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INTTRODUCTION:
It is better to review the basics concepts, costing methods and techniques
and elements of costing before we work out a costing for a spinning mill.
Cost accounting is a system of determining the costs of products or
services. It has primarily developed to meet the needs of management. It
provides detailed cost information to various levels of management for
efficient performance of their functions.
Financial accounting provides information about profit , loss, cost etc., of
the collective activities of the business as a whole. It does not give the
data regarding costs by departments, products, processes and sales
territories etc. Financial accounting does not fully analyse the losses due
to idle time, idle plant capacity, inefficient labour, sub-standard
materials, etc. Cost accounting is not restricted to past. It is concerned
with the ascertainment of past, present and expected future costs of
products manufactured or services supplied. Cost accounting provides
detailed cost information to various levels of management for efficient
performance of their functions.
"A cost is the value of economic resources used as a result of producing or
doing the things costed"
Cost is ascertained by cost centres or cost units or by both.
For the purpose of ascertaining cost, the whole organisation is divided into
small parts of sections. Each small section is treated as a cost centre of
which cost is ascertained. A cost centre is defined as " a location, person,
or item of equipment(or group of these) for which costs may be ascertained
and used for the purpose of control. A cost accountant sets up cost centres
to enable him to ascertain the costs he needs to know. A cost centre is
charged with all the costs that relate to it. The purpose of ascertaining
the cost of cost centre is cost control. The person in charge of a cost
centre is held responsible for the control of cost of that centre.
Cost unit breaks up the cost into smaller sub-divisions and helps in
ascertaining the cost of saleable products or services. A cost unit is
defined as a " unit of product , service or time in relation to which cost
may be ascertained or expressed." For example in a spinning mill the cost
per kg of yarn may be ascertained. Kg of yarn is cost unit. In short Cost
unit is unit of measurement of cost.
METHODS OF COSTING:
Method of costing refers to the techniques and processes employed in the
ascertainment of costs. The method of costing to be applied in a particular
concern depends upon the type and nature of manufacturing activity.
Basically there are two methods of costing
1.Job costing: Cost unit in job order costing is taken to be a job or
work order for which costs are separetely collected and computed.
2.Process costing: This is used in mass production industries
manufacturing standardised products in continuous processes of manufacutring.
Cost are accumulated for each process or department. For spinning mills ,
process costing is employed.
TECHNIQUES OF COSTING:
These techniques may be used for special pupose of control and policy in
any business irrespective of the method of costing being used there.
Standard costing: This is the valuable technique to control the cost.
In this technique, standard cost is predetermined as target of performance
and actual performance is measured against the standard. The difference
between standard and actual costs are analysed to know teh reasons for the
difference so that corrective actions may be taken.
Marginal costing: In this technique, cost is divided into fixed and
variable and the variable is of special interest and importance. This is
because, marginal costing regards only variable costs as the costs of
products. Fixed cost is treated as period cost and no attempt is made to
allocate or apportion this cost to individual cost centres or cost units.
Cost Ascertainment is concerned with computation of actual costs.
Ascertainment of actual costs reveals unprofitable activities losses and
inefficiencies .
Cost Estimation is the process of predetermining costs of goods or
services. The costs are determined in advance of production and precede the
operations. Estimated costs are definitely the future costs and are based on
teh average of the past actual costs adjusted for future anticipated changes
in future. Cost estimates are used in the preparation of the budgets. It
helps in evaulating performance. It is used in preparing projected financial
statements. Cost estimates may serve as targets in controlling the costs.
CLASSIFICATION OF COSTS:
Costs are classified into direct costs and indirect costs on the basis of
their identifiability with cost units or processesses or cost centres.
DIRECT COST: These are the costs which are incurred for and
conveniently indentified with a particular cost unit, process or equipment.
For a spinning mill, costs of rawmaterial used, packing material, freight
etc are direct costs
INDIRECT COST: These are general costs and are incurred for the
benefit of a number of cost units, processes or departments.
These costs cannot be conveniently identified with a particular cost unit or
cost centre. In a spining mill, power cost, administrative wages, managerial
salaries, materials used in repairs etc are indirect costs.
The terms direct and indirect should be used in relation to the object of
costing. An item of cost may be direct cost in one case and the same may be
indirect in the other case.It is the nature of business and the cost unit
chosen that will determine whether a particular cost is direct or indirect.
FIXED AND VARIABLE COSTS; Costs behave differently when level of
production rises or falls. Certain costs change in sympathy with production
level while other costs remain unchanged. As such on the basis of behaviour
or variability, costs are classifed into fixed, variable and sem-variable.
FIXEDCOSTS; These costs remain constant in "total" amount over a wide
range of activity for a specified period of time. They do not increase or
decrease when the volume of production changes.
VARIABLE COSTS: These costs tend to vary in direct proportion to the
volume of output. In other words, when volume of output increases, total
variable cost also increases and vice-versa.
ELEMENTS OF COST: A cost is composed of three elements i.e. material
, labour and expense. Each of these elements may be direct or indirect.
| DIRECT
COST |
INDIRECT
COST |
| Direct
material |
Indirect
material |
| Direct
labour |
Indirect
labour |
| Direct
expenses |
Indirect
expenses |
MATERIAL COST:
DIRECT MATERIAL is that which can be conveniently identified with and
allocated to cost units. Direct materials generally become a part of the
finished product. For example, cotton used in a spinning mill is a direct
material.
INDIRECT MATERIAL is that which can not be conveniently identified with
individual cost units. In a spinning mill, engineering department spares,
maintenance spares, lubricating oils, greases, ring travelers etc
LABOUR COST:
DIRECT LABOUR cost consists of wages paid to workers directly engaged in
converting raw materials into finished products. These wages can be
conveniently identified with a particular product, job or process.
INDIRECT LABOUR is of general character and cannot be conveniently
identified with a particular cost unit. In other words, indirect labour is
not directly engaged in the production operations but only to assist or help
in production operations. For example in a spinning mill, the number of
maintenance workers, no of workers in utility department etc
EXPENSES; All costs other than
material and labour are termed as expenses.
DIRECT EXPENSES are those expenses which are specifically incurred in
connection with a particular job or cost unit. Direct expenses are also
known as chargeable expenses.
INDIRECT EXPENSES can not be directly identified with a particular job,
process and are common to cost units and cost centers
PRIME COST = Direct material +Direct labour +
Direct expenses
OVERHEAD = Indirect material + Indirect labour + Indirect expenses
TOTAL COST = PRIME COST + OVERHEAD
ADVANTAGES OF COST ACCOUNTING:
- It reveals profitable and unprofitable activities.
- It helps in controlling costs with special techniques like standard costing
and budgetary control
- It supplies suitable cost data and other related information for managerial
decision making such as introduction of a new product, replacement of
machinery with an automatic plant etc
- It helps in deciding the selling prices, particularly during depression
period when prices may have to be fixed below cost
- It helps in inventory control
- It helps in the introduction of a cost reduction programme and finding out
new and improved ways to reduce costs
- Cost audit system which is a part of cost accountancy helps in preventing
manipulation and frauds and thus reliable cost can be furnished to
management
.ESSENTIALS OF A GOOD COST ACCOUNTING SYSTEM:
- The method of costing adopted. It should be suitable to the industry
- It should be tailor made according to the requirements of a business. A
ready made system can not be suitable
- It must be fully supported by executives of various departments and every
one should participate in it
- In order to derive maximum benefits from a costing system, well defined cost
centers and responsibility centers should be built within the organization
- controllable and uncontrollable costs of each
responsibility centre should be
separately shown
- cost and financial accounts may be integrated in order to avoid duplication
of accounts
- well trained and educated staff should be employed to
operate the system
- It should prepare an accurate reports and promptly submit
the same to
appropriate level of management so that action may be taken without delay
- resources should not be wasted on collecting and compiling cost data not
required. Only useful cost information should be compiled and used whenever
required.
CASE 1. Project costing for a POLY/COTTON PLANT with autodoffing and
link to autoconer:(IN INDONESIA)
Following information is required to work out a costing for a new plant:
- The average count of the plant
- Capacity of the plant - No of spindles to be installed and the number of
back process and winding machines required
- Investment on machineries
- Investment on land
- Investment on building
- working capital required
- product lay out, the count pattern
- Selling price of individual counts
-
raw material cost including freight, duty etc)
- packing cost per kg of yarn
- freight per kg of yarn
- direct labour cost
- indirect labour cost
- fixed power cost
- variable power cost
- spares consumption
- administration costs
- selling overheads
Let us work out a project cost:
For this , i have used the details of the modern mill which is running in
Indonesia from year 2000
STEP NO.1: Contribution to be calculated. In general for a spinning
mill ,contribution per kg ofa particular count is calculated to work out the
economics for a new project as well as for a running mill.
Cotribution = selling price - direct cost
Direct cost for a spinning mill includes rawmaterial price, packing cost,
freight. All other costs are either fixed costs or semi variable costs. The
other costs can not be conveniently allocated to per kg of a particular
count.
The basic idea of a new project or a running plant is to maximise this
contribution. Because once the plant is designed, spares cost, power cost,
administration cost,labour cost etc almost remain constant. There will not
be significant changes in these costs for different count patterns if the
plant is utilisation is same.
The following table gives the details of count pattern, selling price,
rawmaterial price, packing cost and contribution per kg of different counts
for a particular period ( year 2000). This is just an example , one should
understand that the selling price, rawmaterial price and all other costs
keep changing. THis is the reason why costing is important for a running
mill. All the costs are changing. Some costs change every month, some once
in a year. Therefore costing plays a major role to run the plant
efficiently.
| count |
no. of
spls |
no of
mcs |
prdn/mc |
prdn kgs/day
|
raw material
cost/kg |
packing cost
/kg |
freight per
kg |
commn 2% on
selling price |
selling price
/ kg |
contribn
per kg |
| 20s
CVC |
4480 |
4 |
1109 |
4436 |
1.456 |
0.046 |
0.051 |
0.04 |
2.2 |
2674 |
| 24s
CVC |
4480 |
4 |
881 |
3525 |
1.456 |
0.046 |
0.051 |
0.05 |
2.3 |
2470 |
| 30s
CVC |
5600 |
5 |
679 |
3394 |
1.456 |
0.046 |
0.051 |
0.05 |
2.4 |
2712 |
| 30s
TC |
4480 |
4 |
679 |
2716 |
1.240 |
0.046 |
0.051 |
0.04 |
2.15 |
2091 |
| 36s
TC |
6720 |
6 |
552 |
3315 |
1.240 |
0.046 |
0.051 |
0.05 |
2.4 |
3365 |
|
|
23 |
|
17385 |
|
|
|
contrbn/
day |
13312 |
In
the above table, all the costs are in US$. The ringframes are with 1120 spindles
per machine with automatic doffing and link to autoconer. Packing cost is based
on indonesian packing material prices for carton packing.
The ultimate aim of the project is to
maximise the contribution. Looking into the cotribution per kg of yarn, the
project should produce only 36s TC. But in this project they have considered 5
different counts. Because
- yarn market is not stable. It needs a lot
felxibility
- customers are not same, the price depends
on the customers
- the end uses are not same, the price
depends on the enduse
- this unit exports 80% of the yarn, it can
not depend on one country, eg. 36sTc is only for Philippines market, it can
not be sold in Malaysia, eventhough the quality is good
- the count pattern depends upon the market
requirement and the major counts in the market, not only on the
contribution
- A linear programming technique can be used
to maximise the contribution, considering all market constraints, and
production constraints.
- flexibility needs more investment and more
day to day expenses, if a project has to be more flexible, it has to invest
more money on infrastructure
- the major factor which will make the
project feasible with less felexibility is YARN QUALITY in a spinning
mill
- Since this is a critical step for a new
project, management should be clear about their Yarn quality , Flexibility
required for marketing and should make use of Linear Programming Techniques to
find out the best product mix to maximise the
contribution.
STEP NO. 2:
To work out the Total Investment cost ( machineries, accessories, land and
builidng, humdification and electrical instruments)
The following table gives the requirement of produciton machines. To calculate
the number of back proess and winding drums required, a detailed spin plan
should be worked out with speeds and efficiencies to be achieved in each
machine.
While calculating the no of machines required, m/c utilisation, m/c efficiency ,
waste percentage, twist multipliers, delivery speeds etc should be considered
properly. These factors should be decided based on yarn quality required, end
breakge rates and the capacity of machine.
INVESTMENT ON MACHINERY
|
MACHINERY |
NO. OF MCS |
RATE / MC |
TOTAL COST |
| Trutzschler
Blowrrom line for cotton |
1 line |
416,640 |
416,640 |
| Trutschler
Blowrrom line for Polyester |
1 Line |
321,365 |
321,365 |
| Trutshcler
DK-903 cards |
22 |
92,500 |
2,035,000 |
| Rieter
RSB-D30 draw frames (with autoleveller) |
6 |
|
1,648,000 |
| Rieter double
delivery drawframe |
10 |
| Rieter
unilap |
2 |
| Rieter E62
combers |
10 |
| Howa speed
frames with overhead blower |
7 |
144530 |
1,011,710 |
| Ring frames
with auto doffer |
23 |
148,960 |
3,426,080 |
| winding
machines ( 26 drums per mc) |
23 |
93,200 |
2,143,600 |
| Roving
transport ( manual) |
1 |
150,000 |
150,000 |
| Argus fire
system |
1 |
50,000 |
50,000 |
| |
|
|
|
| |
|
TOTAL |
11,202,395 |
Some of the following points can be considered
while deciding the machines.
From the above table it is clear that, 23 ring frames with 1120 spindles are
working with auto doffing and with link to auto corner. The major advantage
of this automation is to reduce labour and to reduce the problems related to
material handling. One has to really work out the benefits achieved because
of this and the pay back for the extra investment.
Draw frame contributes a lot to the yarn quality and the ring frame and
winding machine working. It is always better to go in for the best draw
frames like RSB-D30 draw frames with autoleveller. It is not wise to buy a
cheaper draw frame and save money.
It is always better to keep excess carding and autoleveller draw frames, so
that flexibility of the project is also maintained. If the coarser counts
contributes more and the market is good, overall production can be
increased. If the market is for finer count, both the machines (carding and
draw frames) can be run at slower speeds, which will surely contribute to
yarn quality.
Speeds of speed frame , combers and ring frames do not affect the yarn
quality as it is affected by card and draw frame speeds.
Blow room capacity should be utilized to the maximum, as it consumes a lot
of power ,space and money.
Ring frame specification should be perfect, because the working performance
and power consumption of the ring frame depends on the specifications like,
lift, ring die, no of spindles etc. Ring frame specification should be
decided to get the maximum production per spindle and to reduce the power
consumed per kg of yarn produced by that spindle. Because the investment
cost and the power consumption for the ring frame is the highest in a
spinning mill.
INVESTMENT ON ACCESSORIES:
The following table gives the details of the accessories like cans for
carding, draw frame, bobbins, trollies etc
|
ACCESSORIES |
NO. OF MCS |
RATE / MC |
TOTAL COST |
| Carding cans
36" x 48" |
120 |
160 |
19,200 |
| comber cans
24" x 48" |
350 |
85 |
29750 |
| Drawframe
cans 20" x 48" |
1100 |
53 |
58,300 |
|
Identification bands 20" |
400 |
1.2 |
480 |
|
Identification bands 24" |
50 |
1.8 |
90 |
| Roving and
spinning bobbins |
|
|
36,000 |
| Plastic
crates |
400 |
6 |
2,400 |
|
trolleys |
|
|
10,000 |
| Cone
trolly |
80 |
200 |
16,000 |
| Fork
lift |
1 |
27,000 |
27,000 |
| hand
truck |
3 |
1000 |
3,000 |
| |
|
|
|
| |
|
TOTAL |
202,220 |
SERVICE AND MAINTENANCE EQUIPMENTS:
The following table gives the details about the investments required on service
and maintenance equipments
| SERVICE
AND MAINTENANCE EQUIPEMENTS |
NO OF
MCS |
RATE/MC |
TOTAL
PRICE |
| Cots buffing
machine and accessories |
1 |
20000 |
20000 |
| Card room
accessories |
1
set |
60,000 |
60,000 |
| Spindle oil
lubricator |
1 |
4000 |
4000 |
| Clearer
roller cleaning machine |
1 |
3000 |
3000 |
| Vacuum
cleaner |
5 |
3000 |
15000 |
| pneumatic
cleaners |
6 |
500 |
3000 |
| Weighing
balance |
3 |
2000 |
6000 |
| Strapping
machine |
2 |
2000 |
4000 |
| Premier
autosorter |
1 |
2500 |
2500 |
| Premier uster
tester |
1 |
45000 |
45000 |
| Premier
strength tester |
1 |
45000 |
45000 |
| premier fiber
testing |
1 |
45000 |
45000 |
| Premier
Classidata |
1 |
25000 |
25000 |
| Erection
charges |
|
|
150000 |
|
|
TOTAL |
427500 |
Card service machines like Flat tops clipping
machine and flats grinding machine are very important for yarn quality. One
should not look for cheaper machine. It is always better to go for reputed
manufacturers like GRAF, HOLLINGSWORTH etc.
Rubber cots contributes a lot to yarn quality. Bad buffing in ring frame can
increase the imperfections by 15%. Poor quality of buffing in drawframe and
speedframes can affect both production and quality. It is better to go for
the best cots mounting machine and cots buffing machine.
HUMIDIFICATION AND ELECTRICAL EQUIPMENTS:
The following table gives the details about the investments required on
humdification and electrical istruments
| Electrical
installation including transformer, incoming and outgoing panels, bus
duct, capacitor, etc for 3800 KVA |
350,000 |
| Cables |
125,000 |
| Compressor,
Dryer and pipe lines |
180,000 |
| humidifaction
system |
767,000 |
| chillers |
176,000 |
| Ducting and
installation for humidification system |
125,000 |
| workshops,
hydrant and other equipments |
100,000 |
| |
|
|
TOTAL |
1,823,000 |
In
indonesia, most of the units use PLN power and some of the spinning mills use
Gensets. A detailed costing has to be done to compare the cost per unit to
decide, Whether to use the PLN power or to go in for Gensets. while working out
the costing finance cost on investment , overhauling cost, running cost,
efficiency of the machine should be considered for cost caluculation in the case
of Genset. In case of PLN power, the losses due to power interruption( based on
the area data), finance cost on initial investment, md charges, unit charges to
be considered. It is better to use 50% PLN and 50 % own generation.
The
following table gives the details about land and builiding
investments
| Land
cost |
200,000 |
| Land
development |
40,000 |
| Factory
building Including Service ally 192 x 62 meters 11,712 Square meter @ 120
usd/sq meter |
1,405,440 |
| Road and
others |
40,000 |
|
TOTAL |
1,445,440 |
STEP NO.3: To calculate the expenses (
labour, power, stores, working capital, insurance etc)
Working capital = 3,000,000
LABOUR:The following table gives the details about labour requirement
|
DEPARTMENT |
No of people required |
|
Production |
140 |
|
packing |
15 |
|
maintenance |
30 |
|
utility |
17 |
|
administration and personal
dept |
20 |
| |
|
|
Total no of
people required per day |
222 |
| wages at 50
usd/month including bonus and insurance |
111,00 |
| other
facilities at 35 % |
3,885 |
| salaries for
managerial staff |
10000 |
| Other
facilities at 35 % |
3500 |
| |
|
|
Total
labour cost / month |
28485 |
POWER: The following table gives the details about
the power
| Total
units(KWH) produced (consumed)per day |
69559 |
| Unit cost
(cost / KWH) |
0.03 |
| Total
production in Kgs |
17,390 |
| KWH/ Kg of
yarn |
4.0 |
| TOTAL
POWER COST /DAY |
2087 |
SPARES:
The following table shows the spares cost,
repair , and insurance
| spares cost
at usd 8/1000 spindle shift |
222,566 |
| repairs and
other overheads |
200,000 |
| Insurance at
0.175% on investment and working capital |
31320 |
| TOTAL
cost per year |
453886 |
STEP
NO.4: PAY BACK CALCULATION
| DETAILS |
IN
USD |
|
INVESTMENT: |
|
| Land and
building |
1,444,440 |
| Machinery,
accessories & service equipments |
11,832,115 |
| Electrical
and Humidification ducts |
1,823,000 |
| |
|
|
TOTAL
INVESTMENT |
15,099,555 |
| |
|
| WORKING
CAPITAL |
3,000,000 |
|
GRAND
TOTAL |
18,099,555 |
| |
|
| RECURRING
EXPENDITURES PER DAY |
|
| Salaries and
Wages |
949.5 |
| Power
cost |
2087 |
| Stores ,
repairs and insurance |
1260.8 |
|
TOTAL |
4297.3 |
| |
|
| INTEREST
CALCULATION (per day) |
|
| On capital
8% |
3355.5 |
| on working
capital 9% |
750 |
| |
|
| TOTAL
EXPENSES INCLUDING INTEREST |
8402.8 |
| |
|
| TOTAL
CONTRIBUTION PER DAY |
13312 |
| NET PROFIT(
before depreciation & taxation) |
4909.2 |
| PAY BACK
PERIOD |
8.54
years |
|