Subject: Management Accounting and Controls

Company: Pak Electron Limited

Submitted By:

Zubair Shahid – 22-10396

Hammad Ahmed – 221440872

Haider Ali Awan – 221452154

Muhammad Awais – 2211242

Muhammad Bilal - 2210606

Section: E

Submitted to: Dr. Zia Rehman

 INTRODUCTION OF COMPANY:

PEL (PAK ELEKTRON LIMITED) is the manufacturing company that was established in 1956
through technical collaboration with AEG and was setup by Malik brothers. This manufactures
home appliances, transformers and switch gears. After some time it was acquired by Saigol
group in 1978 and initially it was catering the power division but then it made its mark in the
appliances division as well in which they started developing microwaves, refrigerators, deep
freezer, dispensers, TVs, air-conditioner, and Small Domestic Appliances like toasters, kettle,
iron, machines etc. The company also became the sole distributor of LG Corporation’s home
appliances in 2009. And currently they were working on many products to introduce in the
markets very soon. In 2019 company revenue reached to Rs.23, 077 Million with a mild increase
of 2.54% as compared with Rs.22, 504 Million of corresponding period of last year.

Organizational Chart:

Here is how the company has its organizational chart or we can say an organogram:
 Mission:

The main mission of PEL is to provide quality services and products to all of their customers,
and to make sure that they are completely satisfied- and to maximize the returns for all of their
shareholders by focusing on the personal development of their human resource so that they are
able to meet the future challenges accordingly by promoting good governance, a safe working
environment and good values to ensure that they are happy as well.

Vision:

“To excel in providing engineering goods and services through continuous improvement.”

Work Ethics:
PEL believes in serving the nation through making and selling home appliances and electrical
goods and is committed to represent ethical responsibilities and further they strive to be model of
principles and want to be accountable for all their actions. Apart from this they value human life
and try to maintain safe operations in the facility and are persistent in delivering the promises
they have made. They also value the safety, security and peace of mind for the employees and
embrace every opportunity of growth and development of the organization.

Type of Costing System PEL uses:

PEL uses process costing system as the product that has been chosen for the project from PEL is
refrigerator so that is basically a standardized product. It is not unique and it is assembled and the
customer will end up getting the same product which is a refrigerator. The refrigerator has
different categories and their Branding Head states that there are many categories in the
refrigerator. They have the glass wool type, the invert on etc. and within those there is different
shapes and sizes but the final product in the end will still be the same that is the refrigerator.

Find out and categorize Direct Material, Direct Labor and Manufacturing Overhead.

Direct Materials:
The direct material cost for PEL’s refrigerator involves:
 ● Steel metal for outer cabinet and door

● Glass wool

● Cooling system

o Compressor

o Condenser

o Coils made of copper

o Fins

● Aluminum sheets

● Vacuum formed plastic for interior

● Light

● Plug and wires

● Compatible UPS (if Inver on Series)

Direct Labor:
The direct labor that is involved along the production of the refrigerator are those who are
employed below the officer level and the people involved are helpers, technician and the
supervisors of that production unit and they are involved in the direct production of the
refrigerator while the other departments which are involved in the planning and marketing and
also financing of this refrigerator are indirect labor.

Factory Overhead:
The factory overheads include all other costs that are not directly involved with the production of
the final product and those costs for PEL include:

● Salaries, wages and benefits

● Travelling and conveyance
● Electricity, gas and water
● Repair and maintenance
● Insurance
● Depreciation
● Amortization of intangible assets
● Provision of obsolete and slow-moving stock
 ● Carriage and freight
● Erection and testing
● Other factory overheads

The employees at PEL have relatively low pay but the benefits they get are good especially the
health benefits their employees mentioned were really good. They are properly financed when
they have to travel to different countries for an advertisement shoot so the overall benefits are
really good.

What is the impact of Corona on that company and industry?

The main mission of PEL is to provide quality services and products to all of their customers, and to
make sure that they are completely satisfied- and to maximize the returns for all of their shareholders by
focusing on the personal development of their human resource so that they are able to meet the future
challenges accordingly by promoting good governance, a safe working environment and good values to
ensure that they are happy as well. Coronavirus (COVID-19) is likely to have an adverse impact
on Pakistan’s economy like the way the epidemic has taken its toll on the global markets and
the economy. Pakistani markets and imports are also starting to feel the impact of the outbreak
despite the fact that not a single case of the disease has been reported in the country. However,
the virus is spreading fast in neighboring Iran Many economists and stakeholders are reluctant
to anticipate the impact of the virus on Pakistan’s economy. However, a few of them are
skeptical while some others are optimistic about converting the threat into an opportunity.
Taking a look at the supplier side of things for PEL, we were told that since they cater to a very
large international market as well-, they need to ensure that the products they manufacture are up
to the quality standards for the domestic as well as the international market. For that purpose, a
significant part of the raw material procurement that PEL does is from international markets. A
major portion of these are procured directly, however, a certain part of them are also bought from
vendors/retailers that sell these imported products. This is also why they have been greatly
affected by the changing exchange rates.

Costs that can be avoided

As this is a global pandemic, every Multi-National company is facing a lot of crisis in their
business and expenditures. Before this pandemic we never heard about this lockdown situation.
All of the leading business companies are suffering from this pandemic, so as the Pak Elektron
Limited Company. This company has the best electronic and home appliances in Pakistan. As all
the other companies, PEL is also suffering from the business crisis. The major costs of the
companies are considered to be the billing utilities, salaries of the employees, manufacturing and
production costs of the company are the basic utilities that in normal routine and normal lifecycle
of life these expenses are very basic and they barely have an effect on the income and profit of
the company. But in this situation where business is having zero progress all the business had
stopped to a certain point where there is no external gain to the company. The cost that shouldn’t
be avoided is of some of their leading company employees that played very significant role in
their respective field such as, Marketing, Sales, and HR department.

Due to this many companies including Pak Elektron Limited many companies have started
Downsizing, because the manufacturing units are not working and if the units are not working at
a specific period of time for the production of appliances. Then how will the appliances come to
the market. Avoiding the salaries of employees, not only PEL but the leading companies of the
world like Emirates, Emaar, Etihad these companies have started downsizing, even they have
said to their employees we don’t have money to give you salaries for even next 3 months. If
anyone of you don’t want to continue they can resign. These business tycoons are going in loss,
so with this issue, downsizing of employees, termination of employees, and cutting of the
salaries and working from home is the way to avoid the cost crisis in lockdown situation. The
working and manufacturing of units have been reduced because in lockdown situation nothing
can stayed open because of this global pandemic. The owners of the companies are facing
existential crisis because they have their own kind of expenses, utility bills and their costs on
their running business as well. There is no production, no sale and, no income for them as well.
So, they are in the same scenario like their employees.

Online Trade

Online trade of business is the main source of the companies to earn some money. Online trade
in this lockdown situation is completely working as a flame of candle in the dark room. The
people of the country don’t have money to buy any external or miscellaneous expense in this
time of lockdown. The people who are buying any external or electronic product is in any case of
emergency or urgent need, and in that time online trade plays the main and vital role for the
company. The people book their orders and the delivery team delivers that to respective delivery
address, and the procedure of payment is done online. But this online trade has also affected the
cost and income of the people in lockdown. Like people before lockdown were using online
trade at the ratio of 35% but now that ratio has fallen to 5 to 7% which is also in a very rare case.
The trend of buying appliances online wasn’t very high in any time. People use to go the outlet
and compare 2 or 3 products and buy 1. This is why electronic industry is suffering more crisis
than any other industry in Pakistan. Online trade in this lockdown situation is not much working
in the respective direction but it is playing a role in what we say, “Something is better than
nothing”. Some of products are being sold, at least not very much but some revenue is coming to
the company which is a very significant thing in this time of trial.

IMPACT OF IMPORTS FROM CHINA

Providing quality products and services to our customers and maximizing returns for all
stakeholders by optimizing resource use. Promoting good management, organizational principles
and a safe and socially responsible work climate is mission of our company.

We provide quality products on cheapest price. We made refrigerators, deep freezer, A/C
invertor, transformer or other home appliances. We purchase different parts of refrigerators, AC,
transformers or all parts of home appliances on cheap price. As you know that china is the main
exporter in the world who provides these things on lowest rate. No doubt, these things also be
available in Pakistan, here the labor are too much costly and resources are too short that we are
unable to purchase these things from Pakistan.

The refrigerator PEL is developed, manufactured and distributed locally, and produces 100%
local items. It's Pakistan's cheapest choice. In all PEL coolers, the thermoplastic polymer known
as Acrylonitrile-Butadiene-Styrene is used because it is ideal for safe and secure food holding the
sun. It is regarded as a plastic that supports food. They are Pakistan's most affordable option.
With over 100 factories, PEL has about 1,000 stores and an after-sales support network. A ten-
year contract that guarantees simple maintenance and longevity. We import Acrylonitrile-
Butadiene-Styrene from china. It is the raw material that are used for the manufacturing of things
like refrigerator, cooler, and other home appliances

As we are importing different parts of refrigerator like steel metal for outer cabinet and door,
Glass wool, Compressor, Condenser, coils made of cooper, Fins, Aluminum sheets, Light, plugs
and wire, and compatible UPS. In Pakistan we have made an assembling unit where these things
assembled to form refrigerator. Sometimes, labor are too costly and resources are too short that
assembling of refrigerator become impossible. In that case we import refrigerator or other home
appliances directly from china because labor are very cheap in china. The company also accounts
for scrap, spoiled, or defected goods. They have an internal maintenance department at the
factory- where each individual defected piece is sent so it can be fixed, and other than that, for
the refrigerator department in particular, since the assembling process of it is all automated, the
probability of error is close to zero. Other than that, the scrap material that is left out from the
packaging that their material comes from is discarded as waste. We also imported scrap items or
parts from china for the maintenance of defected things.

ISSUES IN COSTING
The rating agency notes that the rates reflect the diversified income stream and strong presence
of Pak Elektron Limited (PEL) across the market for appliances and power products. The
company has continued to concentrate on growing slate products and sales by launching new
goods (TV and water supply). By exploiting its name, the company has concentrated. While
pricing has recently been revised, the business has seen a margin contraction due to high costs of
depreciated Pakistani Rupee and the high cost of debt.

The cash flows of the Company have remained under pressure and have resulted in reduced
coverage levels in conjunction with high borrowings. Another burden on the company is the
increase in interest rates.

Because of its long inventory and receivable duration, PEL is vulnerable to financial risks.
Though improvement was observed during 6MCY19 in the working capital process, space for
further improvement still remains. The financial structure of the Organization is characterized by
intermediate leverage by borrowing to sustain high inventory rates. The business published
(March 2019) a Commercial Paper to fund the requirements of working capital and is currently
issuing a private Sukuk for the same purpose. The ratings depend on the ability of the
management to retain its market share and margins. Any further margin deterioration, in turn,
may adversely affect the rate.

SOLUTIONS
After doing a thorough analysis of the financial statements of the company as well as the
information gathered upon asking the workers at PEL, we have concluded that the company’s
operations and costs are being handled pretty well and professionally. However, a few problems
that were faced while analyzing the financial statements and the solutions that we can provide to
the company include that the company should have separate financial statements for each
product or add it with their notes. This will help provide insights to the performance of every
single product being produced and it makes it easier to analyze individual products performance
and financials. This also makes it easier to point out the financial issues related to specific
products and sort them out.

The company should separate the refrigerators and deep freezers since that is being done
collectively.

The company should shift from imported spare parts to locally assembled ones as due to the
decreasing value of Pakistani rupee, the costs for imported parts are high. So this will help the
company to increase its profit margins. This would also help reduce the burden of high cost of
debt.

The company should reduce its receivable durations which will help increase the cash inflows
resulting in a better cash flow. This way the company will have to rely less on interest and
borrowings, so the company can have healthier financial statements.

The company should try and improve its profit margins in order to avoid any adverse effects on
the financial statements.

The company should provide more information on the method of costing or the inventory
valuation technique that they have used.

The company should clarify the basis on which the assumptions of the financial statements have
been made. This would help better understand the financial statements for the stakeholders as
well as other bodies involved.

Thank You!