Lucky Assignment

8/18/2019 Lucky Assignment

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Certification

We hereby certify that the material presented in this report is original and no other persons’

work or ideas have been used without acknowledgement.

Student Reg. No Name Signatures

MF/2012/3481 A.G.S.Prathibha

MF/2012/3485 D.C.Malalagama

MF/2012/3500 R.P.T.Madushani

MF/2012/3512 P.P.H.Lunuvila

MF/2012/3516 M.L.T.Jayamali

MF/2012/3520 K.P.Warshamana

MF/2012/3527 D.H.M.Dissanayake

MF/2012/3533 P.G.C.Sadiranga


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Acknowledgements

This assignment could not have been written without the guidance of our post coordinator

Mrs. M.S Nanayakkara. Her guidance had been a source of encouragement at all time and we

would like to express our gratitude to her.

We wish to special thank to the chairmen Mr. Lal Keerthi Amarasiri Gunawardhane and staff

of accountancy of Lucky Lanka Milk processing co ltd .

Lastly we would like to thank our family and friends for the support and encouragement

provided throughout this assignment. And also we would like to express our gratitude to all

those who a were not mentioned here for giving us.


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Contents

01. Introduction of the assignment ....................................................................................................... 4

02. History of Lucky Lanka Milk Processing Company Limited ............................................................... 5

03Analyze the overhead allocation system ............................................................................................ 6

04. Evaluate The Appropriateness Of Existing System ........................................................................ 10

05. Barriers and Opportunities of Alternative method (ABC Method) ................................................. 12

05.1 Barrios and opertuties of ABC Method ..................................................................................... 12

05.1 .I Barrios ................................................................................................................................ 12

05.1.II Opportunities ..................................................................................................................... 13

06. Outcomes of the report writing ....................................................................................................... 18

07. Conclusion ...................................................................................................................................... 19

07.References ....................................................................................................................................... 20

08. Appendices ...................................................................................................................................... 21

08.I certify letter of the company ................................................................................................. 21


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01. Introduction of the assignment

According to the Activity Based Costing system (ABC System) topic in Cost and

Management Accounting Subject, the assignment that was given to us to analyze the costing

system which is using the selected company and introduce the alternative methods to the

selected company. Therefore the company our group is selected for that is the Lucky Lanka

Milk Processing Com ltd.

For this evaluation activity we are used two costing methods. Those are traditional method

and Activity Based Costing (ABC) method. According to the Lucky Lanka Milk Processing

co ltd, they are currently using a traditional method for their costing system. But it is not the

pure traditional method that we are learned. The Chairman Mr. Lal Keerthi Amarasiri

Gunawardhane who is the owner of the company, add some secret value or percentage for

their each unit cost of production.

In this assignment we are expected to evaluate the existing method (traditional method) and

alternative method (Activity Based Costing system) for Lucky Lanka Milk Processing Co Ltd

to compute their unit cost effectively and most accurately.


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02. History of Lucky Lanka Milk Processing Company Limited

Lucky Lanka Milk Processing Company Limited was started the journey back in 1991 as

small scale business by Mr. Lal Keerthi Amarasiri Gunawardhane which is located in a

remote village like Kamburupitiya of Matara district in Southern province where far from the

Capital City of the country.

The small business started with a single household cow, has been sprouted throughout the

country with the involvement of thousands of milk farmers, hundreds of employees and many

of suppliers up to a national enterprise by now. Milk considered to be of high nutritional

value food material is processed and further developed so that the nutritional value & taste is

enhanced and presented in a different form to the customers. Not only yoghurt is a high

nutritional food but also it consists of medicinal value too. Traditional Sri Lankan Hospitality

blended with international sophisticated food technology well packed in Lucky Yoghurt in

order to optimize customer hospitality, Lucky seven flavors are presented in an attractive

Ready to Serve and single serving package system. Well-qualified Staff ensures the quality of

incoming raw materials and the final products through continuous inspection, monitoring and

laboratory testing including chemical & microbiological testing of each batch. Product

quality is maintained according to the Sri Lankan Quality Standards [SLS] 824 right

throughout the manufacturing process.

They expected to be a national industry, which makes the path towards the prosperity of the

country, their major objective is to make social & economic enhancement of their

stakeholders.

The Vision and Mission of Lucky Lanka Milk Processing Company Limited is;

Vision

2020 Global Lucky

Mission

Creation of healthy generation towards prosperous future in Sri Lanka


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03Analyze the overhead allocation system

There are two method for allocate overhead cost. They are,

1. Traditional Method

2. Activity Based Costing System Method

Lucky Lanka Milk Processing Co. Ltd used traditional method to allocate overhead cost. If

Lucky Lanka Milk Processing Co.Ltd used traditional method to allocate overhead cost, some

occasion they follow conventional method of owner. Then company owner get direct

impartial to allocate overhead cost. According to that we can identify that the Lucky Lanka

company implements a special method based on traditional method to allocate overhead cost

for each products.

The Lucky Lanka Milk Processing Co.Ltd produces 27 products. According to traditional

method we selected 6 products of Lucky Lanka and calculate overhead cost and cost per unit

are followed.

Yogurt

Direct Material

Direct Labor

Overhead cost

Total cost

Cost per unit =

25 00000

98 000

13029325

15627325

15627325

1500000

10.42 Rs


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Kalkiri Bottle

Direct Material = 617 120

Direct Labor = 62 000

Overhead cost =

= (4291.40*200) = 85 8280

Total cost = 1 537 400

Cost per unit =

= 50.57

Keerasa Bottle

Direct Material = 8 190 000


Overhead cost =

(4291.40*200) = 858 280


Cost per unit = 9 088 280

300 000

= 30.29


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UHT Packet



Overhead cost =

(4291.40*140) = 600 796


Cost per unit = 3 828 296

250 000

= 15.31

RTS Vanila Bottle



Overhead cost =

(4291.40*84) = 360 477.6

Total cost = 1 855 645.6

Cost per unit = 1 855 645.6

62 400

= 29.74


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RTS Chocolate Bottle



Overhead cost =

(4291.40*84) = 360 477.6

Total cost = 1 900 137.6

Cost per unit = 1 900 137.6

62 400

= 30.45

Although we calculate to use traditional method they said that they used conventional method

to allocate overhead cost. According to company rules and regulation they don’t present their

conventional method to external parties.

So the owner hasn’t enough knowledge about other alternatives method they continue the

overhead cost in traditional method since a long time.

The owner of Lucky Lanka has decided to use congruent method than currently existing

method for allocate overhead cost of their products. For that he has handover to account

section to do about that.

According to traditional method which used currently existing hasn’t certain base for their

products. Therefore they can’t allocate overhead cost of each product. Then also they can’t

correctly recognize profit and loss of each product.


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04. Evaluate The Appropriateness Of Existing System

( Tradtional Method )

Lucky Lanka Milk Processing co. Ltd use traditional methods to evaluate overhead cost and

endemic methods to evaluate cost. Those are indicated in their financial statements according

to evaluation. Though Lucky Lanka is using traditional methods it is different with the

answer whatever they gained. Because, of their addition of endemic evaluations.

There are many advantages and disadvantages they gained from evaluating overhead cost

under traditional method of 27 items of Lucky Lanka company though they substitute some

value according to their endemic method.

In here, in very large scale companies, they calculate total cost and overhead cost of new

products according to Activity Based Costing system. So when they get the difference

between cost of product according to activity based system that mean, the answer would

larger they give up from those products. But, In Lucky Lanka company they would get some

advantages though they substitute some values according to traditional method. So, they

expand their network of products by starting new items and they have gained ability of

conducting this company successfully.

Although above companies do not use this method to calculate overhead cost when

evaluating total cost. They use Activities Based system method and they obtain correct

answer with this method according to international standards. So that, Lucky Lanka company

could not compete with international companies and they will face disadvantages instants.

That mean, they cannot go forward with them by competing.

It is essential to protect from income tax, producing tax and other different taxes Lucky

Lanka company because of using this traditional method and their substitutions. Because,

through this method it shows profit margin in lower place. But these valuations completely

wrong in financial statements and accuracy too decries in those. Therefore the decisions of

Lucky Lanka company are decrease in accuracy so it will barrier for conducting and going

forward. Also, have to face many difficulties when getting decisions .The way of evaluating

overhead cost according to traditional method is; dividing total overhead cost by total item of

products. But Lucky Lanka substituted some value to that answer secretly.


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So it is very comfortable to study data according to calculations. But, these are wrong in

accuracy. Therefore never expect to get successful audit report.

It is advantage for Lucky Lanka company using this method. Because there are no anymore

other cost, and cost of other calculation. And also little time will spend for this calculation.

As a result, accounts section can obtain cost evaluation in short period.

In traditional method we can calculate overhead cost of products in one rate. It will be direct

labors (Rs) or direct labor hours. Because direct labor is the main factor of product items.

But, there are rates according to Activity Based System when calculating cost. So it will give

correct answer than other methods.

The decision takers that mean, internal and external parties can easily point out decisions

through studying the valuations under traditional method. So there is no any unnecessary time

spreading.

Although when we getting answer according to traditional method, it does not give pure

answer for company and we can see disadvantageous instants.

Therefore, it is optimal solution and very good decision to use Activity Based Costing system

to evaluate cost of Lucky Lanka company. So we can indicate that then they could gain the

vision and go forward by successful evaluations. That mean this is the method that they

should use is our decision.

An advantage of using traditional-based costing is that it aligns with Generally Accepted

Accounting Principles, or GAAP. Easy implementation for companies that provide one

product also is a plus. However, traditional costing is an outdated costing system in Lucky

Lanka Milk processing Co Ltd because those this company now use machines and computers

for much of their production. Computers and machines make the system outdated because it

often uses direct labor hours to calculate cost. Cost is not appropriately assigned because

direct labor hours is not the best cost driver to use. Traditional costing negates other cost

drivers that may contribute to the cost of an item. Another disadvantage of solely using the

traditional costing system is that it can lead to bad management decisions because it excludes

certain nonmanufacturing costs.


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05. Barriers and Opportunities of Alternative method (ABC Method)

Even though person Lucky Lanka company used the traditional method system to calculate

the overhead cost to overcome. Barrios of in that system and to calculate the overhead cost

accurately. Activity based costing system can be used As well as both advantages and

disadvantages can be generated in the organization by using Activity based system.

05.1 Barrios and opertuties of ABC Method

05.1 .I Barrios

Activity Based Costing system is very complex method. Therefore a huge cost havespent to calculate the each product cost by using Activity based costing system then

traditional system.

When implementing the Activity Based Costing system the company have to pay

more tax rate than traditional method.

By now new technics are introduce to allocate the overhead cost. Therefore it is not

suitable using Activity Based Costing system. (Computer system)

Owners don’t have enough knowledge about Activity Based Costing system to

implement it.

Unless present worker know about Activity Based Costing system new employees

have to recruited who have a wide knowledge about the Activity Based Costing

system.

A primary disadvantage of Activity Based Costing is that it is not possible to divide

some overhead costs such as the chief executive’s salary on a per products basic.

Too much attention to detail and control might obscure the bigger picture or make the

firm lose sight of strategic objectives in a quest for small savings making the firm.


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05.1.II Opportunities

Lucky Lanka (pvt) Ltd company is a large scale company, because it have to spend

large amount of expenses for their productions. Therefore the most overhead cost is

appropriate method to allocate overhead cost is Activity Based costing method than

traditional method.

As well as Lucky Lanka (pvt) company manufacturing 27 products in large scale.

Allocating overhead cost according to the Activity Based Costing system method is

most effective to reach economic scale to the company.

As implement overhead cost according to the Activity Based costing system it is very

helpful to identify severally. Therefor proprietor can make decisions in accurately.

Activity Based Costing system is a special method for campaign with international

companies, Because it is implement according to the international standards.

As allocate individual overhead cost for each product, company can identify overhead

cost from owner to lowest employer and other external parties directly. Therefore

company can make decision accurately and efficiently. As well as company can

identify indirect cost for each unit of products distinctly.

Likewise the owner can determine the accurate decisions about the production and

profit. Therefore the company able to decide whether they can reach their vision or

not. If they cannot reach their vision successfully, they can use Activity Based

Costing method to efficacious their vision and other activities.

Using the Activity Based Costing method Lucky Lanka (pvt) Ltd Company can

increase their productivity, efficiency and effectiveness.

Lucky Lanka (pvt) Company fixation of selling price for multi products underActivity Based Costing is fair and correct because overheads are allocated on the

basis of relevant cost drivers.

Fair the allocations of overhead occupy a considerable portion in the total cost

components. It is advantages of implement Activity Based costing method to Lucky

Lanka (pvt) company.


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Greater costing accuracy is the primary benefit of activity-based costing. The Company

assign cost only to the products that require the activity for production. This method

eliminates allocating irrelevant costs to a product. Other advantages of activity-based costing

include an easy interpretation of cost for internal management, the ability to enable

benchmarking and a greater understanding of overhead costs. Implementing an activity-based

costing system within a company requires substantial resources. This can prove a

disadvantage for companies with limited funds. Another disadvantage of using activity-based

costing is that it is easily misinterpreted by some users.


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Yogurt Traditional Method

Direct Material -

Direct Labor -

Over Head -

Total Cost -

Cost Per Unit -

ABC Method (Yogurt)

Direct Material

Direct

Electricity

Total Electricity Cost * 1000

Machine Hours

Salary

Total Salary Cost * 1500

Direct Labor Hours

2 500 000

98 000

13 029 325

15 627 325

15 627 325

1 500 000 (Units)

10.42 RS

2500 000

98 000

2202702 * 1000 = 1 134 244

1942

3139062 *1500 = 1 928 170

2442

2 500 000

98 000

1 134 244

1 928 170


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Depreciation

Total Depreciation cost * 1000

Machine hours

Raw material others

Fuel

Others

1393849 *1000 =717738

1942

Total Raw Material Others * 1 500 000

No of Production Run Units

1038963*1500 = 492041

4167300

Total Fuel Cost * 1000

Machine Hours

518745 * 1000 =267119

1942

Others Cost * 1500

Direct Labor Hours

4736004 *1500 = 2909094

2442

717 738

492 041

267 119

2 909 094

10 046 406TOTAL COST


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Cost Per Unit =

According to the given information for yoghurt product from Lucky Lanka (pvt) Ltd

company their traditional method cost per unit is Rs10.42.As well as Activity Based Costing

system method cost per unit is Rs.6.70. According to our opinion Activity Based Costing

system method is more profitability to Lucky Lanka (pvt) Ltd Company based on this

information. Yoghurt product is over cost than Activity Based Costing system method.

Therefore Lucky Lanka (pvt) Ltd Company should applied Activity Based Costing system to

determine the yoghurt cost per unit for more accurate accounting. As not given accurate

information we use direct labor hours as cost drives for compute the Activity Based Costing

system method. Therefore we cannot certify this result is not accurate.

Total Cost

No of Production

10046406

1500000

6.7 Rs


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06. Outcomes of the report writing

We selected the lucky Lanka Pvt Ltd manufacturing firm to study its overhead allocation

system because they are Production Company in Matara area. Firstly we got an opportunity

to meet the owner in the financial department and got great ideas with an experience

regarding the overhead allocation.

They explain about their Over Head allocation system and they discuss with us about their

system. But they did not use standard method for allocate their Over Head and these days he

had assigned for studding a new method allocating overhead cost to the accounting

department. But he said that the result was pending yet. Finance Manager discuss with us

about the system clarifications and suggestion. We give our ideas and our knowledge about

Over Head allocation method. We emphasized barriers of their existing overhead allocation

method related traditional method.

Owner of the company give the chance to us do their overhead allocation in their factory as a

one day workshop. We calculate overhead cost of the company through using Activity base

costing method. It’s had a great chance to use our theoretical method to use in practical

purpose. All member of our team had a great chance to increase practical knowledge doing

this work in that day.

And also we face lots of difficulties to doing that theoretical part using as a practical usage.

All our members solve that problem discuss with Factory Manager of Lucky Lanka milk

processing co.Ltd. All members of our team got a great experience doing this theoretical

things as a practically in the company.

This is larger scale manufacturing company in Sri Lanka. Therefor we face lots difficulties to

allocate various type of Over head cost in that company. We identify various type of cost that

company and allocate that cost using our Activity Base Costing Method.

All members of our group successfully involve to their programme and get a great idea about

practically usage of Activity Base Costing method and Traditional Method .


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07. Conclusion

According to our assignment requirements, we select Lucky Lanka Milk processing Co.Ltd

as a company. First we discussed with owner of the company about their Overhead cost

allocation method. According to their information they use Traditional Method for their

overhead allocation.. But it is not the pure traditional method that we are learned. The

Chairman Mr. Lal Keerthi Amarasiri Gunawardhane who is the owner of the company, add

some secret value or percentage for their each unit cost of production.

In this assignment we are expected to evaluate the existing method (traditional method) and

alternative method (Activity Based Costing system) for Lucky Lanka pvt ltd Company to

compute their unit cost effectively and most accurately. An then we represent outcomes of

doing this type of assignment.

According to our team members opinion Lucky Lanka milk processing co.Ltd want to use

new overhead allocation method to their company because existing allocation method will

directly badly affect to company.


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07.References

T.Lucy (TL) ,Management Accounting ,5th

edition, Book Power, Landon 2003

www.luckylankamilkproceessing.lk


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08. Appendices

08.I certify letter of the company

Lucky Assignment

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