing facility in Khewra in 1944 with a capacity of 18,000 tonnes per annum. This facility was sited next to the salt range as rock salt and limestone; two key raw materials for manufacturing soda ash were available here in abundance.
In 1995 ICI Pakistan Limited set up a USD 490 million PTA manufacturing facility at Port Qasim, near Karachi, which was commissioned in 1998. In 2000, the business was de-merged to form Pakistan PTA Limited, which was at the time a subsidiary of ICI Plc UK.
Our turnover at ICI Pakistan Limited in 2008 was Rs 31.92 billion and the profit before tax crossed Rs 3.13 billion. We are one of the largest quoted companies on the Karachi, Lahore and Islamabad Stock Exchanges with a paid up share capital of Rs 1.39 billion. Our company employs around 1300 permanent staff members.

DATA COLLECTION
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BASIC DEFINITIONS
Inventory is the stock of goods a firm holds for sale or for processing in its primary operations. The activity (or activities) identified as the primary operations of the firm determines which assets may be considered inventory rather than other assets. For example, the autos on an automobile dealer’s lot are inventory, however, the autos used by the sales force of a textile manufacturer are property, plant, and equipment. Also, the fact that an asset is for sale does not make it inventory -- if the auto dealer has decided to sell its old tow truck, it would be listed as PPE held for sale.
The determination of inventory “cost” differs across merchandising (retailing) firms and manufacturing firms. A merchandising firm purchases goods for sale in their finished form. No further processing is needed to prepare the items for sale. A manufacturing firm purchases materials and processes them into a new product.
Merchandising Firms
Merchandising firms typically show only one inventory account on the balance sheet. This inventory account includes all of the costs of acquiring the goods for sale, such as purchasing, transportation, receiving, unpacking, inspecting, shelving, and bookkeeping costs. There are no manufacturing costs.
Manufacturing Firms
Manufacturing firms typically show three inventory accounts on the balance sheet (or a total on the balance sheet with the breakdown in the footnotes). These accounts reflect costs of “inventory” at various stages of production.
Raw Materials Inventory:
Goods not yet placed into the production process.
Work-in-Progress Inventory:
Goods in the production process but not yet completed.
Finished Goods Inventory:
Goods that are completed and ready for sale.
FLOW OF COSTS THROUGH THE INVENTORY ACCOUNTS
The costs of acquiring raw materials flow into the Raw Materials Inventory account. Once the production process begins, the costs related to those raw materials that are “in process” are transferred to the Work-in-Progress (WIP) Inventory account. Other costs of production are accumulated in the WIP Inventory account during production, such as wages of employees working on a production line, salaries of the plant manager, and depreciation of equipment used in production.
When the production process is complete, costs in the WIP Inventory account related to the completed units are transferred to the Finished Goods Inventory account until the goods are sold. When the product is sold, the costs in Finished Goods Inventory are transferred to the Cost of Goods Sold (COGS) account (an expense account).
Determining the “cost” to transfer from Raw materials to WIP, from WIP to finished goods, and from finished goods to COGS is the tricky part. For example, consider the difficulty of estimating cost for the simplest case of a raw material like nails. A manufacturer has a barrel full of nails (raw materials). When the manufacturer buys new nails, it pours them into the barrel and increases raw materials inventory (at actual cost) and decreases cash (or increases accounts payable). Then the manufacturer uses a nail in production. How much gets credited to the raw materials account; that is, what is the “cost” of the nail that was used? Some of the nails in the barrel cost $.01. Some cost $.012. Do you think manufacturers keep track of which nails are used? What if a worker bends one nail and “scraps” it? How does that cost get factored into the cost of inventory?
KEY POINTS:
1) By the time the costs related to a piece of inventory get to the finished goods account, the dollar amount in the account related to any given inventory item represents the accumulation of all costs of all raw materials on that inventory item, and an allocation of labor and overhead costs related to producing that item. Thus, the dollar amount of COGS (the expense that offsets sales revenue and represents production costs) is all costs of production, but only for those units sold during the period.
2) Recall the accounting issues associated with revenue recognition – what are the criteria for when a firm can record that a sale has taken place? The same criteria are important when thinking about inventory. An item is included in inventory (that is, no sale is booked) until the risk and rewards of ownership pass to another party. Consider the intention of the parties, legal title, possession, terms of contract, etc.
Goods in transit
Include in inventory of seller until title passes to buyer either at f.o.b. shipping point or f.o.b. destination.
Consignment goods
Include in consignor’s inventory until sold by consignee.
Goods sold with buyback guarantees
Include in inventory of seller because the seller is obligated to repurchase inventory in the future for some price.
Sales with a high rate of return (Conditional sales)
Include in the inventory of seller until the amount of sales returns can be reasonably estimated.
Sales on installment
Include in inventory of seller until the bad debts can be reasonably estimated. DETERMINATION OF INVENTORY COST
To answer the question: How does a firm measure inventory “COST”?, we will analyze detailed data about the inventory purchases and sales of ICF, Inc. That is, we will be acting like a bookkeeper who is recording a firm’s journal entries related to the inventory accounts. Using the detailed data, we will “prepare” ICF’s income statement, the inventory line-item on the balance sheet, and the information you can expect to see in an inventory footnote. Having prepared the financial information using the fundamental data, you should then be able to reverse engineer financial statement disclosures to ascertain the fundamental data.
A. Frequency of inventory calculations
Before we get into how to determine inventory cost, it is necessary to describe two different methods firms can use to “relieve” costs from the inventory accounts.
Periodic Inventory System
Purchases of inventory are recorded as increases in the inventory account.

Dr. Inventory (either Raw materials or WIP)
Cr. Cash or Account Payable
The balance in the inventory account is not reduced when a sale is made; instead, ending inventory (raw materials + WIP + finished goods) is determined by a physical count of items on hand. Cost of goods sold is computed (plugged) using the inventory equation (and recorded as an adjusting entry).
Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory
(Plug) (Known) (Known) (Known)
Remember, the firm is counting raw materials, WIP, and finished goods separately and ascribing some “cost” to each item in inventory. We will discuss how these costs are determined later.
The inventory account is then decreased and COGS account increased by the difference between Goods Available for Sale (Beginning Inventory + Purchases) and Ending Inventory.
Dr. Cost of Goods Sold
Cr. Inventory
In the periodic inventory system, the firm does not keep track of COGS and EI during the period. These numbers are derived purely through the inventory count at the end of the period which determines EI. Since there is no benchmark as to how much should be in inventory when the count is done, the periodic inventory system provides no control over inventory shrinkage (e.g., damage, theft). Since the cost of goods sold is a plug (based on the ending value of inventory), any loss due to shrinkage will be included in cost of goods sold.
Perpetual (Continuous) Inventory System
Purchases of inventory are recorded as increases in the inventory account (as they are with a periodic inventory system).
The balance in the inventory account is reduced and the balance in cost of goods sold increased every time a sale is made.
Dr. Cost of Goods Sold
Cr. Inventory
The amount by which the inventory account is reduced when a sale is made is an estimate of the cost of the item. This estimate is made based on the manufacturing specifications for the item. Therefore, the inventory account keeps a running balance of the goods that should be in inventory.
The estimates, however, will almost surely differ from the actual cost -- there is scrap, more (or less) labor than anticipated, it costs more or less to heat the factory than anticipated, etc. Thus, even if a firm is on the perpetual system, it does a physical count of inventory on the balance sheet date (at a minimum). The firm makes an adjustment to the inventory account for any differences (they should be minor) between the general ledger balances of the inventory accounts (raw materials, WIP, and finished goods), which were based on estimates, and the actual cost of inventory based on what was counted in the factory. The physical counts of inventory provide control over inventory shrinkage (e.g., theft, spillage, waste) because the firm knows what the cost-basis of ending inventory in the factory should be. Henceforward, we will assume firms use a periodic inventory system. Why?
1) Even firms that follow a perpetual system have to do inventory counts (as in the periodic system) as noted above.
2) When using financial statement data, the distinction is not important. Moreover, you probably won’t know which system a firm uses.
B. Cost Flow Assumptions
A key step to implement the periodic inventory system is to count inventory and ascribe to it some cost:
Cost = Q * P = where Q is the number of units and P is the price per unit.
Determining Q is relatively straight forward. Determining P is generally the tough part.
Some firms can specifically identify each unit in ending inventory so they know its cost. Such firms determine cost using the “Specific Identification” method. This method is usually not feasible and is found primarily with big ticket items, such as automobiles, jewelry, aircraft, etc.
If specific identification of the cost of each item in inventory is not feasible, then the company must make some assumption about the flow of goods through the factory so that it can assign a cost to those that are in inventory. That is, the company makes an assumption about which items were sold during the period and which items remain. It is very important to note that the flow assumption that is used to determine inventory cost need not match the actual flow of goods!
Weighted Average Method
Ending inventory is valued as a weighted average of the costs of goods available for sale. The cost of all units available for sale is divided by the total number of units available for sale to arrive at the average cost per unit. The number of units in ending inventory is multiplied by the average cost per unit to arrive at the ending inventory value.

First-in, first-out (FIFO); or last-in, still-here (LISH)
Assumes that the oldest inventory units (those purchased first) are sold first. Therefore, the newest units (those purchased most recently) remain in inventory.
Last-in, first-out (LIFO); or first-in, still-here (FISH)
Assumes that the newest inventory units (those purchased most recently) are sold first. Therefore, the oldest units (those purchased first) remain in inventory.
SUMMARY:
Most firms use either LIFO or FIFO. We will focus on these two methods in class. You should be aware of the existence of the other methods, but you will not need to implement them on an exam. Following is a layout of the T-accounts that we will use to discuss LIFO/FIFO inventory computations.
Typically, when a firm uses the LIFO inventory method, it keeps its regular inventory accounts (i.e., Raw materials, WIP and finished goods, which are shown as one inventory account below) on a FIFO basis and records an adjustment for the difference between LIFO and FIFO as follows.
Inventory (FIFO) LIFO Reserve (Contra-Inv.) COGS (LIFO) Beg. Bal.
Additions:
Purchases
of raw materials
+
Labor and overhead
Transfer to
COGS
Beg. Bal.
Current period adj. =
ΔLIFO Reserve (could be a debit)
Beg. Bal. = 0
Transfers from FIFO Inv. account
Current period adj. =
(could be a credit)
End. Bal. End. Balance End. Balance


CHAPTER 3:
SWOT ANALYSIS
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Strengths:
One thing which must be appreciated for ICI Pakistan Ltd is that they have the ability to change them according to the changing business and economical environment due to which company is still strong enough to face economical crises.

Weakness:
There is no such organization to which we can say that; it’s perfect, every organization has some weakness to which they try to overcome and try to become perfect one. Inventory theory problems usually estimate demand distribution parameters using historical data. Situations under which a better choice of estimators can reduce the cost due to statistical estimation are examined. The tests assume demand to be identically and independently distributed and lead time to be known. Results indicate that the sample mean and standard deviation are outperformed by an exponentially smoothed average and a modified exponentially smoothed mean absolute deviation.
Opportunities:
Lot of opportunities are there for ICI PAKISTAN Ltd to grow progressively and dynamically as they are the biggest industrial group, if they focus on the better policies that helps them in their deposit growth. If company annual report attracts the customer, investors and finance personnel than there are lot of opportunities for the company to gain maximum costumers.

Threats:
Modern world is a global village where competition is very tough, each organization whether it is small business enterprises or a multinational organization is improving itself so quickly that some time it becomes threat for its rivals. Same is the case with ICI Pakistan Ltd, today many leading companies of Pakistan are giving tough time to ICI Pakistan. These Companies are not only making their environment larger but also they are very much focused on economic environment concern to their business. They are attracting customers with their products so that they could become leading company and could have more customers than any other company. In my opinion ICI Pakistan’s management should consider it as a threat to their market repute and should resolve these problems in order to become higher then other biggest companies.

CONCLUSION
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While summarizing the report we studied that business and non business (NGOs) enterprises are concerned with inventory system in a way that all the factors of inventory system should be appropriate inventory system, and inventory situation affect directly to business which in last brings after effects to their stock

Some weak policies were also seen while studying the organization. Such policies are creating problem for company’s progress as it could be future threat for the company in such a competitive world. Some suggestion in this regard is also made that how could the company improve their inventory system to make their appropriate inventory system successful.

REFERENCES
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o Mr Imran Qureshi
Marketing Manager, Soda Ash

  • Mr. Ali Zaman
    Business Manager, Polyester Fibres

o Syed Danyal
Business Development Manager
www.icipakistan.com