Nature of the organization:

Rangpur Foundry Limited was incorporated in Bangladesh on 30th June 1980 as a

Private Limited Company under the Companies Act, 1913(Now 1994) and subsequently
on 8th November 1996 the company was converted into a Public Company was converted
into a Public Limited Company. The Company went into public in 1999 and its shares
are listed in the Dhaka and Chittagong Stock Exchanges. The Company’s registered
officer is situated at Property Heights, 12 R.K. Mission Road, Dhaka-1203 and the
factory is located at BSCIC Industrial Estate, Kellabond, Rangpur.Now it is the
market leader in the cast iron and PVC industries. To become the market leader it
had to pass a long path and had to cope with the fierce competition in the
Bangladesh cast iron and PVC market. It had to be conscious every moment about the
market. Its experienced personnel always aware about the position of the company
and devoted them to keep its position safe. This stiff attitude of the employee
places the company to its position. Now RFL is the market dominator company in
Bangladesh cast iron and PVC industries.

Nature of production and nature of products:

RFL produces plastic and iron products continuously according to demand in the
market. Sometimes they also produce according to order of some organization such
as WASA, BMDA, DPSE etc. But the specifications of the products of order do not
vary significantly with the normal products, though they accept order from the
customers. Their production remains same. Their products are mainly of two types-
plastic products and cast iron products. The products are- Tube Wells and Spares,
Centrifugal Pumps, PVC Thread Pipe, PVC Pipes, PVC Filters, Hose Pipes, Engine
Spares, Irrigation Pump Spares, Rice Hauler Spare.

Cost accounting –a Managerial Control Tool:

Cost accounting is a managerial control tool for RFL management. At the beginning
of an accounting period cost and management accounting department of RFL produces
a master budget comprising of cash budget, production budget, sales budget,
purchase budget, direct labor budget, overhead cost budget, cost of goods sold
budget, capital expenditure budget etc. Every month cost and management accounting
department of RFL prepares cost statement of each product, income statement to
compare with their budgeted cost and profit .Thus cost accounting department of
RFL provides information whether RFL will be able to produce within their target
cost. If product cost varies with their budget, then management tries to find out
the reasons for the variation. And take necessary action to reduce the variations
such as searching a new supplier of raw materials to buy better materials at lower
cost, whether machine should be replaced to increase productivity, whether worker
should be trained to reduce abnormal spoilage etc. cost account helps management
whether the company accept a tender and order or not. And if they accept what will
be the cost and the profit margin of receiving the order.

Cost Accounting System:

Elements of costs: cost elements of RFL products are

Material cost,
Labor cost, and
Manufacturing Overhead cost.
They use the following materials-
• Pig Iron
• Hard Cock
• Ship Scrap
• Lime Stone
• Steam Coal
• Charcoal
• Graphite
• Fire Brick (in Pcs)
• Nut and Bolts
• Piston Rods
• PVC Bucket (in Pcs)
• Check Valb (in Pcs)
• PVC Resin
• Stabilizer
• Calcium Carbonate
• Stearic Acid
• Titanium Dioxide
• Paraffin Wax
• Dop Oil
Manufacturing Overhead costs are following-
• Carriage, Loading and Unloading
• Travel and Conveyance
• Printing and Stationery
• Repairs and Maintenance
• Postage, Telephone and Fax
• Power and Fuel
• Entertainment
• Medical and Sanitation
• Insurance.

Cost objects
A cost object is anything for which measurement of cost is desired. The cost
object of RFL are-
• Products,
• Machine,
• Process,
• Customers,
• Unit (Plant),
• Administration Department,
• Sales and Marketing Department.

Cost centre
A responsibility centre where the manager is accountable for cost only. Cost
centre of RFL are-

• Foundry Shop
• Machine Shop
• Fitting Shop

Cost classification and objectives

They classify the costs on the following three bases-
• Behavioral Cost Classification,
• Functional Classification.

Behavioral Cost Classification:

Variable Cost and
Fixed Cost.

They use this classification for decision making especially when they receive an
order. They use variable cost and fixed cost for CVP analysis. For accepting an
order they consider only the variable cost such as material cost, labor cost and
electricity cost.

Functional Classification of Cost:

Direct Material Cost,
Direct Labor Cost,
Manufacturing Overhead Cost,
Non-manufacturing Overhead Cost.

They use this classification to determine the cost of an object such as cost of a
PVC Pipe, to determine the profit of a product.

Cost flow chart:

Recording of different cost:

From the annual report and primary data gathered from the company we got the idea
that it records its different cost consumed by the different unit of production.
There are 5 units from which one is now closed i.e., unit no. 1. The recording
processes of different items are as follows:

Materials:
When RFL purchases raw materials, it passes the following entry:

Material control a/c Dr. xxx

Account payable /cash/bank xxx
When direct materials are issued to production it passes the following entry:

Work in process-Foundry shop xxx

Material control a/c cr. xxx

Direct Labor Cost:

When direct labor cost is assigned to process

Work in process-Foundry shop xxx

Work in process- Machine shop xxx
Work in process-Fittings shop xxx
Direct labor control a/c cr. xxx

Electricity cost:
When electricity cost is assigned to process

Work in process-Foundry shop xxx

Work in process- Machine shop xxx
Work in process-Fittings shop xxx
Electricity expense a/c cr. xxx

Manufacturing overhead cost:

When Manufacturing overhead cost are assigned to process

Work in process-Foundry shop xxx

Work in process- Machine shop xxx
Work in process-Fittings shop xxx
Manufacturing overhead control xxx

When goods are transferred from foundry shop to machine shop

Work in process- Machine shop dr xxx

Work in process-Foundry shop cr xx

When goods are transferred from machine shop to fittings shop

Work in process- Fittings shop dr xxx

Work in process- Machine shop cr
xxx

When goods are completed and transferred to finished goods in fittings shop

Finished goods control dr xxx

Work in process- Fittings shop cr xxx

When finished goods are sold the entry to record the cost of goods sold is

Cost of goods sold dr. xxx

Finished goods control cr xxx
The Company presents raw materials in the four different phases i.e., opening raw
materials, material purchase, closing raw materials and raw materials consumption
for the year. Beside this they record unit wise raw materials using and opening
and closing stock.
On the other hand the company also records the value of the Work-In-Process and
Finished Goods Stock but in this case they do not record unit wise rather as a
whole.
An example of presentation of stock of the company is as follows:

Raw Materials (Extract)

Items’ Name Unit-2
Qty in MT Unit-3
Qty in MT Unit-4
Qty in MT Unit-5
Qty in MT Total Value (in Taka)
Opening Stock:
Pig Iron
Hard Cock
6.36
62.02
7.92
77.34
436,344
4,182,322
Materials Purchase:
PVC Resin
Stabilizer

1522.32
102.66
6.23
.42
200,634,400
5,711,185
Closing Stock:
Fire Brick
Nut & Bolt
8461.00
13.68
17186.00
21.06
396,874
1,377,326
Material Consumption:
Piston Rod
PVC Bucket
12.43
24303.00
21.99
42998
1,029,320
116,166

Work-In-Process:
Particulars Qty in MT Value (in Taka)
Stock as on 01.01.06
Tubewell & Others
PVC Pipe
60.54
79.91
1,571,130
5,591,425
Stock as on 31.12.06
Tubewell & Others
PVC Pipe and Hose Pipe & Others
44.68
62.14
1,476,794
5,015,998

Finished Goods Stock:

Particulars Qty in MT (Equivalent) Value (in Taka)
Stock as on 01.01.06
Tubewell & Spares
Irrigation Pump Spares
Engine Spare
Rice Hauller Spare
Centrifugal Pump
PVC Pipe and Hose Pipe & Others
134.43
5.42
0.54
25.41
43.32
1208.12
3,777,466
136,464
16,155
659,036
1,136,116
89,129,560
Stock as on 31.12.06
Tubewell & Spares
Irrigation Pump Spares
Centrifugal Pump
PVC Pipe and Hose Pipe & Others
138.79
4.98
75.22
683.46
5,007,434
292,680
2,096,972
65,606,343

In the RFL perspective the direct labour cost is named as Salaries, Allowances &
Wages which is recorded on the unit basis. In the case of electricity and factory
overhead the company follows the same recording practices. An example of
presentation of manufacturing expenses of the company is as follows:

Items Unit-2 Unit-3 Unit-4 Unit-5 Total

2006
2006 Tax Holiday Taxable Total 2006 2006 2006 2005
Salaries, Allowances & Wages 1,765,986 15,259,590 642,805 15,902,395
 1,284,233 6,317,833 25.270,447 23,754,348
Power & Fuel 223,014 5,789,686 243,888 6,033,574 299,365
394,428 6,950,381 6,645,494
Other factory overhead 126,747 3,290,488 138,611 3,420,999 200,139
224,167 3,950,152 3,822,795

Administrative and Selling Overhead:

Like the direct cost assigned on the product on the unit wise the administrative
and selling expenses are also recorded on the basis on the unit of the company.
There are lot o lists of the administrative and selling expenses of the company.
An example of presentation of Administrative and Selling Overhead the company
are as follows

Items Unit-2 Unit-3 Unit-4 Unit-5 Total

2006
2006 Tax Holiday Taxable Total 2006 2006 2006 2005
Salaries & Allowances 437,775 7,89,024 2,477,338 10,374,362 879,879
685,382 12,377,398 10,049315
Depreciation 317,412 231,922 77,308 309,230 224,802 1,892
853,336 1,039,016
Sales Incentive 20,881 469,404 156,468 625,872 32.234 36,931
715,918 644,194

Cost assignment and allocation:

Cost assignment is the allocation and tracing of integrated cost according to
their cost drivers. This encompasses both (1) tracing accumulated costs that have
a direct relationship to a cost object, and (2) allocating accumulated costs that
have an indirect relationship to a cost object.
RFL traces material cost and labor cost to specific product because these costs
have direct relationship with that product. For example, raw material cost of a
Tube well are- cost of Barrel, Head cover, Handle, Base, Plunger, Accessories,
Paint and Varnish. These costs directly related to Tube well. Common cost of a
factory (for example, salary of factory manager) is allocated to different product
on the basis of production volume and common cost of office (for example,
administration overhead) is allocated to different product on the basis of sales
units. RFL allocates the actual common cost at the end of a month to determine the
cost of a product. RFL allocates budgeted common cost to determine the quotation
price of a tender or order.
COST DETERMINATION OF THE FINAL COST OBJECT
Cost determination of the final cost object:
For determination of cost of a product they use different method for tender offer
and normal selling of their product. For accepting a tender they exclude all
factory overhead costs because it is the production behind their normal
activities. They always try to win the tender with other parties. For the pricing
of the normal selling product they include all overhead cost. As they are market
leader they dominate the product market, they are the price setter in the market
that gives them the opportunity to mark up 20-25% on cost of production and other
overhead cost.

An example of Tender pricing of RFL

Resin 90.06
RM 86.66
Order Qty. (Mtr)
2,400
LB 0.90
EL 0.90
Length per Pipe Meter 6.00

Weight per meter Kg 18.33

Per Mtr Total

Material Cost 1,589 3,813,216
Labour Cost 17 39,600
Electricity Cost 17 39,600
Total Production Cost 1,622 3,892,416

Truck fare (@Tk. 6000/Truck*13.33) 8,0000 33 80000

Unloading (@Tk. 350/Truck*13.33) 4,667 2 4,667
BUET Test Fees 23,720 10 23,720
Interest for 2 months @ 14.00% 39 93,352
Incidental @ 5.00% 110 264,000
Int. on Earnest money – for 3 months on Tk. 500,000 14.00% 1 2,750
Interest on PG – for 3 months on 10% QP @ 14.00% 39 92,400
Schedule Purchase 2 5,.000
TA & DA 4 10,000
VAT on QP 2.00% 44 105,600
Total Cost 1,907 4,575,752
Margin 13% 13%
Quoted Price 2,200 5,280,000

An example of cost determination of Super T/W of RFL

Super T/W
Kg Tk.
1. Barrel 6.500 299.48
2. Head Cover 2.500 115.18
3. Handle 2.300 105.97
4. Base 2.200 101.36
5. Plunger 1.000 46.07
Sub Total 14.500 668.06
6. Accessories 1.200 94.12
7. Paint & Varnish -- 9.00
Sub Total 1.200 103.12
Total Material Cost 15.700 771.19
Labour Cost 44.67
Power Cost 7.25
Total Cost/Set 823.10
SP India 920.00
CM 96.90
CM 10.53%
Valuation of inventory:
As the company has different types of inventory for its different production runs,
it always follows weighted average method of inventory valuation. From the company
reports and the data from the key personnel’s of the company we have found that
the inventories are valued at lower of cost (determined on weighted average
method) and net realizable value. Cost of finished Goods includes materials and
production cost while Work-In-Process includes material, labour and power cost.
RFL follows perpetual inventory recording system.

Evaluation of the cost accounting system of the company:

RFL is a well established company in the area of PVC production and cast iron
product. If we critically analyze the cost accounting system it would be found
that the company does not follow complete activity costing system, but uses two
overhead recovery rate (overhead recovery rate on the basis of production volume
and overhead recovery rate on the basis of sales). The main difference with the
other industries of the country is that the company does not follow integral
method of accounting rather non-integral process.
The company in their recording procedures classifies costs on the basis of
behavioral as well as functional for decision making and cost determination. From
the company data it is clear that for the internal recording purpose the company
follows variable costing systems and at the end of the every month and adjustment
is made to achieve the financial reporting. And the only difference is that in the
material i.e., quantity and efficiency variance but no labour and over head
variance.
Here another important issue is that the company always complies with target
costing system and on the basis of their set up target they find out the
efficiency of the company’s performance. The company set a fixed margin for every
product and this is in between 20% to 25%. But in case of tender it can not
maintain this margin and the margin is lower than the selling margin in the
market.
The company never follows the competitors’ pricing policy of the industry.
According to the information by the employees; the company set their price on the
basis of their production cost rather to competitor’s price and maintains a fixed
margin. The company demands that it is the market leader in maximum items (Tube
well, PVC Pipe, etc.) and the other companies in this industry follow their
pricing policy not the market price.

Recommendations for the improvement in the systems:

The following recommendations are suggested for the improvement for the costing
system of the company:
In the present context the non-integral method is rare case, so company
should adopt integral method of recording so that the monthly adjustment for the
financial reporting is not required. Non-integral method will also save time and
money,
Company should change its pricing policy. In the present context it fixes up
their product price based on a fixed margin rather to consider the competitors’
pricing policy. But day by day competition is rising, so RFL should consider the
market price for price fixing.
 The company is following two overhead recovery rates (overhead recovery rate
on the basis of production volume and overhead recovery rate on the basis of
sales) which is a cost distortion process. So the company should follow the
ability to bear process and can introduce activity based costing for more accurate
pricing of product.
In case of tender, they exclude the overhead cost; it may lead the
management to lower the price of a product and ultimately it will decrease profit.
So they should include all manufacturing overhead cost in the tender.

Conclusion:
RFL is the pioneer in the PVC Pipe and cast iron product market. It is the market
leader but in some cases it faces the competition from the followers. In the
modern age technology has been dramatically improved and all companies are using
about the same technology. Therefore some organizations can survive; some can not
because of the control of the cost. If a company can control cost, it can easily
sell the product in the market at a lower price comparing to others. However,
although RFL enjoys benefit in pricing comparing to other companies, it must be
aware about their cost control .RFL should use proper allocation of overhead
especially they should use activity based costing for more accurate pricing so
that it prevail its position in the market.