costing evaluation for better productivity control

Costing Evaluation for Better Productivity Control

Costing Evaluation for Better Productivity Control

Sumit AgarwalShree Badri Kedar Papers Ltd.

Nazibabad

D K SinghalChandpur Enterprises Ltd.

[email protected]

By:

July, 16-17, 2009, IPPTA Zonal Seminar, Jaipur.

Costing…….…(Is it a way?)Costing…….…(Is it a way?)

Waste paper :Rs.9.00 Recovery (Yield) :80% Net Waste Paper Cost :Rs.11.25 Conversion :Rs. 8.75 Total Cost :Rs.20.00 Selling Price :Rs.21.00 Margin :Rs. 1.00

Fundamental Difference with Conventional AccountingFundamental Difference with Conventional Accounting

ApproachIn conventional accounting, approach is methodological. In the proposed system, the approach is more flexible. The management decides whether to take into account various aspects like excise, freight, commission, depreciation etc.


Capital InvestmentAs an asset in account books OR as money spent, for which a return will be available for the time to come. Depreciation- Value of asset decreases with time, but not as per the actual resale value.

Depre-ciat-ion! Sometimes, it may cause Depre-ss-ion (?)


InputsConsidered as consumed in account books.Considered as and when actually consumed in present case. Partial consumption may be accepted. Store virtually not considered as a part of mill operations.

Example: Wire life of 6 month.– 31 March, 1 September, 1 April One Wire– 1 April, 1 September, 31 March Three Wire


ProductConsidered sold when an invoice is raised.Considered sold to finished stock godown as and when produced.Virtually, one may assume that finished stock godown is an intermediate customer.


TaxationMODVAT is considered amount received.If input taxes are more, this amount only adds up in account books. Cost of input is considered as landed cost.


Inward FreightConsidered as a separate head.Is clubbed with the item procured.


Rounding OffAccount books must tally rupee by rupee and paisa by paisa.Remember your accounts department lost in books for just a couple of rupees mismatch?Minor rounding can be done. For an invoice value of Rs.3,67,539.47, it may be taken as 3,70,000 or something else. After all, this is just a tool to know where do we stand.

Development of Benchmarks Development of Benchmarks Yield of Waste Paper

Depending on past experience, a yield figure is accepted for every grade of waste paper and product.

A separate account is maintained for different grades of waste paper, considering daily consumption and purchase.

In case the physical estimated stock varies significantly from that in account, the yield figure is modified.

Development of Benchmarks Development of Benchmarks

Sample Calculation

Newsprint 40.956 T

ONP (@88% yield) 40.956/0.88 46.541 Cream Wove 18.749 T

ONP (33%, @82% yield) 0.33*18.749/0.88 7.031

Office Record (33%, @78% yield) 0.33*18.749/0.78 7.932

Old Books (34%, @82% yield) 0.34*18.749/0.82 7.774

Sample Account for Waste PaperSample Account for Waste Paper

Sl. Waste Paper Opening Balance

Received Consumed Closing Balance

1 Newsprint 120786 18740 53572 85954

2 Office Record 80326 NIL 7932 72394

3 Old Books 61742 9050 7774 63018

4 White Cuttings 24320 8800 NIL 33120

5 ….

287174 36590 69278 254486

TOTAL


Chemical Consumption Fixed Dose Chemicals- Retention Aid, DSR etc.

Consumption is proportional to production.

Fixed Purpose Chemicals- Alum, Rosin

A specific consumption per ton of paper is considered, and the figure is updated as and when required.


Boiler Fuel A specific fuel consumption figure is accepted based upon previous

experience. Typical figures for bagasse may look as-

Normal weather 700 kg/T

Rainy weather (wet bagasse) 850 kg/T

Very cold weather 750 kg/T

Here again, the figures may be revised after a few months of operation, if a significant difference is observed between the booked figures and actual stock position.

Electricity ConsumptionElectricity Consumption

Daily consumption figures from energy meter (Grid Power).

Actual consumption of Diesel (Electricity from DG)Use diesel consumption X cost of diesel X DG maintenance factor

Increased boiler fuel consumption figure (Own Turbine)Cost of (total fuel – fuel required for process)Cost of turbine maintenance

Daily ConsumablesDaily Consumables

Electrical: Fuses, Relays, contactors etc. Mechanical: Bearings, Nut, Bolt, Grease, Lubricants,

LPG, Oxygen, welding rods etc. Packing: Hessian, Core Plug, Labels etc. Misc.: ….

Fixed Expenses (Process)Fixed Expenses (Process)

Wire Felt Rolls Coating & Grinding Screen Baskets etc. Replacement of Equipments Continuing Process Up-gradation

Fixed or Variable cost? Wire (Rs.75 pmt or Rs.1,00,000 per month)………………...You Decide!

Fixed Expenses (General)Fixed Expenses (General)

Salary & wages Interest of financial institution Licensing etc. Car, Petrol, Travel, etc. Telephone

These are generally fixed, often with a minor variation.

Fixed ExpensesFixed Expenses

Cost of process fixed expenses may be considered as on per ton basis or per day basis.

Cost of general fixed expenses may be taken on per day basis.

Effect of Price FluctuationEffect of Price Fluctuation

An averaged base price is considered for the whole month or so.

After that, the base price may be revised according to actual conditions.

For seasonal items (like bagasse, old copy) this price may be considered as fixed for the whole year.

Because the product prices are not going to change frequently as per the prices of these items.

Input CostInput Cost

The sum of all input costs is taken as input cost.

Product CostProduct Cost

The cost of product is considered as if the product packed is being sold to market.

In other words, we may consider the finished product godown as a ghost customer.

Monitoring PeriodMonitoring Period

For most of the cases, it has been found that daily monitoring gives practically accurate results.

After a month or so, the profit statement can be cross checked by collecting more realistic data as indicated in next slide.

Sample Input CalculationSample Input CalculationSl. Inputs Weight Rate Value

1 Newsprint 53572 9 4821482 Office Record 7932 15 1189803 Old Books 7774 13 1010624 White Cuttings NIL 17 05 ….

A Waste Paper 69278 702190

1 Retention Aid 14 175 24502 AKD 400 29 116003 Rosin 100 29 29004 Alum 245 4.5 1102.55 UF Resin 185 18 33306 … 0

B Chemicals 21383

C Boiler Fuel 48495 1.5 72742

D Electricity 34500 4.25 146625

E Packing Material 15000

F Consumables 25793

G Fixed Expenses 120000

TOTAL Input 1077939

Sample Output & Profit CalculationSample Output & Profit Calculation

TOTAL Input 1077939

ProductionNewsprint 40956 17 696252Cream Wove 18749 24 449976……TOTAL Output 59705 1146228

Profit/Loss (Rs.) 68289Profit/Ton (Rs./Ton) 1.14

Cross CheckCross Check

Product cost = sum of product costs for the whole period. Product cost = Closing value of product in stock + Product

actually sold in rupees – Opening value of product in stock !!! Base price same for the period In case of substantial difference, check for the base price for its

correctness. Similarly, the inputs are to be checked.

OutcomeOutcome

In which grade of paper the profit is more? For lighter basis weight, the product prices are on a little higher

side. Is the price difference proper? Can a furnish change be considered to reduce input cost? What

would be the monetary gain? In case the production is increased, the impact on profit increase

is slight, normal or very high? In case machine had a poor run due to more joints, what

happens to profits?

Thank You.Thank You.

costing evaluation for better productivity control

Technology

finished stock godown

conventional accounting

fixed expenses

waste paper

base price

day basis

fundamental difference

input cost