GREEN UNIVERSITY OF BANGLADESH

Assignment
on
“Application of cost Accounting on Manufacturing Sector in Bangladesh”

Submitted to

DR. MOHAMMAD DELWAR HUSSAIN

Assistant Professor

Department of Business Administration

Submitted by
S A M Mahfuzul Hoque
ID:193006050
Department of Business Administration

Date of Submission: 13-09-2020

Cost Accounting System Used by Beximco
Pharma

ABSTRACT

The more the development of the market economy, the more the significance of management
accounting. To keep pace with this increasing market economy, it becomes imperative for the
organizations to adopt new management accounting tools and techniques. It is also important for
the Bangladeshi organizations. This paper seeks to obtain an overview of the management
accounting practices in the listed manufacturing companies of Bangladesh. Data has been gathered
by a questionnaire survey from eight manufacturing sectors. The analysis has revealed that though
there is difference in extent of practices among the sectors, all sectors fail to practice some newly
developed techniques. If this trend continues, Bangladeshi organizations will lag behind in the race
of global competitiveness and comparative advantages. It is therefore, some policy
recommendation has been made to improve and fasten the management accounting practices.

Origin of the Report

This report was originated to make a study about the cost accounting system of Beximco
Pharmaceuticals Ltd. for the requirement of completion of 1st semester of Master of Business
Administration (MBA) program of the Department of Accounting & Information Systems,
University of Dhaka. This term paper was an attempt to acquaint the students with the real-world
situations so that the knowledge gained from the classroom is further strengthened. As the
classroom discussion alone cannot make a student perfect in handling the real business situation,
therefore it is an opportunity for the students to know about the real-life situation through this term
paper.
Background of the Report

Cost accounting as a tool of management provides management with detailed records of the costs
relating to products, operations or functions. There are many more cost accounting techniques
which are used for cost determination, control and analysis purposes. This study attempts to
investigate the adoption levels and also satisfaction levels of twenty cost accounting techniques of
manufacturing organizations in Bangladesh. It also examines the influence of cost accounting
techniques on overall satisfaction level, decision-making and performance improvement. To
achieve these purposes, I select Beximco Pharmaceuticals Ltd manufacturing organizations have
been surveyed. Findings reveal that the high adoption levels of cost accounting techniques are
insignificant. It also shows that there are few cost accounting techniques which have influence on
overall satisfaction

level, decision-making and performance improvement. The importance of cost accounting and cost
accounting information is being increased day by day. It is not only help to reduce cost but also in
all kind of decision making. Without analysis of cost accounting information, no manager can
make effective decision. The cost accounting collects the data, analyze those data and help the
managers to make better decision. In accordance with development of new tools and techniques
of cost accounting the use of cost accounting information is changing. Managers need to use the
cost accounting information in different way from traditional method to evaluate the
performance. Developing and accepting the JIT, TQM and other contemporary costing techniques
force to manager to change the performance evaluation techniques and requires different cost
accounting information unlike traditional labor-based information now a day’s which become
obsolete. Primarily this report is concerned with cost accounting information by an organization
in decision making as well as corporate reporting, the tools and techniques used by organizations
and the implications of these in the organization.

We select Beximco Pharma to examine the use of cost accounting information and cost accounting
tools and techniques used by the company. We emphasize on the implication of using information
and technique and examine whether Beximco Pharma use or not that particular techniques and the
reason of following or not following based on our queries to respective authority of the company.
Scope of the Report

This report is limited to the cost accounting department of the Beximco Pharma including cost
accounting systems procedure and techniques. Since Beximco want to achieve top quality along
with cost control it uses its cost accounting information very strongly. This report covers only the
use of cost accounting information for the purpose of decision making and corporate reporting not
overall performance of the Beximco Pharma.

Objective of the Report

1. To have a general idea about cost accounting information and its use in decision making.

2. To have clear understanding about the cost accounting system used by Beximco Pharma.

3. Finding out the disclosure of cost accounting information used by the company.

4. To draw a conclusion based on our understanding of Beximco Pharma.

Methodology of the Report

The details of the work plan are furnished below

Data sources

The data and information for this report have been collected from both the primary and secondary
sources. Among the primary sources, face to face conversation with the respective stuffs of the
head office. The secondary sources of information are annual reports, websites, and study of
relevant reports, documents and different manuals.

Data processing

Data collected from primary and secondary sources have been processed manually and qualitative
approach in general and quantitative approach in some cases has been used throughout the study.

Data analysis and interpretation

Qualitative approach has been adopted for data analysis and interpretation taking the processed
data as the base.
Organization of the Report

This report is divided in to mainly 5 parts. The 1st part is introductory part that states the origin,
background, scope, objectives, methodology of the report. The 2nd part is the literature review of
the study. This part explains the cost accounting information and its use in decision making by the
managers. The next part discusses about the cost accounting system of Beximco Pharma. The 4 th
part finds out the contemporary methods and techniques of cost accounting used in Beximco
Pharma. The last part concludes the report with some recommendation.

Limitation of the Report

There were some limitations in the preparation of the report. The source of the cost accounting
system of the company was mainly based on their financial reports of different. Though we
conducted the responsible authority, they were reluctant to give us the full disclosure about their
management policies. Because of such information is prepared for the management for internal
use only, this was not available. Moreover, most of them were confidential. Other limitations were
our time constraint and resources to prepare an effective term paper on this topic.

Cost Accounting Information

In a broad aspect, cost accounting refers to the measurement, analysis, and reporting financial and
nonfinancial information relating to the cost of acquiring or using resources in an organization. So,
cost accounting can be defined as the information obtained from cost accounting activities. For
example, calculating the cost of product is a cost accounting function that answers manager’s
decision-making needs (such as choosing products to offer). Modern cost accounting takes the
perspective that collecting cost information is a function of the management decision being made.
Cost accounting information helps the manager in short-run and long-run planning and control
decisions that increase value for the customers and lower the costs of products and services. For
example, managers make decisions regarding the amounts and kinds of material being used,
changes in plant processes, and changes in product designs.
Cost Accounting Information in Decision Making

For making decision by using cost accounting information cost accountant usually follow some
specific models. They use different decision model for different courses of action. Management
accountants work with manager by analyzing and presenting relevant data to guide decisions. For
example, if any organization wants to reduce its existing manufacturing costs it must identify the
alternatives then it will analyze the alternatives by using only relevant data i.e., which can influence
the decisions.

Factors regarding decision making using cost accounting information

There are several factors that affect the decision-making procedure of the managers. Some
important factors are discussed here:

a. Relevant costs and relevant revenues

Relevant costs are expected future costs and relevant revenues are expected future revenues that
differ among the alternative courses of action being considered. Both relevant costs and relevant
revenues must occur in future and they differ among the alternative courses of action. Focusing on
the relevant data is especially helpful when all the information needed to prepare detailed income
information is unavailable. Understanding which costs are relevant and which are irrelevant helps
the decision maker concentrate on obtaining only the pertinent data and saves time.

b. Qualitative and quantitative relevant information

Manager defines and weighs qualitative and quantitative information. Quantitative information is
those which can be measured by the numerical number and qualitative information are those which
cannot be measured by the number and off course manager will decide which one is measurable
by the number and which one is not. Relevant cost analysis generally emphasis on quantitative
factors but qualitative factors also have their own importance.

c. One time only special orders:

When factory has idle production capacity then manager must decide whether accepting or
rejection special orders if special order has no long implications. Example: if any company has
capacity to produce 18000 units and currently producing 16000 units. The total cost (fixed-5 and
variable-5) per unit is tk. 10. If they got an order to deliver 4000 units for tk.6 per unit, they should
accept it. But if they get the order of 5000 units, they should not accept it because it crosses its
relevant range. To make decision about special onetime order only relevant cost should be
considered. A common term in decision making is incremental cost which means additional cost
for producing every additional unit is also important in this regard.

Insourcing Vs. Outsourcing and Make Vs. Buy decision

Outsourcing or Bye decision is purchasing goods and services from outside rather than producing
in inside of the organization. Whether bye or make is sometimes influenced by qualitative factors.
For example, Coca-Cola company will never do outsourcing due to secrecy of the formula, know-
how, and technology. In order to make decision if bye or make manager usually take into
consideration about quality, dependability, material handling and set-up activity. And off course
manager does cost benefit analysis based relevant cost information.

e. Focusing on grand total:

Manager will focus on grand total cost in making decision rather than unit cost. Sometimes unit
cost could be misleading. If we want to make decision about make or buy, insourcing vs.
outsourcing we need to consider total cost not unit cost.

f. Using constrained resources

Under this condition, manager should select the product that yields the highest contribution margin
per unit of the constraining or limiting resources.

g. In deciding whether add or drop customer or to add or discontinue segment

Manager should focus on whether total overhead cost change in making decision about adding or
dropping customer or adding or discontinuing segment. Manager should ignore allocating
overhead cost.
h. Replacement of equipment

In the time of equipment replacement existing book value is irrelevant because it is a sunk cost so
it should be ignored.

i. Concentrate on consistency on performance evaluation

There is always a confliction between the decision model used by a manager and the performance
model used to evaluate that manager. Top management must ensure that the performance
evaluation model will be consistent with decision model. A common inconsistency is to tell these
managers to take a multiple year view in their decision making but then to judge their performance
only on the basis of current year’s operating income. If there is no consistency between
performance evaluation and performance model then control will be impossible and making
decision model will be valueless.

Cost Accounting Information in Corporate Reporting

The main purpose of cost accounting information is to help managers in decision making. Such
information is provided for the internal purpose only. There are some guided rules and regulations
about the information in the reports. According to IAS 1 (Presentation of Financial Statements),
paragraph 117, “An entity shall disclose in the summary of significant accounting policies: (a) the
measurement basis (or bases) used in preparing the financial statements, and (b) the other
accounting policies used that are relevant to an understanding of the financial statements.”

It is important for an entity to inform users of the measurement basis or bases used in the financial
statements (for example, historical cost, current cost, net realizable value, fair value or recoverable
amount) because the basis on which an entity prepares the financial statements significantly affects
users’ analysis. When an entity uses more

than one measurement basis in the financial statements, for example when particular classes of
assets are revalued, it is sufficient to provide an indication of the categories of assets and liabilities
to which each measurement basis is applied. According to paragraph 125 of the same IAS,

“An entity shall disclose information about the assumptions it makes about the future, and other
major sources of estimation uncertainty at the end of the reporting period, that have a significant
risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within
the next financial year. In respect of those assets and liabilities, the notes shall include details of:
(a) their nature, and (b) their carrying amount as at the end of the reporting period.”

An entity presents the disclosures in paragraph 125 in a manner that helps users of financial
statements to understand the judgements that management makes about the future and about other
sources of estimation uncertainty. The nature and extent of the information provided vary
according to the nature of the assumption and other circumstances. Examples of the types of
disclosures an entity makes are:

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

(b) the sensitivity of carrying amounts to the methods, assumptions and estimates underlying their
calculation, including the reasons for the sensitivity;

(c) the expected resolution of an uncertainty and the range of reasonably possible outcomes within
the next financial year in respect of the carrying amounts of the assets and liabilities affected; and
(d) an explanation of changes made to past assumptions concerning those assets and liabilities, if
the uncertainty remains unresolved.

Other IFRSs require the disclosure of some of the assumptions that would otherwise be required
in accordance with paragraph 125. For example, IAS 37 requires disclosure, in specified
circumstances, of major assumptions concerning future events affecting classes of provisions.
IFRS 7 requires disclosure of significant assumptions the entity uses in estimating the fair values
of financial assets and financial liabilities that are carried at fair value. IAS 16 requires disclosure
of significant assumptions that the entity uses in estimating the fair values of revalued items of
property, plant and equipment. There are also some guidelines for reporting cost accounting
information in IAS 2: Inventories. The objective of this Standard is to prescribe the accounting
treatment for inventories. A primary issue in accounting for inventories is the amount of cost to be
recognized as an asset and carried forward until the related revenues are recognized. This Standard
provides guidance on the determination of cost and its subsequent recognition as an expense,
including any write-down to net realizable value. It also provides guidance on the cost formulas
that are used to assign costs to inventories
Measurement of inventories

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

Cost of inventories

The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs
incurred in bringing the inventories to their present location and condition.

Costs of purchase

The costs of purchase of inventories comprise the purchase price, import duties and other taxes
(other than those subsequently recoverable by the entity from the taxing authorities), and transport,
handling and other costs directly attributable to the acquisition of finished goods, materials and
services. Trade discounts, rebates and other similar items are deducted in determining the costs of
purchase.

Costs of conversion

The costs of conversion of inventories include costs directly related to the units of production, such
as direct labor. They also include a systematic allocation of fixed and variable production
overheads that are incurred in converting materials into finished goods. Fixed production
overheads are those indirect costs of production that remain relatively constant regardless of the
volume of production, such as depreciation and maintenance of factory buildings and equipment,
and the cost of factory management and administration. Variable production overheads are those
indirect costs of production that vary directly, or nearly directly, with the volume of production,
such as indirect materials and indirect labor. The allocation of fixed production overheads to the
costs of conversion is based on the normal capacity of the production facilities. Normal capacity
is the production expected to be achieved on average over a number of periods or seasons under
normal circumstances, taking into account the loss of capacity resulting from planned
maintenance. The actual level of production may be used if it approximates normal capacity. The
amount of fixed overhead allocated to each unit of production is not increased as a consequence
of low production or idle plant. Unallocated overheads are recognized as an expense in the period
in which they are incurred. In periods of abnormally high production, the amount of fixed
overhead allocated to each unit of production is decreased so that inventories are not measured
above cost. Variable production overheads are allocated to each unit of production on the basis of
the actual use of the production facilities. A production process may result in more than one
product being produced simultaneously. This is the case, for example, when joint products are
produced or when there is a main product and a by-product. When the costs of conversion of each
product are not separately identifiable, they are allocated between the products on a rational and
consistent basis. The allocation may be based, for example, on the relative sales value of each
product either at the stage in the production process when the products become separately
identifiable, or at the completion of production. Most by-products, by their nature, are immaterial.
When this is the case, they are often measured at net realizable value and this value is deducted
from the cost of the main product. As a result, the carrying amount of the main product is not
materially different from its cost.

Disclosure of Inventory in Financial Statements

The financial statements shall disclose: (a) the accounting policies adopted in measuring
inventories, including the cost formula used; (b) the total carrying amount of inventories and the
carrying amount in classifications appropriate to the entity; (c) the carrying amount of inventories
carried at fair value less costs to sell; (d) the amount of inventories recognized as an expense
during the period; (e) the amount of any write-down of inventories recognized as an expense in
the period in accordance with paragraph 34; (f) the amount of any reversal of any write-down that
is recognized as a reduction in the amount of inventories recognized as expense in the period in
accordance with paragraph 34; (g) the circumstances or events that led to the reversal of a write-
down of inventories in accordance with paragraph 34; and (h) the carrying amount of inventories
pledged as security for liabilities. Information about the carrying amounts held in different
classifications of inventories and the extent of the changes in these assets is useful to financial
statement users. Common classifications of inventories are merchandise, production supplies,
materials, work in progress and finished goods. The inventories of a service provider may be
described as work in progress. The number of inventories recognized as an expense during the
period, which is often referred to as cost of sales, consists of those costs previously included in the
measurement of inventory that has now been sold and unallocated production overheads and
abnormal amounts of production costs of inventories. The circumstances of the entity may also
warrant the inclusion of other amounts, such as distribution costs.
An overview of Beximco Pharma

Beximco Pharmaceuticals Ltd. is a leading-edge pharmaceutical company and is a member of the

BEXIMCO Group, the largest private sector industrial conglomerate in Bangladesh. The strategic
strengths of Beximco Pharma are its strong brand recognition, highly skilled work force and
diversified business mix. Beximco Pharma brands – Neoceptin R (Ranitidine), Napa
(Paracetamol), Amoral (Amlodipine), Nonflowing (Ciprofloxacin), Bexitrol F (Salmeterol Plus
Fluticasone), Bextrum Gold (Multivitamin and Multi Mineral) and Atova (Atorvastatin) are among
the most recognized brands in the Bangladesh Pharmaceutical industry. Beximco Pharma started
its operation in 1980, manufacturing products under the licenses of Bayer AG of Germany and
Upjohn Inc. of USA and now has grown to become nation’s one of the leading pharmaceutical
companies, supplying 15% of country’s total medicine need. Today Beximco Pharma
manufactures and markets its own `branded generics’ for almost all diseases from AIDS to cancer,
from infection to asthma, from hypertension to diabetes, both nationally and internationally.

Beximco Pharma manufactures a range of dosage forms including tablets, capsules, dry syrup,
powder, cream, ointment, suppositories, large volume intravenous fluids, metered dose inhalers
etc. in several world-class manufacturing plants, ensuring high quality standards complying with
the World Health Organization (WHO) approved current Good Manufacturing Practices (cGMP).
The recipient of three times `gold’ national export trophy, Beximco Pharma is the largest exporter
of pharmaceuticals from Bangladesh, spreading its presence in many developing and developed
countries across the globe. Beximco Pharma is the only company in Bangladesh to receive this
highest national accolade for export, for record three times. Beximco Pharma markets its brands
through professional sales and marketing teams in African, Asian and European markets. It also
supplies its products to renowned hospitals and institutions in many countries, including Raffles
Hospital and K K Women & Children Hospital in Singapore, MEDS and Kenyatta National
Hospital (KNH) in Kenya, Jinnah Hospital, Agha Khan Hospital and Shaukat Khanum Memorial
Hospital in Pakistan. Beximco Pharma is also an enlisted supplier of WHO and UNICEF. Another
important business activity of Beximco Pharma is the contract manufacturing for major
international brands of leading multinational companies. Beximco Pharma is acclaimed
domestically and internationally for its outstanding product quality, world class manufacturing
facilities, product development capabilities and outstanding service. Beximco Pharma has a strong
market focus and is anticipating continued future growth by leveraging business capabilities and
developing superior product brands and markets. In particular the company is very interested in
developing a strong export market in USA and Europe. To meet the future demand Beximco
Pharma has invested US$ 50 million to build a new state-of-the-art manufacturing plant,
confirming to USFDA and UK MHRA standards. This new plant will also offer contract-
manufacturing facility to leading pharmaceutical companies, especially from Europe and US.

Cost Accounting System of the company

The company primarily uses batch costing method in their costing system. As a pharmaceuticals
manufacturing company, they need to produce huge amount of product so here batch costing is
appropriate for the company. Here it is cost effective and easy to calculation. Batch costing has
the several advantages over other methods in regard of the providing following information: -the
analysis and the cost control at each cost generator; -the operative management of each place
generator of costs, the specification of the production and of the predicted costs and their control
and realization; -the correct assessment of the produced stocks; -determination of the efficiency
obtained by the taken decisions. The company uses weighted average method in time of inventory
valuation. They believe that it gives more accurate and clearer picture of inventory. In this method
it is very hard to manipulate and easy to calculate though it has a limitation that it sometimes can’t
represent inflation.

Valuation of Inventories

Inventories are carried at the lower of cost and net realizable value as prescribed by IAS 2:
Inventories. Cost is determined on weighted average cost basis. The cost of inventories comprises
of expenditure incurred in the normal course of business in bringing the inventories to their present
location and condition. Net realizable value is based on estimated selling price less any further
costs expected to be incurred to make the sale. Cost included for the local raw materials purchased
are 1) Procurement Cost. 2) Transportation Cost 3) Bank Charge Cost included for the imported
raw materials are 1) Procurement Cost 2) Bank Charge for Opening L/C 3) Insurance 4) Clearing
from the Port and 5) Transportation Cost.
Disclosure of Inventory in Financial Statements

According to IAS 2: Inventories, the Company disclosed the following information regarding
inventory:

(a) The Company uses weighted average method in measuring the inventories.

(b) The total carrying number of inventories is taka 1,739,818,419.

Product Costing Methods

Degree of Aggregation in Overhead Rate Calculation

Overhead Allocation Bases

Contemporary cost accounting methods and techniques used by Beximco Pharma

Beximco Pharmaceuticals Ltd is a leading company in our country. To compete with the other
companies in the industry, Beximco Pharma uses several contemporary methods and techniques.
Mass production of a mature product with known characteristics and a stable technology was the
basis of traditional cost accounting models. Anyway, Beximco Pharma, with automation, lessened
the labor content in manufacturing process while the other costs in the company are increased.

Flexible manufacturing system

Flexible manufacturing systems use computer-controlled production processes, including

CAD/CAM programmable machine tools. Because flexible manufacturing reduces setup or
changeover times, companies can efficiently manufacture a wide variety of products in small
batches. Though Beximco Pharma can adopt flexible manufacturing system, it merely reduces the
size of the batch.

Total quality management

Total Quality Management refers (TQM) to the process of continuous improvement to achieve the
full customer satisfaction. Rather than waiting to inspect items at the end of the production line or
striving to stay within acceptable tolerance limit, TQM’s goal is eliminating all waste. In Beximco
Pharma, quality is maintained with great care. As it is a pharmaceutical company, it is mandatory
to keep up with the quality level with the other companies. As a result, they have received GMP
Clearance from Therapeutic Goods Administration (TGA) of Australia and from Gulf Central
Committee for Drug Registration, Executive Board of the Health Ministers’ Council for Gulf
Cooperation Council (GCC) states (representing Saudi Arabia, Kuwait, Bahrain, United Arab
Emirates, Qatar and Oman). The company is also in the process of obtaining approvals from
several other regulatory authorities including National Health Surveillance Agency (ANVISA) of
Brazil, Medicine and Healthcare Regulatory Agency of United Kingdom (UK MHRA), US FDA
etc.

Pull Rather than push system

Pull system refers to decision will come from downstream of management. The factory production
line operates on a demand-pull basis. A pull system can only work while manufacturing process
can react to a pull system. However, Beximco Pharma doesn’t follow the pull system they use
push system. The authority of Beximco Pharma believes that push system is more effective than
pull in the context of Bangladesh. Because of JIT is not possible in the firm, pull system is difficult
to implement because in pull system it is believed that it is better not to produce unnecessary
products and do not keep inventory in hand.

Activity-Based Management

The activity-based management system links resources consumption to the activities a company
performs and cost the activities to product or customers. Activity-based management uses activity-
based costing systems to measure and control this relationship. In Beximco Pharma there is no
such use activity cost driver to measure the cost of a product. The traditional system is used to
determine the cost of the product.

Life Cycle Costing

Life cycle costing tracks and determines the cost attributed to each product and service from its
initial research and development to development to final marketing to customer. In Beximco
Pharma, this type activities are done in mainly in the Central Product Management (CPM)
Department. The activities of CPM are:

 Market research
 Selection of new product
 Design and testing of product (DTP)
 Sample store (logistics) management
 Making strategy

The department deals with the controllable marketing variables, the 4p’s. This department takes
decisions in the following areas:

Product – Size, color, shape, packaging etc.

Price – Raw materials cost, customer ability, regulatory body’s approval etc.

Concluding Remarks

Beximco Pharmaceuticals Ltd. is a leading-edge pharmaceutical company and is a member of the

BEXIMCO Group, the largest private sector industrial conglomerate in Bangladesh. Beximco
Pharma is also the largest exporter of pharmaceuticals from Bangladesh, spreading its presence in
many developing and developed countries across the globe. Recently, BPL has successfully made
its footmark in the global market when it made it debut on the London Stock Exchange as the first
Bangladeshi company to be listed in the world’s most prestigious bourse. This milestone event has
widened the responsibility, accountability and transparency of the company beyond geographical
border. The listing adds new challenges to the staffs of Accounts & Finance department who are
directly responsible for financial reporting to a diverse group of stakeholders both in national and
international arena. In this report, we have tried my level best to identify cost accounting
techniques and procedures used by Beximco Pharma. What and how Beximco Pharma use cost
accounting information for decision making and external financial reporting along with describing
the procedure and systems of using cost accounting information. In this report, we imply our
acquired knowledge from cost accounting course and try to comply with the techniques procedure
and systems followed by the company.
Beximco believes that quality and control should be ensured and these can be ensured by using
proper cost accounting information. Relevant and reliable cost information can be ensured by
implementing by using effective cost accounting methods. And they do the best one fit in the
context of Bangladesh