RSM international Hyder Liaquat Nauman COST AUDITORS’ REPORT TO THE DIRECTORS We Avais Hyder Liaquat Nauman, Chartered Accountants, having been appointed to conduct an audit of cost accounts of D.G. Khan Cement Company Limited, have examined the books of account and the statements prescribed under clause (e) of sub- section (1) of section 230 of the Companies Ordinance, 1984 and other relevant record for the year ended on June 30, 2010 and report that: 1. We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purpose of this audit. 2. In our opinion: a) Proper cost accounting records as required by clause (e) of sub-section (1) of section 230 of the Companies Ordinance, 1984 (XLVII of 1984), and as required by Companies (Audit of Cost Accounts) Rules, 1998 (Rules), have been kept by the Company; b) Proper returns, statements and schedules for the purpose of the audit of cost accounts have been received from branches not visited by us; ©) The said books and records give the information required by the Rules in the manner so required; and 3. In our opinion and, subject to best of our information- a) The annexed statement of capacity utilization and stock-in-trade are in agreement with books of account of the company and exhibit true and fair view of the company’s affairs; and b) Cost accounting records have been properly kept so as to give a true and fair view of the cost of production, processing, manufacturing and marketing of the under mentioned products of the company, namely:- i, Ordinary Portiand Cement ji, Sulphate Resistant Cement ssh foots We dee Lrageot Jamon AVAIS HYDER LIAQUAT NAUMAN CHARTERED ACCOUNTANTS: Engagement Partner: Syed Naveed Abbas Date: October 04, 2010 Place: LahoreD G KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 TABLE OF CONTENTS e Brief history of company e Report Capacity Cost Accounting System Production Raw Material Wages & Salaries Stores & Spares Depreciation Overheads Royalty / Technical Aid Payments Abnormal Non-Recurring Features Cost of Production Sales Profitability Cost Auditor’s Observations & Conclusions eee e eer ee eresD G KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 STATEMENT OF CAPACITY UTILIZATION {Production 2010 2009 Installed Utilized Installed Utilized Units | Capacity | Capacity | Capacity | Capacity Clinker M.Tons 4,020,000 4,684,379 4,020,000 3,946,101, Capacity Utilized 2010 2009 percentage 16.53% 98 % Reason: Installed capacity is based on 300 working days. Plants were operated more than 300 » days to cater the increased cement demand. we Pa A Chief Executive Chief AccountantD G KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 STATEMENT OF STOCK IN TRADE Raw Material Lime Stone Shale Gypsum Iron ore & Bauxite Silica sand Work-in-Process Raw Meal Clinker Finished Goods ‘Cement (unpacked) Cement (Packed) Others Packing Material (No. of bags) Ral Chief Executive 2010 2009 ] Quantity | Cost Quantity | Cost M.Tons | Rupees | M.Tons | Rupees 79,027 | 14,506,474] 85,309 {15,948,835 12,930 | 1,673,157| 12,600} —_ 1,390,446 81,570 | 48,843,626 | 86,338 | 45,804,682 70,776 | 58,819,894 | 86,034 | 56,384,663 14,698 | _3,913,149} 21,278 |_1,885,796 127,756,300 121,414,472 37,668 | 14,451,672] 37,806 { 13,722,759 239,667 | 523,087,558] 148,402 |_373,720,924 537,539,230_ 387,443,683 51,605 | 122,150,352] 59,535 [ 122,150,352 35,560 | 97,217,485 | 28,000 | _97,217,485 219,367,837 249,916,037 9,368,964 152,216,162 7,634,639 141,060,910 LA Chief Accountant ae?D G KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 Brief history of the company D.G.Kan Cement Company Limited is a public limited company incorporated under the Companies Ordinance 1984 and is listed on all stock exchanges in Pakistan. Its main business activity is to manufacture and sell Ordinary Portland Cement and Sulphate Resistant Cement. The plant commenced production on April 01, 1986. Currently Company has three production lines, viz. two production lines at Dera Ghazi Khan and one cement plant at Khairpur village Distt. Chakwal. Unit- I and unit- II at Dera Ghazi Khan has production capacities of 2700 & 4000 tons per day respectively. The plant at District Chakwal has production capacity of 6700 tons per day. KPMG Taseer Hadi and Company, Chartered Accountants is the statutory auditors of the Company. The Company's financial statements have been audited up to June 30, 2010. wsD G KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 1. CAPACITY a) Licensed, Installed and utilized capacity Installed Utilized Cn capacity capacity capacity 4,020,000 4,684,379 116.53 Comments on Variance Installed capacity is based on 300 working days. Increased production was achieved due to better plant run to cater the increased cement demand. b) Other Activiti The Company is not engaged in any activity other than manufacturing of Ordinary Portland Cement and Sulphate Resistant Cement, yeD G KHAN CEMENT C MPANY LIMITED COST AUDIT For the year ended June 30, 2010 2. COST ACCOUNTING SYSTEM Brief comments on cost accounting system: > — Quantitative data at each stage of the process is gathered and complied into a daily production report. This report also covers month to date and year to date quantitative data. > The Company is using integrated Fox- Pro based accounting software in which cost accounting functions and financial accounting functions are combined in one system of ledger accounts. This enables the company to get information regarding cost records. > The system can generate various cost reports some of which are as follows: Direct departmental cost (for each cost center). Distribution of total production cost into raw material, gypsum and manufacturing cost. Distribution of common cost. Summary of common cost distribution. Detail of direct cost of Limestone. Detail of total cost of Limestone. Detail of direct cost of Shale. Detail of total cost of Shale. Stock valuation of raw materials. Direct cost of Production departments, Total cost of Production departments, Stock valuation of Production departments. Classification of Production costs into variable and fixed costs. Detail of total cost before coal distribution. Detail of Direct cost distributed. Detail of total cost after coal distribution. Detail of coal consumption in Plant 1 & 2. Department wise coal summary. ‘Adequacy of Cost Accounting System to determine the cost of product The system and procedures adopted by the company are adequate for determination of cost of product. wesDG KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 PRODUCTION a) Production Production Clinker (Metric Tons) 2010 2009 Ordinary Portland [4,474,587] 3,811,488] Sulphate Resistant 09,7! 84,3 b) Percentage of Production to Installed Capacity % to total installed capacity Clinker 2010 2009 Ordinary Portland 4} 114.31 a Sulphate Resistant 5.22 CC 116.53 98.16 ©) Addition to Production Capacity i. During the year NIL ii, Preceding two years po NILD G KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 4. RAW MATERIALS a) Cost of Major Raw Materials Consumed 2010 | 2009 _| | Quantity | Value _[Rs./M. Quantity | Value Rs. /™| (M.Tons)| Rs. Ton_| (M. Tons) Rs. Ton Limestone/clay —6,305,964]1,157,544,851) 183.56 5,284,515] 992,370,326] 187.75] Shale 599,958, 77,635,283, 129.40, 547,402] 60,407,363, 110.35] ‘Transportation charges for the year 2010 amounted to Rs. 290.32 million (2009 Rs. 219.45million) b) Consumption of Major Raw Material Per Unit Of Production Compared With The Standard Req ments: [ Consumption Per M. Ton of Clinker Production 2010 ___ 2009 ; Actual Actual Actual Standard Raw Material | consumption | Consumption | Consumption | Requirement Limestone/clay 135, 1.34 1,32 1.18 Shale 0.13 0.14 0.15 7 | c) Variance in Major Raw Materials Consumption - ‘% Increase/ % Increase/ Raw Material | (Decrease) (Decrease) material consumption compared with compared with __| last two years. standard | 2010 | 2009 | 2008 | 2009 | 2008 | Standard | Variance Limestone/clay [1.35 | 1.34 | 1.32 |_.746 | 2.27 1.18 14.41 Shale (0.13 [0.14 [0.15 [ (7.14) | (3.33) 0.37 (64.86)_| aD G KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 Explanation of Variances The variance in material consumption per M. Ton is due to difference in chemical composition of major raw materials used and change in production mix. da) Method of Accounting Recelpts/purchase of raw materials The company has six types of materials which are directly used in production namely: Limestone Shale Gypsum Iron Ore Bauxite Silica Sand oy sene ‘The company excavates Limestone and Shale from its quarries which have been leased from the Government of Punjab and local residents, The other materials Gypsum, Iron Ore, Bauxite and Silica Sand are purchased from outside and are routed from stores accounting system. Cost of purchase of raw materials includes royalties, duties, taxes, transport, handling and other costs directly attributable to the acquisition of materials. Stocks of limestone and shale are accounted for when they are received at raw material yards and cost of service centers associated with raw materials incurred up to that stage is divided in proportion of consumption pattern among them. Issuance of materials to production Monetary value of raw material issues and balances are booked on average cost basis. vc,D G KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 5. SALARIES AND WAGES a) Total Salaries and wages Paid (Rupees in thousand) Increase /— 2010 Decrease} Rs. Rs. Rs. Direct labour cost on production 187,604 174,176 13,428 8 ii, Indirect labour cost on production 508,135 467,232 40,903 9 iii, Employees’ cost on administration 91,633 73,858 17,775 24 iv. Employees’ cost on selling and distribution 54,149 49,946 4,208 8 v. Bonus to workers and employees* 58,698 60,237__(1,539) Total employees cost ( i to iv) 841521765212 __ 76,309 * It is included in items (i) to (iv) above b) Salaries and Perquisites of Directors and Chief Executive i. Chief Executive (Rupees in thousand) 2010 2009 |_Increase / (Decrease) | Rs. Salaries & other benefits Rs. Rs, % Managerial remuneration i 6,518] 5,668| 850] 1 Housing 270| __270| ec eeeeeeee0| Medical Expenses 1,359) 385] 974 [Others [4,843] 4,238) 605 Total 12,990 10,561 2,429 weeD G KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 ii, Directors (Rupees in thousand) Salaries & other benefits [| 2010 2009 ‘| Increase / (Decrease) Rs. Rs. Rs. % Managerial remuneration ~~ 10,310 8,964) 1,346 ~_15] Gratuity/Contribution to P. Fund 1,034] 896) «1385 35) ‘Housing, 683| 594 89) 15) Leave passage 635) 697| (62) (9) Medical Expenses a) 30 79 263] (Others 2,045| 1,266] 779| "62 Total ___ 14,813 12,447 2366 ¢) Total Man-Days of Direct Labour Plant Maximum days | Normal working [Actual working Available days days Plant- 1 365 300 334 Plant II 365 300 334 Plant- Il 365 300 347 d) Average Number of Workers Employed 2010 2009 2008 988 952 936 e) Direct Labour Cost Per M. Ton 2010 2009 2008 Rs. Rs. Rs. Direct labour cost per M. Ton 38.22 44,92 30.83 weD G KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 f) Explanation for Variance In Item (e) The decrease in labour cost attributed to increased production. g) Comments On Incentives Schemes During the year company provided incentives as follows; + Production workers. Management has not yet announced the rate of bonus for officers. however, provision of 345 days basic pay plus 1 month cost of living allowance has been made in books of accounts. * Officers: Management has not yet announced the rate of bonus for officers. However, following provisions pay have been made in books of accounts: 87 days basic pay for D.G. Khan Plant 92 days basic pay for Khairpur Project 90 days basic Pay for officers in head office and marketing Officers.D G KHAN CEMENT COMPANY LIMITE COST AUDIT For the year ended June 30, 2010 6. STORES AND SPARES a) Expenditure per M. Ton of Output [ 2010 [_ 2009 | Cost per M. Ton of output _ 226.90 | b) System of Stores Accounting: The company is maintaining an integrated Inventory System with other accounting modules, A separate code has been allocated to each item in the system. The system is maintained at the factory and updated at the Head Office. Each production department is given a separate code and the stores and spares consumed are charged department-wise on the basis of actual consumption Store receipts are recorded on the basis of receiving reports, gate inward passes, purchase orders, demand notes etc. Issues are made on the basis of issue requisitions received from the relevant department. Receipts of stores and spares These are valued at cost comprising of purchase price, import duties, other taxes, transportation, handling and other costs directly attributable to the acquisition of stores and spares. Issues and balance of stores and spares Stores and spares are valued on moving average cost. Items in transit are valued at cost comprising invoice values plus other charges paid thereon, c) Slow Moving Items Slow moving items amounted to Rs. 393,292,129 (2009: Rs. 360,690,036) that is 13.032% of closing inventory. peD G KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 7. DEPRECIATION a) Method of Depreciation Assets Method of depreciation All operating assets (except plant & machinery) Reducing balance method Plant & machinery Straight line method b) Basis of Allocation Of Depreciation The depreciation of common assets is allocated to production departments on the basis of proportion of services rendered to the respective departments. ging Depreciation To Cost of Product °) Basis of Depreciation of assets in use of production and service departments is charged to cost of production. weD G KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 8. OVERHEADS a) Total amounts of the Overheads (Rupees in thousand) i a oo Sr. # | 2008 9,022,747 | _— 111,658 lling & distribution My 1,871,517 561,465, Financial 1,902,760 2,606,358 1,749,837 _ 664,367 15,726,686 11,445,707 i) Break-up of items - Factory overheads - _ _(Rupees in thousand) Particulars 2010 2009 | 2008 | Increase/(Decrease) _| Rs. Rs. Rs. | Compared to | Compared to 2009 2008 Indirect labor 508,135 467,232 348,434 40,903] __159,701) Electricity and gas __1,991,243| 1,427,631, 1,644,759 563,612) _ [Furnace Oil/Coal __ 6,100,305] 6,603; 4,595,975| __(503,603)|_——, ‘Stores and spares 1,096,570, 879,772| 761,950, 216,798 334,620) ‘consumed a | a — Repair and maintenance 165,951) 131,911 34,040, 67,469 [Insurance [52,727] 45,573) 7,154 9,645] [Depreciatior 1,379,750) 1,354,851 24,899] 33,322] ‘Amortization — (80)! (3,331) Royalty 185,052| 86,514] 98,538 101,321, Excise duty 34,839) 4,816 8,877| 'Vehicle running 21,041 2,833} 5,557] lexpenses ee [Telephone and Postage | 4,829/ 4,188) 641 (554) Printing and Stationery 4821] 8,149 (3,328) 1,350) ‘Legal and professional 2,079 2,856. (77) 603| |charges | i ‘Travelling & Conveyance 8,652, 6,297 2,355 352| Estate Development 12,514 10,285| 2,229) 2,875| Rent, rates & taxes 492) 7,731 ~ 6,239) (5,490) Freight charges 4,924 _ 5,600) (676) 8 ‘Other Expenses 19,834 16,150 3,684) (Total ___ 11,594,758 11,106,959 9,022,747 487,799) 2,572,011D G KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 ii) Break-up of items - Administration overheads (Rupees in thousand) Particulars 2010 2009 2008 Increase / (Decrease) Rs. Rs. Rs. | Compared |Compared| — to 2009 | to 2008 ‘Salaries, wages & others benefits al 91633, 56,893; 17,775) 34,740) Electricity 3,863} ___ 381. 878| [Repair and mair 6,052! 1,614) (701)|___4,438) ‘Insurance 159% — 1,675] (411) (79), [Depreciation a 11,538, 11,955, (4,150) (417) Vehicle running __5,252| 4,259) 3,539) __ 993] 1,713 Postage, telephone & | telegam 9,568) 3,353] 3,439) 6,215] 6,129 IPrinting & stationery 7 5,716 3,423) 2,206) 2,293) 3,510| Legal & professional charge 6,978) 6,694) 1,740] 284] 5,238) [Traveling &conveyance 4,983. 5,208) 6,765 (G06)| 4,762) Rent, rates & taxes 1,480, 185, 170, 1,295] 1,310) ‘Auditor's remuneration 1,500, 1,320 1,723 180] (223) Entertainment 1,492, 1441 1,132 51 360) [School expenses 11,292! 9,790! 9,004! 1,502 2,288) Fees and subscription —_ 4,948 | 3,818) 1,982| 1,130] 2,966! Miscellaneous — 4,540) 3,792 | 4,836) 748) (296) Total 172,431, 141,852|_114,658| __30,579| 60,773 weD G KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 iii) Break-up of items - Selling and distribution overheads (Rupees in thousand) Particulars 2010 2009 | 2008 | Increase/(Decrease) Rs. Rs. Rs, | Compared | Compared to to 2009 2008 Salaries, wages & others 4,203 18,78 36} 225] 191) 258) [Insurance | (56) Depreciation/Amortization | (59) \Vehicle running ~ 322 803 Postage, telephone & legram 1,468) 1,166) Printing & stationary 66] 7 Rent, rates & taxes _ - 490) 82, Legal & professional charge @a7y 16, ‘Traveling & conveyance (1,249), (1,641) Entertainment 8} _3 _ 185) _ ____ 282! Advertisement & sales promotion _ 527 1657, 3,395, 3,614) 1,876| Freight charges 917,045) 1,802,362) 505,133) (885,317) 411,912] (Other expenses “1,213| 2,519 2,596 (1,306), (1,383) Total _ 994,418) 1,871,517, 561,465, (877,099) 432,953 iv). Financial Charges (Rupees in thousand) [Particulars __ —| 2010 2009 2008 - Rupees Rupees Rupees Financial charges | 1,902,760 | _2,606,358 [1,749,837 weeD G KHAN CEMENT COMPANY LIMIT COST AUDIT For the year ended June 30, 2010 b) Reasons for significant variances i. Factory overheads + Salaries increased due to yearly increments and increase in allowances and other benefits. ‘© The increase in Electricity expenses is due to increased production and hike in gas tariff and increase in fuel costs. © The decrease in furnace oil/Coal is attributed to reduction in coal prices in first half of the financial year. © The increase in stores & spares is attributed to inflationary factor and devaluation of Pak Rs. because most of the items used are imported. * The increase in repair & maintenance cost is due to: a) Devaluation of Pak Rupee because the payment of operation and maintenance of power generation unit is made in foreign currency © The increase in royalty and excise duty due to increased production. ii, Administration expenses * Salaries increased due to yearly increments and increase in allowances and other benefits. ili, Selling & Distribution expenses * Salaries increased due to yearly increments and increase in allowances and other benefits. «The decrease in Freight expenses is due to decreased exports of cement and clinker during year.D G KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 iv. Financial expenses * The decrease in finance cost was due to repayment in of long term loans and efficient management of funds. Cc) Basis of allocation of overheads ‘* The cost of service department, including civil, electrical, mechanical, water supply and quality control has been allocated on the basis of ratios worked out on actual services rendered to production departments. «The cost of general factory administration department is allocated on the basis of number of employees of production departments. d) Cost of Packing (Rupees in thousand) 2009 Particulars: 2010 fo Rupees | Rupees Cost of packing material ___1,560,509/ 1,268,999 [Other departmental cost 232,420 212,482 ‘Total —_ 4,792,929 1,481,481 weD G KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 9. ROYALTY / TECHNICAL AID PAYMENTS Royalty Pai Royalty charges for the year 2010 amounted to Rs. 185,052,101 (2009 Rs. 86,514,350) Average royalty chargeable to per unit of the product (Cement). 2010 2009 2008 Rs./M.Ton Rs,/M.Ton Rs./M.Ton Royalty per unit [ 37.70 22.31 19.81 meD G KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 10. ABNORMAL NON-RECURRING FEATURES a Features Affecting Production There were no features like strikes, lockouts, major breakdowns in the plant, substantial power cuts and serious accidents affecting production during the year. b. Special Expenses ‘There were no special expenses incurred on the production during the year. weD G KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 11, COST OF PRODUCTION Cost Per Unit of Different Varieties Co 2010 | _2009 Products Rupees/M. Ton | Rupees/M. |Rupees/M. Ton a Ton | (Ordinary Portland Cement - 207. (444.69) 'Sulphate Resistant Cement _ (3,164.48 | (366.22) Total — __ 3,205.95 (441.62) Comments on Variance Decrease in per unit cost is due to; ‘+ Increased production during the year. Fixed cost of per unit decreased. + Decreased in fuel cost in international markets. On average coal price during the _ period has decreased by 21 % compared with last year.D G KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 12. SALES a) Local Sales of Different Vari Product Quantity Value ‘Avg. Sales Realization M.Ton Rupees/M.Ton OPC 3,961,491.81 12,144,881 3,065.73 ‘SRC 142,369.06 ___ 493,083 3,463.41 Clinker - = : _- b) Export Sales: [Product | Quantity Value ‘Avg, Sales Realization M.Ton Rupees ‘000 Rupees/M.Ton OPC 805,102 3,375,208 4,192.28 ‘SRC = - = = Clinker 71,041.42 262,182 3,690.55, Profit or loss on export Cement Rs. ‘000 Export sales 3,375,208 Cost of sales 2,201,060 Gross Profit on export 1,174,148 Clinker Rs. ‘000 Export sales 262,182 Cost of sales 155,052 Gross Profit on export 107,130DG KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 13. PROFITABILITY Gross Profit/(Loss) (Per M.Ton) Earned Product 2009-2010 2008-2009 Rupees Rupees Local ‘OPC — 302.98 1176.67 - SRC 665.16 1315.82 —__Glinker : - Export OPC 1,458.38 __1,859.25 SRC - 1,632.97 Glinker 1,507.99 (5.52) Comments Profitability declined due to stiff competition both in local as well international markets. weD G KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 14, COST AUDITOR'S OBSERVATIONS AND CONCLUSIONS a. Matters which appear to us to be clearly wrong in principal or apparently unjustifiable NIL b. Cases where the company funds have been used in a negligent or inefficient manner N/A c, Factors which could have been controlled but have not been done resulting in increase in the cost of production N/A i) The adequacy or otherwise of budgetary control system, if any, in vogue in the company The budgetary control system exists and operates adequately. (ii) The scope and performance of Internal Audit, if Any A full fledge internal audit department is functioning in the company. The audit findings are regularly reported to the top management and corrective measures are immediately adopted wherever necessary. weD G KHAN CEMENT COMPANY LIMITED COST AUDIT For the year ended June 30, 2010 e. Suggestion for improvements in performance i. fi. iti. iw Rectification of general imbalance in production facilities Nit Fuller utilization of installed capacity Comments on areas offering scope for a) Cost reduction N/A b) Increased productivity NIL ¢) Key limiting factors causing production bottlenecks NIL d) Improved inventory pol NIL e) Energy conservancy NIL State of technology, whether modern or obsolete. ‘The project is based on modern dry process with energy efficient technology and environment control system. Plant, whether new or second hand when installed. The Plants when installed were new. haw!