Reckitt Benckiser Pakistan – Cost Accounting Report

Reckitt Benckiser Pakistan Ltd. is among the leading consumers and pharmaceutical manufacturers of Pakistan. Its registered and head offices as well as manufacturing facilities are located in Karachi. Reckitts London, together with its nominees own 58.1% stake in the equity of Reckitts Pakistan Ltd.

Reckitts Pakistan has a paid-up capital of Rs.320 million, its sales being Rs.1962.40 million with a pretax profit of Rs.253.55 million in 1998. The Company’s financial health has remained robust over the past several year and last year its sales have grown by 27.9%.


Reckitts is known to its consumers in the sub- continent since 1916 when Graham’s Trading Company was established as an agent to import and sell its product.


Reckitts formally entered the Pakistan Market in 1951 as a trading concern. Soon it had established its first manufacturing unit at Mauripur and today it is known as one of the leading manufacturer and marketer of household and pharmaceutical products in Pakistan.


In last year the Reckitt & Colman has merged with Benckiser to become Reckitt Benckiser. Benckiser does not have the operations in Pakistan. This has come with the change in top management, which is now led by the new CEO Mr. Sabir Sami.


Over the years, Reckitts has been introducing Quality product, which meet consumer demand. Brands like Cherry Blossom, Robin Blue, Dettol, Dispirin have been household names for years. More recently it has introduced a wider range of its international products such as Mortein, Dettol shaving Cream etc.


Today Reckitt is a public limited company quoted on the Stock exchanges of the country, It employs 1400 people, has 4 manufacturing units, has a track record of growing sales and profits. Besides these tangibles, Reckitts is known as an ethical corporate citizen, it is a socially conscious company and has always worked in a manner that serves its commercial interest whilst contributing to the welfare of the environment in which it operates.


As mentioned earlier, the products of Reckitt Benckiser Pakistan Ltd. mainly lie in the two following areas; consumer and pharmaceutical. Its consumer product line is consisted of:


  1. Robin Blue
  2. Cherry Blossom
  3. Zip
  4. Coopex
  5. Mortein
  6. PifPaf
  7. Cobra Cream
  8. Silvo
  9. Brasso
  10. Mansion
  11. Harpic
  12. Dettol, and
  13. Mortein Liquid Bleach


Among the pharmaceutical products, Reckitt manufactures:


  1. Aspro
  2. Disprin
  3. Disprofen
  4. Paracetamol
  5. Tamgesic
  6. Bronchalite
  7. Theopyline
  8. Genticyn
  9. Nicotrin
  10. Epilim, and
  11. Fybogel




The company has its head office in the State Life Bldg. Karachi, two factories at Manghopir Karachi, one at S.I.T.E. and one at Korangi. It also has a warehouse at S.I.T.E.

The operations of the company are mainly carried over through the following departments;


  1. Finance
  2. Supply chain
  3. Marketing
  4. Human Resources
  5. Information System





The finance Department is headed by the Finance Director and is further sub-divided into four departments:


  1. General Accounting Department:


Mainly deals with the recording of everyday transactions take place into the general ledger and the preparation of the trial balance.


  1. Treasury Department:


The operations of treasury department include disbursements, payments to   suppliers and bank dealings.

In short, the treasury department has following responsibilities:


  • Pay roll
  • Payment to suppliers
  • Disbursements
  • Insurance
  • Banking Procedures
  • Workers Funds



  1. Finance & Secretarial Practices:


The operations of this department include liasoning with auditors, and dealing with the legal affairs that pertain with the financial activities of the company.


  1. Management Reporting and Planning Department:


The activities of this department include planning, Overhead Control, Capital   expenditure control, costing, budgeting and monthly reporting. The focus of this report is the accounting and reporting practices that take place in this department.


Round the year, the Management Reporting and Planning department is engaged in the preparation of the following reports:



  • Overhead Report
  • Capital Expenditure Report
  • Contribution Before Marketing Statement
  • Other activities include:
  • Monthly reporting
  • Budgeting
  • Costing



Overhead report is generated on IBM AS 400 mainframe system using FRS (Financial reporting system). It basically takes figures from General Ledger. The report is divided in two parts:


  1. Overhead Establishment Report
  2. Overhead Operating Report.


Overhead Establishment Report


This part of the Overhead report deals with the expenses related to the company’s employees such as salaries, bonuses, dividends, perks, house rentals, provident & gratuity payments etc.


Overhead Operating Report


This part of the Overhead includes all operating expenses that are incurred. Examples may be electricity, insurance, rent, etc.


The report is generated department wise and the departments that engage themselves in this practice are:


  1. Finance
  2. T. Department
  3. Marketing
  4. Quality Assurance
  5. All Factories
  6. Human Resources
  7. Procurement
  8. Supply Chain
  9. Distribution, and,
  10. Sales


The report gives actual figures for the month and cumulative year to date, which are compared with the budgeted figures, and the actual figures for the last year.  Variances that arise from the last year and budgeted figures are also recorded.  The report is circulated to all department heads. Reasons for material variances from budget are sought from the department heads in monthly meetings known as Pakistan Leadership Team (PLT) meeting, which includes all top management executives of the company in the country.



Capital expenditure includes all the additions in the plant, machinery, equipment, land and building and other long-term assets for the given period. Capital expenditure report is also generated on monthly basis. It is a PC based report, which basically shows additions during the year. This report is also prepared Department wise.


The report gives for the month expenditure, year to date expenditure and budgeted expenditure.  The main source of figures for addition is the general ledger. The report is sent to the Department heads and reasons for variances if any, are explained by them. Capital expenditure is strictly controlled and requires proper authorization. . Any addition, which is not in budget, is required to be justified properly and approval from Regional Head office is sought.  Fixed Asset register is updated using the monthly capital reports.



This statement shows line wise contribution which is calculated by deducting prime cost from Net selling price for each product. Thus this report shows contribution made by each product and overall company CBM. This statement is analyzed and compared with last year CBM statement and with the budgeted CBM statement. Reasons for variance are given in a separate report. Variances could be due to change in Sales price, cost of material, change of source of material, changes in Bill of Material (formulation), or changes in exchange rates. The statement is sent to the Directors, Factory managers and Product managers.


Another analysis is done for products with variation of more than 5% against budget. Reasons for such variance are given and action to improve the CBM is taken.


CBM Statement is prepared on the PC but main input come from BPCS modules of IBM mainframe computer.  It is possible to view various cost sets being maintained in the system e.g. for actual cost, replacement cost, budgeted cost etc. It is also possible to view bill of material requirements for each product. This becomes handy in statement preparation and in analysis work.



Monthly reports are prepared for local management reporting and for reporting to the regional Head Office. Section of Finance report is compiled by management accounting section. Other departments e.g. Operations, Marketing, Human Resources etc send their monthly reports which are compiled as one report to be circulated to PLT (Pakistan Leadership Team) members. This report is discussed in PLT meeting held each month. Various actions are agreed to be taken in the meeting to improve the performance. Overhead reports, CBM statement and analysis and Capital expenditure reports are part of Finance report. Variances are discussed and actions are agreed to collectively improve the performance.


Regional reporting is done on software called Hyperian. Monthly Financial results are compiled by Management Accounting section in the shape of schedules called B schedules. These B Schedules show monthly profit and loss account, Balance sheet, cash flow from Operations, and financial analysis of various products. These are on standard format applicable globally in Reckitt Benckiser. The B’s are sent to the region using Hyperian software linked with all the offices globally.



The company uses standard costing for its variable, fixed, and allocated costs. Hence, it uses a predetermined rate for all these types of expenses, and allocates the costs on the basis of these rates. The base used for each element of cost is different for different product categories.




RBPL for its Pakistani operations is using BPCS as its Enterprise Resource Planning (ERP) system and BPCS caters for standard costing. All the inventory items are received at standard cost and Purchase Price Variance (PPV) is captured when invoice is received. Material is issued as per Standard Bill of Materials (BOM). All the additional issues of materials are treated as usage variance. Anything if left over after production is taken back to inventories and is favorable usage variance. For Labor Rate & Efficiency variance, standard labor is taken from the system by taking into account the production of every finished product times the hours required to produce that product. Finished Goods-actual hours consumed for production are fed into an add-on system developed locally. The variance comes out to be the difference between the actual payroll and the standard labor cost. All the above variance is allocated to stocks and COGS, production wise. The format of the variance report is attached herewith.


The Production Process

The production process can be briefly described in three steps:


  1. Issue Requisition:


The materials that are used for the production process are first requisitioned. The material requisition is a formal process in which a “Material Requisition Ticket” is issued.


It enlists the date, the amount of material and the job for which the material is being issued. For every process the requisition ticket is prepared however meager the amount may be. If, by chance the material is sent back the subsequent adjustments to the raw material accounts are done accordingly.


  1. Production—Work In Process:


The materials that are requisitioned by the production personnel are then taken to the actual production plant. The nature of material determines which process it is to undergo. The material undergoes several production processes depending upon the complexity of the product involved.


For example, all the tablets require at least three different processes. First the raw material is washed, so as to remove the impurities involved. Then they are treated with Sodium Hydroxide. Then they undergo the various plant processes to appear in powdered form. They are then solidified and attain the shape of tablets.


  1. Packaging:


The finished product although has all the necessary qualities of a packed product, however, the unpacked product loses its effectiveness due to dampness in the atmosphere and various other chemical reactions. For example, Reckitt has five automated Blister Machines, which pack the tablets into blisters of 10 tablets each (or the desired quantity).


As far as the liquid products (bottled products) are concerned, quality-conscious personnel pack them and then lid is placed.


  1. Bulk Packaging:


Initially the finished products are packaged into large or bulk quantities for storing purposes. However when the actual distribution occurs, the product is packed into separate small-quantity packs.



  1. Ware House (Finished Goods):


The finished products are not sold off instantaneously, but are kept for the time being in the storeroom or warehouse.

This may occur because:


  • There is no immediate demand for the product in the market so is being stored for later dispatch
  • There is extreme demand for the product, however in anticipation of markup over the stipulated prices, the products are not being released to the market.


  1. Invoices Received:


The finished products are sold to the final consumers through supplier chains and retailers. When the products are sold, the company receives invoices for the finished products. These invoices, within due time convert into Accounts Receivables, which on collection serve to fulfill the cash requirements of the company.



Budget exercise for next year starts in August each year and budget is finally approved by end October each year. It is a rigorous exercise carried by management accounting section. Forms are sent to all departments seeking their input in terms of figures for next year e.g. their overheads for next year, Capital expenditure requirements, Sales forecast, Budgeted raw and packing material rates from procurement, labor hours required for each product and labor rates from factories, Production figures from operations etc. These forms are received in the Management Accounting section by a certain date. The Management Accounting section then stars to compile all the data in the shape of budget document.


In this process the department prepares Budgeted CBM statement, Budgeted Overhead reports with calendarisation Budgeted capital expenditure reports with calendarisation, Budgeted B schedules forecasting results for next year etc. All these are compiled in one document, which is sent for approval to the Regional Head Office. Once approved these documents are sent to each head of discipline for their future reference and control.



Variance Analysis at RBPL

The production process at RBPL is monitored round the clock through an online computer network. Each activity in the production process is measured and is recorded in the system and for the purpose of internal control, the system generates various reports, which serves as the performance indicators for the management. As mentioned earlier the process at RBPL is totally automated and there is very low labor requirement to run the system. These major variations result from the material usage, material handling, maintenance and repairs.


Material Variance:


All material related variances are measured and controlled through Daily Production Reports, Weekly Production Reports and Monthly production reports.


  1. Daily Production Reports:


Daily Production Report is a report generated to measure the daily performance of the production process. This performance is compared against the estimated performance standards, which are based on the last performance of the production system. These reports are relatively detailed reports than the weekly and monthly reports and are reported to owner before they are forwarded to the production, finance and the accounts department of the company. This is due to the centralized decision making system. These reports measures:


  • Total Number of Units produced – This report evaluates the performance of the company on the basis of number of units produced.


  • Raw Material Consumption report: This report provide information regarding the per unit consumption of the raw material against the Predetermined yield rates. Pre-determined yield rates are established for all the raw material consumption per unit of product produced. The report compares the actual yield rates versus the predetermined on a given day and highlights variance of above 5 percent of the predetermined yield rate.

Raw material consumption for each unit produced is controlled as illustrated by the given example.                                                                    `

  • Production losses/ wastage report: This report provides information regarding the production loses in a given day. The predetermined rate for usual loses/wastage are compared against the actual wastage and are reported to finance and production department for internal control.

Predetermined rate for raw material ranges from 2-5 percent of the total raw material consumed.


  1. Weekly and Monthly Production Report.


Weekly production report evaluates performance of the production system over a week. The weekly performance standards are measured against the actual performance of last year. The purpose is to see that the output, raw material, wastage, maintenance and others have remained within the predetermined variance ranges within the week or not


Labor Variance


As mentioned earlier, the process at the firm needs very low labor involvement due to its automation. The scope of their work includes case lifting, supervisors and drivers. Almost 75 percent are involved in the work of logistics moving the materials in to the manufacturing department and than carrying them to the go-downs, then to the trucks. This is one the major activity and has the highest wastage percentage due to the breakage of cases.


Wages for these employees are adjusted for the inflation rate each year. Increases in these wage rates are compared to the increase in the sales value. The company monitors the Labor Rate Variance after each quarter.


The efficiency of these contracted employees is monitored on daily basis. The emphasis of the analysis is on the lifters. Daily movement of the cases per day is divided by the no of employee per shit to see whether they have met the performance or not. For example: If the total number of contracted employees assigned to move the finished goods to the go-down are 100, they are expected to move 10,000 cases in one shift of 8 hours on average. If they are not performing up to the mark then their supervisor will be questioned for such performance.





Spoilage at RBPL is checked by the quality Control Department and reported to the production authorities. Spoiled units are of two kinds:


  • Defective units
  • Spoilage


Defective units are those, which are made defective during the manufacturing process.

Cost for these units are estimated before hand and are included in the budget. Some of these units are sold and their salvage value is treated as recovery of defective units cost, and is deducted from final cost.


In the second case only wastage is included. This is in excess of normal spoilage and is due to reasons other than manufacturing. This spoilage will be recognized as period cost and eventually put into a loss account.



RBPL’s operations are focused on improving the production volume as demanded by the Parent Company. Their efforts are directed to ensure that they meet their production targets. This very approach is translated into the fact that they use the actual costing system. The company also does not engage in formal budgeting process leaving the operations prone to the external influences, that has a significant impact especially in a country like Pakistan.


This lack of focus on budgeting and cost cutting activities, results in a variance analysis and reporting system that is not demanding. They should not only rely on last year’s performance figures as current year standards since they will indicate what happened rather than what should have happened. They should plan out their material procurements and try not to order too soon, as this will increase storage costs, or too late as production might stop because of unavailability of materials.


The firm also does not take into consideration the opinions and suggestions of the external system analysts. The company accountants perform their evaluation themselves. We believe that the company cannot have a fair and objective evaluation of the system without involving an external analyst, because as an outsider, he can identify weaknesses and suggest potential areas of improvement, better than the company analyst.


The most serious problem with the system in the flow of information is the centralized decision-making style and little delegation of authority to line managers. The reports that are generated through the managerial accounting system are first sent to the owner and then they are routed to the line managers. We feel that not only does this under-utilize the skills and abilities of the line managers but it also prevents the owner from focusing on only the critical management issues. Under the current system, the owner has to handle operational problems as well as seek solutions to longer-term issues. Due to his unnecessary involvement in routine and operational problems, he may not be able to give sufficient time to long term planning. This may hinder the company’s long-term growth prospects.



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