A Report on Balanced Scorecard system of Premier Cement Ltd.docx

Origin of the report This assignment has been undertaken as a part of our course F-302 (Managerial Accounting) under the BBA program. The report under the headline "Balanced Scorecard and Master Budget Analysis of Premier Cement Ltd." has been prepared towards this purpose. Here we have selected Premier Cement Ltd. To show the process of Master Budget and Balanced Scorecard approach.

Objectives of the report The objectives of the report includes the following  Show the master budget of Premier Cement Ltd.  To learn about BSC.  To gain the knowledge of Strategic Management approaches and systems.  How balanced scorecard transforms strategy into action and desired behavior.  To know the application of BSC in real life.  Improve decisions and better solutions.

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Methodology For preparing the report we have collected data from Premier Cement Ltd. We have visited their business places for collecting data. Since the master budget and balanced scorecard is a modern accounting tool so it is not fully visible in all the business strategies. For preparing the report we have collected data what were available to them through annual reports and periodicals and assumed the rest necessaries to make the report a successful one.

Limitations of the report The major limitations we have encountered so far are:  Lack of experience on our part has acted as constraints in the way of meticulous exploration on the topic.  Lack of data.

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About Premier Cement Ltd. Premier Cement Mills Limited is one of the leading innovative cement manufacturers in Bangladesh. Manufacturing EUROPEAN standard product using the best raw materials and technical excellence for ensuring dependability and superiority of its outputs. The products provide strength and durability to buildings of high dimensions, roads, bridges, and infrastructure that speeds up the line of commerce, and to houses providing comfort and security to families across Bangladesh, India, Myanmar, etc. Premier Cement is known as one of the top cement brands in Bangladesh. Associated companies adhere to the same demanding standards as they provide construction materials such as Ready Mix Concrete, Block, Pipe, and other pre-stressed concrete units to the Government, Builders, and Manufacturers. They enjoy a good history as well as a sustaining reputation in Bangladesh. Premier Cement Mills started commercial production on March 12, 2004 with its 1st unit having a production capacity of 0.6 million tons per annum. In January 2011, Production Unit-2 was installed with a capacity of another 0.6 million ton per annum. From November 2012 Premier Cement started production with its 3rd and 4th Units, having a combined annual capacity of 1.2 million tons, in order to meet the additional market demand. Now the company runs with an annual production capacity of 2.4 million tons (8,000 tons per day) with 700 employees involved in its operation at both home and abroad. The company uses the most sophisticated cement plant namely FLS SMIDTH of Denmark, Packer from HAVER & BOECKER GmbH Germany and machineries maintaining European standards and qualities. The factory is located at West Muktarpur, Munshiganj. On the front side of the factory land is the Dhaka-Munshiganj road and on the rear side is the river Shitalakhya which meets with the river Dhaleshwari and further downstream, both the rivers falls into the mighty Meghna. Thus the factory site has marvelous accessibility both by land and river.

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Vision and Mission 

Work towards the development of the society through sustainable growth and high quality performance.



Provide satisfaction to customers, an enjoyable working environment for the employees & to create value for the stakeholders



They have very basic, well specified goals and objectives. These include:



To improve comprehensively on the current success areas.



To improve the brand image



To satisfy the customers.



To be among the top 5 cement manufacturers in Bangladesh,



To earn reasonable profits.



To capture the target market share.

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Balanced Scorecard A balanced scorecard can be thought of as a strategic chart of accounts for a company. Balance scorecard captures both the financial and non-financial elements of a business's strategy and it discusses the cause and effects of the relationships that drive business results. It is a combination of quantitative and qualitative measures; it acknowledges the expectations of the different stakeholders of a business and relates an assessment of performance to choice of strategy. Balanced Scorecard recognizes the need to identify and track a number of financial and nonfinancial measures to provide a broader view of the business. For this purpose, an organization is not limited to accounting data. A company may select indicators of Process, efficiency, safety and customer satisfaction or employee morale. This can capture information about current performance and emphasize leading indicators of future success. The objective is to produce a set of measures matched to the business so that performance can be monitored and evaluated. Balanced Scorecard was created by Robert Kaplan and David Norton to translate vision and Strategy into objectives. The balanced scorecard is meant to help managers keep their finger on the pulse of the business. Each organization will emphasize different measures depending on their strategy. Management is, in effect, translating their strategy into objectives that can be measured.

Features of Balanced Scorecard:    

It translates company strategy into performance measures It emphasizes on continual improvement It integrates financial measures with non-financial measures It provides with personal scorecard besides an overall balanced scorecard

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Balanced scorecard of Premier Cement Talking to the executives of Premier Cement we found that the company does not follow the balanced scorecard approach. But we asked them some qualitative questions regarding their product and production process and managed to gather some ideas on ways in which the balance scorecard of Premier Cement can be drawn. Premier Cement is known as one of the top cement brands in Bangladesh. The associated companies adhere to the same demanding standards as provided construction materials such as Ready Mix Concrete, Block, Pipe, and other pre-stressed concrete units to the Government, Builders, and Manufacturers. The company enjoys a good history as well as a sustaining reputation in Bangladesh. They import quality raw materials from different countries and carry on production maintaining the standards and technical excellence. They produce European standard product ensuring dependability and superiority of its outputs. During production process they give utmost importance to the safety issues of the employees and carry out rigorous maintenance of their machines. They look to ensure door to door delivery in time. They use latest IT equipment and constant surveillance. Premier Cement looks to train employees, improve interdepartmental communication and motivate the employees which will assist them to produce quality products. They also look for ways to reduce their delivery time. Following those processes they like to retain previous customers and looks to attract new customers. All these help Premier Cement to increase revenue and profit margin of the company. For all those process to be carried out properly Premier Cement can use the Balanced Scorecard.

Necessity of Balanced Scorecard to Premier Cement: Balance scorecard has been being used by many mangers, because it helps employees to focus their actions on executing organizational strategies. Under the balance scorecard approach, top management translates its strategy into performance measures that employees can understand and influence. Balanced Scorecards are seen as a strategic performance management tool and this can help identify, control and monitor any problems that arise within the organization therefore it would be wise for an organization to adopt the Balance Scorecard. Balanced scorecard can help Premier Cement in the following ways 

Improve processes Motivate and educate employees

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        

Monitors your organization progress Enhances your business information system It creates greater customer satisfaction Increases financial usage Builds on other management ideas Views the actual performances of the organization Performances are viewed and managed in an ongoing manner Enhances career development programs Improves productivity and innovation

Ways in which Premier Cement can prepare Effective Balanced Scorecard: Managers should carefully select performance measures for their own company’s balanced scorecard, keeping the following points in mindFirst and foremost, the performance measures should be consistent with, and follow from, the company’s strategy. If the performance measures are not consistent with the company’s strategies, people will find themselves working at cross-purposes. Second, the performance measures should be understandable and controllable to a significant extent by those being evaluated. Third, the scorecard should not have too many performance measures. This can lead to a lack of focus and confusion.

Barriers to Effective Balanced Scorecard: The implementation of the strategies undertaken by any corporation is the root of ultimate success. But a study shows that nine out of ten organizations fail to execute their business strategies properly. The underlying reasons are –  Misunderstanding of organizations strategies by the workforce  Fewer discussions in the strategy among the workforces  Budget confliction to the strategies  Less incentives linked to strategies

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How Premier Cement can link Balanced Scorecard to Strategy The Balanced Scorecard was created by Robert Kaplan and David Norton to translate vision and strategy into objectives. The balanced scorecard is meant to help managers keep their finger on the pulse of the business. Each organization will emphasize different measures depending on their strategy. Management is, in effect, translating their strategy into objectives that can be measured. The Measures help managers balance their focus between current and future performance. Premier Cement can follow simple but efficient protocol to gather information & feedbacks from respective fields. They can run their inter-functional assessments over the gathered information and take decisions to provide superior values to the customer. The link can be shown by the diagram below:

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How Balanced Scorecard can convert Premier Cement strategy into Action The balanced scorecard usually has four broad categories, such as financial performance, customers, internal processes and learning and growth. Typically, each category will have two to five measures. A sample is shown below:

Premier Cement can improve their business performance by maintaining proper balanced scorecard. The performance indicators can include improvement in the quality of product in factory, relationship with retailers and builders, economic development, development in safety standards. The scorecard provides flexibility in performance measures and the scorecard measures can be determined properly only if the overall strategy is understood.

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Breaking down the process in which the Premier Cement Balanced Scorecard can be prepared The strategy for Premier Cement is to retain and attract new customers with quality products. So they focus on the quality of the product. They do not compromise quality for cost. They want their product to be efficient and sustain natural calamity like earthquake. In the following diagram we tried to shoe the process in which Premier Cement can prepare their balanced scorecard and can improve financial performance through providing quality products. Different measures on balanced scorecard are selected based on the qualitative information we gathered:

Financial

Increase in total

Profit margin of

perspecti

revenue (+)

cement (+)

Customer

Quantity of

Retain previous

Attract new

cement sold

customers (+)

customer and

perspecti

increase

Produce

Internal business process

Learning and

cement with

Delivery cycle

quality raw

time

materials and

Train employee with new technology

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(-)

Improve inter department coordination with latest IT

Increase employee satisfaction by motivation,

(+) & (-) shows the desired changes Demonstration of the possible balance scorecard of Premier Cement:    

    

Premier cement needs to train its employees with modern technology and aware them of the safety issues that are needed to be followed during production. Improving the coordination between all the department is important because it reduces delivery time and helps to stay in one common objective. Increasing employee satisfaction will also encourage them to work efficiently and maintain timely delivery. Premier cement supplies cement to both consumer and industrial market. In both the markets the buyers will want to buy standard quality of cement with imported raw material and cement made with proper proportion of each materials using modern technology. Ensuing standard quality always add up to the quantity sold. Reduction in delivery time and on time delivery will always attract new customers and assist in retaining previous customers. Also proper packaging is necessary. Attaining the internal business process properly will increase the market share which will be beneficial in the long run. Finally increasing the quantity sold will increase the revenue and profit margin. So, profit will be attained which will increase the company value. A balanced scorecard will assist in growth and help Premier cement to sustain their reputation in the market.

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Master Budget Analysis A master budget is the central planning tool that a management team uses to direct the activities of a corporation, as well as to judge the performance of its various responsibility centers. It is customary for the senior management team to review a number of iterations of the master budget and incorporate modifications until it arrives at a budget that allocates funds to achieve the desired results. Hopefully, a company uses participative budgeting to arrive at this final budget, but it may also be imposed on the organization by senior management, with little input from other employees. The budgets that roll up into the master budget include:



A sales budget, including a schedule of expected cash collections



A production budget



A direct materials budget, including a schedule of expected cash disbursements



A direct labor budget



A manufacturing overhead budget



An ending finished goods inventory budget



A selling and administrative expense budget



A cash budget



A budgeted income statement



A budgeted balance sheet

Premier Cement Ltd follows the master budget process but they mainly emphasis on the cash budget, budgeted income statement and budgeted balance sheet. With the help of our text book and the information provided by the Premier Cement personnel we have prepared the other budgets. Most of the information used in these budgets is hypothetical because Premier Cement has a variety of materials used in production and complexity as well as vagueness is found everywhere in the annual report provided by the company.

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Sales Budget The sales budget is the starting point in preparing the master budget. It is an Operating plan for a period expressed in terms of sales volume and selling prices for each class of product or service. Preparation of a sales budget is the starting point in budgeting since sales volume influences nearly all other items. According to their master budget Premier Cement Mills Limited plans to sell Bags worth 6141 million taka and the average selling price of all their bags will be around 690 taka Premier Cement Mills Limited Ltd. Sales Budget For the Year Ended June 30, 2013 Quarter

Budgeted Sales Selling Price Total Sales (in millions)

1

2

3

4

Year

2150000

2556,000

2596,000

1598,000

89,00,000

690

690

690

690

690

1483.50

1763.64

1791.24

1102.62

6141.00

A schedule of expected cash collections is prepared after the sales budget. Cash collections consist of collections on credit sales made to customers in prior periods plus collections on sales made in the current budget period. At Premier Cement Mills Limited, 90% of sales are collected in the quarter in which the sale is made and the remaining 10% are collected in the following quarter. The accounts receivable at the end of the year is estimated to be 109.65 million taka.

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Schedule of Expected Cash Collections (in millions) Quarter 1 Accounts Receivable, Beginning Balance First-Quarter Sales

2

3

4

46.22 1335.15

Second-Quarter Sales

46.22 148.35

1483.50

1587.27

176.36

Third-Quarter Sales

1763.64

1612.11

Fourth-Quarter Sales Total Cash Collection

1,026.28

Year

723.24

688.8

179.12

1791.24

992.35

992.35

998.76

6076.95

Production Budget The production budget is prepared after the sales budget. It sets forth the units expected to be manufactured to satisfy budgeted sales and inventory requirements. Expected production volume is determined by adding desired ending inventory to planned sales and then subtracting beginning inventory. Premier Cement Mills Limited management believes that an ending inventory equal to 10% of the next quarter’s sales strikes the appropriate balance. Premier Cement Mills Limited Ltd. Production Budget For the Year Ended June 30, 2013 Quarter

Production Add desired ending inventory of finished Goods Total Needs Less beginning inventory of finished goods Total production 17 | P a g e

1

2

3

4

Year

2150000

2556,000

2596,000

1598,000

89,00,000

255600

259600

159800

170000

170000

2405600

2815600

2755800

1768000

9070000

(257000)

(255600)

(259600)

(159800)

(257000)

2148600

2560000

2496200

1608200

8813000

Direct Material Budget How much material will be required for production and how much material must be bought to meet this production requirement depends on both expected usage of materials and inventory levels. Premier Cement Mills Limited has estimated that their budgeted direct material sale 2494.07million taka. That means the production of each Bag will need raw materials worth 283 taka. Premier Cement Mills Limited Ltd. Direct Material Budget For the Year Ended June 30, 2013

Quarter

Required Production Cost of Raw Materials per Bag of Cement Cost of Raw materials (in millions)

1

2

3

4

Year

2148600

2560000

2496200

1608200

8813000

283

283

283

283

283

608.05

724.48

706.42

455.12

2494.07

The direct materials budget is usually accompanied by a schedule of expected cash disbursements for raw materials. This schedule is needed to prepare the overall cash budget. Disbursements for raw materials consist of payments for purchases on account in prior periods plus any payments for purchases in the current budget period. At Premier Cement Mills Limited, the policy is to pay for 60% of purchases in the quarter in which the purchase is made

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and 40% in the following quarter. The accounts payable at the end of the year is estimated to be around 182.04 million taka.

Schedule of Expected Cash Disbursements (in millions) Quarter 1 Accounts Payable, Beginning Balance First-Quarter Purchases Second-Quarter Purchases Third-Quarter Purchases Fourth-Quarter Purchases Total Cash Disbursements

2

3

4

153.50 364.83

153.50 243.22 434.68

608.05 289.79 423.85

518.33

Year

677.90

713.64

724.48 282.56

706.42

273.07

273.07

555.63

2465.52

Manufacturing Overhead Budget The manufacturing overhead budget contains all manufacturing costs other than the costs of direct materials and direct labor (which are itemized separately in the direct materials budget and the direct labor budget). The information in the manufacturing overhead budget becomes part of the cost of goods sold line item in the master budget. At Premier Cement Ltd. the estimated amount of manufacturing budget is 445.61 million taka which implies that the manufacturing budget for per bag of cement is around 164 taka. The depreciation amount in manufacturing overhead is 157 million which is depreciated over a straight line basis over the quarters.

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Premier Cement Ltd. Manufacturing Overhead Budget For the Year Ended June 30, 2013

Quarter

Required Production Manufacturing Overhead per Bag of Cement Total Manufacturing Overhead (in millions) Less Depreciation (in millions) Cash Disbursements (in million)

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1

2

3

4

Year

6,79,372

5,00,000

5,85,000

9,53,116

27,17,488

164

164

164

164

164

111.4

82

95.9

156.31

445.61

(39)

(39)

(39)

(39)

(157)

72.4

43

56.9

117.31

288.61

Direct Labor Budget The direct labor budget is used to calculate the number of labor hours that will be needed to produce the units itemized in the production budget. The direct labor budget is useful for anticipating the number of employees who will be needed to staff the manufacturing area throughout the budget period. This allows management to anticipate hiring needs, as well as when to schedule overtime, and when layoffs are likely. The budget provides information at an aggregate level, and so is not typically used for specific hiring and lay off requirements. Premier Cement has estimated their direct labor to be 65.09 million taka for 27, 17,488 bags of cement which means their labor cost per bag is 23.95 taka.

Premier Cement Ltd. Direct Labor Budget For the Year Ended June 30, 2013

Quarter

Required Production Labor Cost per Bag of Cement Total Direct Labor cost (in millions)

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1

2

3

4

Year

6,79,372

5,00,000

5,85,000

9,53,116

27,17,488

23.95

23.95

23.95

23.95

23.95

16.27

11.975

14.01

22.83

65.09

Ending Finished Goods Inventory Budget

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Selling and Administrative Budget

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Cash Budget

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Budgeted Income Statement

Primer cement Ltd. Budgeted Income Statement For the Year Ended June 30, 2013

Amount in Taka (in millions) Turnover Cost of Goods Sold Gross Profit Administrative Expenses Profit from Operation

6141.00 (3510.494) 2630.506 50.51 2579.996

Finance Cost

120.79

Profit before tax

2459.21

Provision for income tax Total Comprehensive Income for the year

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-2459.21

Budgeted Balance Sheet Premier Cement ltd. Budget Balance Sheet June 30, 2013 ASSETS Amount in Taka(million) Non-Current Assets Property, Plant & Equipment Capital work in progress

1289.313 82.91

Current Assets Inventories

61.37

Trade and other receivables

46.23

Advances, Deposits & Prepayments

71.87

Cash and Cash Equivalents TOTAL ASSETS

5.18 1556.876

EQUITY AND LIABILITIES Shareholder's Equity

327.488

Issued Share Capital

175.00

Retained Earnings(loss) Tax holiday reserve

(59.786) 2.274

Share money deposit

210.000

Non-Current Liabilities

536.297

Long Term Loan

536.297

Current Liabilities and Provisions

693.090

Short Term Loan

400.342

Trade and other payable

36.069

Premier cement mills ltd.

252.491

Provision for Income Tax

252.491

Total Equity and Liabilities 26 | P a g e

1556.876

References 1. Annual Report of Premier Cement 2. Website of Premier Cement

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