EXECUTIVE SUMMARY

Cost Accounting System is a branch of managerial accounting concerned with accumulating

manufacturing costs for financial reporting and decision-making purposes. It is a process that
aims to capture a company's costs of production by assessing the input costs of each step of
production as well as fixed costs such as depreciation of capital equipment.
The report assemblage involves understanding the significance of applying cost accounting
system to the costing techniques. In the process we have come across certain issues that demand
special attention as the selection of valuation techniques among the options available.
We also verify how smoothly the establish standards and norms comply with the overall cost
accounting process of the company.
However, while accumulating necessary data for the report preparation we have faced few
restrictions such as time constraints, political condition of the country, and limited disclosure of
necessary information by management of Aristopharma Limited.

LETTER

OF

TRANSMITTAL

2nd January,2014.
Md.Jamil Sharif
Lecturer
Department of Accounting & Information Systems
Faculty of Business Studies
University of Dhaka.
Subject: Application of Cost Accounting System of Aristopharma Limited.
Dear Sir,
Here is the report on Application of Cost Accounting System of Aristopharma Limited as
you assigned us to do. It is a great pleasure for us to submit this Report. We have tried our best
efforts to achieve the objectives of the Report and hope that our endeavor will serve the purpose.
We sincerely believe that the knowledge we have gathered during the preparation of the report
will immensely help us in our future professional life.
We thank you for providing us with this opportunity and hope that you will approve our
submission cordially.

Faithfully Yours
SIGANTURE

Batch: 17th, Section: A

Department of Accounting & Information Systems
Faculty of Business Studies
University of Dhaka.

INTRODUCTION
Objective:
Objectives of the report are given below:
To have a general idea about cost accounting information and its use in decision making.
To find out the disclosure of cost accounting information used by the company.
To have clear understanding about the cost accounting system used by Aristopharma
Limited
To draw a conclusion based on our understanding of Aristopharma Limited.

Scope:
This report is specifically limited to the accounting Segment of determining the cost of Products
of Aristopharma including cost accounting systems procedure and techniques. Since
Aristopharma wants to achieve high quality along with cost efficiency it uses its cost accounting
information very effectively.

COMPANY BACKGROUND
Selected Company:
As per the Requirements of the Report we have taken Aristopharma Limited, a leading
Pharmaceutical Company, for the purpose of analyzing its entire cost Accounting System.

Company Profile:
Aristopharma Ltd. is a leading pharmaceutical company in Bangladesh. The company started its
journey in 1986 with the honest promise of providing quality medicines at affordable prices to
countrymen. Its state-of-the-art manufacturing plant, located at Shampur-Kadamtali I/A, 10 km
from central Dhaka, is equipped with highly sophisticated and advanced facilities. The facility is
planned and designed to meet the local as well as international demand both qualitatively and
quantitatively.
It started manufacturing sterile ophthalmic products in 2002 and presently is maintaining no. 1
position in ophthalmic market in Bangladesh. Aristopharma's 2nd plant with 66,000 sq.ft. floor
area was built in 2010 beside the existing plant to manufacture hi-tech products like inhalers,
lyophilized injections, pre-filled syringes, suppositories, insulin & others bio-tech products.
Apart from normal tablet and capsule this plant would help us to manufacture amino acid,
hormone, vaccine, anti-cancer products etc.
In Aristopharma, quality is a journey, not a goal. It continuously sets higher standards and feels
passionate to achieve all that. The motto of Aristopharma's quality policy is "Quality the unit
we count." The WHO approved current Good Manufacturing Practices (cGMP) & current Good
Laboratory Practices (cGLP) are followed in every step of operation.
With the aim to cope with the challenges of globalization, Aristopharma ltd. stepped beyond the
boundary of Bangladesh in 2000, Vietnam being the first country to export. Today Aristopharma
exports it quality medicines to 21 countries of 5 continents and is moving aggressively to expand
and extend its export market.

Vision:
Vision is to provide better healthcare for the society by manufacturing &
marketing quality medicines at affordable price.

Motto:
Motto is "Quality- the unit we count". And by quality we never mean only
product quality, it extends to our all business activities as well.

Strength:
Strength is the support that we have gained from our people, our customers
and other stakeholders around us.

Production Capacity:
With the addition of the 2nd plant the yearly production capacity of Aristopharma Limited has
now come up to
Dosage Forms

Yearly Production
Capacity
1750 million
460 million
34 million
26 million
20 million
5 million
4 million
2 million

Tablet
Capsule
Injection
Bottle
Ophthalmic Products
Tube
Suppository
Inhaler

TERMINOLOGY
JOB ORDER COSTING:
Job order costing system is used in situations where many different products are produced each
period. For example clothing factory would typically made many different types of jeans for both
men and women during a month. In a job order costing system, costs are traced to the jobs and
then the costs of the job are divided by the number of units in the job to arrive at an average cost
per unit.
Job order costing system is also extensively used in service industries. Hospitals, law firms,
movie studios, accounting firms, advertising agencies and repair shops all use a variety of job
order costing system to accumulate costs for accounting and billing purposes. The details here
deal with a manufacturing firm, the same concept and procedures are used by many service
organizations.

PROCESS COSTING:
Process costing is a method of allocating manufacturing cost to products to determine an average
cost per unit. It is used by companies which mass produce identical or similar products. Since
every unit is essentially the same, each unit receives the same manufacturing input as every other
unit. Refineries, paper mills, and food processing companies are examples of businesses which
use process costing.

INVENTORY VALUATION METHODS:

FIFO METHOD
The first-in, first-out (FIFO) method is a widely used inventory valuation method that assumes
that the goods are sold (by merchandising companies) or materials are issued to production
department (by manufacturing companies) in the order in which they are purchased. In other
words, the costs to acquire merchandise or materials are charged against revenues in the order in
which they are incurred.
Under first-in, first-out method, the ending balance of inventory represents the most recent costs
incurred to purchase merchandise or materials.

WEIGHTED AVERAGE METHOD

An average in which each quantity to be averaged is assigned a weight. These weightings
determine the relative importance of each quantity on the average. Weightings are the equivalent
of having that many like items with the same value involved in the average.

SCRAP:
Its the worth of a physical asset's individual components when the asset itself is deemed no
longer usable. The individual components, known as "scrap" are worth something if they can be
put to other uses. Sometimes scrap materials can be used as is; other times they must be
processed before they can be reused. An item's scrap value is determined by the supply and
demand for the materials it can be broken down into.

SPOILAGE:
Normally, spoilage is of two types. They are normal spoilage and abnormal spoilage.

NORMAL SPOILAGE:
Its the deterioration of a firm's product line that is generally considered to be unavoidable and
expected. Normal spoilage refers to the inherent worsening of products during the production or
inventory processes of the sales cycle. Companies typically set a normal spoilage rate for lines of
products which they produce and assign the costs of such spoilage to cost of goods sold.

ABNORMAL SPOILAGE:
Abnormal Spoilage is spoilage that is not part of everyday operations. It occurs for reasons such
as the following: out-of-control manufacturing processes, unusual machine breakdowns, and
unexpected electrical outages that result in a number of spoiled units. Some abnormal spoilage is
considered avoidable; that is, if managers monitor processes and maintain machinery
appropriately, little spoilage will occur. To highlight these types of problems so that they can be
monitored, abnormal spoilage is recorded in a Loss from Abnormal Spoilage Account in the
general ledger and is not included in the job costing inventory accounts (work in process,
finished goods, and cost of goods sold).

DEFECTIVES:
Production that does not meet quality standards or designated product specification and that is
reworked to a sufficient quality level so that it can be sold through normal distribution channel.

NORMAL DEFECTIVE UNITS:

The number of defective units is those which are expected as part of the production process.

ABNORMAL DEFECTIVE UNITS :

The number of defective units is those which are arise for unusual or abnormal reasons.

CONTRIBUTION MARGIN RATIO:

The phrase 'contribution margin' can also refer to a per unit measure of a product's gross
operating margin, calculated simply as the product's price minus its total variable costs. The
Contribution margin ratio is the percentage of contribution over total revenue, which can be
calculated from the unit contribution over unit price.

COMPARISON

OF

PERIODS:

A method of evaluating two or more measured years to compare the results at one time period on
an annualizes basis. Comparison of periods is a popular way to evaluate the performance of
investment over two or more constructive time periods. Comparison of periods can be:

Week over week

Month over month
Quarter over quarter
Year over year

Production Document:
Part 1

Part 2

Part 3

Part 4

Authorizes Storekeeper to
Issue necessary Material

Requisition for
Material

Advance Notification to
Tool Room

Tool List

Subsequently agreed with

Clock Card

Operators Job
Time Ticket
Inspection
Request

These forms are often

combined and are
required for each
operation to part

Progress Advice

Production Control Board

7

COMPANY ANALYSIS
Aristopharma Limiteds overall Cost Accounting System has been analyzed and presented under these
Specific Areas:

COSTING SYSTEM:
Aristopharma mainly follows job order costing for pharmaceutical products and in order to be
able to exercise control over the cost incurred and the efficiency of the overall system they
implement process costing.

METHOD

OF INVENTORY

VALUATION:

FIFO, from the point of view of control as costs incurred in two periods, past current are
segregated.

JOB ORDER COSTING

FOR

VALUATION PURPOSE:

Since their products are not homogeneous and production is based on orders placed by customers
as per their requirements they simply apply this system.

SHORTCOMINGS:
According to the management this system is suitable to the type of process they follow in the
production.

COMPLIANCE

OF

ACCOUNTING PROCEDURES:

Yes, there are hardly any situations to the contrary. The principles and guidelines are implemented
accordingly in order to maintain books of accounts as per the accounting standards.

ADAPTATION
THE MISSION

COST ACCOUNTING SYSTEM

ACHIEVEMENT:
OF

TO

Well, as their motto is to give quality products based on efficient business activity and their
vision is serving customers with reasonable price for the products, both these particulars have
been achieved by their cost accounting system which helps in achieving cost efficiency.

FIXATION

OF

SELLING PRICE:

Usually they aim to maintain a 40% c/s ratio, marginal costing helps in fixing approximate
selling prices for products.

TREATMENT

OF

FACTORY OVERHEAD:

It is specifically based on machine hours.

OVERHEAD VALUATION METHOD:

a. Variable
b. Fixed
c. Semi-variable

FURTHER CLASSIFICATION

OF

OVERHEAD:

Semi-variable overhead is usually separated into fixed and variable elements. However, this
leads to problems of apportioning these items between fixed and variable which is somewhat
controlled by applying the comparison of period method.

Waste:
Normal waste is absorbed in the cost of net output while abnormal waste is written off to costing
profit and loss account. When however, waste has any reusable value, the process account is
credited with the quantity and value of normal waste. Alternatively, sale proceeds of waste, if
any, are treated as miscellaneous income.

SCRAP:
When scrap is identifiable with a particular job or process and its value is significant, the scrap
account is charged with full cost. The profit or loss in the scrap account on realization, if any, is
to be transferred to costing profit and loss account.

DEFECTIVES:
Accounting for defective is concerned with accounting for rework and costs rectification. The
possible ways of treatment are:
If the dept. responsible for defective can be correctly placed, the rectification cost is charged to
that dept. In the case of abnormal defectives which are beyond the control of the organization the
rework cost is charged to costing P/L account.

SPOILAGE:
N/S (which is inherent in the operation) cost are included in the costs either by charging the loss
due to spoilage to the production order or charging it to production overhead so that it is scraped
over all products. A/S is charged to costing P/C account.

10

CONCLUDING REMARKS

Aristopharma Limited uses Job Order Costing System because its production is Order based.
The Company uses FIFO method for Inventory Valuation because expiry factor is related to
the nature of its products.
For the determination of Pre-determined factory Overhead to Control Cost, It uses Machine
Hours.
Aristopharma Limited uses the guidelines prescribed in IASs for the treatment of Waste,
Spoiled & Defective units of Products.
Its overall cost Accounting system has a great impact in the determination of profit as profit s
based on the marginal Costing.
Aristopharma Limiteds promise of quality product at an affordable price is mentioned in its
Vision & Motto. This Company believes that this Promise can be maintained through its
existing Cost Accounting System.

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METHODOLOGY
The details of the work plan are furnished below:

Data Sources:
The data and information for this report have been collected from both the primary and
secondary sources. Among the primary sources, we collect information by face to face
conversation with the respective stuffs of the head office. The secondary sources of information
are annual reports, websites, and study of relevant reports, documents and different manuals.

Data Processing:
Data collected from primary and secondary sources have been processed manually and
qualitative approach in general and quantitative approach in some cases has been used
throughout the study.

Data Analysis and Interpretation:

Qualitative approach has been adopted for data analysis and interpretation taking the processed
data as the base.

APPENDIX
12

Questionnaire:
1.
2.
3.
4.
5.
6.
7.
8.

What is the Overall Costing System adopted by the Cost management Authorities?
What is method of Inventory Valuation?
How is factory overhead treatment made for accounting purposes?
What are the methods of Factory Overhead Valuation?
Are there any further classifications of Such Overhead valuation?
What are the accounting treatments related with Scarp, Waste, defective & Spoilage?
What are the Bases of fixing Selling Prices?
Why are you Preferring Job order Costing method for valuation purposes? Are there any
shortcomings that you faced?
9. Do you strictly abide by the Cost accounting Procedures that have been established by
institutional Organization?
10. How well does the Cost Accounting Systems of the Company adapt to its mission
achievement?

References:
1. Horngren, Charles T., Datar Srikant M., Foster, G.; Cost Accounting: A
Managerial Approach, Prentice Hall, Inc.; 12 th Edition, 2007.
2. Rayburn, Latricia G.; Cost Accounting: Using A Cost Management
Approach; Irwin Book Team; 6th Edition, 1996.
3. Hansen, Don R., Mowen Maryanne M.; Cost Management: Accounting
and Control; South-Western College Pub; 5th edition, 2005.
4. International Financial Reporting Standard; International Accounting
Standard Board; as approved at 1 January, 2008.

5. http://www.aristopharma.com
6. http://britannica.com
7. http://en.wikipedia.org
8. http://www.bizmanualz.com

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