Tariq Glass Industries

Tariq Glass Industries
TABLE OF CONTENTS:

Executive Summary 3
Introduction 4
Cost Methods Used 6
Analysis of Income Summary 7
Analysis of Cost of Goods Sold Statement 9
Application of Activity Based Costing 11
Break – Even Analysis 12
Evaluating Annual Results to orient the outsider 13
Conclusion & Recommendations 14
References 15
Appendix 16

 
Executive Summary

Over the last twenty years, Tariq Glass Industries Ltd. has excelled in the art of glass manufacturing. The company has gained immense popularity under the brand names of Toyo Nasic, Omroc and Nova. Today it has become a reliable house hold name in Pakistan. This company enjoys a competitive superiority over its rivals primarily because the glassware produced in this firm is of matchless quality. Tariq Glass Industries also offers extensive variety in terms of its products, which attracts consumers from all regions of the country. Moreover the company runs operations in the international markets as well across Europe, Middle East, Africa, Asia and the Far East. Presently the Managing Director or the CEO of the company is Mr. Tariq Baig.
This report presents a brief, yet comprehensive analysis of the financial position of the company in terms of its financial statements and the cost methods used for valuing the inventory. The report covers tenure of three years starting from the year 2007 up till the present year 2009. A careful analysis reveals that the company earned reasonable profits in the year 2007 and the preceding years. But since 2008 due to various macro economic factors and some internal policies the company is facing tremendous losses. The major reason for these losses is attributed to external factors. These factors include the financial crunch that has devoured the financial systems of the world as well as political instability in our country. Certain other factors include rampant inflation. Due to rising prices the manufacturing process has turned out to be very expensive resulting in relatively lower profits. These factors have resulted in inefficient operations because of rising expenses and diminishing revenues.
Lastly the report concludes by summarizing the major causes of the present financial position of the company. Various financial ratios have been computed which outline the underlying factors for the unsuccessful operations of the company. The final analysis indicates that the financial position can be improved by efficiently managing the production process in accordance to the macroeconomic factors. This will result in lower per unit costs. Moreover the cost systems must be cautiously evaluated so that they represent true costs for the inventories. Certain employees can also be laid off to reduce expenses.
 
Introduction
Tariq Glass Industries Limited was formerly known as Nasir Saddique Corporation of Pakistan Limited and more popularly recognized as Toyo Nasic. The company was established in 1981 as a public limited company. The project was set up with the Technical assistance of Toyo Nasic Glass of Japan which is the leading manufacturer of Glass ware in Pakistan.
Over the last twenty years, Tariq Glass Industries Ltd. has excelled in the art of glass manufacturing. Under the popular brand names of Toyo Nasic, Omroc and Nova, Tariq Glass Industries Ltd. has become a reliable house hold name in Pakistan. By fulfilling the needs of quality glass tableware and nurturing the basic ingredients of Quality, Variety, Reliability and above all having a Competitive Edge, Tariq Glass Industries Ltd. is now the market leader in Pakistan. This success is now fast spreading to international markets across Europe, Middle East, Africa, Asia and the Far East. The backbone of Tariq Glass Industries Ltd. is a team of qualified, experienced and dedicated professionals with a proven expertise along with a staunch backing through technical collaboration with Toyo Glass of Japan.
Production Capacity
The plant boasts a production capacity of almost 200 metric tons of glass tableware per day, having a combination of single and double gob press machines as well as H-28 press and blow machines for light weight product ranges.
Decorating Facilities
For the creative and decorative needs of our clients, Tariq Glass Industries Ltd. has the facility of a fully automated, state-of-the-art printing machine, with the capability of printing six colors simultaneously, including quality gold and silver banding.
Warehousing
To ensure uninterrupted and consistent supply of goods to valued clientele, an all weather warehousing facility caters for raw materials, packing goods as well as finished products storage.
Quality
Tariq Glass Industries Ltd. stands committed as a team to manufacture quality glass tableware products through dedication, creativity, experience and technology. Their focus is striving not only to meet the expectations of their clientele, but also their imaginations. Their journey continues towards excellence.
Quality Assurance
At Tariq Glass Industries Ltd. assuring quality starts with a careful selection of indigenously available raw materials, which are processed through a most modern and fully automated plant. Quality Assurance at every step is constantly monitored by their experts through a fully equipped on site laboratory.
 
Cost Methods Used

As Tariq Glass industries mainly deals with the glass making including bottling and many more. Company basically uses two cost methods which are job order costing; it is the cost system which provides a method for tracking resource consumption directly to individual product. In this type of cost system cost of direct material, direct labour and overhead are accumulated separately for each job. Second one is the Activity Based Costing, it is an overhead allocation method that uses multiple overhead rates to track indirect cost by the activities that consume those cost. In activity based costing many different activity bases or cost drivers are used in applying overhead cost to products. Thus activity based costing recognizes the special overhead considerations of each product line. Other than this activity based costing provides management with information about the cost of performing various overhead activities.
As this company is engaged in diverse production activities so it uses both above prescribed cost accounting system, the overhead application rate using job order costing is determined by the given formula:

Overhead Application Rate = Est. Overhead Cost / Est. units in the activity base


 
Analysis of Income Summary

INCOME STATEMENT ANALYSIS

2007 2008 2009
Sales 1,108,446,723 1,174,459,701 1,409,803,158
Cost of goods sold 908,757,268 1,054,201,600 1,282,562,334
Gross profit 199,689,455 120,258,101 127,240,824

Operating Expense:
Administrative 29,340,674 31,917,516 32,040,086
Selling and Distribution 54,551,193 54,069,253 75,479,250
83,891,847 85,986,769 107,519,336
Operating Income 115,797,588 34,271,332 19,721,488
Financial charges 33,699,627 34,636,004 56,353,274
82,097,961 (364,672) (36,631,786)
Other Income 970,704 478,110 70,042
83,068,665 113,438 (36,561,744)
Other Expenses 5,700,790 5,209,669 -
Profit/loss before tax 77,367,875 (5,096,231) (36,561,744)

Tax amount 27,041,619 12,054,694 5,859,010
Profit/loss after tax 50,326,256 (6,958,463) (30,702,734)

An income statement is a summarization of a company's revenue and expense transactions for a particular period of time. The income statement reports on the financial performance of the company in terms of earning revenue and incurring expenses over a period of time and explains how the company's financial position changed between the beginning and end of that period. Therefore it is extremely important for the company's owners, creditors and other interested parties to adequately understand the income statement, because ultimately the relative success or failure of a company is based upon its ability to earn revenues in excess of its expenses. Once a company's assets are acquired and the business process is initiated, the revenues and expenses are important dimensions of a company's operations.
The table above illustrates the financial performance of Tariq Glass Industries, in terms of its income statements for three consecutive years. These income statements reveal the amount of profit and loss incurred by the company for the years 2007, 2008 and 2009. We have observed that in the year 2007 the company earned a net profit amounting to 50,326,256 which was slightly greater than the profit of the year 2006 which was 49,112,726, thereby revealing smooth operations. Now if we analyze the figures of the year 2008, it is observed that sales figures rose as compared to the sales figures for the previous year, but due to rising inflation rates and the dreaded financial crisis the cost of goods sold and other expenses also increased considerably, which resulted in a lesser operating income or a net loss of 6,958,463.
In the year 2009 the company again incurred a significant net loss amounting to 30,702,734, which is almost five times greater than the previous year's loss. This is primarily due to the political instability in the country, the financial crisis and soaring inflation rates. Although sales figures enhanced in the year 2009, but consequently the cost of goods sold also increased manifold. Even after the increase in cost of goods sold figures the gross profit was still greater than the preceding years' gross profit. But the selling and distribution expenses also increased significantly, which greatly offseted the gross profit. The cumulative effects of all these changes resulted in a lower operating income as compared to the preceding years and therefore a net loss was incurred.
All in all it can be stated that the income statements for the past three years reveal that Tariq Glass Company is in a weak financial position due to various internal and external factors. The owners of this company need to initiate drastic measures in order to control their losses and improve their financial position. These measures may include a cost efficient production process and significant reduction in expenses. 
Analysis of Cost of Goods Sold Statement

COST OF GOODS SOLD ANALYSIS

2007 2008 2009
Direct Material
Raw material consumed 249,131,532 277,538,301 324,517,791
Packaging material consumed 121,307,354 117,462,993 175,336,958
Direct Labor
Salaries, wages and other benefit 140,182,082 177,168,480 222,976,693
Manufacturing Overhead
Stores and spares consumed 43,225,138 73,354,553 62,967,856
Fuel and power 289,128,308 323,853,591 387,568,006
Depreciation 51,381,351 57,968,756 88,537,394
Carriage and freight 3,832,906 5,957,782 4,665,431
Repair and maintenance 4,169,813 5,037,167 8,319,414
Travelling and conveyance 4,306,285 7,585,491 8,307,241
Insurance 2,242,276 2,647,275 3,286,869
Postage and telephone 687,974 850,956 1,009,267
Rent, rates and taxes 959,138 1,845,518 1,002,630
Printing and stationary 110,903 111,425 232,526
Entertainment 96,198 131,200 301,200
Others 2,340,084 3,253,502 4,679,865
Total Manufacturing Cost 913,101,342 1,054,766,990 1,293,709,141
Work in process
Opening 5,006,759 5,466,576 7,425,414
Closing 5,466,576 7,425,414 11,007,463
Cost of goods manufactured 912,641,525 1,052,808,152 1,290,127,092
Finished goods inventory
opening 19,874,464 23,758,721 22,365,273
Closing 23,758,721 22,365,273 29,930,031
COST OF GOODS SOLD 908,757,268 1,054,201,600 1,282,562,334

Above given table includes cost of goods sold during the three executive years which are 2007, 2008 and 2009. Cost of goods sold includes direct material, direct labour and finally manufacturing overhead. As cost of goods for year 2007 is 908575268 and a major portion includes manufacturing overhead. As we look at 2008 cost of goods sold it comes out to 1054201600 which is greater than 2007 cost, main increase in cost are because of salaries paid to labour and the rent paid or taxes paid, company work in process and finished goods inventory also increases compared to last year inventory. 2009 in which the cost of goods sold results to 1282562334 a higher value compared to last year, the major reasons behind this increased value is the increase in direct material cost because of increased inflation and the overhead component which is fuel and power and this is because of high load shedding and increase in petroleum prices. So company cost of good increase every year results in a short of profits every year.
 
Application of Activity Based Costing

Tariq glass industries also uses activity based costing in which the overhead cost is allocated to two different cost pools and these cost pools are then driven by different cost drivers. The overhead is distributed on the basis of number of employees working on a particular department. The two cost pools are ordering and inspecting cost pools and these pools are driven by the crushing and moulding drivers.
We assume that during the present year, 2009, overhead accounts to 746,214,657 which is to be spread in the above given cost pools. The ratio of splitting cost among both cost pools is based upon the number of employees working in each department. Total employees working at ordering are 40 and on inspection are 60 so the cost comes out to be:
Total Overhead 100% 100
Ordering 40% 40
Inspecting 60% 60

Total Overhead 100% 746,214,657
Ordering 40% 298,485,863
Inspecting 60% 447,728,794

Now assigning cost to the cost drivers of individual cost pool:

Ordering cost pool:
Ordering Overhead 100% 10,000
Purchase orders for crushing 20% 2,000
Purchase orders for moulding 80% 8,000

Ordering Overhead 100% 298,485,863
Purchase orders for crushing 20% 56,997,173
Purchase orders for moulding 80% 241,488,690

Inspection cost pool:
Inspection Overhead 100% 2,400
Inspection for crushing 75% 1,800
Inspection for moulding 25% 600

Inspection Overhead 100% 447,728,794
Inspection for crushing 75% 335,796,596
Inspection for moulding 25% 111,932,198

This is how the overhead cost is spitted to different cost pool and then to their respective cost driver by defining stated percentages according to which the total overhead cost is divided among each activity pool. The values for splitting cost using Activity Based Costing are based upon assumed percentages. 
Break – Even Analysis

Break Even analysis helps to decipher exactly how much dollar sales or units are to be produced so that a company will be in a position of no profit no loss.
The total cost incurred by the company in 2009 is 1,293,709,141 in which fixed cost totalled 547,494,484 and variable cost was 746,214,657. Company produces 1 million units throughout the year 2009 so break even in dollars and units come out to be:
Contribution margin per unit = Sale price – variable cost
= 1293.71 – 746.21 = 547.5
Contribution margin ratio = Sale price – variable cost / sale price
= 1293.71 – 746.21 / 1293.71 = 0.4231
Break even in rupees = Fixed cost + Target Operating Income / Contribution margin ratio
= 547,494,484 + 0 / 0.4231 = 1,294,007,289
Break even in units = Fixed cost + Target Operating Income / Contribution margin per unit
= 547,494,484 + 0 / 547.5 = 999,990 units.
Assuming that company has not estimated any operating income so the contribution margin per unit comes out to be 547.5 Rs and break even in units are 999,990 units. These are the units that the company should sell in order to be at breakeven point. While calculating the amount of sales in rupees required for the company to breakeven, the value turns out to be approximately 1.2 billion rupees for the year 2009.  
Evaluating Annual Results to orient the outsider

Observing the past year performance of Tariq glass industries, the company has borne heavy losses in the last two years due to political instability, global recession and rising inflation. By analyzing the income statement of the company one concludes that investors would be unwilling to invest in the stocks of this company, but other than the income statement some financial ratios are used in order to detect the liquidity position of the company. This data is for the years 2007 up till 2009 while setting benchmark year 2007.
Year 2007
Current Ratio = Current Asset/Current Liability 1.1
EPS = Net profit/No of shares 3.85
Debt Equity Ratio = Debt / Equity 50.83%

Year 2008
Current Ratio = Current Asset/Current Liability 1.04
EPS = Net profit/No of shares -0.83
Debt Equity Ratio = Debt / Equity 27.68%

Year 2009
Current Ratio = Current Asset/Current Liability 1.04
EPS = Net profit/No of shares -1.33
Debt Equity Ratio = Debt / Equity 38.59%

The current ratio has increased from the base year and has remained relatively same in 2008 and 2009 due to increase in stores and spares. If we take inventory into consideration then it is not a good thing as either it is stockpiled with the company or it is not utilized properly. The company doesn't have an ideal ratio that is 2:1 but it covers all the current liabilities.
The EPS ratio has gone negative in 2008 and 2009 because the company incurred heavy losses during these years. Debt Equity Ratio tells what percentage of equity is financed by debt. If the ratio of debt is high it is considered good as the company gets the hedge and tax shelter. The ratio should not exceed 50% as then it will be difficult to pay off the debts. Well as in 2008 and 2009 it hasn’t gone very high so it’s reasonable. 
Conclusion & Recommendations

To conclude, the income statement clearly depicts heavy losses which the company has gone through in the last two years. It is indeed an alarming situation and certain measures should be taken. The losses are mainly due to rising Inflation rates which have shot up in the current times, the expenses and the costs have increased much. Moreover there is overall global recession which has made everything even worse. Another major reason is political instability in Pakistan.
After looking at the ratios which are deduced from company’s figures it is seen that the company is going through losses and they are to be rectified in some way. This can be done through effective cost management at internal level. They should increase their current ratio level. As this shows that the company has enough assets to cover its liabilities. It is actually a guide to the magnitude of the financial margin of safety.
Most of the losses which they are bearing are due to external effects so if government changes some policies and reduce the overall inflation rate. This would reduce the overall input costs. But internally what the company can do is that it can manage its costs in a better way, effective management of cost systems may reduce their overall expenses. The company can also lay off certain employees in order to reduce salary expenses. So by taking into consideration all or some of the above stated recommendations the company can improve its current situation.
 
References

www.tariqglass.com
http://www.researchandmarkets.com/reports/585535
http://www.pakboi.gov.pk/pak/xdetail.asp?ComID=26391
http://it.glassglobal.com/directory/glass/profile/default.asp?ID=34336
http://www.alacrastore.com/company-snapshot/Tariq_Glass_Industries_Limited-2515850
http://www.docstoc.com/docs/17455272/TOYO-NASIC-TARIQ-GLASS-INDUSTRIES-LIMITED
http://www.tariqglass.com/tgiadmin/financials/THIRD%20QUARTERLY%20ACCOUNTS%20MAR-2006.pdf

 
Appendix

The annual report is attached for further reference.