Page 20 - DCOM202_COST_ACCOUNTING_I

Cost Accounting – I

Notes
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Case Study Mhlume Sugar Company Limited: A Case Study in

Costing & Pricing

Robert L. Hurt Accounting

This article discusses a field study of Mhlume Sugar Company Limited. The main
motivation for the study was to observe, discuss, and learn about Mhlume’s activity-
based costing system in order to reflect upon some fundamental issues regarding costing
and pricing. This article describes: (1) the physical process of sugar refining, (2) the basic
nature and principles of activity-based costing (ABC), and (3) the accounting issues raised
by Mhlume’s operation, including their application of activity-based costing and transfer
pricing considerations in their operation.
The Sugar Refining Process

Mhlume’s operation is set up in two basic parts. The estate operation is concerned
with cultivating and harvesting the sugar cane and transferring it to the mill; the mill
operation then takes the raw sugar cane and processes it into brown sugar. (Making white
sugar involve further processing which the Mhlume mill is not equipped to do at this
time.)

The estate’s harvesting cycle begins roughly around 1 May each year and ends roughly
in November or December. (The company’s fiscal year also coincides with its physical
operations.) Harvesting the cane involves two basic steps. First, the standing fields of
sugarcane are burned. Burning removes the leaves from the standing cane and facilitates
the harvesting process. Without the process of burning the fields, the cane would have to be
harvested with its leaves intact; the leaves would then have to be removed during the mill
process. Further, burning the fields heats up the sucrose inside the cane, making it easier
to work with. In addition, burning the fields drives away the native snakes, making it safer
for the workers to cut the cane. Eventually, environmental laws in Swaziland may prohibit
burning the fields prior to harvest; at that time, Mhlume and other sugar processing plants
will have to revise their harvesting and milling procedures. After burning the fields, the
sugar cane is harvested. Migrant workers are engaged each year to cut down the cane
by hand. Workers are paid a fixed daily salary with the possibility of earning incentive
pay for cutting more than their daily quota. Harvesting the cane is a very labor intensive
process, making it well-suited to the Swazi economy, where labor resources are plentiful
but machinery is not. The cut cane is transported to Mhlume’s mill. On arrival at the mill,
the cut cane is crushed to extract the liquid from its core. (The crushed cane can then be
burned, producing the by product bagasse, which is used to fuel the mill’s machinery.)
The liquid is heated, causing the sucrose to fall to the bottom where it can be collected
for further processing. At this point, the sucrose itself is dark and thick, resembling
molasses (indeed, molasses is the other by product of the process). Chemicals are added
to the sucrose to cause crystallization into the brown sugar that is the mill’s principal
product. With good soil, sugar cane is a perennial; that is, the cane will grow back every
year without replanting. However, because the Mhlume estates have poor soil, the cane
must be replanted approximately every five years. A specially grown seed cane is used to
re-plant the fields on a rotating basis. Mhlume produces about one-third of Swaziland’s
total sugar output annually (the kingdom’s total annual sugar output is about 450,000
tons). Approximately one third of the kingdom’s total output is used internally, with the
remaining two-thirds being sold on the world market.
Contd…

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