1

Cost Accounting
Group Members:
Rao Ihtisham Ahmed
Nabeel Tariq
Haider Khan
Muhammad Tayyab Imran
Muhammad Saad
Submitted to:
Ma’am Nausheen Shehzad
 2

Introduction......................................................................................................................................................4
Mission statement.............................................................................................................................................5
Company Comparative Analysis.......................................................................................................................6
Business Overview.......................................................................................................................................6
Direct material..................................................................................................................................................6
Direct Labor......................................................................................................................................................8
FOH.................................................................................................................................................................. 8
High-Low method.............................................................................................................................................8
Modified Wage plan.......................................................................................................................................10
Detail process:................................................................................................................................................11
Order Point:....................................................................................................................................................13
Economic Order Quantity...............................................................................................................................14
Inventory Method...........................................................................................................................................16
Details of the Payroll:.....................................................................................................................................17
Material Usage & Labour Variances:..............................................................................................................18
Cost Volume Analysis and break even:..........................................................................................................19
Actual and Applied FOH:...............................................................................................................................21
Conclusion & Key Findings:...........................................................................................................................23
Appendices:....................................................................................................................................................24
........................................................................................................................................................................ 24
........................................................................................................................................................................ 24
 3

Introduction
Pakistan Aluminum beverage cans limited is a publicly listed company established in

December 14 by Ashmore group- an investment group of UK. The company was

established through a heavy investment of $80 million, making it the first aluminum cans

production plant in Pakistan with an estimated capacity of 700 million cans which is

further expandable to 1.2 billion. The composition of the board of directors is controlled

by Ashmore limited with 51% ownership of shares whereas the local partner of the

company is Liberty group. Aluminum beverage cans limited is currently involved in the

production and sale of cans to other manufacturers and they have an estimated market cap

of 15,816,541.53 (000). Company shares are traded under the symbol PABC and have a

share price of RS 43.80 which was recorded on 2nd December when the stock market was

closed for the weekend.

PABC has employed around 200+ workers and has mentioned that their employees are

the core reason of their progress in the industry. For this reason, they have given

respectable credits to their talents engineers and employees workforce. It is equally

important to mention that PABC recognizes their corporate social responsibility towards

the general public and has introduced measures like forestation to reduce global

warming in order to restore the natural climate and environment of Pakistan.

The company CEO, Mr. Azam Sakrani, stated that they want to revolutionize the

beverage industry of Pakistan to reduce the reliance on imported materials. The

company
 4

exclusively wants to provide a better economic environment in the beverage industry to

ensure cost-effectiveness can be achieved and lower prices can be passed onto

consumers. He mentioned that previously beverage manufacturers had to import material

from countries like Turkey, Jordan, and Dubai and from other surrounding areas because

no local product was available to them. Hence, the mission statement of the entity is as

follows:

Mission statement
Company is on a mission to increase its regional market capitalization by honoring all the

new trends in the market to improve customer satisfaction and to maximize returns to its

shareholders.

For this purpose, they have visualized their future actions and have stated that on their

website in the following terms:

“The vision of the company is to become the regional supplier of beverage cans and to

improve their production ability.”

 5

Company Comparative Analysis

Business Overview

The company is the sole local manufacturer and faces no local competition in the

domestic market. This provides them with a monopoly in the market. However, rather

than taking any unfair advantage of their position in the market, they strive to be the best

and have attained a strong foothold in the market. Generally, the company enjoys the

following advantages:

● 10-year tax holiday by establishing the plant in a special economic zone.

● International integration with Roeslein-USA for plant commissioning.

● Collaboration with DESCON for the development of local infrastructure.

● Targeting other markets that are accessible through Pakistani markets.

The collaboration with international organizations allowed them to produce certified

products which meet international standards like ISO 22000.

Direct material
6
 7

Direct Labor

FOH

High-Low method
Using some data and assumptions, we used the high low method to determine the
variable and fixed cost of a single unit of aluminum can. We were able to calculate the
variable cost using two different volumes. During the interview with the manager, we
were informed that the level of products in 2021 year have been 558 million cans and in
2020 the amount has been 358 million. Against the 558 million units, the cost of power
and fuel incurred in a year is PKR 251242262, while against the 338 million production
the cost was reduced to PKR 174752452. Using the changes in units produced and
power/fuel the variable cost came out to be 0.382.
 8

After deducting the total variable cost from the total cost, we were able to determine the
fixed cost remainder which was PKR 37,835,692.

.
 9

Modified Wage plan

PABC employ both an hourly and piece rate plan where if an employee works 8 hours a
day, he will receive Rs 1600 (200x8) however a piece rate plan is followed if an
employee produces more than the quota of 16300 units. A modified wage plan table was
created based on the employee information in the. A week’s data was collected and
calculated by analysing the pieces finished by the labour and what they have earned
during the week. The data says that 46,500,000 units are produced in a month.

1. We also gained insights that manual workers worked 8 hours a day and 40 hours
a week

2. Their monthly salary was 35,200

3. During the month they work 22 days.

Based on the above information we calculated that 176 hours are worked in a month
(8x22). From this value we calculated the earnings per hour where 35,200 was divided by
176 which gave us 200 that indicates that one worker earns Rs. 200 per hour.

Quota: 16300
 10

As per the modified wage plan, the employees receive Rs 200 per hour for working 8
hours a day. Moreover, on each extra unit that the employee produces, he earns Rs. 0.09.
Overall, the labour productivity is exceeding the quota of 16300 pieces a day with the on
Thursday and Friday where the employee gets the piece rate rather than the hour rate.

Detail process:

Cutting the blank

● 1 The modern method for making aluminum beverage cans is called two-piece
drawing and wall ironing. The process begins with an aluminum ingot which was
cast to be about 30 inches (76 cm) thick, then rolled into a thin sheet. The first
step in the actual manufacture of the can is to cut the sheet into a circle, called a
blank, that will form the bottom and sides of the can. Each blank is 5.5 inches (14
cm) in diameter. Some material is necessarily lost between each circle, but
manufacturers have found that minimum aluminum is lost when the sheets are
wide enough to hold two staggered rows of seven blanks each. About 12-14% of
the sheet is wasted, but can be reused as scrap. After the circular blank is cut, it is
"drawn" or pulled up to form a cup 3.5 inches (8.9 cm) in diameter.

Redrawing the cup

● 2 The small cup resulting from the initial draw is then transferred to a second
machine. A sleeve holds the cup precisely in place, and a punch lowered swiftly
into the cup redraws it to a diameter of about 2.6 inches (6.6 cm). The height of
the cup increases simultaneously from the initial 1.3 to 2.25 inches (3.3 to 5.7 cm).
The punch then pushes the cup against three rings called ironing rings, which
stretch and thin the cup walls. This entire operation—the drawing and ironing—is
done in one continuous punch stroke, which takes only one fifth of a second to
 11

complete. The cup is now about 5 inches (13 cm) high. Then another punch
presses up against the base of the cup, causing the bottom to bulge inward. This
shape counteracts the pressure of the carbonated liquid the can will contain. The
bottom and lower walls of the can are also a little thicker than the upper walls, for
added strength.

Trimming the ears

● 3 The drawing and ironing process leaves the can slightly wavy at the top. These
small ripples in the metal are called "ears." "Earing" is an unavoidable effect of
the crystalline structure of the aluminum sheet. Aluminum companies have
studied this phenomenon extensively, and they have been able to influence the
placement and height of the ears by controlling the rolling of the aluminum sheet.
Nevertheless, some material is lost at this stage. About a quarter inch is trimmed
from the top of the can, leaving the upper walls straight and level.

Cleaning and decorating

● 4 The drawing and ironing process leaves the outer wall of the can with a smooth,
shiny surface, so it does not require any further finishing such as polishing. After
the ears are trimmed, the can is cleaned and then imprinted with its label. After the
can is decorated, it is squeezed in slightly at the top to a make a neck, and the neck
is given an out-ward flange at the very top edge, which will be folded over once
the lid is added.

The lid

● 5 The lid is made of a slightly different alloy than the aluminum for the base and
sides of the can. The inward bulge of the bottom of the can helps it withstand the
pressure exerted by the liquid inside it, but the flat lid must be stiffer and
stronger than the base, so it is made of aluminum with more magnesium and less
 12

manganese than the rest of the can. This results in stronger metal, and the lid is
considerably thicker than the walls. The lid is cut to a diameter of 2.1 inches (5.3
cm), smaller than the 2.6-inch (6.6 cm) diameter of the walls. The center of the
lid is stretched upward slightly and drawn by a machine to form a rivet. The pull
tab, a separate piece of metal, is inserted under the rivet and secured by it. Then
the lid is scored so that when the tab is pulled by the consumer, the metal will
detach easily and leave the proper opening.

To ensure that the cans are made properly, they are automatically checked for
cracks and pinholes. One in 50,000 cans is usually found to be defective.

Filling and seaming

● 6 After the neck is formed, the can is ready to be filled. The can is held tightly
against the seat of a filling machine and a beverage is poured in. The lid is
added. The upper flange formed when the can was given its neck is then bent
around the lid and seamed shut. At this point, the can is ready for sale.

Order Point:
The point at which an item should be ordered is called its order point. It occurs when a

set level of minimum inventory on hand is reached. Daily usage is the expected rate at

which the product will be used, lead time is the approximate time interval between

ordering and receipt of the ordered product, and buffer stock is the minimum stock level

required to avoid stock disruptions.

For Pakistan Aluminum Beverage Cans Limited, the order point is calculated on

aluminum coils, one of the primary inputs in their manufacturing process.

 13

Order Point = (Daily usage * Lead time) + Safety Stock

Daily Usage 50 KG per Day

Lead Time 7 days

Buffer Stock 100 KG

Order Point = (50*7) + 100 = 450KG

Order Point

Economic Order Quantity

It is the ideal quantity to order at a point in time. It includes the ordering costs which

incorporate the communication costs and the salaries of purchasing personnel of the

company. Furthermore, EOQ also consists of the carrying costs which are the costs that

the company incurs because of the storage of materials.

The formula for EOQ is:

(2CN/k)^1/2

Where:

C = Cost of placing an order

 14

N = Number of units required annually

K = Annual carrying cost per unit of inventory

Cost of placing an order (C) 6000

Number of units required annually (N) 13000

Annual carrying cost per unit of inventory

(K) 4

EOQ 6245
 15

Inventory Method
Inventory Method used: First In First Out (FIFO)
 16

Details of the Payroll:

Pakistan Aluminum Beverage Cans Limited adheres to the minimum wage rate in

Pakistan which is 25,000 rupees. per month for their laymen who usually do menial jobs

like picking up scrap metal, broken metals, etc, and take them to warehouses or other

miscellaneous jobs all day and give them their corresponding daily wages. They also

have a permanent staff consisting of administrative staff, managers, officers, and top

management which are paid according to their respective skillset.

The payroll summary is given as follows:

 17

Material Usage & Labour Variances:

As the main raw material used to create aluminum cans is aluminum coils, the following

variances were calculated based on that. Standard and actual costs were calculated in

order to calculate the variances.

The number of cans produced in 2021 by the company was 558 million. The plant

remained operational for 345 days in the year and had a downtime of 20 days. The

production plant is operational for 24 hours in a day. Hence, the number of actual hours

worked was 8280 hours. As it took 8280 hours to create 558 million aluminum cans, 1

can is produced in every 0.000148 hours.

 18

The actual material used was 6.9 Million KG, while the standard material used was 7

Million. The actual price of aluminum coil was Rs 550/KG, while the standard price was

Rs 560/KG. Based on the wage rate, the actual rate of labour was Rs 200 per hour,

whereas the standard rate was Rs 170.

The results show that the material usage variance, material price variance, and the labor

efficiency variance are favorable. While the labor rate variance is unfavorable. This

shows that the company was efficient in both the buying and the usage of materials. As

the actual rate paid to workers was greater, the labor rate efficiency is unfavorable.

However, the labor efficiency variance shows that labour productivity is satisfactory.

Cost Volume Analysis and break even:

 19

Following is the list of variable and fixed costs for consecutive three fiscal years. Fixed

Costs are those that remain fixed throughout the year. fixed cost refers to the cost of a

business expense that doesn't change even when there's an increase or decrease in the

number of goods and services produced or sold. Fixed costs are commonly related to

recurring expenses that aren't directly related to production, such as rent, interest

payments, and insurance. Variable Costs on the other hand changes throughout the year.

variable cost is a corporate expense that changes in proportion to how much a company

produces or sells. Variable costs increase or decrease depending on a company's

production or sales volume—they rise as production increases and fall as production

decreases. Examples of variable costs include a manufacturing company's costs of raw

materials and packaging.

Cost of Raw materials is also variable since it depends on the number of units produced
 20

@26-30 in Rupees / Kg. Moreover, piece wise labor is also variable usually paying 120 in

Rupees for extra 100 kg making it 3000-3500 kg extra units per month and based on that

yearly variable costs are computed.

Break even:

Fixed Cost/ Contribution Margin

66,204,652/75-21.58

882,707Cans to be sold.

Actual and Applied FOH:

Actual

Applied and Actual FOH

Actual Factory Overhead 18,456,115

Applied Factory Overhead 17,300,120

Journal Entries
 21

SR Accounts Dr CR
1 Work in process 17,300,120
Applied Factory 17,300,120
Overhead
2 Actual Factory 18,456,115
Overhead
A/p 18,456,115
3 Applied Factory 17,300,120
Overhead
Actual Factory 17,300,120
Overhead
4 Under Applied Factory 1,155,995
Overhead
Actual Factory 1,155,995
Overhead
 22

Conclusion & Key Findings:

All in all the company’s production process is highly efficient as evident from their

material variances. This can be attributed to the state of the art cans manufacturing plant.

The high volume of production of cans which is currently 558 million per year bring into

account economies of scale, allowing the company to achieve production efficiency.

Another important factor is the lack to competition in the local industry, Pakistan

Aluminum Beverage Cans Limited is currently the only cans manufacturer in the

country. The demand for aluminum cans remains fairly constant throughout the year.

Furthermore, the company is non-cyclical since it serves FMCG companies whose

demand of beverages remains stable despite economic cycles.

When it comes to the variances, Pakistan Aluminum beverage cans limited maintains

good levels with almost all results being positive. The first two variations show that the

organization wastes little material and that the work involved in making the products is

very efficient. The labor rate variance ratio is unfavorable because the company pays

employees more than expected; however, this is offset by the lower overhead costs

incurred by the company; therefore this is not an alarming situation; However, the

company can make more profit by reducing these costs, but that could lower employee

morale, so rates are fixed and not expected to change.

Looking at the financial performance of the company, the firm generated a healthy

amount of net income. The net profit margins were close to 20%. The current ratio
 23

Improved to 1.68 which shows that the company has more than enough current assets to

finance its current liabilities.

Appendices: