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Category: Business

Autor: anton 12 June 2011

Words: 11320 | Pages: 46

Internship Report

On

Standard Costing Procedure &

Cost Variance Analysis:

A Study on GlaxoSmithKline Bd. Ltd.

Submitted To

Mr. Syed Manzur Quader

Lecturer

Independent University, Bangladesh

Chittagong

Submitted By

TASBEER AKTAR ABEER

ID#0311022

Independent University, Bangladesh

Date of Submission: 10th September, 2007

Letter of Transmittal

Monday, September 10, 2007

To

Mr. Syed Manzur Quader

Lecturer,

Independent University, Bangladesh

Chittagong

Sub: Submission of Internship Report.

Dear Sir,

This is much to my delight that I am submitting herewith my internship report titled “Standard Costing Procedure and Cost Variance Analysis– A study on GlaxoSmithKline Bangladesh Limited”.

As of my organization’s requirement and supervisor’s suggestions and guidance, I have tried my best to make this report meaningful. I believe and hope that you will find this report informative and insightful.

I, therefore, would like to request you to accept my report and oblige me with the honor of completing my internship. Any further clarification, if needed, regarding the report will be instantly responded.

Thank you,

Sincerely,

Tasbeer Aktar Abeer

ID# 0311022

Bachelor of Business Administration

Independent University, Bangladesh

Acknowledgement…………………………..

I take the privilege to appreciate all of the individuals who have helped me to prepare this report during the last three months.

Firstly, I express my gratefulness to Almighty Allah who has made be able to pursue my study.

I would like to express my gratitude to Mr. Mohammad Alamgir, Manager, Human Resources Development(HRD), GlaxoSmithKline Bangladesh Ltd, for giving me the opportunity, appointment and lastly for his certification for the internship program that I had completed. I specially want to thank Mr. Omar Faruq and Mr. Mujibur Rahman, Finance and Accounts Department. Without their help it was impossible to complete the report properly.

I convey my gratitude to my honorable Supervisor, Mr. Syed Manzur Quader, Lecturer, School of Business, Independent University, Bangladesh, for his guidance and co-operation, which helped me immensely to prepare this report. He guided me in coordinating the whole report. He spent time to check the draft report and given his suggestions on different chapters of the report. Without his help, it would have been hard to come up with a comprehensive report.

My special thanks go to all of my friends and the people who were directly or indirectly supported and encouraged me during my internship program.

Executive Summary…………………………..

The research is based on the standard Costing Procedure and Cost Variance Analysis of GlaxoSmithKline Bangladesh Ltd. The purpose of this research is to understand how the standard costs of different cost elements are being determined and how the cost variances between standard performance and actual performance are calculated. The other purpose of this research is also to determine the weaknesses of the standard costing procedure and cost variance analysis.

From the view point of function this was a descriptive research. The research was conducted on the basis of ‘Survey Method’ and ‘Secondary Data Analysis’. Regarding Survey Method all collected Primary Data was the Qualitative Data and was collected by asking questions through interview and formal and informal discussion. No questionnaire was used for this purpose. Secondary data from different documents and article are also used in this research. The research was undertaken on the basis of non-probability sampling and the sample was chosen from the employee of GSK who are directly involved with importing.

From the exploration of the standard costing procedure of GlaxoSmithKline Bangladesh Ltd, it has been found that the company determines the standard cost of every product by calculating the standard cost of direct material, standard cost of direct labour and standard cost of overhead individually. The standard cost of direct material is comprised of standard cost of both the raw material and packing material. By multiplying the standard rate with the standard material quantity, standard cost of raw material and packing material can be calculated. Standard cost of direct labour is calculated by multiplying the standard labour hour (comprised of both the manufacturing standard hour and packing standard hour) and standard labour hour rate. Finally, to calculate the standard cost of overhead, the overhead costs are distributed to different departments say production department and service department which is called primary distribution and then the costs of service departments are redistributed to production departments which is called secondary distribution. From that, the variable and fixed overhead rate is calculated. By multiplying the rates with the standard labour hour of a product, the fixed and variable overhead can be got. At last, standard direct material cost, standard direct labour cost and standard overhead cost are added to get the total standard cost of a product.

In cost variance analysis, the deviation between standard cost and actual cost of a cost element is calculated. If actual cost is greater than the standard cost, then situation is called unfavourable and if the actual cost is lower than the standard cost, then the situation is called favourable. By calculating different cost variances, the company can take precautionary actions.

There are some major weaknesses in standard costing procedure and cost variance analysis. In standard costing procedure, the standard rate o direct labour and the fixed and variable overhead calculation is oversimplified and in cost variance analysis, all the variances are not calculated which shows a broken picture of the full process.

There is also a case study for the standard costing procedure which provides the necessary documents to understand the procedure. The calculations are thoroughly explained and the equations are broken down to have a better view of the standard costing procedure.

Table of Contents………………………..

Page no.

Chapter – 1 Introduction 1

1.1 Introduction 2

1.2 Origin of the Report 2

1.3 Objectives 3

1.4 Scope 4

1.5 Methodology 4

1.6 Limitations 6

Chapter – 2 Company Overview 7

2.1 GSK Mission 8

2.2 GSK Management 9

2.3 Business Segments 9

2.4 GSK Worldwide 10

2.5 Strategy 11

2.6 Collaborations and Partnerships 12

2.7 Environment, Health & Safety (EHS) 13

2.8 Global Manufacturing & Supply (GMS) 14

2.9 GMS Chittagong Sight 14

Chapter – 3 LITERATURE REVIEW 16

Chapter – 4 FINDINGS & ANALYSIS 19

4.1 Standard Costing Procedure of GSK 20

Case study 31

4.2 Cost Variance Analysis of GSK 46

4.3 Weaknesses of Standard Costing Procedure & Cost Variance Analysis of GSK 54

Chapter – 5 CONCLUSION 57

Bibliography

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CHAPTER 1

INTODUCTION

________________________________________

________________________________________

Introduction…………………………………….

1.1 Introduction:

Standard Costing is one of the most important accounting systems for any company as it sets a standard cost for a product. Comparing to that standard cost a company can control the cost of its products more effectively. In Bangladesh, without GlaxoSmithKline Bangladesh Ltd, no company follows this costing system. GlaxoSmithKline Bangladesh Ltd has effectively adopted this costing method through which they are being more able to track the deviation of costs in production process to reduce the cost by cost variance analysis.

Although standard costing is very effective one but it is difficult to implement. In GSK, Finance and Accounts Department is responsible to maintain this

Costing method. As, most of the raw materials are imported from foreign countries, therefore in the case of standard costing of raw materials Planning, Procurement & Supply (PPS) Department is responsible for this. In the system, it is also necessary to determine the standard raw material and packing material quantity which is supplied by the Quality Assurance Department.

But Finance and Accounts Department has to play the major role in determining the standard cost of products and also the cost variance analysis. They have to track even a slight deviation from the standard rate or amount for each and every product. If there is a big deviation between the standard and actual amount, they have to report quickly to the Site Director of the company.

1.2 Origin of the Report:

To complete a BBA program it is necessary to perform an internship program under any reputed organization. This program actually makes a relationship between theoretical and practical knowledge. With the help of the program we can build ourselves confident that we can handle the practical job life. Since it is true that by having only theoretical knowledge it is difficult to adjust with the practical job life, unless without having any practical job experience. This program breaks our hesitation regarding practical job environment.

So it is mandatory for the university to arrange the internship program for the students. This program has different phase those are as follows:

 Orientation with the organization

 Working in different departments

 Completing the Internship Program

 Finally write a report regarding designated topic.

The topic of my internship program is “Standard Costing Procedure and Cost Variance Analysis- a Study on GlaxoSmithKline Bangladesh Ltd”.

I have to submit this empirical project report after completing my Internship Program, which covers an overall period of approximate 12 weeks starting from 1st July, 2007.

1.3 Objectives:

The objectives of this report are as follows:

To know the standard costing procedure of GlaxoSmithKline BD. Ltd.

To know about the cost variances involved with the standard costing in GlaxoSmithKline BD. Ltd.

To identify the weaknesses of standard costing procedure and cost variance analysis of GlaxoSmithKline BD Ltd.

1.4 Scope:

The scope of this research is strictly bounded by the topic of the report ‘Standard Costing Procedure and Cost Variance Analysis of GlaxoSmithKline Bd. Ltd.’ The purpose of this research is to know the whole standard costing procedure, cost variance analysis and the weaknesses of them. So the scope of this research is restricted within two three departments: Planning, Procurement & Supply (PPS) department and the Finance department and Quality Assurance Department of GSK.

1.5 Methodology:

Methodology is the chronological selection of the methods among different alternatives to conduct a research in a planned manner.

From the view point of Objective, it is an Applied Research as the research was undertaken to answer some specific question. From the view point of function it was a Descriptive as well as Exploratory research as the research was undertaken to know the procedure and calculation of standard costing and cost variance and further to identify the weaknesses of them. From the view point of Nature of Data, the research was mainly based on qualitative data, however some quantitative data were used, though limitedly to supplement the qualitative data and from the view point of Research Place it was both ‘Field Research’ and ‘Desk Research’ as the research was conducted among the employees of GSK by asking questions to them with the help of some necessary documents of standard costing.

• Research Design:

After the objectives are being set, it is important to do the research design that means how to collect the data.

Among different methods of data collection, the report was conducted on the basis of both the survey method and secondary data analysis. In Survey Method the data which are collected are primary data and in secondary data analysis the data which are collected are secondary data. In survey method, all Primary Data was the Qualitative Data and was collected by asking questions through interview and formal and informal discussion. No questionnaire was used for this purpose. From the view point of Communication, the survey was conducted through ‘Human Interactive Media’.

• Sampling Design:

When the researcher talks about all the respondents regarding the research, this is called the population. And a small part of the population is the sample.

Population: The target population of this research was the employees of GSK who was responsible for the standard costing procedure and cost variance analysis. Therefore, the Finance and Accounts Department, Planning, Procurement & Supply Department and the Quality Assurance Department was the target population of this research.

Sample Size: The research was undertaken on the basis of the ‘Non-Probability or Purposive Sampling’. The respondents were chosen conveniently from the target population and the Sample Size of this research was Five.

• Collecting the Data:

To conduct the research both the primary and secondary data are used.

Primary Data: Primary data are collected by asking questions or by direct interview from the employees. Formal and informal discussion was also a source of primary data. Questionnaires are not prepared for primary data as it was not necessary.

Secondary Data: As the research was mainly a descriptive research, therefore, documents related to standard costing and cost variance analysis was the major source of data. Without these, secondary data was also found in books, journals, articles etc.

• Analyzing the Data:

As it was mainly a descriptive research, therefore no statistical tool was used to analyze the data. The report was mainly written on the basis of explanation of the procedure and calculation of standard costing and cost variances.

• Writing the Report:

This is a popular report. So, all the technical terms are avoided.

1.6 Limitations:

During the time of research I had to face some problems which could have affected my report. The limitations were:

The time frame was very short to gather in depth knowledge about all the jobs related to my study.

Confidentiality of data was a barrier while gathering required data.

Workload of the employees acted as another barrier while gathering data.

________________________________________

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CHAPTER 2

COMPANY OVERVIEW

________________________________________

________________________________________

GlaxoSmithKline…………………………………….

GlaxoSmithKline is a Research-Based Pharmaceuticals company, Headquartered in the UK and with operations based in the US. This is the only pharmaceutical company researching both Medicines and Vaccines for the World Health Organization’s three priority diseases – HIV/AIDS, Tuberculosis and Malaria. GSK has also developed some of the leading global medicines in these fields.

GlaxoSmithKline plc is a public limited company incorporated on 6th December 1999 under English law. Its shares are listed on the London Stock Exchange and the New York Stock Exchange. On 27thDecember 2000 the company acquired Glaxo Wellcome plc and SmithKline Beecham plc, both English public limited companies, by way of a scheme of arrangement for the merger of the two companies. Both Glaxo Wellcome and SmithKline Beecham were major global healthcare businesses. GSK plc and its subsidiary and associated undertakings constitute a major global healthcare group engaged in the creation, discovery, development, manufacture and marketing of pharmaceutical and consumer health-related products. GSK has its corporate head office in London. It also has operational headquarters in Philadelphia and Research Triangle Park, USA, and operations in some 117 countries, with products sold in over 140 countries. The principal Research and Development (R&D) facilities are in the UK, the USA, Japan, Italy, Spain and Belgium. Products are currently manufactured in some 37 countries. The major markets for the Group’s products are the USA, France, Japan, the UK, Italy, Germany and Spain. With its continuous success the company is now the second top pharmaceutical company of the world.

2.1 GSK Mission:

“Our global quest is to improve the quality of human life by enabling people to do more, feel better and live longer.”

2.2 GSK Management:

GSK is managed by the Board of Directors and the Corporate Executive team. The Board is comprised of three (3) Executives and eight (8) Non-Executive Directors who are responsible for the corporate governance and ultimately accountable for company’s activities, strategy and performance.

The Chief Executive Officer (CEO) is responsible for the management of the business and is assisted by the Corporate Executive team that manages company’s activities. Each member is responsible for a specific part of the business and reports to the CEO.

2.3 Business Segments:

GSK operates principally in two industry segments:

1. Pharmaceuticals (prescription pharmaceuticals and vaccines)

2. Consumer Healthcare (over-the-counter medicines, oral care and nutritional healthcare).

 Prescription Medicine:

GSK’s Prescription Medicines include treatments for a wide range of conditions such as infections, depression, skin conditions, asthma, heart and circulatory disease and cancer. Products are in various stages of approval around the world and may not be available in every country. The products listed under the US trade marks are for United States residents only. Products listed under the UK trade marks are for United Kingdom residents only.

 Vaccines:

GSK markets over 25 vaccines worldwide to prevent potentially life-threatening or crippling illnesses such as hepatitis A, hepatitis B, diphtheria, tetanus, whooping cough, measles, mumps, rubella, polio, typhoid, influenza and bacterial meningitis. The majority of its vaccine R&D activities are conducted at GlaxoSmithKline Biologicals in Rixensart, Belgium.

2.4 GSK Worldwide:

Table 2.1: GSK Worldwide

Europe North America

Central and South America Caribbean

Asia and Australasia

Southeast Asia

Africa

Middle East

 United Kingdom

 Albania

 Austria

 Armenia

 Belarus

 Belgium

 Bosnia Herzegovina

 Bulgaria

 Croatia

 Cyprus

 Czech Republic

 Denmark

 Estonia

 Finland

 France

 Germany

 Georgia

 Greece

 Hungary

 Iceland

 Ireland

 Italy

 Kazakhstan

 Latvia

 Lithuania

 Macedonia

 Malta

 Moldova

 Netherlands

 Norway

 Poland

 Portugal

 Romania

 Russia

 Serbia & Montenegro

 Slovakia

 Slovenia

 Spain

 Sweden

 Switzerland

 Ukraine  United States

 Canada

 Mexico  Argentina

 Brazil

 Colombia

 Costa Rica

 Ecuador

 El Salvador

 Guatemala

 Honduras

 Nicaragua

 Panama

 Peru

 Uruguay

 Venezuela  Dominican Republic

 Jamaica

 Trinidad  Australia

 Azerbaijan

 Bangladesh

 China

 Hong Kong

 India

 Japan

 Korea

 New Zealand

 Pakistan

 Sri Lanka

 Taiwan

 Uzbekistan  Cambodia

 Indonesia

 Malaysia

 Myanmar

 Philippines

 Singapore

 Thailand

 Vietnam  Algeria

 Kenya

 Morocco

 Nigeria

 South Africa

 Egypt

 Israel

 Saudi Arabia

 Turkey

2.5 Strategy:

GSK’s Strategy is to strive for excellence in the following four key areas of their business:

1. Optimizing the performance of key products:

Both Pharmaceutical and Consumer Healthcare businesses of GSK focus on ways to improve the return from their intellectual property by maximizing sales of key products. Their activities include:

Achieving worldwide sales force excellence.

Achieving Pharmaceutical and Consumer Healthcare marketing excellence.

Maintaining the highest ethical standards.

Improving the cost-effectiveness of operations.

2. Delivering the product pipeline for patients:

GSK aims to create the best Product Pipeline in the industry for the benefit of society. This includes developing a focused strategy to support the pipeline and manage the full life cycle of compounds from launch as prescription medicines through to potentially becoming over-the-counter products.

They measure R&D productivity by the number and level of innovation of the products it creates, and by the ability to address unmet patient needs.

3. Being the best place for the best people to do their best work:

GSK is committed to creating the best place for the best people to do their best work by:

 Recruiting and developing the best people in the industry.

 Supporting a culture of high reward for high performance.

 Ensuring good communication and employee involvement.

 Maintaining a diverse and healthy workforce

4. Improving access to medicines

GSK is finding innovative ways to bring medicines, vaccines and health education to patients in all countries, including those suffering from epidemics and neglected diseases.

2.6 Collaborations and partnerships:

Professional partnerships with others in Industry, Academia and Government are a fundamental part of the way GSK conducts its business. It seeks organizations engaging in breakthrough work to create new medicines, and approach its collaborations with Creativity and Flexibility. GSK view partnership as an active alliance.

To these collaborations GSK brings an extensive history of successful partnership and the focused effort of an organization committed to the highest quality science. Its collaborative research programs are driven by scientific curiosity and are characterized by shared input from each party.

GSK is committed to partnering with academic institutions. It has developed more than 800 early discovery research collaborations with colleges and universities around the globe, and fund research for hundreds of masters-level, doctoral and fellowship students each year.

GSK’s Experience, Expertise and Enthusiasm for collaboration offers its partners the chance to fully realize their goals while allowing GSK to pursue its mission of helping people do more, feel better and live longer.

 Collaboration in clinical programs:

GSK collaborate with Investigators and Institutions that have special interest and expertise in conducting clinical trials. Research areas include:

 Neuroscience

 Oncology

 Infectious diseases

 Cardiovascular / metabolic

 Respiratory

 Musculoskeletal / inflammation

 Gastrointestinal / urology

2.7 Environment, Health and Safety (EHS):

Every year, GSK report its Environment, Health and Safety (EHS) performance to the public on this website as part of the Corporate Responsibility Report. The legacy companies (Glaxo Wellcome and SmithKline Beecham) individually published EHS reports for a number of years prior to the formation of GSK in 2000.

Environment, health and safety issues are managed through an integrated system that aims to ensure issues and risks are identified, standards are established, training is provided, targets set and audits conducted. This systematic management approach to EHS is aligned with the International Standards Organization (ISO) 14001 standard and the OHSAS 18001 standard.

GSK has a clearly defined EHS management structure and organization and a framework for managing EHS issues. The framework includes EHS policy, EHS vision and 64 global EHS standards. EHS Plan for Excellence sets out GSK’s strategy for improving its environmental performance up to 2010 with five-year improvement targets applying throughout its operations. Consultation with stakeholders has helped to identify the prime sustainability challenges it face. These are: energy efficiency, the impact of pharmaceuticals in the environment, and more sustainable materials consumption. It has begun work developing strategies to tackle these issues.

Business processes integrate EHS into the business and GSK has environmental programs to manage emissions and releases to air, water and land. Its safety programs cover Driver Safety, Material Safety, Ergonomics and Process safety among others and its health programs cover Resilience and Mental well-being and human immunodeficiency virus as well as exposures to chemicals.

2.8 Global Manufacturing & Supply (GMS):

GSK manufactures a large portfolio of products, ranging from tablets and toothpaste to inhalers and complex capsules, in over 28,000 different pack sizes and presentations.

Manufacture of medicines starts with the development of a therapeutic active ingredient (bulk active) in a selected formulation. Global Manufacturing and Supply (GMS) develops manufacturing processes for full scale volume production of active compounds at primary manufacturing sites. Secondary sites then convert these active compounds into finished medicines.

Each year GMS produces around 6,000 tones of bulk actives and more than four billion packs, which are sold in over 140 countries. It also supports about 2,000 new products and line extension launches every year.

By adopting leading edge practices and developing its people, GMS provides:

 A secure source of supply of high quality products

 Compliance with regulatory requirements and customer expectations

 Best in class cost.

2.9 GMS Chittagong Site:

In Bangladesh GMS operates a site located in Chittagong city.

 This is one of the largest Secondary Manufacturing Site in Bangladesh. This site produces most of the Secondary Pharmaceuticals Dose form including Antibiotics.

 Chittagong manufacturing and packaging plant was built in 1917 on 17 acres of land.

 The site has 71 management, 262 fulltime workers and additional staff of seasonal, part-time workers for packing of Dextrose.

 It has separate manufacturing areas isolated from main factory building for Cephalosporin group of products.

 Manufacturing and Packaging of Inhaler, Penicillin and few Non-Penicillin products have been contracted out to two (2) local manufacturers. One is BPL and another one is TBL.

 This site is a Tobacco free site.

2.9.1 Organogram of GMS Chittagong Site:

Fig 2.1: Organogram of GMS (Chittagong Site)

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CHAPTER 3

LITERATURE REVIEW

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Literature Review…………………………………

To have a more clear idea about the research topic and to generate research question a researcher must conduct literature survey. As the report is based on the standard costing procedure and variance analysis therefore the topic of the literature survey is similar to that.

The article is written by Bruce L. Baggaley, on August,2003, who is a senior partner of BMA, Inc. The article is about how the Standard cost accounting presents a problem for lean companies. Its measurements motivate behaviors that are harmful to lean, and it does not provide reliable cost information for decision-making in a lean environment. In this article there is an exploration what it is about standard costing that causes this conflict with lean and suggest an alternative costing approach that is consistent with the goals of lean and which provides the basis for sound management decisions.

The article first describes why there is a trouble with standard costing. In standard costing system there is a concept named volume variance, which occurs due to the difference between the actual production unit and the standard production unit. If the actual production is less than the standard production there is a negative volume variance which indicates that the company is not achieving its production volume. In lean period, the company tries to cut off production. When companies begin the lean period, they normally reduce the volumes produced as they work down inventories and seek to produce only the amounts demanded. So, at that time a big negative volume variance occurs which is added with the per unit cost of production and show that the per unit profitability has reduced. At that time, the executives who are expected to show lower costs at lean period cannot do so because of the negative volume variance and the sales people cannot achieve the targeted profit they have been assigned. Therefore, in the management ranks lean is often seen as making results worse, not better.

In this article the reason that the standard costing is not working properly in the lean period is explained. The reason why standard costing doesn't work in a lean company is that it is based upon a contrary model of how companies make money in manufacturing. The model which traditional costing is designed to support is the traditional mass production model that seeks economies of scale to create the lowest unit cost for items produced. Using this model it is encouraged a highly automated factory capable of producing large production runs top amortize the cost of these expensive resources. Companies make money by reducing the per unit part cost. Lean on the other hand seeks to make products one at a time promoting the flow through the production process. Companies make money by flowing greater volumes of production through the same resources.

In the article it is recommended to follow the lean approach to costs. In this approach all costs are charged which are required to operate it as they are incurred. That means work-in-process inventories can be ignored to the extent that they are low, level and under kanban control. "All costs" include payroll costs for production labor, production support, operations support, engineering support, machinery and equipment, materials used in production, and facilities cost. Because the value stream is comprised of a group of people who work as a team to improve the production flow of a group of similar products, the payroll costs charged should be limited to those people who work on that team for most of their time. There should minimal apportioning of people's time, and no overhead allocations. All costs are directly charged.

Having calculated the total costs of the value stream, the "average cost per unit shipped" is a simple and reliable way to measure value stream efficiency. Unlike traditional performance measures, it supports lean behavior. It is reduced as the units shipped increase and/or as inventories decrease, and vice-versa. It has the advantage of being simple to calculate, easy for people to understand and a reliable financial measure of lean progress.

From the above discussion on the article, it can be understood that the article describes the problems of standard costing in the lean period and has given an alternative solution for it. There were no studies took place to describe the standard costing procedure and cost variance analysis So I have chosen this topic as my Research Project.

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CHAPTER 4

FINDINGS

&

ANALYSIS

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Findings and Analysis…………………………

4.1 Standard Costing procedure of GSK

In GSK, the standard cost of a product comprised of 3 elements. They are:

1. Standard cost of Direct Material

2. Standard cost of Direct Labour

3. Standard cost of overhead

4.1.1 Standard cost of Direct Material:

As GSK is a pharmaceutical company, therefore the final products are different kinds of medicines. For medicines the packaging materials are as important as raw materials.

Therefore, Standard cost of Direct Material = Standard cost of Raw Material

+

Standard cost of Packaging Material

In both the standard cost of Raw Material and Standard cost of Packing Material, there are two important dimensions. One is the standard price of the material and another one is the standard quantity of the material.

To control the cost, it is very important to purchase the material at a reasonable price. The standard material price can be defined as the price which is paid to purchase the material under the most favourable possible condition.

The standard quantity of the material is the second factor affecting the standard cost of raw material. If the mixing of raw material or the usage of packing material is not correct, then it will affect the standard cost of material.

Therefore, Standard cost of Raw Material = Standard price of Raw Material Ч

Standard Quantity of Raw Material

And, Standard cost of Packing Material = Standard price of Packing Material

Ч

Standard quantity of Packing Material

4.1.1.1 Standard Cost of Raw Material:

Previously, it was expressed that Standard Cost of Raw Material comprised of two dimensions. One is the Standard Cost of Raw Material and another one is the Standard Quantity of Raw Material.

Therefore, Standard Cost of Raw Material = Standard Price of Raw Material

Ч

Standard Quantity of Raw Material

4.1.1.1.1 Standard Price of Raw Material :

In GlaxoSmithKline, most of the raw materials to produce medicines are imported from different countries. And Standard Price of Raw Material can be estimated by the following equation.

Standard Price of Raw Material = C & F Value + Duty1 + IDSC2 + Other3 + Subsidiary Duty

The elements of Standard price of Raw Material are described as follows:

• C & F value is the price of the raw material provided by the supplier. For Standard Costing, it is forecasted on the basis of previous rates.

• Duty is set by Government on the basis of Harmonized System (HS) Code.

• Infrastructure Development Service Charges (IDSC) is set by Government on Budget Report. But this charge is excluded in the next budget report (2007-2008).

• Other Costs consist L/C opening charge, Foreign Correspondence Fee, Agency Commission and other expenses which are assumed on the basis of previous years cost. The cost is set on the basis of C & F value.

• Subsidiary Duty is the additional duty (if any) given to custom authority.

The terms which are described above can be calculated by the following equations:

(a) Assessable value = C & F value + Insurancea1 + Landing Chargea2

a1) Insurance = C & F value Ч % of Duty

a2) Landing Charge = C & F value Ч % of Landing Charge

(1) Duty = Assessable Value Ч % of Duty

(2) IDSC = Assessable Value Ч % of IDSC

(3) Other = C & F value Ч % of other Costs

After addition of all the values showed in the Material price equation, it will be converted to taka from the foreign currency and standard Price of raw material can be got.

4.1.1.1.2 Standard Quantity of Raw Material

In GlaxoSmithKline, each and every medicine is made from different raw materials. In those raw materials, one material will be the Active Ingredient (the main element which works) and others will be the Excipients (which supports the active ingredients) for that particular medicine. The Standard Quantity of Raw Materials is got from Quality Assurance Department which prepares the product formula and the product formula tells which raw material is needed for what amount. Quantity is given per batch or per 1000 tablets or per pack etc. If the quantity of raw material is given in per batch or per 1000 tablets then it can be easily converted to per pack in the following way:

If quantity is given per batch, then

Standard quantity (in kg/gram) per batch

Per pack quantity = ------------------------------------------------------------------

(No. of medicine in one batch)ч(No. of medicine in one pack)

The company uses the batch size (number of tablets) considering the losses. That means, they consider the standard yield not the actual yield. For example, if per batch size is 100000 tablet and standard loss is 1%, then standard yield is (100000-100000Ч1%) or 99000 tablets. So, the company will use 99,000 tablets per batch for number of medicine in one batch, not 1,00,000 tablets.

After getting both the Standard Price and Standard Quantity of the raw material, standard cost of raw material is determined.

4.1.1.2 Standard Cost of Packing Material:

Standard cost of packing material is also comprised of two dimensions. One is the Standard Price of packing material and another one is the Standard Quantity of packing material.

Therefore Standard Cost of Packing Material = Standard Price of Packing Material

Ч

Standard Quantity of Raw Material

4.1.1.2.1 Standard Price of Packing Material:

Almost all the packing materials are locally purchased. Therefore the complications/procedure of purchasing packing material is much easier than importing raw materials from foreign countries. The standard price of packing materials is got from Planning, Procurement and Supply Department. The price of the material is provided by the local supplier. And no other costs are included there.

4.1.1.2.2 Standard Quantity of Packing Material:

The Quality Assurance Department provides the standard quantity of the packing material. Some materials can be exactly quantified in numbers and some are used as much as it is needed.

4.1.2 Standard Cost of Direct Labour:

Standard cost of Direct Labour is also one of the important cost elements of cost sheet. Standard cost of Direct Labour is based on both the standard rate of direct labour and total standard man hours.

Therefore, Standard Cost of Direct Labour = Standard Rate of Direct Labour

Ч

Standard Labour Hours

4.1.2.1 Standard Labour Hour:

As, the final product consists both the raw material and packing material, therefore the standard labour hour of a product consists both the Manufacturing Standard Hour for the raw materials and Packing Standard Hour for the packing materials. The Standard Hour is determined by the Product and Packing Development Department which they get from the previous years performance.

4.1.2.1.1 Manufacturing Standard Hour:

There is a standard time or hour for manufacturing every product. Manufacturing standard hour is calculated for per batch or per 1000 tablets so that it can be converted into per pack size.

In GlaxoSmithKline BD Ltd, for manufacturing concern, a worker gets 550 minutes for working where there is 65 minutes of break in total consists o lunch break, tea break and early finish. So, his standard time for manufacturing is 485 minutes per day.

For different products, different operations should be completed by different numbers of operators. The operations are: Granulation, Checking, Blending, Compression, Coating etc. It is then calculated how many hours are needed to complete one particular kind of operation for one batch by the required number of operators. The summation of the hours is the standard man hour per batch. Then the standard man hour per batch is converted to standard man hour per pack. In this case also the company will use standard yield, not the actual yield.

Standard Man Hour per Batch

Therefore, Standard Man Hour per pack = ---------------------------------------

Number of pack per Batch

4.1.2.1.2 Packing Standard Hour:

For packing, there is also a standard time for each and every product. As same as the manufacturing standard, there is a standard available time o 485 minutes per day for a worker. The workers are given different types of work for packaging. Like machine operator, strip inspection and counting, team leading, documentation and in process checking, Fixing sticker on carton and inserting carton into fibrite box etc. For all the operations, hoe many workers or operators are needed, it is determined from the product and packing development department. And it is also determined what the standard output per day is. From these informations, the standard Man Hour per 1000 packs or 500 packs is calculated.

The calculation of packing standard hour is as follows:

No. of Operators Ч Standard time (hr)

Packing standard hour for 1000 packs = ------------------------------------------- Ч 1000

Standard output per day

After getting both the manufacturing standard hour and packing standard hour, the total standard labour hour can be calculated in the following way:

Standard Labour Hour = Standard Manufacturing Hour + Standard Packing Hour

4.1.2.2 Standard Rate of Direct Labour:

There are several production departments in GlaxoSmithKline BD Ltd such as Tablets Manufacturing (TM), Oral Liquid (OL), Topical (TP), Clean Liquid (CL), Dextrose (DP) and Cap Manufacturing (CM). In different production department, production process is different. Therefore, the wages of the workers are different. So, standard rate of Direct labour is calculated differently for different department.

Firstly, the total wages of the workers of each department are calculated. The amount of Direct Labour or wages can be got from the budget. After calculating the amount of direct labour for each and every department, it is determined that how many total labour hours are needed for each department. Finally, total direct labour amount of each department is divided by the total direct labour hour of that particular department to get the standard labour hour rate.

Therefore,

Direct labour amount of a department

Standard Direct Labour hour rate = ----------------------------------------------------

Direct labour hour of that particular department

4.1.3 Standard Cost of Overhead:

Overhead costs are the costs which are not directly involved with the production. But without incurring this part of the costs, production cannot be continued. Therefore it is also an important element of cost.

In GlaxoSmithKline, the standard overhead cost is divided into two parts. One is the Standard Variable Overhead and another one is the Standard Fixed Overhead.

4.1.3.1 Standard Variable Overhead:

Standard Variable Overhead comprised of two dimensions. One is Standard variable overhead rate and the other one is the standard man hour for that product.

Therefore, Standard Variable Overhead = Standard Variable Overhead rate

Ч

Standard Man Hour

4.1.3.1.1 Standard Variable Overhead Rate:

Standard variable overhead rate can be calculated by dividing the total variable overhead amount by the total standard man hour of that production department.

Therefore,

Total variable overhead amount of a production dept.

Standard variable overhead rate = -------------------------------------------------------------

Total standard man hour of that production dept.

For total variable overhead amount of a production department, primary and secondary allocation of the overhead costs should be done. For primary and secondary allocation, there is some basis of allocation. Like the total floor space occupied, no. of batch released, no. of mailbox, steam used, no. of over printed items etc used or consumed by different production and service department. Different overhead costs will be distributed to different production and service department on these allocation bases. At first, the costs will be distributed to both the production departments and service departments which are known as primary distribution. By adding up those costs, the company will get the total overhead costs of a particular production department prior to the secondary distribution.

GlaxoSmithKline Bangladesh Ltd considers the total overhead cost of a particular production department prior to the secondary distribution as its Standard Variable Overhead Cost. The company considers the cost as variable because each production department is responsible for its own costs. If a production department is closed then the costs related to that department can be deleted. For example, if a production department is stopped, repairs and maintenance cost of the department is no longer to be incurred. Therefore it is a variable overhead cost for that department. In this way, we can see many variable costs. But there are also many costs which we say semi-variable or fixed costs. The company also considers these costs as variable costs in its primary distribution. Because it thinks that even there are many semi- variable or fixed costs, it can eliminate the costs within 3 to 4 months after removing a particular production department. The company does it for simplification of the standard costing procedure. Therefore, total variable overhead cost of a production department is the cost before the secondary distribution.

To determine the standard variable overhead rate, another thing to calculate is the total standard man hour of that production department. Firstly, for that, the company needs to calculate the standard man hour for each and every product of a particular production department. Then, they need to add up those standard man hours for getting the total standard man hour for the whole production department. Finally, by dividing the total variable overhead amount of a production department by the standard man hour for that department, the company gets the standard variable overhead rate of that particular department.

4.1.3.1.2 Standard Man Hour:

Described in 2.1 as standard labour hour.

Therefore, Standard Variable Overhead = Standard Variable Overhead rate

Ч

Standard Man Hour

4.1.3.2 Standard Fixed Overhead:

In GlaxoSmithKline Bangladesh Ltd, most of the overhead costs are fixed overhead. The amount of fixed overhead is much greater than the variable overhead. Alike the standard variable overhead, standard fixed overhead can be calculated by multiplying the Standard fixed overhead rate and the standard man hour.

Therefore, Standard Fixed Overhead = Standard Fixed Overhead rate

Ч

Standard Man Hour

4.1.3.2.1 Standard Fixed Overhead Rate:

Total Fixed overhead amount of a production dept.

Standard Fixed overhead rate = -------------------------------------------------------------

Total standard man hour of that production dept.

After distributing the overhead costs in both the production and service department on some particular allocation basis or known as primary distribution, the costs distributed in service department are redistributed in the production department on the same allocation bases. This is known as secondary distribution.

In GlaxoSmithKline, after the secondary distribution, the total overhead cost in a particular production department less the total overhead cost in the same production department prior to the secondary distribution or we can say only the incremental cost for the secondary distribution in a production department is known as the standard fixed overhead amount. It is because the cost of service department cannot be removed completely. Even if a production department were closed, it cannot happen that the service will be terminated or the cost will be reduced. For, example, if a production department is closed, then the company cannot fire some mid- level managers or the employees from the different service departments like the Human resources department, Finance and Accounts department or IT department etc. Therefore, the costs of the service departments distributed in a production department can be considered as the standard fixed overhead amount and by dividing that amount by the total standard man hour of all the products in a production department, we can get the standard fixed overhead rate.

4.1.3.2.2 Standard Man Hour:

Described in 2.1 as standard labour hour.

Therefore, Standard Fixed Overhead = Standard Fixed Overhead rate

Ч

Standard Man Hour

After adding all the standard costs, the company can get the total standard cost of a particular product which is shown in the product standard cost sheet. For every product in GlaxoSmithKline Bangladesh Ltd, the company has a standard cost sheet.

The whole process can be understood by the following way:

Case study of Standard Costing Procedure:

To understand the standard costing procedure of GlaxoSmithKline Bangladesh Ltd, we can consider a case where a product is taken from tablet manufacturing department named ABC tablet. The standard costing of ABC tablet can be understood from the following standard cost sheet:

GlaxoSmithKline BD Ltd

Cost Sheet

Product Name: ABC tablet 30mg tablet 500’s Batch Size: 4,00,000 Tablet

Standard Yield: 3,96,000 Tablet

Material Code No. Description Unit Unit Price Quantity Per Pack Loss (%) Cost Per Pack % of Total Costs

Raw Material

8001200 Alisone Hydrochloride BP kg 7800 0.0225000 0 175.50

8007265 Lactose 170 Mesh kg 2967 0.0200000 0 5.50

8003930 Gelatin Powder kg 2724 0.0027500 0 1.54

8004270 Aspertame kg 1779 0.0108400 0 6.42

8009095 Opadry CU M-3500 pharma grade kg 102 0.0125000 0 13.63

8009098 Talcum Powder kg 1556 0.0051000 0 5.40

8009623 Maize Starch kg 58 0.0350000 0 2.10

Total Raw Materials: 272.86

Packing Materials:

9090010 Aluminium Foil Kg 430.000 0.16480 2 72.2813

9100010 Printed Carton No. 5.350 1.00000 2 5.4570

9210370 BOPP Tape-Opaque Roll 85.000 0.00050 2 0.0434

9210450 BOPP Tape-Transparent Roll 65.000 0.00020 2 0.0133

9200060 Fibrite Box No. 27.500 0.02000 1 0.5555

9140090 Outer Label No. 0.485 0.02000 2 0.0099

Total Packing Materials: 78.36

Total Materials Cost: 351.22

Variable Labour & Overhead

Direct Labour 111.7 0.1336000 14.92

Variable Overhead 97.32 0.1336000 13

Total variable Labour & Overhead cost 27.92

Total Variable Cost 379.14

Contribution 90.86

Fixed Overheads: 233.47 0.1336000 31.19

Total Product Cost: 410.33

Trade Price 470

Gross Profit/(Loss) 59.67

1.0 Standard cost of Direct Material (ABC Tablet)

1.1 Standard Cost of Raw Material (ABC Tablet):

1.1.1 Standard Price of Raw Material (ABC Tablet):

GlaxoSmithKline BD Ltd

Product Name: ABC tablet

Code No. 189

Name of Items

Unit

Currency

Conversion rate

A Forecasted C&F value

B Duty(%)

C IDSC(%)

D Others(%)

E Insurance(1%)

F=BЧ1% Landing charge 1%

G=BЧ1% Assessable value

H=B+F+G Duty

I=HЧC IDSC

J=HЧD Others

K=HЧE Total Landed Cost

L=B+I+J+K Total Landed cost in Tk

M=LЧA

Alisone Hydrochloride BP Kg GBP 131.0000 41.1 25.00% 4.00% 15.00% 0.4110 0.4110 41.9220 10.48 1.68 6.29 59.5457 7800

Lactose 170 Mesh Kg USD 71.0000 35 0.00% 4.00% 15.00% 0.3500 0.3500 35.7000 0.00 1.43 5.36 41.7830 2967

Gelatin Powder Kg GBP 131.0000 15.8 12.00% 4.00% 15.00% 0.1580 0.1580 16.1160 1.93 0.64 2.42 20.7960 2724

Aspertame Kg GBP 131.0000 10.32 12.00% 4.00% 15.00% 0.1032 0.1032 10.5264 1.26 0.42 1.58 13.5832 1779

Opadry CU M-3500 pharma grade Kg GBP 131.0000 0.65 0.00% 4.00% 15.00% 0.0065 0.0065 0.6630 0.00 0.03 0.10 0.7760 102

Talcum Powder Kg GBP 131.0000 8.2 25.00% 4.00% 15.00% 0.0820 0.0820 8.3640 2.09 0.33 1.25 11.8802 1556

Maize Starch Kg GBP 131.0000 0.35 12.00% 4.00% 10.00% 0.0035 0.0035 0.3570 0.04 0.01 0.04 0.4428 58

From this chart we can get the standard cost of raw material of ABC Tablet imported from foreign countries.

1.1.2 Standard Quantity of Raw Material (ABC Tablet)

The material quantity of ABC Tablet can be got from the following table:

Batch Size: 400,000 Tablets Department: Tablet

CODE MATERIAL Quantity

8001200 Alisone Hydrochloride BP *17.82

8007265 Lactose 170 Mesh 15.84

8003930 Gelatin Powder 2.178

8004270 Aspertame 8.585

8009095 Opadry CU M-3500 pharma grade **9.900

8009098 Talcum Powder **4.039

8009623 Maize Starch 27.72

* Contaning 30mg Alisone Hydrochloride

**includes approx. 5% process loss

Appearance : White capsule shape biconvex tablet having one face engraved with A

Compression weight: 45mg

Diameter : 5.0mm

Length : 10.00mm

Thickness : 4.0mm

Hardness : 10kp

Disintegration Time : After compression : less than 5 minutes

Compiled by: Checked by: Approved by:

Effective Batch No. 2008

Ref. DTM 29000. Version 11 dt. May 1986

Calculation: (per pack quantity)

MATERIAL Quantity

(Per Batch) Qty per Batch

Qty per pack =------------------------- Ч 500(pack size)

3,96,000(std. yield)

Alisone Hydrochloride BP 17.82 0.0225000

Lactose 170 Mesh 15.84 0.0200000

Gelatin Powder 2.178 0.0027500

Aspertame 8.585 0.0108400

Opadry CU M-3500 pharma grade 9.900 0.0125000

Talcum Powder 4.039 0.0051000

Maize Starch 27.72 0.0350000

1.2 Standard Cost of Packing Material (ABC Tablet)

1.2.1 Standard Price of Packing Material:

Description

Code

Unit

Price

Aluminium Foil 9090010 Kg 430.000

Printed Carton 9100010 No. 5.350

BOPP Tape-Opaque 9210370 Roll 85.000

BOPP Tape-Transparent 9210450 Roll 65.000

Fibrite Box 9200060 No. 27.500

Outer Label 9140090 No. 0.485

1.2.2 Standard Quantity of Packing Material:

Chittagong Bangladesh

GlaxoSmithKline BD Limited

Product & Packaging Development

Quality Assurance Department

PRODUCT PACK SPECIFICATION

Product: ABC 30mg Tablet 500’s Pack Code: A 76

(50Ч10 Tablets in strip)

CODE MATERIAL Quantity

9090010 Aluminium Foil 3.296 gm per strip

9100010 Printed Carton 1

9210370 Printed Self-Adhesive BOPP Tape-Opaque q.s.

9210450 Printed Self-Adhesive BOPP Tape-Transparent q.s.

9200060 Printed Corrugated Fibrite Box for 50 cartons 1

9140090 Self-Adhesive Outer Label 1

OVER PRINTING

Carton to be overprinted with:

Batch

MFG

EXP

MRP INCL. VAT

Strip to be overprinted with:

Batch

MFG

EXP

Corrugated fibrite to be labeled with one Outer label

Compiled by: Checked by: Approved by:

Calculation:

MATERIAL Quantity (per strip= 10 tablets)

Qty per stripЧ50

Quantity per pack= --------------------------

(kg) 1000

Aluminium Foil 3.296 gm per strip 0.16480

Printed Carton 1 1.00000

Printed Self-Adhesive BOPP Tape-Opaque q.s. n/a

Printed Self-Adhesive BOPP Tape-Transparent q.s. n/a

Printed Corrugated Fibrite Box for 50 cartons 1 0.02000

Self-Adhesive Outer Label 1 0.02000

After the calculation, the values will be transferred to the standard cost sheet added to get the standard cost of material.

2.0 Standard Cost of Direct Labour (ABC Tablet)

2.1 Standard Labour Hour:

2.1.1 Manufacturing Standard Hour:

Manufacturing standard hour can be calculated from the following table:

GlaxoSmithKline Bangladesh Limited

Production Department Manufacturing Standard

Department/Section

Product Name

Batch Size

Manufacturing Standard No.

Date issued

Tablet Manufacturing ABC Tablet 400,000 Tablets L-071F __/__/____

A. Total Clock minutes available: 550 minutes

B. 1) Lunch break 30 minutes

2) Tea break 30 minutes

3) Early Finish 05 minutes

C. 1) Set up time 10 minutes

2) Adjustment 10 minutes

3) Other (Foil Change) 25 minutes

D. Standard Packing Time (A-B) 485 minutes

Operations

Machine No. of Operators Std. output per day Std. Time per Batch Std. Man Hour per Batch

Granulation

Checking

Blending

Compression

Help to Machine Operator

Checking

Film Coating

Checking

Pharma Trisix 900

Cotagram

Malegan Dryer

CTZ Mb3

Manaser

2

1

2

1

1

1

2

1

1 batch with 1 hr OT

400000 Tablets

1 batch with 1 hr OT

540 minutes

180 minutes

60 minutes

1350 minutes

675 minutes

180 minutes

600 minutes

180 minutes

18.00

3.00

2.00

22.50

11.25

3.00

20.00

3.00

Notes: Last issue: Manufacturing Standard No. QNC-25

Dt. 25.07.2005

Total Man Hour per Batch

82.75

Prepared By Checked By Approved By

Next Review: October, 2010

Calculation:

Total manufacturing hour per batch = 82.75 hours

Total man hour per batch (82.75 hr)

Therefore, Total manuf. hour per pack= --------------------------------------------Ч500

Standard yield (3,96,000 tablets)

= 0.1044823 hours

2.1.2 Packing Standard Hour:

Packing standard hour can be calculated from the following table.

GlaxoSmithKline Bangladesh Limited

Production Department Packing Standard

Department/Section

Product Name

Pack Size

Packing Standard No.

Date issued

Tablet Packaging ABC Tablet 50Ч10’s=500’s P-099T __/__/____

A. Total Clock minutes available: 550 minutes

B. 1) Lunch break 30 minutes

2) Tea break 30 minutes

3) Early Finish 05 minutes

C. 1) Set up time 10 minutes

2) Adjustment 10 minutes

3) Other (Foil Change) 25 minutes

D. Standard Packing Time (A-B) 485 minutes

Operation

No. of Operators

Std.output per day

Std. time(min)

Std. Man Hour

Packing 9 2500 485 72.75

Cleaning - - - -

Total Standard Man Hour 72.75

Standard Man Hour per 1000 packs 29.10

Description of Work

No. of Operator

Machine Operation

Strip inspection & counting

Inserting 50 strips into carton & closing

Fixing sticker on carton & inserting carton into fibrite box, Fibrite box making closing with self

Adhesive tape, outer labeling & stacking on pallet

Team leading, documentation & in-process checking

2

1

2

2

2

Note: 1) Last issue: Packing standard No. M-02 D Dt. __/__/____

6(Six)

Machine

Machine speed per minutes

Total number of operators

Tansons 12 Track

Strip packing Machine

44Ч4=176 strip

Prepared By

Checked By

Approved By

Next Review: October, 2010

Calculation:

Standard packing hour for 2500 packs = 29.10 hours

Std. Pack hr for 1000 packs (29.10)

Therefore, standard packing hour for 1 pack = ---------------------------------------------

1000

= 0.02910 hours

Therefore, Total Standard Labour Hour = Standard Manufacturing Hour

+

Standard Packing Hour

= 0.1044823 hours + 0.02910 hours

= 0.1336 hours

2.2 Standard Rate of Direct Labour

Direct labour amount of a department

Standard Direct Labour hour rate = ----------------------------------------------------

Direct labour hour of that particular department

Standard Labour amount of tablet department can be got from the budget. It is the accumulated wage amount of all the workers in tablet department.

To calculate the total direct labour hour of the whole tablet department, we need to calculate the direct labour hour of all the tablets. These hours can be calculated by the previous section 2.1 .

After that, the total is done by the following way:

Tablet Name

Total

Batch to be Produced

(in 200_)

Manuf. Std Hour

(per batch)

Packing Std. hour

(per batch)

Total Std. Labour Hour

(per batch)

Total Std. Labour Hour

ABC 412 82.75 23.04 105.79 43585.48

X 330 51.62 20.5 72.12 23799.6

Y 228 101.1 24.65 125.75 28671

Z 280 91.34 25.4 116.74 32687.2

M 335 64.56 22.78 87.34 29258.9

N 290 74.85 23.67 98.52 28570.8

Total Hours 186573

Direct labour amount of a department

Standard Direct Labour hour rate = ----------------------------------------------------

Direct labour hour of that particular department

Budgeted Direct Labour Amount for tablet depart. in the year 200_= 2,08,46,000

( see page-__ in primary distribution as staff salary & benefit) tk

Therefore,

2,08,46,000

Standard Direct Labour hour rate = --------------------------------------------------------

186573

= 111.7 taka

3.0 Standard Cost of Overhead (ABC Tablet):

3.1 Standard Variable Overhead:

3.1.1 Standard Variable Overhead Rate:

Total variable overhead amount of Tablet dept.

Standard variable overhead rate = -------------------------------------------------------------

Total standard man hour of Tablet dept.

Total variable overhead amount (primary distribution) of Tablet dept.

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