Lahore School of Economics

Managerial Accounting
Term Project

PAKAGES LIMITED
FINAL REPORT

Presented By:
Hassan Inam Khan
Maha Safdar
Mishal Sohail
Sheikh Muhammad Danyal Mubashir
Talha Khalid
Waleed Haroon
Zoha Niazi

MBA II
Section B

Submitted to:
Dr. Nayyar Raza Zaidi

1st July, 2015

 P
1. Introduction
ackages Limited was established in 1956 as a joint venture between the Ali
Group of Pakistan and Akerlund and Rausing of Sweden - who later founded
Tetra Pak - Packages provides premium packaging solutions for exceptional
value to individuals and businesses. It is the sole largest industry in Pakistan
serving about 35% needs of the country. Syed Baber Ali Shah, who was the
first managing director of Packages Limited, went to Sweden in 1954 to negotiate the contract
with Akerland & Rausing of Sweden. Akerland and Rausing had been the leading paper
converters in Europe. Pakistanis needed technical collaboration with their Swedish partners. In
the beginning, the first problem was the selection of the site. Finally, Lahore was selected due to
the following reasons:

Easy availability of workers.

Easy availability of raw material.
Easy transportation all over the country

Packaging is the use of containers and components with the addition of labeling to
protect, identify, merchandise and facilitate the use of products, protection and identification
being the overwhelming factors in this process. This obviously facilitates the use of a product
of a particular brand.

Packages Limited is divided in to three business units: Flexible business unit, Paper and board
business unit, Carton, Corruwal, Consumer Products unit. We would be discussing the costs for
flexible business unit.

Business Divisions
Packaging Division
Packages provides multi-dimensional and multiproduct packaging solutions to its clients that are
involved in manufacturing consumer products across industries. The Packaging Division comprises of
two business units based on packaging material categories:

Folding Cartons

Flexible Packaging

Folding Cartons
With over 56 years of experience in providing reliable service and quality, Folding Cartons business
provides a wide range of packaging products to tobacco, pharmaceutical, Fast Moving Consumer
Goods, personal & home care and food industries. Folding Cartons business is equipped with state of
the art machinery and a dedicated and qualified workforce that is supported by strong backward and
lateral integration. These factors contribute to provide high volumes and consistent quality at a
competitive price for our customers. The Folding Cartons business unit is divided into two main
functions:

i) Planning and Development

ii) Operations

Flexible Packaging
To accommodate increasing demand for sophisticated packaging, Packages established a Flexible
Packaging business unit in 1986 at its Lahore Plant. Flexible Packaging business provides a one stop
packaging solution by providing high quality detailed graphics in Flexographic and Rotogravure
printing. Flexible packaging business also provides lamination for plastic films, aluminum foil, paper,
multi-layer blown film extrusion for high speed technology in multi-lane slitting, standalone spout
inserted bags, poly-bags, zipper-bags, sleeves and ice cream-cones.

Consumer Products Division

Packages started commercial production of tissue and other consumer products in 1982 at the Lahore
Plant. We currently provide a complete range of tissue and personal hygiene products that are
convenient, quick and easy to use; ranging from facial tissues to tissue rolls, table napkins, pocket
packs, kitchen rolls, wet tissues, party packs, paper plates, cups and adult diapers. We provide
consumers complete convenience with tissue and paper products for every occasion. With its high-
quality tissue and consumer products, business unit makes life more comfortable for consumers every
day.

Operations
Business unit flexible (BUF) provides a one stop packaging solution by providing high quality
detailed graphics in Flexographic and Rotogravure printing. They also provide lamination for;
plastic films, aluminum foil, paper, and multi-layer blown film extrusion for high speed
technology in multilane slitting, standalone spout inserted bags, poly bags, zipper bags, sleeves
and ice cream cones.

As a part of an environmental friendly organization, BUF is also working on 4 Rs of packaging

i.e. Reduce, Reuse, Recycle and Recover. BUF is a responsible organization certified for properly
implementing Quality Management System ISO 9000, Environment Management System ISO
14000and hygiene Management System HACCP.
Flexographic printing
The flexographic line, flexographic printing in up to eight colors can be done on paper, poly-
coated paper and films. They have the first ever gearless press in the country which has the
ability to print life like images on materials like Polyethylene, OPP, and Polyester.

Rotogravure printing
With the help of latest in-house cylinder making and engraving facilities, customers can choose
from up to ten colors Cerrutti presses of very high quality printing results. Commonly used
printing substrates on the rotogravures are: PET, BOPP, Metallized OPP, Pearlised OPP, Paper
and PVC.

Lamination
Packages has both solvent based and solvent-less laminators. With the help of modern machines
even complex structures of three to four laminations can be done on lamination facilities.
Equipped with Italian technology, computerized control and auto splicing, Packages can laminate
BOPP, Polyester, Al foil, Met OPP, Met PET, .E. paper as fast as 250 m/min with continuous
production. An automatic viscosity control system ensures consistent quality. The R&D center at
Packages helps customers develop cost effective laminates to suit their needs.

Extrusion
Packages have their own mono- and multi-layer extrusion facility that can extrude polyethylene of
different grades and colors. Canadian technology with computerized control and monitoring of
each layer on their 3 and 5 layer extrusion line enables them to produce high output to meet the
customers' demands and keep up with new market trends. They extrude a number of specialized
films which includes oil, ghee, detergent and food films. These specialized films are known for
their strength and high barrier properties. They also have an on-line slitting option on the line
which makes our system more efficient.
Bag and sleeve making
Bag making is an integral part of Flexible Line. They have the capability to provide the following
variety of bag constructions: Side Seal, Double Side Seal, Bottom Seal, Three Side Seal, Bottom
Gusset Bags and Side Gusset Bags. They have automated sleeve-making machines on which we
make shrinkable PVC sleeves.

Cost accounting

Cost accounting provides the detailed cost data that management needs to control current
operations and plan for the future. Companies must control costs in order to keep prices
competitive. In todays global environment, cost information is more crucial than ever in
remaining competitive.

2. Benefts of cost accounting

Following are the most important advantages of a good cost accounting system:

Classification and Subdivision of Costs

In the contrast to a single profit or loss figure supplied by general accounting, the cost
accounting classifies costs and income by every conceivable subdivision of the business
enterprise. In a good costing system data regarding costs by departments, processes, functions,
products, orders, jobs, contracts and services can easily computed.

Adequacy or Inadequacy of Selling Prices

Unit cost of production, administration and safe made possible by cost accounting aids
management in deciding the adequacy or inadequacy of selling prices i.e. neither too high
detracting business, nor too low resulting in losses to the concern. In period of depressions,
slumps, or in case of competition management forced to lower prices even below cost of
production and sale. In such circumstances, cost accounting will help management in deciding
the proper reduction.
Control of Material and Supplies
In good costing system materials and supplies must be accounted for in terms of departments,
jobs, units of production or service. This will eliminate altogether or reduce to the minimum
misappropriations, embezzlements, deterioration, obsolescence, and losses from defective,
spoiled, scrap and out of date materials and supplies.

Whether to Manufacture or Purchase from Outsiders

Cost records furnish information regarding the cost of manufacturing of different finished parts,
which assist management in making a decision whether to purchase these parts from outside
manufacturers or manufacture them in the factory.

Use of Standards for Measuring Efficiency

A complete cost accounting system, generally, has a well-developed plan of standards to measure
the efficiency of the organization in the use of materials, incurrence of labor and other
manufacturing cost.

Budgeting

In a good cost accounting system, preparation of various budgets periods in advance of actual
production and sale of goods is necessary. These budgets include budgeted statement of profits,
budgeted cost of plant improvements, budgeted cost of production, budgeted cash receipts and
payments, and so forth. These budgets show the plans of the management for future periods and
they reflect the expected results of these plans. They are of great help in getting the sales manager,
the works manager, and the treasurer into agreement as to a plan that can sold, manufactured and
financed. In other words, budgeting, inculcates the habit of thinking and calculations before taking
decisions.

Reliable Check on General Accounting

Finally, an efficient and proper system of cost accounting is a most reliable and independent
check on the accuracy of the financial accounts. This check made effective through reconciliation
of the balance of profit or loss shown by the costing profit and loss account and the balance of
profit of profit or loss revealed by the general accounting profit and loss account
3. Accounting details about the company:
This division is a manufacturing business. Manufacturing consists of activities and processes
that convert raw materials into finished goods.

Job order or process costing?

The company is using a job order costing system when many different products are produced
each period. The products are usually manufactured to customers specifications and are unique in
nature. In a job-order costing system, direct materials and direct labor are traced directly to each
job as the work is preformed. The job cost sheet is used by the accounting department to track the
direct and indirect costs associated with a given job.

Direct material, direct labour and FOH costs

Manufacturing costs are usually classified as follows:

1. Direct materials,

2. Direct labor, and

3. Manufacturing overhead.

Direct material Raw materials are the basic materials and parts that are to be used in the
manufacturing process. Raw materials that can be physically and directly associated with the
finished product during the manufacturing process are called direct materials.

Direct labor is the work of factory employees that can be physically and directly associated
with converting raw materials into finished goods. Those labor costs that can be easily traced to
individual units of product.

Manufacturing costs that cannot be traced directly to specific units produced.

Manufacturing/factory overhead consists of costs that are indirectly associated with the
manufacture of the finished product. Manufacturing overhead includes:

1. Indirect material;

2. Indirect labor;

3. Depreciation on factory buildings and machines

4. Insurance, taxes, and maintenance on factory facilities

Fixed and variable costs. (Methods used)

Fixed costs are those costs which do not change with the level of production, whereas variable
costs are those costs which change with the level of production. The fixed costs include:

Property, plant and equipment

Intangible assets
Investment property
Capital work-in-progress
Investments
Long-term loans and deposits
Retirement benefits

The variable costs include:

Materials Consumed
Salaries, Wages and amenities
Fuel and Power
Production Supplies
Excise Duty and Sales tax
Rent, rates and taxes
Repairs and Maintenance
Packing Expenses
Technical fee and royalty
Other Expenses

There is no formal method for estimating variable costs. Packages keep on varying with the
requirements of the order. They are calculated on actual costs incurred.

Fixed capital expenditure and depreciation

Operating fixed assets except land is stated at cost less accumulated depreciation. Land and
capital work-in-process ate stated at cost. The management carried out a comprehensive review of
the useful lives of major items of plant and machinery in1985.Depreciation in respect of such assets
is charged in annual installments so as to write off their yearend book value over their remaining re-
estimated useful lives. Depreciation on all other operating fixed assets is charged to profit on the
straight line method so as write off the historical cost of an asset over its estimated useful life at
the following annual rates:

Plant and Machinery6.25%to20%, Buildings2.5%to5%, Other equipment10%to33.33%, Furniture

andfixtures10%to20%, Vehicles to 20%. The full annual rate of depreciation is applied on the cost
of additions, excluding exchange differences, while no depreciation is charged on assets deleted
during the year. The net exchange differences relating to an asset, at the end of each year, is
amortized in equal installments over its remaining useful life.

Accounting convention
The accounts have been prepared under the historical cost convention, modified by
capitalization of exchange differences as referred in their annual reports.

Employee Policies and Benefits

Packages like to make sure that their corporate culture emphasizes people, and the need to satisfy
their potential. The attractiveness of any company's corporate environment can be gauged by the
employees it hires and retains. An impressive 42% of employees have been with Packages for more
than 10 years, and almost 26% for more than 20. This is just one of the reasons why the people
would consider Packages as a prospective employer. Another is the technical excellence of the
employees. 33% of the employees working as technical personnel have a bachelors or advanced
degree. Packages take pride in the diversity of staff, with chartered accountants, MBAs, engineers
and even qualified lawyers on board.

Details of payroll
The direct labor is usually on contract basis. The employees wages are calculated by multiplying the
established rate per hour by the number of hours worked. This plan does not provide an incentive for
the employee to achieve a high level of productivity. The hourly rate for the workers is set within
standards by the Government of Pakistan, which is minimum 9000 per month. So the hourly rate
comes out to be:

Per day: 9000/ 30 = 300/day

Hourly rate: 300/8 = 37.5/ hour (overtime exclusive)

Overtime is 2 times the hourly rate for every additional hour worked:

37.5*2 = 75/ hour

The payrolls are prepared on monthly basis and the HR Department deals with it.

Taxation

The charge for current taxation is based on taxable income at the current rates of taxation after
taking into account tax credit and rebates realizable, if any.
Spoiled, swap or defective goods.

Stores and repairs: Usable stores and spares are valued principally at moving
average cost, while items considered obsolete are carried at nil value. Items in transit are
valued at cost comprising invoice value plus other charges paid there on.

Stock in trade: Stock of raw materials, except for those in transit, work-in- process and
finished goods are valued principally at the lower of average cost and net realizable value. Cost of
work- in-process and finished goods comprise cost of direct materials and labor and appropriate
manufacturing overheads. Materials in transit are stated at cost comprising invoice values plus
other charges paid there on. Net realizable value signifies the estimated selling price in the ordinary
course of business less costs necessarily to be incurred in order to make a sale.

Just in time or not

Just in time delivery inventory helps manage the inventory on hand so that its only whats
currently needed for production. This eliminates the need for capital to be tied up in large
amounts of inventory and in costly warehouses. Packages does not maintain the just in time
delivery.
4. Income Statements
2014 2015 2016
Net sales 11,745,290 14,887,857 15,087,350
(10,270,14 (12,892,59 (12,872,82
Cost of sales 3) 0) 5)
Gross Profit 1,475,147 1,995,267 2,214,525
Administrative expenses (321,836) (587,636) (787,249)
Distribution & marketing costs (399,987) (586,466) (580,062)
Other operating expenses (30,888) (153,971) (221,968)
Other income 288,492 329,377 322,147
Profit from operations 1,010,928 996,571 947,393
Finance cost (528,371) (845,253) (751,551)
Investment Income 1,534,453 2,043,111 2,553,678
Reversal of impairment on
investments 361,161 - -
Profit before tax 2,378,171 2,194,429 2,553,678
Taxation (890,089) (398,617) (213,216)
Profit for the year from continuing
operations 1,488,082 1,795,812 2,536,304
Loss for the year from discontinued (3,929,101
operations ) (249,103) -
(2,441,019
Profit / (loss) for the year ) 1,546,709 2,536,304
Basic earnings / (loss) per share
From Continuing operations 17.64 21.28 29.89
From Discontinued operations (46.56) (2.95) -
From profit / (loss) for the year (28.92) 18.33 29.89
Diluted earnings / (loss) per share
From Continuing operations 17.09 20.01 26.59
From Discontinued operations (46.56) (2.95) -
From profit / (loss) for the year (29.47) 17.06 26.59
5. Company Ratios

Analysis of Key Ratios

The gross profit margin has improved for the company over the last 3 year. This shows that the
company achieved cost efficiencies over the period of time which helped in improving the gross
margin which was the highest in 2016 at 14.68%. The company was also able to improve its
Profit before Tax% in 2016 which reflected the improved capacity of the company to adequately
meet its expenses. The company is increasing its current ratio year on year and it is the highest in
2016 at 1.67. An analysis of this in isolation would not be accurate unless we have the industry
averages. However, on the outer look the company is does not have ample current assets to meet
the current liabilities, causing liquidity issues. On the whole, the profitability situation of the
company has improved and is at its best in 2016.
Horizontal Analysis of Income Statement
The horizontal analysis reflects the positive growth in net sales experienced by Packages. The
growth has been at 1.34% in the most recent years. However, cost of sales that has declined
significantly from 25.54% to -0.16%. This decline in cost of sales has enabled the company to
maintain its profits even though the growth in gross profit has declined.

The company experienced an increase in its administrative expenses of about 33%. A possible
explanation for this could be the increase in inflation which would have reduced the salaries of
workers and the utility expenses. On the other hand, the selling and distribution expenses
increased by 46.5% from 2014 to 2015 but declined by 1.01% from 2015 to 2016 and other
operating expenses also decreased greatly over the course of 3 years. This represents the
efficiency of the management in controlling the costs effectively. But there has been a decrease
in the operating income.

Lastly, the finance cost has decreased by 11% in the last two years. One of the reasons for this is
that Packages, experienced a decline in its working capital requirements since its current assets
were more than sufficient to meet its current liabilities. The company also decreased its long
term borrowing as currently, the company has no plans for expansion.

The year on year marginal growth in net profit was lower compared to 2014 to 2015. However,
the reason for this was that the company radically improved its efficiency in 2015 and took it to a
very high level. In 2016, the company was able to achieve a higher net profit, although the
percentage change was not as high as that in 2015.
6. Vertical Analysis of Income Statement

The vertical analysis shows that majority of the cost of the company is absorbed by the cost of
goods sold which is the highest expense. The cost of goods sold as a proportion of sales, for the
company, is slightly decreasing and is the lowest in 2016 at 73.03%. This represents that the
company has achieved cost efficiencies over a period of time. This control over the costs has
enabled the company to report higher gross income, which is 12.56% of the sales in 2016 and the
highest over a period of 3 years.

The company has been able to control its selling and distribution expenses to some extent, which
fell to -3.29% as a proportion of sales in 2016 in comparison to 2015. On the whole, the
 company was able to control its costs effectively thereby giving a boost to the profits of the
company which is the highest in 2016 at 14.29% of sales.

7. Analysis of Cost of Sales

Cost of sales 2014 2015 2016
Materials consumed 7,406,733 9,131,266 9,130,892
Salaries, wages and amenities 755,895 874,407 961,884
Travelling 12,278 23,305 26,620
Fuel and power 920,546 899,376 1,080,433
Production Supplies 232,923 305,690 368,763
Excise duty & sales tax 754 3,843 3,359
Rent, rates & tax 313,037 264,795 139,367
Insurance 26,714 36,916 42,133
Repairs & Maintenance 306,975 303,071 325,962
Packing expenses 42,044 194,760 263,983
Depreciation on owned assets 327,956 405,011 485,716
Depreciation on assets subject to lease 548 1,039
Amortisation 194 2,599 7,329
Technical fee and royalty 7,440 10,394 20,073
Other expenses 110,193 131,449 156,975
10,463,682 12,587,430 13,014,528
Opening WIP 250,247 245,126 222,374
Closing WIP (245,126) (222,374) (211,698)
Cost of goods produced 10,468,803 12,610,182 13,025,204
Opening stock of finished goods 609,944 808,604 526,196
11,078,747 13,418,786 13,551,400
Closing stock of finished goods (808,604) (526,196) (678,575)
10,270,143 12,892,590 12,872,825

8. Vertical Analysis of Cost of Sales

% of % of % of
Cost of sales 2014 CGS 2015 CGS 2016 CGS
Materials consumed 7,406,733 72.12% 9,131,266 70.83% 9,130,892 70.93%
Salaries, wages and amenities 755,895 7.36% 874,407 6.78% 961,884 7.47%
Travelling 12,278 0.12% 23,305 0.18% 26,620 0.21%
Fuel and power 920,546 8.96% 899,376 6.98% 1,080,433 8.39%
Production Supplies 232,923 2.27% 305,690 2.37% 368,763 2.86%
Excise duty & sales tax 754 0.01% 3,843 0.03% 3,359 0.03%
Rent, rates & tax 313,037 3.05% 264,795 2.05% 139,367 1.08%
Insurance 26,714 0.26% 36,916 0.29% 42,133 0.33%
Repairs & Maintenance 306,975 2.99% 303,071 2.35% 325,962 2.53%
Packing expenses 42,044 0.41% 194,760 1.51% 263,983 2.05%
Depreciation on owned assets 327,956 3.19% 405,011 3.14% 485,716 3.77%
Depreciation on assets subject to
lease - - 548 0.00% 1,039 0.01%
Amortization 194 0.00% 2,599 0.02% 7,329 0.06%
Technical fee and royalty 7,440 0.07% 10,394 0.08% 20,073 0.16%
Other expenses 110,193 1.07% 131,449 1.02% 156,975 1.22%
10,463,68 101.88 12,587,43 13,014,52
2 % 0 97.63% 8 101.10%
Opening WIP 250,247 2.44% 245,126 1.90% 222,374 1.73%
Closing WIP (245,126) -2.39% (222,374) -1.72% (211,698) -1.64%
10,468,80 101.93 12,610,18 13,025,20
Cost of goods produced 3 % 2 97.81% 4 101.18%
Opening stock of finished goods 609,944 5.94% 808,604 6.27% 526,196 4.09%
11,078,74 107.87 13,418,78 104.08 13,551,40
7 % 6 % 0 105.27%
Closing stock of finished goods (808,604) -7.87% (526,196) -4.08% (678,575) -5.27%
10,270,14 100.00 12,892,59 100.00 12,872,82
3 % 0 % 5 100.00%
 9. Horizontal Analysis of Cost of Sales
%chang %chang
Cost of sales 2014 2015 e 2015 2016 e
Materials consumed 7,406,733 9,131,266 23.28% 9,131,266 9,130,892 0.00%
Salaries, wages and amenities 755,895 874,407 15.68% 874,407 961,884 10.00%
Travelling 12,278 23,305 89.81% 23,305 26,620 14.22%
Fuel and power 920,546 899,376 -2.30% 899,376 1,080,433 20.13%
Production Supplies 232,923 305,690 31.24% 305,690 368,763 20.63%
Excise duty & sales tax 754 3,843 409.68% 3,843 3,359 -12.59%
Rent, rates & tax 313,037 264,795 -15.41% 264,795 139,367 -47.37%
Insurance 26,714 36,916 38.19% 36,916 42,133 14.13%
Repairs & Maintenance 306,975 303,071 -1.27% 303,071 325,962 7.55%

Packing expenses 42,044 194,760 363.23% 194,760 263,983 35.54%

Fixed: Depreciation on owned
assets 327,956 405,011 23.50% 405,011 485,716 19.93%
Fixed: Depreciation on assets
subject to lease - 548 - 548 1,039 89.60%
1239.69
Fixed:Amortisation 194 2,599 % 2,599 7,329 181.99%
Technical fee and royalty 7,440 10,394 39.70% 10,394 20,073 93.12%
Other expenses 110,193 131,449 19.29% 131,449 156,975 19.42%
10,463,68 12,587,43 12,587,43 13,014,52
2 0 20.30% 0 8 3.39%
Opening WIP 250,247 245,126 -2.05% 245,126 222,374 -9.28%
Closing WIP (245,126) (222,374) -9.28% (222,374) (211,698) -4.80%
10,468,80 12,610,18 12,610,18 13,025,20
Cost of goods produced 3 2 20.45% 2 4 3.29%
Opening stock of finished goods 609,944 808,604 32.57% 808,604 526,196 -34.93%
11,078,74 13,418,78 13,418,78 13,551,40
7 6 21.12% 6 0 0.99%
Closing stock of finished goods (808,604) (526,196) -34.93% (526,196) (678,575) 28.96%
10,270,14 12,892,59 12,892,59 12,872,82
3 0 25.53% 0 5 -0.15%

The costs of sales of Packages have been increasing over time and much of this is because of
increased cost of production as it increased in comparison to last year i.e. 2015. Apart from that
the major contributor of increased cost of sales is the raw material expense as it plays a major
role in the production of paper despite the fact that its share as a percentage of total cost of sales
has somewhat decreased since it contributed about 72.12% in 2014 as compared to 70.83% in
2015. The vertical analysis further shows that the overall cost of sales increased but this is
happening mainly because of the fact that the cost of goods manufactured are rising. The closing
work in process has reduced over 3 years which shows operational efficiency of the company as
the work is not piling up and the company is able to convert them to finished goods in
appropriate time. This can be seen from the vertical analysis of the cost of sales as the closing
work in process comprises of 1.64% for 2016 as compared to 1.72% in 2015. In the same way
the closing stock of finished goods also decreased in proportion of cost of sales to 5.27% in 2016
from 7.87% in 2014.

The horizontal analysis of the cost of sales also shows an increasing trend from 2014 to 2015 but
they have reduced by 15% from 2015 to 2016. This analysis also shows that the major increase
was in amortization as they grew by 1239.69% from 2014 to 2015 and then by 181.99% from
2015 to 2016. In addition to that the depreciation on assets subject to lease along with technical
fees and royalty also increased from 2015 to 2016. On the other hand the rent expenses
decreased by about 47.37% from 2015 to 2016 along with excise duty and sales tax. As a result
the overall cost of production increased by 3.29% from 2015 to 2016 in comparison to a high
change from 2014 to 2015 of about 20.45%. The overall work in process has decreased but the
closing stock of finished goods has increased.

Breakeven Analysis

Breakeven analysis is an analysis used to determine the point at which revenue received
equals the costs associated with receiving the revenue.

Finding break-even point of a product or service is an essential tool in choosing the best price
per unit of a product and also helping to determine projected sales. Break even analysis can used
for a number of different applications. Its basic function is to determine when a product or
service will be profitable. This analysis can be applied to many other applications to determine a
future forecast in sales, set a unit price and to target the best strategic options for the company.
Once the break-even figures are determined, the company can then use this information for other
financial projections.
The breakeven point can be calculated by the under-mentioned formula:

Costs
Breakeven Point=
SalesVariable Costs

Step 1

The formula shows that given the financial statements of the company, the first step in
conducting break even analysis is to classify costs into fixed and variable components. The
calculations of which are shown below:

Packages Limited
Fixed Costs
For year 2014 through 2016
2014 2015 2016
Cost of sales
Insurance 26,714 42,133 36,916
Depreciation on owned assets 327,956 485,716 405,011
Depreciation on assets subject to lease 1,039 548
Amortization 194 7,329 2,599
Technical fee and royalty 7,440 20,073 10,394
362,304 556,290 455,468
Administrative expenses
Insurance 4,970 12,540 9,459
Depreciation on owned assets 10,858 18,857 20,767
Amortization 4,789 8,736 8,018
Depreciation on investment property 1,629 2,842 3,623
22,246 42,975 41,867
Distribution & marketing costs
Insurance 4,981 16,646 23,678
Advertising 96,870 174,119 177,613
Depreciation on owned assets 5,757 6,967 6,413
107,608 197,732 207,704
Finance cost 528,371 751,551 845,253
Total Fixed Costs 1,020,529 1,548,548 1,550,292

Packages Limited
Variable Costs
 For year 2014 through 2016
2014 2015 2016
Cost of sales
Materials consumed 7,406,733 9,130,892 9,131,266
Salaries, wages and amenities 755,895 961,884 874,407
Travelling 12,278 26,620 23,305
Fuel and power 920,546 1,080,433 899,376
Production Supplies 232,923 368,763 305,690
Excise duty & sales tax 754 3,359 3,843
Rent, rates & tax 313,037 139,367 264,795
Insurance 26,714 42,133 36,916
Repairs & Maintenance 306,975 325,962 303,071
Packing expenses 42,044 263,983 194,760
10,017,899 ######## 12,037,429
Administrative expenses
Salaries, wages and amenities 179,222 327,287 381,549
Traveling 15,438 23,108 43,686
Rent, rates and taxes 9,917 21,206 66,554
Printing, stationery and periodicals 12,578 17,437 17,195
Postage, telephone and telex 9,603 14,225 12,989
Motor vehicles running 12,438 17,350 15,530
Computer charges 9,237 17,615 21,293
Professional services 28,663 26,590 98,076
Repairs and maintenance 7,837 14,201 16,920
Other expenses 38,511 68,723 65,961
323,444 547,742 739,753
Distribution & marketing costs
Salaries, wages and amenities 122,723 161,095 146,333
Traveling 18,721 22,202 27,027
Rent, rates and taxes 8,374 6,660 7,670
Freight and distribution 109,786 150,439 141,234
Provision for doubtful debts 12,281 2,784
Other expenses 36,828 48,338 47,245
308,713 388,734 372,293
Other operating expenses 30,888 221,968 153,971
Taxation 890,089 213,216 398,617
13,715,056
Total Variable Costs 11,571,033 13,702,063

Step 2:
For calculating break even sales contribution margin percentage is calculated by formula:

SalesVariable Costs
CM Percentage=
Sales

Step 3:

Calculate the break even sales by dividing the fixed costs by CM Percentage. The results of
which are shown in the table below:

2014 2015 2016

Net sales 11,745,290 14,887,857 15,087,350
Total Variable Costs 11,571,033 13,715,056 13,702,063
Contribution Margin 174,257 1172801 1385287
Contribution Margin Percentage 1.48% 7.87% 9.18%
Total Fixed Costs 1,020,529 1,548,548 1,550,292
Breakeven Sales 689546.622 196765.947 168877.124

Break even analysis confirms that Packages Limited has achieved operational excellence.
Contribution margin percentages of sales have increased dramatically as compared to the last
few years. This is also reflected in lower breakeven sales from 2014 to 2016.

Overall Packages Limited has been doing well in 2016 as compared to previous years and also
based on the current industry situation in Pakistan.

Activity Based Costing

ABC Costing is an accounting method that identifies the activities that a firm performs, and
then assigns indirect costs to products. An activity based costing (ABC) system recognizes the
relationship between costs, activities and products, and through this relationship assigns
indirect costs to products less arbitrarily than traditional methods.

Activity based costing has grown in importance in recent decades because (1)
manufacturing overhead costs have increased significantly, (2) the manufacturing overhead
costs no longer correlate with the productive machine hours or direct labor hours, (3) the
diversity of products and the diversity in customers' demands have grown, and (4) some
products are produced in large batches, while others are produced in small batches.

Cost Object Cost Driver Activity Cost Pool

Materials Consumed Direct tracing to each product Unit Level
line
Salaries, wages and Workers Allocated Product Sustaining
amenities Level
Travelling No. of Visits Product Sustaining
Level

Fuel and power Liters of Petrol Product Sustaining

Level

Production supplies Based on raw material Product Sustaining

used Level
Rent, rates and taxes Floor area Facility Level

Insurance Floor area Facility Level

Repairs and Based on raw material Product Sustaining

maintenance used Level
Packing expenses Based on raw material Product Sustaining
used Level
Other expenses Based on raw material Product Sustaining
used Level
Administrative Costs No. of Offices Facility Level
Distribution and No. of delivery vans Product Sustaining
Marketing Costs Level

Folding Cartoons Flexible Packaging Consumer Products

Division

Raw Materials Used 35% 20% 45%

No. of Workers 1500 1000 2500

Liters of Petrol 9000 7250 13750

Area % (Square ft) 40 20 40

No. of Visits 100 80 200

No. of Delivery Vans 350 250 900

No. of Offices 3 2 8
Budgeting

A budget is a set of interlinked plans that quantitatively describe an entity's projected

future operations. A budget is used as a yardstick against which to measure actual
operating results, for the allocation of funding, and as a plan for future operations.

The budgeting process typically begins with a strategy planning session by senior
management. The management team then applies the agreed strategic direction to a series
of plans that roll up into a master budget. The plans include a sales budget, production
budget, direct materials budget, direct labor budget, manufacturing overhead budget,
sales and administrative budget, and fixed assets budget. All of these plans roll up into
the master budget, which contains a budgeted income statement, balance sheet, and cash
forecast. There may also be a financing budget in which is itemized the debt and equity
structure needed to ensure that the cash requirements of the budget can be met.

Sales Budget:

Sales Budget: 2016 (Rupees)

Budgeted Sales 74439
Selling Price per unit 250
Total Revenues 18,609,821 (25% Increase)

The budgeted sales for 2016 were PKR 14681.612 million which was

owed to stability in manufacturing industry of consumer goods.

Average price of all the products made was 250 leading to roughly

58.72 million units to be produced in a year.

Production Budget

Production Budget 2016 Units

Budgeted Sales 18,609,821
Add: Desired Inventory 930491 ( 5% of Sales)
Total Production Required 19540312.05
Less: Beginning inventory 222,374
Units to be produced 19317938.05

Due to power shortages and unpredictability in demand, Packages

maintains a 5% stock of the overall units predicted to be sold in the

current year. In year 2015 Packages already held 1 million in stock

therefore after adjusting for the budgeted units to be sold and closing

inventory, the budgeted units to be produced in year 2015 were 60.66

million units.

Direct Material Purchases Budget

Direct Material Budget 2016 (rupees)

Production in units 19317938.05
Materials per unit 125 (50% of selling
price)
Production needs 2414742256
Add: Desired ending inventory 120737113 (5% of Production
needs)
Total needed 2535479369
Less beginning inventory 1587364
Material to be purchased 2533892005

Direct Labor Budget

At Packages, each unit of product requires 0.5 hours of direct labor.

The Company has a no layoff policy so all employees will be paid for 40 hours
of work each week.

In exchange for the no layoff policy, workers agreed to a wage rate of Rs. 40
per hour

Direct Labor Budget

Production in units 19317938.05
Direct Labor hours 0.35
Labor hours required 6761278.3
Wage Rate 37.5/hr
Total Direct Labor Cost 253547936

Overhead Budget

% of
Overhead Budgeted Budgete
Overhead Budget Expenses Sales d Sales
18,609,
Indirect Material 1302687.47 7% 821

Indirect Labor 1302687.47 7%

Travelling 186098 1%

Fuel and Power 1674883 9%

Rent, rates & tax 558294.63 3%

Insurance 152,755 0%
Repairs and Maintenance 558294.63 3%

Total 5735700.2

Selling and Administrative Budget

At Packages, variable selling and administrative expenses are 3% of budgeted

sales.

Fixed selling and administrative expenses are budgeted to be Rs. 1,538,000 for the
year 2016.

Selling and Administration Overhead % of Budgeted Budgeted

Budget Expenses Sales Sales
Selling and Administration 18,609,8
Expenses 558294 3% 21
Fixed selling and administrative
expenses 1302687.47 7%
1860981.47

Flexible Sales B
Budget Flexible Volume Static Actual e
Actual Variance Budget Variance Budget Costs C

Units Sold 65032 - 65032 (13,490.00) 78,490

Selling Price 231.99 (18.00) 250 - 250

1508677 16,2580 19,622,50

Revenues 3 (1171227) 00 (3364500) 0

Variable Costs - -

(1,349,000. 105.50
Direct Materials 6857528 354328 6503200 00) 7,849,000 04
Direct Labor 4114516 2601280 63.300
 (809,400.0
.8 1513236.8 0) 4,709,400 26

Manufacturing 2743011 (607,050.0 42.200

Overheads .2 (183428) 2926440 0) 3,532,050 17

13,715, 1203092 (2,765,450. 16,090,45 211.00

Total Variable costs 056 1684136 0 00) 0 09

1,372,29 (607,050.0
Contribution Margin 4 (2854786) 4227080 0) 3,532,050
1,548,5 1,600,00 1
Fixed Costs 48 (51,452.00) 0 - 1,600,000

2,536,30 (607,050.0
Operating Incomes 4 1,211,304.00 2627080 0) 1,932,050
Variance Analysis

Static Budget variance for operating income:

Actual result static budget amount

2536304-1932050

= 604254 F

Sales volume variance for operating income:

(Budget selling price Budget variable cost per unit) * (actual units sold Budget units sold)

(250- 205) x (65032- 78490)

= -605610 U

Price variance:

(Actual SP Budget SP) * Actual units sold

(231.99-250)*65032

= -1171226.32 U
Efficiency Variance:

(Actual quantity of input used- budget quantity of input allowed for actual production)x budget
price of input

(65032-78490)*250

=-3364500 F