CMA Final Report

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Decision making in Crescent Jute Product Limited

COST & MANAGERIAL ACCCOUNTING

Submitted to:

Mr. Shahzad Butt

Submitted by:

Ann- ul- huda Bostan

Nabiha Javed

Qurat-ulain Malik

Johar Zaman Abbasi

Wajih- Ul-Hassan

MBA II-B

Date: 21/5/ 2014


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ACKNOWLEDGEMENT

All the praise of Almighty Allah, The Lord of Creation, the known and unknown universe, who

descended His last Prophet Hazrat Muhammad (SAW), the Benefactor of Humanity; to guide the

mankind and enlighten the ones who believe Almighty Allah, who bestowed us good health,

courage and knowledge to carry out and complete our work.

It is unimaginable that an academic effort of this magnitude could successfully come to its

fruition without the help of others. Expressing gratitude to those whom it is due is a highly

regarded Islamic custom based upon the statement of Prophet Muhammad (S.A.W).

Whoever does not thank people does not thank Allah.

We express our highest Gratitude to our kind Supervisor, Shahzad Butt who kept our morale

high by his suggestions and appreciation. His motivation leads us to this success, without his

sincere and cooperative nature and precious guidance; we could never have been able to

complete this task.

They also provided us all needed information. We also acknowledge their cooperation and are

grateful to them.

Thank you so much

May 21st, 2014


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TABLE OF CONTENTS

Table of ContentsIntroduction: ................................................................................................................................................. 5

Mission: .................................................................................................................................................... 5

Vision: ....................................................................................................................................................... 5

2. Product line: .............................................................................................................................................. 6

II.HESSIAN: ................................................................................................................................................ 6

3. TWINE: .................................................................................................................................................. 7

Jute Features ................................................................................................................................................ 7

Diversified Products: .................................................................................................................................... 7

Process of export department: .................................................................................................................... 8

5.1 Finding of Customers: ........................................................................................................................ 8

5.2 Making Contracts: .............................................................................................................................. 8

Inquiry: .................................................................................................................................................. 8

Feasibility and Availability Of Goods: .................................................................................................... 8

Costing The Approvals: ......................................................................................................................... 9

Quote Price Offer To The Customer: ................................................................................................... 9

Customer Approval: ............................................................................................................................. 9

Contract Review And Issue: ................................................................................................................. 9

Amendment To Contract:..................................................................................................................... 9

Review Activity: .................................................................................................................................... 9

Checking Artwork: .............................................................................................................................. 10

Making Strike Off: .............................................................................................................................. 10

Finance Department:.................................................................................................................................. 10

6.1 Function of finance department: ..................................................................................................... 10

6.2 Components of finance department ............................................................................................... 11

Purchase department: ................................................................................................................................ 14

7.1: Function of purchase department .................................................................................................. 14

Drop and Retaining Decision: ....................................................................... Error! Bookmark not defined.

Make or Buy Decision: .............................................................................. Error! Bookmark not defined.


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Relevant Cost for Decision Making: .............................................................. Error! Bookmark not defined.

Drop or Retaining Decision: ...................................................................... Error! Bookmark not defined.


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Introduction:

CRESCENT JUTE PRODUCTS LIMITED (CJPL) was established in 1965 and is one of thelargest jute mills in the country. The manufacturing facility in Jaranawala (Central Punjab) is

spread over an area of 127 acres comprising of 500 conventional and 60 shuttle-less looms and

the requisite back process.

CJPL employs a workforce of 3,000 and has the capacity to produce 30,000 Metric tons of Jute

goods annually. This production is comprised of a mix of Sacking, Hessian and Twine. CJPL is

part of the Crescent Group (CG); CG is one of the largest Industrial Groups in Pakistan and has

diverse business interests including Textiles, Textile value added, Sugar, Steel and Banking.

Mission:

Our Mission at CJPL is to fulfill our vision through the following activities:

Investment in new technologies for enhancement in productivity.

Creating new and non-traditional jute based products through active R&D.

Retaining and training of professionals to uphold a strong, honest and healthy

organizational culture.

Helping the community to keep the environment clean and healthy and to improve

the quality of life and material well-being of all stakeholders.

Vision:

We, at CJPL, will continue to excel in producing quality jute products by establishing our

position as industry leaders in setting standards for professional excellence.


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2. Product line:

I. SACKING

This fabric can be woven in twill and plain

weave.

Usage:

Most common bag made from this twill

weave fabric is the B Twill bag used for

packaging and storage of food grains such as

wheat and rice, vegetables like onions and

potatoes.This fabric is also used for sandbags.

II.HESSIAN:

Hessian, also termed as Burlap, is a finer

quality jute fabric that has been long used as

the most preferred packaging material for all

kinds of goods. It is woven in plain weave

with single warp and double or single weft

Usage:

Hessian is primarily used in the packaging

of Cotton & rice. It is also used as insulation

& curing material during building

construction..


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3. TWINE:

Jute twine in varying ply and thickness is used extensively for tying and for a variety of

industrial applications such as stitching of bags, cable binding etc.

It is also used as follows:

As a filler yarn for carpet industry.

For binding of the packed bags.

Jute FeaturesJute is a long, soft, shiny plant fibre that can be spun into coarse, strong threads. It is produced

from plants in the genus Corchorus, Jute is one of the cheapest natural fibers and is second only

to cotton in amount produced and variety of uses.

Jute fibers are composed primarily of the plant materials cellulose and lignin. It falls into the

Bast fibre category (fibre collected from bast or skin of the plant) along with Kenaf, Industrial

Hemp, Ramie,and Banana fibres. The industrial term for Jute fiber is Raw Jute.

Diversified Products:

Traditionally jute has been used to manufacture packaging materials like Hessian, Sacking,

Ropes, Twines, and carpet backing cloth. In order to overcome the declining market of these

conventional products of jute, new technologies have been evolved for bulk use of jute as a raw

material in the production of high value added and price competitive intermediaries or final

products.

A host of innovative new products have been developed with high value-addition such as home

textiles, jute composites, jute geo-textiles, paper pulp, technical textiles, chemical products,

handicrafts and fashion accessories etc. These products for new, alternative and non- traditional

use of jute are generally termed as Diversified Jute Products.

Among the various diversified jute products, floor coverings, home textiles, technical textiles,

Geo-textiles, shopping bags, handicrafts, fashion accessories, apparels etc. have potential for

wider use and application.


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Process of export department:

Work in export is divided into four sections geographically for proper distribution and handling

of work. Following is the brief process for all sections of export departments.

5.1 Finding of Customers:

General manager marketing and manager marketing of CJPL makes contact with the potential

buyers through e-mail, telephone, faxes to get orders.

Similarly marketing manager along with the Chief Executive attend different international trades

fairs and present their products to get the buyer attention and order.

5.2 Making Contracts:

Marketing department of CJPL takes following steps to make a contract with the buyer:

Inquiry:

Customers inquiries are received via telex, letters, e-mails or during meeting with the customers.

Inquiry documents are directly sent to CEO for review and comments; if any absence of CEO,

the inquiry documents are send to the GMM for review. After CEO review, these are sent to the

department incharge who after reviewing distributes these documents to the relevant stafflooking concerned marker segments.

Feasibility and Availability Of Goods:

Concerned sectional incharg reviews the customers requirements completely before quoting

price to customers and ensure that:

I.

II. s.

III.


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Costing The Approvals:

After conformation inside / outside, sectional incharge prepare costing sheet of department

incharge review and approval of CEO / GMM. CEO / GMM gives acceptable price or may

suggest new price on costing sheet. In absence of CEO / GMM gives acceptance. if both are not

available then the department incharge is authorized too.

Quote Price Offer To The Customer:

After getting the approval of costing and review of customer requirements, price is quoted to the

customer for conformation.

Customer Approval:

Customer accepts offer or may reject, if reject then the costing sheet again repaired and the

approval procedure repeated.

Contract Review And Issue:

After reviewing the confirmation or purchase order, concern staff issues contract after complete

review and note it in export order register.

Amendment To Contract:

Once the contract is established for quality, quantity, price and delivery. Any request from the

customer for change in assortment of design or increase / decrease in quantity resets, i/c terms,price and delivery.

Customer may ask for any of the following changes.

I.

II.

III.

IV.

V.

Review Activity:

After receiving the amendments by customers, possibility of amendments is reviewed of it is not

possible then regret with the customer. Otherwise impact of changes in price, delivery

communicated to the customer and its copy is retained in the file for future references. The


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amendments copy with regards to quality assortments, shipping or packing instructions and

shipment schedule is send to the department for implementation and follows ups.

Checking Artwork:

After finalizing the contract and making entry in export order register, now concerns A.M

receives art work for the customer for processing the clothes per customers desire.

Artwork contains no of colors and designed used for the final cloth and also the packing, labeling

and stitching instructions as well as telling about the sample size.

Making Strike Off:

When A.M receives artwork then he gives instructions to the concerned production staff to

prepare strike off (sample) as per artwork send by customer. After completion of strike off, these

are checked by concerned A.M and are delivered to the customer after the final approval, so the

production on large scale can be started. If the customer approves the sample the export staff

order of large production. Otherwise they only receive the cost incurred on the preparation of the

strike off.

Finance Department:This is the major department of the company. Finance department is located with the factory. It

prepares different kinds of financial reports and gives information to management for decision-

making purposes.

Finance department prepares the Income statements, Balance sheet, Trail balance, Cash flows,

Production report for the whole month, stock taking report yield comparison report etc. these all

reports are helpful for the management to make production plan, financing decisions and other

important matters. The head of the department in finance manager. He is a chartered accountant.

6.1 Function of finance department:

Following are the main functions of finance department

1. To prepare monthly and half-yearly reports

2. To keep the record of inventory and stock


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3. To maintain a liquid position

4. To maintain adequate cash to run the operations of business

5. To reconcile the bank statements

6. To make payments to the suppliers

7. To maintain debt and credit balances of the customers

8. To deal with the sales tax and income tax departments

9. Preparations of vouchers

10. Prepare profit and loss accounts & income statements

11. Keep record for the payment of salaries

6.2 Components of finance department

Finance department consists of the following sections:

I.

II.

III.

IV.

V.

VI.

VII.

I. Payables, contractors, misc.

In this section usually payables are paid to the suppliers of all goods including stationary,

maintenance goods, cement etc. payable is made according to the contract and according to the

instructions of the CEO. Bill of the supplier, inspection & receipt note, store purchase. Journal

voucher is received after inspection by store dept to this section and then bill is paid according to

the due date.


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II. Bank negotiation & reconciliation

This department starts working when documents reach back to Faisalabad office. Documents are

recorded in document receipt register and in bank register.

Payments are received by two methods:

L/C = Sight, CDA, 120 days, 90 days

Contract = Bill of exchange

If payment is required as according to L/C or contract without factoring then bank charges the

service charges and make payments on the due date. If post shipment payment is required then

bank works as a factor and makes payments after deduction of mark-up.

A report is given to the G.M finance, on daily basis about the customer and payment date. He

makes decision either to grant discount to him or not.

III. Right share

Right share are issued when there is a need of long-term financing. The directors in the Board of

directors meetings issue right shares. These are announced in the newspapers, stock exchange

and letters are issued to authorized banks for collection of money. Foreign investors are called

Non-Resident and special letters are issued to non-resident shares holders to inform about right

share issuance. State Bank of Pakistan approves the issuance of right shares to the non- residents.

IV. Dividend

Dividend is decided in the board of directors meeting and percentage is decided on each share.

Crescent Textile Mills posts dividends warrants to shareholders at their home addresses. In reply,

shareholders apply for dividends. Checks are issued to the shareholders after checking their

records in register.


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V. Store costing

Inspection receipt note, the store costing section receives bill of the related. There are checked

against purchased order and Performa invoice in terms of quantity, specification, price etc. After

this, a bank payment voucher is prepared and sent to payable section, which issue the checks to

the related party and posted in the ledger.

For import when advice from bank is received the work of store costing starts. It is recorded in

L/C ledger with all expenses and the arrival of Bill of Lading. It is also recorded in ledger and

payment is made to the exporter through bank.

VI. Excise

Excise section deals with the outgoing products for issuance of Gate pass. The working of excise

section starts after sale; when a loading program is received from export sale & local sale

processing. According to that program, gate pass are prepared and issued to the god own keeper.

After issuing Gate pass, its details are recorded in the register and then sale invoices are prepared

in which actual value and sales tax value is mentioned.

VII. Audit

The internal audit section performs three types of audit:

1. Pre-audit

2. Post-audit

3. Physical verification

Pre audit deals with the local purchase, TA/DA, utility bills, while post audit deals with L/C,

cotton purchase, dry port, civil works etc.

The working of audit section starts from the receptions of voucher/checks, L/C; ledger after this

pre/post audit is started. At the completion of audit it is installed and stamped and returned to

finance and account department.


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Purchase department:The department is located within the factory. There are eight employees working in the purchase

department.

The decision of the purchase of raw material is med by the top management or when any new

machinery or plant is to be acquired. At the time of the cultivation of the cotton crop, the

decision is made with considering the other factors like requirement, price, quality etc that how

much we should purchase and from whom we should purchase and through what sources we can

finance this purchase. So in this regard, the Chairman with the consultation of the Mill Manager,

General Manager Finance and Technical Manager make the bulk orders.

The finance division helps them in this regard to arrange eh funds. So in this regard, the select

the bank that provide financing facility at lower rate of interest.

As far as the purchase of raw material is concerned, the purchased department fully contributed

its efforts in this regard. Whenever any section of the mills or he head office requires any thing

they make and purchase indent to the purchase department. At mill, the storekeeper made this

indent, on the other hand of the required thing is available with him, he makes the delivery to

that section.

When the supplier dispatches the goods to the mill, a dispatch advice is made by the department t

other store keeper that the items is dispatched to you. At mill, an inward gate pass is made and

the items sent to the store where the storekeeper prepares goods receipt note after inspecting the

items and this GRN one copy is sent to the purchase office and one copy is sent to the account s

office.

7.1: Function of purchase department

Following are functions of purchase department:

Provide link between the workers and management.

Ensure the implementation of the rule and regulations of the company.

Inquires of the complaints against the workers.

To solve the problems and grievances of the workers.


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Relevant Cost for Decision Making:

1.

Drop or Retaining Decision:

Lets look at CJPL product line. It has three product lines: Sacking, Hessian, and Twine. Hessiansales have declined in recent years, leading management to question whether this product line is

worth keeping. CJPL would like to consider two alternatives. Alternative 1 is to retain all three

product lines, and Alternative 2 is to eliminate the Hessian product line.

The income statement for the past year (2013) shows a loss in the Hessian Product line.

Carefully examine Income Statement for CJPL. Notice that the Hessian product line shows a loss

of Rs.4,320,000 for the year. This is the reason management would like to consider dropping this

product line.

Table 1.1Product Line Differential Analysis for CJPL:

Alternative 1 (keep all product lines)Sacking Hessian Twine Total

Sales revenue Rs.70,000,000 Rs.40,000,000 Rs.60,000,000 Rs.170,000,000

Less Variable Costsa 50,000,000 30,000,000 35,000,000 115,000,000

Contribution Margin 20,000,000 10,000,000 25,000,000 55,000,000Traceable Fixed Cost

Salaries 2,520,000 2300,000 3,700,000 8,520,000

Advertising Expense 70,000 70,000 55,000 195,000

Utility Bills 1,200,000 1030,000 1,000,000 3,230,000Depreciation 8,000,000 7,000,000 7,750,000 22,750,000

Rent 4,000,000 3,730,000 4,200,000 11,930,000

Insurance 150,000 120,000 140,000 410,000

Repair and Maintenance 60,000 70,000 55,000 185,000

Total Fixed Cost 16,000,000 14,320,000 16,900,000 47,220,000

Profit (loss) Rs.4,000,000 Rs.(4,320,000) Rs.8,100,000 Rs.7,780,000

a Includes cost of goods manufactured and other variable cost


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Table 1.2Product Line Differential Analysis for CJPL.

Note 1:

If we discontinue Hessian product line then we would be able to avoid the Salaries of Product

line managers. So this cost is relevant to the decision making and will include it

Note 2:

Advertising Expense is directly traceable so you would be able avoid it if we drop the Hessian

Product line. So its a relevant / differential cost

Note 3:

Utility expense is an unavoidable cost because it will be reallocated on the other two product

lines. So its an irrelevant cost to the decision making

Note 4:

Depreciation is a sunk cost. Because it was occurred in the past and it has nothing to do with the

current decision, its an irrelevant cost.

Alternative 2 (Drop the Hessian line)Current Total Total if Hessian

Dropped

Differential

Amount

Sales revenue Rs.170,000,000 Rs.130,000,000 Rs.(40,000,000)

Less Variable Cost 115,000,000 85,000,000 30,000,000

Contribution Margin 55,000,000 45,000,000 (10,000,000)Traceable Fixed Cost

Salaries 8,520,000 6,220,000 2,300,000

Advertising Expense 195,000 125,000 70,000

Utility Bills 3,230,000 3,230,000 0

Depreciation 22,750,000 22,750,000 0Rent 11,930,000 11,930,000 0

Insurance 410,000 410,000 0

Repair and Maintenance 185,000 115,000 70,000

Total Fixed Cost 47,220,000 44,660,000 2,440,000

Profit (loss) Rs.7,780,000 Rs.220,000 Rs.(7,560,000)


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Drop and Retaining Decision:

The differential analysis presented in Table 1.2 Product Line Differential Analysis for

CJPL provides the answer that the CJPL production and sale of Hessian should not be

discontinue. If Hessian product line is discontinued then it would decrease the net operating

income of the company as a whole by Rs 7,560,000.

2.

Make or Buy Decision:

Table 2.1 "Make-or-Buy Decision" presents the costs that must evaluate in deciding whether to

make the Sacking or buy them from an outside company. This is called a make-or-buy decision

because the company must decide whether to make the product internally or buy the product

from an outside firm (often called outsourcing).

Table 2.1 Make-or-Buy Decision

Costs to make Sacking Costs to Buy Sacking

Variable production costs Direct materials Sacking from supplier

Direct labor

Manufacturing overhead

Fixed production costs Factory equipment lease Factory equipment leaseFactory building rent Factory building rent

Supervisor salaries Supervisor salaries

After further research, we identified the following product costs associated with Sackingproduction at CJPLs:

Per unit Total Annual cost

at 100,000 Units

Variable Production Costs

Direct material 25 2,500,000

Direct labor 16 1,600,000Manufacturing overhead 10 1,000,000

Fixed production costs

Factory equipment lease 110000

Factory building rent 400000

Production supervisors salaries 252,000

Depreciation 800,000


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Utility Bills 120,000

Insurance 150,000

Repair and Maintenance 70,000

Total production costs 7,002,000

Since CJPL produces 100,000 Sacking each year, the product cost per unit is Rs.53.52

(5,352,000 100,000 units) but CJPLs buy it from outside that will cost them 50 per unit in

order to make or buy decision we will prepare make or buy differential analysis for CJPL

Table 2.2 Make-or-Buy Decision Analysis for CJPL:

Alternative 1

(Make internally)

Alternative 2

(Buy from outside)Variable Costs

Cost to buy from outside 0 5,000,000a

Direct material 2,500,000 0

Direct labor 1,600,000 0

Manufacturing overhead 1,000,000 0

Fixed costs

Factory equipment lease 0 0

Factory building rent 0 0

Production supervisors salaries 252,000 0

Depreciation 0 0

Utility Bills 0 0Insurance 0 0

Repair and Maintenance 0 0

Total production costs 5,352,000 5,000,000

a5000,000 = $50 per unit 100,000 units.

Note1:

All variable production costs will be eliminated if CJPL buys the Sacking rather than making

them. These are differential costs (Relevant Cost).

Note 2:

The factory equipment lease will continue for several years whether CJPL makes or buys the

Sacking. This is nota differential cost (Irrelevant Cost).


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Note 3:

The factory building lease covers several years, so this cost will continue whether CJPL makes

or buys the Sacking. This is nota differential cost.

Note 4:

CJPL hired production supervisors, is to be paid Rs.252,000 per year, and can be let go if

needed. This is a differential cost.

Note 5:

Depreciation, Utility Bills, Insurance, Repair and Maintenance are irrelevant cost because it has

nothing to do with the current decision. So they are nota differential cost

Note6:

The Depreciation is a sunk cost it is not relevant to the current decision. This cost has been

occurred in the past and it has nothing to do with the current decision making.

Realizing that the information shown in Table 2.2 Make-or-Buy Decision Analysis for CJPL,

Companydoes provide saving hoped for , its a kind of favorable analysis in sense of buyingfrom outside.

If CJPL chooses to buy the product from an outside producer, the company avoids such costs as

direct materials, direct labor, manufacturing overhead, and the salary of supervisor. In this

context, avoidable costis the same as differential cost.

Decision:

Based on given data in the annual report. The CJPL should accept the offer made by the supplier

and should discontinue manufacturing the Jute internally.