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|
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 travellers etc
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 proudciton 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 centres.
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 profitabale 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 centres and responsibility centres should be built within the organisation
- controllable and uncontrollable costs of each responsiblity 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 operte the system
- It should prepare an accurate reports and promptly submit teh 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
- rawmaterial 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|
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 E62 combers||10|
|Howa speed frames with overhead blower||7||144530||1,011,710|
|Ring frames with autodoffer||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|
Some of the following points can be considered while deciding the machines.
From the above table it is clear that, 23 ringframes with 1120 spindles are working with auto doffing and with link to autoconer. 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.
Drawframe contributes a lot to the yarn quality and the ringframe and winding machine working. It is always better to go in for the best drawframes like RSB-D30 drawframes with autoleveller. It is not wise to buy a cheaper drawframe and save money.
It is always better to keep excess carding and autoleveller drawframes, 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 drawframes)can be run at slower speeds, which will surely contribute to yarn quality.
Speeds of speedframe , combers and ringframes do not affect the yarn quality as it is affected by card and drawframe speeds.
Blow room capacity should be utilised to the maximum, as it consumes a lot of power ,space and money.
Ringframe specification should be perfect, because the working performance and power consumption of the ringframe depends on the specifications like, lift, ring dia, 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 ringframe is the highest in a spinning mill.
INVESTMENT ON ACCESSORIES:
The following table gives the details of the accessories like cans for carding, drawframe, 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|
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|
|Premier uster tester||1||45000||45000|
|Premier strength tester||1||45000||45000|
|premier fiber testing||1||45000||45000|
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|
|Compressor, Dryer and pipe lines||180,000|
|Ducting and installation for humidification system||125,000|
|workshops, hydrant and other equipments||100,000|
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
|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|
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|
|administration and personal dept||20|
Total no of people required per day
|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
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
|Land and building||1,444,440|
|Machinery, accessories & service equipments||11,832,115|
|Electrical and Humidification ducts||1,823,000|
|RECURRING EXPENDITURES PER DAY|
|Salaries and Wages||949.5|
|Stores , repairs and insurance||1260.8|
|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|