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Cement is the prime component used in construction industry anywhere in the world. In contemporary societies, cement consumption has a direct relation with economic growth of any country. Its production and usage can show country’s improved infra-structure and living standards of its population. In Pakistan, cement industry is one of the major industrial sectors and has a leading contributor in economic growth of the country as well. Pakistan has a well-developed cement industry which currently produces 1,000,000 tons (at 95% capacity level) cement annually. Due to this extensive production, Pakistan ranks amongst the top five exporters and 14th largest cement producer in the word. During the last 5 years, the cement manufactures have benefited from higher gross profit margins due to increase in retention prices, lower energy prices (including coal, HSD and FO) and reduced cost due to installation of efficient energy projects (WHR and coal power plant). Due to this rapid growth in cement industry, Star Corporation – a well-known Pakistani business conglomerate enters into new business and established a cement plant near Katas Raj with the name MP Cement. MP cement starts the production of Ordinary Portland Cement (OPC) through integrated operations and as a result of mass production, produced 110,000 tons cement in 2017. The company has aim to increase the production up to 200,000 tons cement by the year 2018. Although, the company as earned heavy profit in its first year of operations. Yet, the company’s management accountant is unable to launch a stable costing system that can assure appropriate product costing. You are required to recommend the most suitable costing system for MP Cement Company and support your answer with logical and factual reasons (Any three).
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I recomend that the most suitable costing system for MP cement company is Activity based costing system. ABC system is one of the product costing systems. This system is used along with costing of work order or phase to provide exact information about costs and finally management economic decisions making. One of important characteristic of ABC is distinguishing it from traditional systems, attention to new production phenomena and technology effects which are used in services and products.
In traditional costing systems through making cost centers, all productive costs divided
by the number of made products to determine cost price. In this system, there is no direct
relation between necessary activities for producing services and products and their uses from
company's financial sources. Therefore, cost price of product does not reflect activities and
values of sources used directly. ABC system removes this defect through direct correlation of
organizational costs with operating activities costs. From scientific point of view, ABC specifies
causal relations between making costs and activities for producing service and product, which
has economic value for the company. This system considers different main factors as a base for
cost sharing instead of using one factor
ye okay hai ??