Cost Accounting System of the B.A.S.F. Pakistan (Pvt.) Limited

 

BASF Pakistan – Company Profile and Management Report

 

The B.A.S.F. Pakistan has six lines of production and that are:

  • Pigments
  • Dispersions
  • Auxiliaries
  • Powder Product
  • PUR
  • Palatal

 

B.A.S.F. Pakistan uses “Process Costing in Batch mode”. Their system is based on standard costs and calculation of only idle and total variances as their is no chance of having spending variance. This is because the budget is relatively fixed.

 

The control starts from the planning process, whether it is a mission statement, or operating budget or long range objective its provides basis for control. A cost control is a logical integrated tool to gather, evaluate and report the information about the performance of the individuals in particular and organisation in general.

 

Cost Control System

 

The broad goal is of “achieving competitive profits” and there are only few competitors of B.A.S.F. in the market. The guidelines for success factors, Key variables, critical variables, or key result area have been obtained from the top management sitting in Germany. The whole system has been designed to control cost for overheads and all the budgeting is done in this particular phase.

 

Material Cost Control System

 

The effective management of materials is very essential to survive in present world of competition. The only variance that B.A.S.F can face is of import duty fluctuation as most of the raw material is imported. The main characteristics of the B.A.S.F inventory management which is mostly done in the factory is:

  • Best services to the customers
  • Production at maximum efficient and lowest possible cost
  • Managed the inventories at desired and predetermined stock levels.

 

Cost incurred in producing also include any extraordinary expenses that has occurred during that Batch production.

 

Now the material requisition is managed through materials requisition slips, B.A.S.F. has installed a Local Area Network (LAN) which make a direct link between factory and office. As most of the material is imported so these cost are converted into Pakistani rupees for pricing it in the Pakistani market.

 

The lead time for purchasing materials that is depends on various factors such as

  • time required by purchasing department to trace the supplier, negotiate the prices and place the order etc.
  • time needed by the supplier to supply or shipped the goods
  • transit period which includes shipping clearing and other transit time

 

It should also be kept in mind that higher the lead time higher the level of inventory and in turn higher the inventory carrying cost which may effect the competitiveness of the products of an organisation that is why B.A.S.F is involved in Batch Processing in which they pick a required quantity of materials from the stores and than produce.

 

While making the decision or an ordering size, an equilibrium between inventory carrying cost  and ordering of cost shall be made.

 

The valuation methods involved usually inflation adjusted First in First out and under normal conditions Weighted Average valuation is regarded as a suitable method.

 

Labour Cost Control Systems

 

Labour cost control system is also considered as a fixed cost of production. This shows that B.A.S.F is basically capital intensive industry and the role of labour is less important. Although in-spite of the nature of industry it effects the cost of production particularly ever increasing wages and its fringe cost.

 

Cost Control system for Overheads

 

We may define the factory overhead as those cost which cannot conveniently traced to a department, product or service. Unlike the direct materials and direct labour, the factory overheads can not be directly charged to the cost object hence a fair and just allocation system is needed to charge the factory overhead to the ultimate cost object. The other difference between factory overhead and direct material & labour is that the factory overheads are not always variable and big chunk of overheads are not always variable and big chunk of fixed nature.

 

Overheads of fixed nature are usually depreciation, some part of indirect labour etc. and of variable kinds are all the running expenses of the factory like power bills and utility bills etc. The factory overheads are classified into the controllable and uncontrollable overheads so that the responsibility of cost control can effectively put into force and managers of various departments are made accountable for the cost under their control.

 

Allocation of Factory Overheads

 

Generally the allocation of factory overhead need following three considerations:

  • Identification cost objective at receiving end
  • Determination of cost pool
  • Selection of Cost Allocation Base

 

Activity Based Costing technique is selected for allocation of cost. In case the usage of a common cost cannot reliably determined then the next appropriate basis could be the level of activity basis of allocation provide a fair measure of supporting services required by a cost object. Companies are not totally knowledgeable of their performance and Activity-Based Costing (ABC) is the source of this missing information about performance. B.A.S.F. employs this technique which help it to optimize product, service and customer mix, model alternative strategies, evaluate technologies, and focus cost improvement efforts. In its most advanced form, it is a common language of communication and comprehensive model of organisational performance. It is being implemented in B.A.S.F. as can be proved through an example, Cost of power is allocated based on machine hours. Other example is Human Resource Department(personnel) cost can be allocated based on head counts of each cost center or department.

 

The ABC system is very useful particularly in those organisation wherein the high and low volume products are sold in multiple market where cost structure of each market is not comparable and marketing of tailored made products.

 

The implementation of ABC system requires to accumulate the overhead in an activity cost pool and then such overheads are allocated based on relevant and a logical cost driver to the business line or product.

 

Predetermined Factory overhead rates

 

The predetermined rate of overhead are used for the purpose of controlling the cost and measuring the performance of a departmental manager. Basically the concept of predetermined factory rates used in standard costing, fixing the selling price of a product or to prepare a price for a special order or participation in tender etc.

 

Costing systems

 

The basic objective of a costing system and procedure is the determination of a product or service cost based on the selected cost unit. The basic question of cost accumulation has to be solved which is to decide whether they should be accumulated and allocated as and when incurred and services are used to arrive at historical cost or prepare the cost estimation in advance of production as a standard cost.

 

Costing System by time

Standard costing

 

Standard costing procedure is being followed in B.A.S.F. In standard costing the cost of a product or service is determined in advance generally before beginning the year or production. The standard cost are then analyzed through variance analyzing system which also provide a yard stick for performance measurement of various department and processes.

Bill of materials established by the technical department is the basis for preparation of standard costing. The bill of materials contained all technical data such as the expected yield for a hypothetical batch of production, the quantity of various materials needed, labour hours & machine hours of each machine or group of machines require to produce etc. The material price are also predetermined taking into consideration the past experience expected inflation and exchange parity etc. The factory overhead budget is prepared for the expected level of activity and predetermined overhead rates are also worked out. The following steps are necessary for preparing standard costing:

  • sales budget
  • inventory policy
  • production plan
  • material purchase budget
  • material standard pricing
  • factory overhead budget
  • bills of materials

 

Variance analysis systems

 

Variance in the cost is the difference between the standard cost incurred on producing the same.

 

Material Variances

 

The only variance in this matter that B.A.S.F. accounts for is the price variance. It is the variance because the difference in the price of material used between the actual price at which the material is purchased and the predetermined price used in the standard costing. This variance is repoting about the efficiency of purchasing department or may because of unexpected higher inflation or change in exchange parity or change government tax structure.

 

Labour Cost variance

 

Like material variance labour cost variance can also be analyzed into the wage rate(price) variance and an efficiency (usage) variance.

 

The Factory overhead variance

 

The difference between the factory overhead incurred and factory overhead applied or allocated to a service or a product is known as unfavorable or favorable overall overhead depending on the actual being more allocated or less. In B.A.S.F. there is only one variance that is accounted for and is Idle Capacity Variance which is the difference between budget allowance based on actual hours at the standard overhead rate. The responsibility of the idle capacity variance on the shoulder of executive management.

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