Shahzabeen

Irsa Latif
Tayyab mazhar
Introduction
 Indus Motor Corporation (IMC) was incorporated in 1989 as a joint venture company.

 The Company manufactures and markets Toyota brand vehicles in Pakistan.

 The main product offerings ‘Corolla’ in the passenger cars category, ‘Hilux’ in the light
commercial vehicles segment and the ‘Fortuner’ Sports Utility Vehicle.

 The company moreover has 45 vendors within the country that provides IMC with
more than 150 million parts everyday
Benefits of Cost Accounting:

 Show the financial performance and results of any company in a way that is easy for the
audience.

 A key focus of managerial accounting is planning for the future. Managerial accountants
develop reports that are more detailed than financial accountants.

 The information obtained from managerial accounting gives managers a greater sense of
control over an organization's success.

 Since the information provided in managerial accounting reports are only used internally,
they do not have to adhere to generally accepted accounting principles, or GAAP.

 Contrary to financial accounting, which focuses on historical reports, managerial

 The Indus motor company uses a hybrid cost accumulation system in which they use a
combination of both; job and process costing.

 The units sold in 2018 were 64,000 and in 2017 were 60,586.
 Analysis of Income Statement
 The table shows that from 2015 to 2018 there has been a constant improvement in the
company’s performance in all aspects.

 From 2015-2016 the increase in revenue was 12.6%

 The increase between 2016-2017 was only 3.2% which was very low, however the increase
from 2017-2018 was back on track at 24% rate, which means 2017 revenue gain was lowest
and 2018 revenue increased greatly.

 Gross profit however increased a little from 11% to 22.9% between 2017 and 2018 if we
compare it with the increase between 2015-2016 that was 24.4.
 Administrative expenses increased at a very high proportion from 13% to 44% between 2017-
2018.

 The operating expenses however decreased from 22.9% between 2016-2017 to only 9.6%
increase compared to 2017-2018.

 The profit after tax was back on track in 2017-2018 with a rate of 21.3, which fell to 13.4%
between 2017-2018.

 Based on the information, it can be concluded that 2016-2017 was a difficult time for the
company as sales decreased and expenses increased however 2017-2018 year showed the
improvements and the company getting back on track.
Vertical Analysis
 The units sold in 2018 were 64,000 and in 2017 were 60,586.

 The vertical analysis of the income statement shows that the cost of sales have been pretty
much consistent against the net income i.e. it has been within the bracket of 81-83%.

 Majority of the expenses have been consistent as well with a very slight fluctuations of 1%.

 Profit after tax was 10.5% in 2016, 11.5% in 2017, and 11.2% in 2018, which again shows that
yearly the components of the income statement hasn’t seen much of a variation over the years.
Analysis of Cost of Goods Sold
 The table above shows the manufacturing account for IMC and how the company reach
to its Cost of Sales.
 This is to be kept in mind that IMC is involved both in trading in imported vehicles and
manufacturing its own vehicles, the ratio is 95% manufactured and 5% imported for
trading.
 The company is operating at a normal industry norm with 80% of the cost being direct
manufacturing of which 90% is variable. The fixed component is not very high.
 Second important thing is that the company also has very high work in process because
it is a stage by stage manufacturing process but the speed of manufacturing is high due
to high demand so a lot of semi-finished inventory is kept in order to meet demand
spikes.
Cost Break down: Fixed Cost
Variable Cost
Break-Even Analysis
 The table above gives the detail about the companies break-even analysis.

 Break-even analysis calculates what is known as a margin of safety(i.e. amount

 Indus motors reaches its break even point i.e. point of no profit no loss, on the revenue
of Rs.29420209.99 which is almost 20.92% of the amount of sales it has generated in
2018 of Rs.140,208,000.
 This is due to the fact that company has a very low fixed cost
component but the contribution ratio here is questionable as nearly
85% of the revenues are offset by the variable cost component,

 So far so good for IMC as it sits comfortably above its break-even

 These are just average figures, and the actual may vary to a great extent, since there is
always room for error in budgeting and forecasting.
 By taking the growth rates of years 2018, 2017 and 2016, the
average growth rates for 2019 have been calculated, and the income
statement items have been increased by these percentages as
shown in the table above.

 This approach is not very suitable because the growth rates for 2013
and 2014 have been negative but suddenly it spiked in 2015 due to
booming sales so it over exaggerated in 2016, which can be further,
analyzed in variance analyses
Variance Analysis
 This is the budgeted level 1 variance analysis for IMC. Variance analysis shows how a company is
able to predict its future and how close it is to the expectation of the future.

 This above table clearly shows a major difference in the budgeted and actual result which is due
to the reason that we have budgeted the future cost and revenues on the basis of past
performance.

 The company launched its earlier variant of Corolla is 2008 and from then onwards sale went
into decline in 2012 and 2013, so the company launched another variant of Corolla in 2017
actually.
 The budgeted data we estimated did not encompass this factor and Corolla being the highest
selling variant of IMC this has created a serious variance in revenues as well as cost and from
the looks of it,

 It is a favorable variance but it can clearly be seen as a weak budgeting technique to follow so
overall the company’s sales grew in 2018 but the budget technique is not very effective here.
Activity Based Costing
Conclusion & Recommendation
 The company is the largest manufacturer and seller of automobile in
Pakistan and has been operating since 1996 as the first Corolla was born
in 1996 and was amongst the pioneer of car development.

 The revenues have grown at an average of 10% since the inception and
have been the top manufacturer of automobile in Pakistan. The company
has serious issues with tax system of Pakistan as most of the revenues are
consumed by taxes and the only option to increase margins is to cut cost.

 The company enjoyed no competition for the last decade but since 2010
the competition from Honda, Suzuki and imported vehicles have
increased.
 Continues improvement is required in the cost structure as company also trades in
imported vehicles and has to charge a higher rate on it, although as per the financial
statement of the company the company is already following the Kaizen concept which
means continuous improvement.

 The company has very high variable cost dependency, which shows that the break-even
situation is good but according to a report on industry review IMC is on the brink of
over capitalization and has to increase capacity in near future.

 Lastly the ABC costing basis was allocated based on our knowledge of the course and
the figurers and allocation percentages was taken from the interview from the
management of the company, however because of these figures being based on
estimation, no proof comment can be made to the ABC costing and Budgeting of the
company.