Pan Power - Final Report

Syed Muhammad Ramish Zahoor

Muhammad Umer
Essa Rahim
Lahore School of Economics
FNC 501: Cost Accounting
Ms Fizza Malik
December 4, 2022
Table of Contents
Company Overview.................................................................................................................3
Competitors.............................................................................................................................4
Business Processes..................................................................................................................4
Direct Materials......................................................................................................................5
Direct Labour.........................................................................................................................5
Modified wage plan...........................................................................................................................6
Journal entry....................................................................................................................................6
Factory Overheads..................................................................................................................6
Indirect Labour and other expenses.................................................................................................6
Indirect Materials.............................................................................................................................7
Production Statement..............................................................................................................8
Additional Information.....................................................................................................................8
Journal Entries.................................................................................................................................9
LIFO....................................................................................................................................10
Order Point...........................................................................................................................10
EOQ......................................................................................................................................10
Applied and Actual Factory Overhead...................................................................................11
Journal entries................................................................................................................................11
Variances..............................................................................................................................12
Materials.........................................................................................................................................12
Journal Entry.......................................................................................................................................................12
Labor...............................................................................................................................................12
Journal Entry.......................................................................................................................................................13

Ratios....................................................................................................................................13
Liquidity Ratios..............................................................................................................................13
Profitability Ratios..........................................................................................................................14
Conclusion............................................................................................................................15
Company Overview
Pan Power International (Pvt) Ltd went into operation in 2007. There are around 200 employees
in the company working according to the international quality standards of ISO 9001:2015,
ISO14001, and OHSAS18001. Our organization is one of the leading transformer manufacturers
in Pakistan engaged in the fabrication of distribution and power transformers. The company is
pre-qualified and registered with WAPDA. It provides transformers to WAPDA and various
DISCOs throughout Pakistan.
Pan power is a modern heavy engineering complex, one of the largest in the private sector. We
are also manufacturers of pole-mounted, pad-mounted, and power transformers from 10 KVA to
7000 KVA to satisfy the requirements of WAPDA/PEPCO Distributions Companies (DISCOs),
KESC, AJK, and the private sector. In 15 years, we have achieved a production capacity of
10000 Distribution Transformers of different ratings per annum with an annual turnover of more
than 500 million rupees.
Pan power International (Pvt) Ltd is a state-of-the-art facility located at Multan road. It is a 4-
acre premise and has 120,000 square feet of covered area. The company has its own professional
developing labs and aging testing rooms. We also have a futuristic warehouse management
system that helps the store managers to track and document all inventory-related activities. There
are a total of 4 production flow lines at our site. We also use surface-mount technology (SMT)
and wave soldering equipment to achieve the best results.
The Engineering team has experts in design, production, and testing under the leadership of our
chief executive officer, who is a well-experienced and qualified engineer. The employees of our
company are highly competent and devoted with more than a decade of experience and a
satisfied customer base. The top-level managers and the base-level workers work in an
environment where they may operate independently and harness their maximum potential. Both
staff and workers undergo special training to increase productivity and get polished skills.
PPIL is an ISO 9001-2000 certified company. Consequently, our company strictly checks all
'quality control procedures to get optimal results. The company is more than capable of making
pole mounted, pad mounted, sealed type, and conservator type transformers. We also have all the
latest testing facilities for in-house testing. PPIL is known for building high-quality transformers,
meeting local and international standards at competitive prices. Since customer satisfaction and
comfort is our foremost concern, thus we offer a one-year warranty and delivery service to all
customers.

Competitors
Few of the major and renowned competitors of Pan power, by name, are; ‘PEL’,
‘Transfopower’, ‘Grid’, ‘Elmetech’. To counter the threat of this high competition and gain a
competitive edge over other brands, all suitable steps/policies are taken into consideration and
added periodically to company terms. 

Business Processes
The business process of Pan Power is a set of activities that accomplish the organizational goal
of the company. Pan power’s business processes are about having purposeful goals, being as
specific as possible and producing consistent outcomes.

To ensure that production goes smoothly, pan power uses business process management (BPM)
which is a systematic approach to improving those processes, which helps the organizations
achieve specific business goals such as competitive advantage. If the organization is unable to
perform a certain business process internally due to cost or resource constraints, the company
uses outsourcing to complete the business process. 

1. Tanking

The mild steel sheet is cut into prices which then are notched via the notching machine
and rolled through the rollers to form a tank body . Then we weld the fabricated tank
body to form a tank.

2. Slitting

The slitting process slits the core though the slitting machine via high speed blades and
forms bundles in the order of required dimensions. Precision is very important in this
process because the variation in size slitting results in high iron losses.

3. Cutting
 The slitted bundles are then cut into the seven steps of the core formation via the CNC
cutting machine and power presses. The blades are sharpened every cutting of 5" to 6"
material so that the material cut is accurate.

4. Winding

The copper is winded through the machines in the form of coils. The diameter, turns,
length and insulation plays an important role during the winding process as copper losses
depend on these parameters.

5. Assembly

In the assembly phase, the core stacked and the copper coils winded are then assembled
to form a final shape before the tanking of the transformer.

Direct Materials

Direct Materials
25 KVA
Weight Rate Amount
Copper 39 2380 92820
Paper 2.35 520 1222
Block 2.5 910 2275
Silicon steel sheet 84 1310 110040
Channel 19 295 5605
Tank Sheet 25 250 6250
Top and Bottom Plate 33 250 8250
Welding Rod 2 275 550

Direct Materials per unit 227,012

Direct Labour
Labour is divided into 4 departments which are directly involved in the transformer
manufacturing process and their cost is calculated through modified wage plan.
1. tank-body production: 2
2. slitting: 1
3. cutting: 3
 4. winding: 2
5. assembly: 4
Modified wage plan
 360 is the hourly rate of the workforce
 Piece rate is 96
 Standard 1 day production is 30 transformers
Hourly Total
Hours Units Piece Rate Make-up
Days Rate Payroll
Worked Produced (96*unit) Guarantee
(8*360) Earnings
Monday 8 33 2880 3168   3168
Tuesday 8 32 2880 3072   3072
Wednesda
y 8 30 2880 2880   2880
Thursday 8 22 2880 2112 768 2880
Friday 8 30 2880 2880   2880
Saturday 8 26 2880 2496 384 2880
      17280 16608 1152 17760

Direct Labor per Unit (17760*12*4)/750 = 1,137

Journal entry
Work in Process Dr. Rs.16608
Factory Overheads (Make-up Guarantee) Dr. Rs.1152
Payroll Cr. Rs.17760

Factory Overheads
Indirect Labour and other expenses
 Indirect Labour consists of janitor, electrician, machine maintenance staff
 Sales and Admin expenses includes salaries of auditor, accountants, consultants, quality
control staff, and other administration staff related salaries
 Other Expenses include photocopy, workers meal etc.
sales and
admin 6,000,000
expenses
utilities 2,000,000
Indirect Labor 20,000
other expenses 25,000
Total 8,045,000
Per unit : 10726

Indirect Materials

Indirect Materials
25 KVA
Weight Rate Amount
Nut and Bolt 2 650 1300
Connection Wire 0.8 2195 1756
Powder Coating 1.85 760 1406
Oil 87 355 30885
Paint 5 245 1225
Cadmium 100 20 2000
38572
FOH per unit: 48,572
Production Statement
Production Summary
   
Cost of production for the month:    
DM 170259000  
DL 852480  
FOHs 36973500  
Total cost to be accounted for   208,084,980
     
Unit Output for the month:    
Units transferred to Finished Good 750  
Equivalent Units (200* 1/2) 100  
Total Units   850
     
Unit Cost for the month:    
DM 200305  
DL 1003  
FOHs 43498  
Total 244806  
     
Inventory Costs:    
Cost of goods finished during the month 183604394.1  
Cost of Work in Process    
DM 20030470.59  
DL 100291.7647  
FOHs 4349824 24,480,586
Total Production cost accounted for   208,084,980
     
Additional Information
 In October, the company produced 750 25kva transformers. Therefore, per unit direct
material, direct labour, and FOH cost is multiplied by 750.
 It was told to us by the operations manager that 200-300 transformers remain
uncompleted at the end of every month. Therefore, we assumed work in progress as 200
and their completion level to be 50%
Journal Entries

1) Work in Process Dr. Rs. 170,259,000

Materials Cr. Rs. 170,259,000
2) Work in Process Dr. Rs. 852,480
Payroll Cr. Rs. 852,480
3) Work in Process Dr. Rs. 36,973,500
Factory Overheads Cr. Rs. 36,973,500
4) Factory Overheads Dr. Rs. 36973500
Various Other Accounts Cr. Rs. 36,973,500
5) Finished Goods Dr. Rs. 183,604,394
Work in Process Cr. Rs. 183,604,394

Work in Process  
170259000 183,604,394
852480  
36973500  
208,084,980  
bal 24,480,586  
 

Statement of Cost of Goods Manufactured  

   
DM 170259000
DL 852480
FOHs 36973500
208,084,98
Total 0
   
Add: WIP beginning inventory 0
Less: WIP inventory 24480585.88
183,604,39
COG manufactured during the month 4
LIFO
 The company uses LIFO method for inventory costing

Order Point

 Lead time and safety stock information was collected from the manager
 Daily usage was calculated through: material used for 1 unit *number of units produced
in 1 day
 Order Point = (Daily Usage * Lead Time) + Safety Stock
Order Point 6680

EOQ
 C is the cost for placing an order. It includes the inspection cost, transportation cost,
loading & unloading using machinery, and labour cost. It is estimated to be at 10,000rs
 N is the annual unit produced= usage*working days= 1,000*300 = 300,000
 K: Annual inventory cost for storage of copper is estimated to be 20,000* 12. Storage
capacity is 2000kg. Therefore, per unit cost is 20000*12/2000.
 Formula: EOQ = √2CN/ K
Applied and Actual Factory Overhead

 Applied Factory overheads are calculated through direct labour hour method.
 First Estimated budget is calculated using previous months factory overhead

 Factory overhead per unit is multiplied by units produced last month then divided by
number of hours labour worked last month which gives us the Labour hour basis
 Applied factory overhead is calculated by multiplying basis rate by number of hours
employees worked which is 192
Journal entries
1) Work in Process Dr. Rs. 36,404,677

Applied FOHs Cr. Rs. 36,404,677

2) Actual FOHs Dr. Rs. 36,973,500

Accounts Payable Cr. Rs. 36,973,500

3) Applied FOHs Dr. Rs. 36,404,677
 Actual FOHs Cr. Rs. 36,404,677
4) Under-Applied FOHs Dr. Rs. 568,823

Actual FOHs Cr. Rs. 568,823

Variances
Materials
 Material Price Variance (MPV): (Actual Price – Standard Price) * Actual Usage
 Material Usage Variance (MUV): (Actual Usage – Standard Usage) * Standard Price
Material Price Variance (MPV)
Actual Price 2100  
Standard Price 2380  
Actual Usage 38  
  -10640 FAV
     
Material Usage Variance (MUV)
Actual Usage 38  
Standard Usage 39  
Standard Price 2380  
  -2380 FAV
     
Net Material Variance -13020 FAV

 Company is using and sourcing its material well as net variance is favorable

Journal Entry
1) Standard costing Dr 92,820
Unfavorable Variance Dr 0
Actual costing Cr 79,800
Favorable variance. Cr 13,020

Labor

 Labor Rate Variance (LRV): (Actual Rate – Standard Rate) * Actual Hour
 Labor Efficiency Variance (LEV): (Actual Hours – Standard Hours) * Standard Rat
 Labor Rate Variance (LRV)
Actual Rate 4752  
Standard Rate 4320  
Actual Hours 96  
  41472 UNFAV
     
Labor Efficiency Variance (LEV)
Actual Hours 96  
Standard Hours 96  
Standard Rate 4320  
  0  
     
Net Labor Variance 41472 UNFAV

 Labor costs are high and hence unfavorable

Journal Entry
1) Standard costing Dr 41,4720
Unfavorable Variance Dr 41,472
Actual costing Cr 45,6192
Favorable variance Cr 0

Ratios
Liquidity Ratios
 Current Ratio: This ratio gives an idea about company’s ability to meet its current
liabilities by means of its current assets. Current Liabilities of Pan power are
1,007,826,465 and Current Assets are 145,485,881.
Formula: Current Ratio = Current Assets/ Current Liabilities
Calculation: Current Ratio = 145,485,881/ 1,007,826,465 = 0.144
Interpretation: The current ratio had to be 1 or above to depict a positive image of the
company as they would be considered solvent but it is less than 1 i.e. 0.144, this shows
that the company is not solvent in short term.
  Acid –Test Ratio: This ratio measures a company’s ability to meet its short-term
obligations with its most liquid assets to gauge the true liquidity of the firm and therefore,
excludes inventory because it is the least liquid asset.

Formula: Acid –Test Ratio = Current Assets – Inventory/ Current Liabilities

Calculation: Acid –Test Ratio = 145,485,881 – 197,166/ 1,007,826,465 = 0.144
Interpretation: Since the ratio came out to be less than 1 i.e. 0.144 again, this indicates
that the company’s inventory does not have enough weightage in total current assets, it
remains to be not solvent and without enough quick assets.
Profitability Ratios
 Return on Assets (ROA): This ratio measures how efficiently a company can manage its
assets to generate profits during a period.

Formula: ROA = Net Profit/ Total Assets * 100%

Calculation: ROA = 85,486,432/ 328,676,543 * 100 = 26%
Interpretation: The result of the ratio is 26% which means that Pan Power is not able to
fully utilize assets efficiently to generate sales and in turn have profits.
 Net Profit Margin: The net profit margin states how much profit is earned for every
Rs.1 in sales or every single unit sold, after deducting all the expenses.

Formula: Net Profit/ Sales *100%

Calculation: Net Profit Margin = 85,486,432/ 810,286,324 * 100 = 10.5%
Interpretation: A net profit margin of 10.5% states that Pan Power earns Rs.0.304 in
profit for every rupee it collects in its sales.
Conclusion
The transformer industry is a highly competitive market, and pan power needs to ensure that it
maintains its competitive advantage in terms of both price and quality. To achieve this, the cost
of procurement needs to be monitored by the top managers and material sourcing should be done
in a way that cheap rates can be bargained, and costs are saved. One way to reduce procurement
costs can be bulk buying from a trusted supplier and enjoying reduced costs due to the large
order and economies of scale. Also, to make the operation processes more efficient, the company
can implement quality assurance checks throughout the operations process to reduce wastage and
maximize the output. Labor efficiency and output also requires a need for improvement.
In case of quick availability of financial resources, the company is severely lacking behind. The
inventory level being low can be an indication of the firm to be able to sell off the inventory at a
good rate. The Inventory turnover ratio could be in the favor of the company. The fact that
Receivables hold the most weight in the current assets portion depicts that the firm is not able to
collect in time or the firm is selling more on credit, but they need to restructure their credit terms
for all the receivables to collect cash on time. Similarly, the firm is not able to pay their payables
on time, 91% of the Pan Power’s current liabilities portion is withheld by account payables. The
firm has done most of the business upon credit terms, which is why they do not have enough
current assets that could be able to prove the firm to be solvent.
To compete with the competitors, the firm must keep the profit margin low, which is why they
are not able to gather enough net income as compared to sales. The firm could find new suppliers
so somehow, they can increase the net profit, this way they can lower the cost with the same
prices and could be able to have an increase in the profit margin. Even the return on assets for the
firm is quite low, which means that the processes of the firm need to be changed so that the
assets could be utilized at their fullest. This could consequently help the firm grow, since they
could lay off the assets that are not in their use and could understand whether they require more,
which in terms would influence the sales figures.