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A study on formulation of costing system

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A study on formulation of costing system

A study on formulation of costing system

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  • 1. A Study on Formulation of Costing System 1.1PROBLEM STATEMENT Every organization which undertakes manufacturing follows a costing system. Costing system is necessary as it evaluates the cost of various products manufactured and also to have a proper control over the inventory. Hassan Co-Operative Milk Producers’ Societies Union prepares a cost statement for the various products it produces like milk, ghee, butter, peda, ice creams etc. In such a case, it becomes necessary to study the costing system followed in the organization as a thorough detail would help to find any weaknesses which can be overcome using suitable techniques. It will be useful to reduce the expense on certain items which would reduce cost and increase the profit. Present costing system is inadequate and will not give a proper guidance regarding various cost centres and costs incurred for individual products hence a new cost format has to be employed to check the various costs incurred on products and also the costs incurred in various departments. 1.2 OBJECTIVES Costing is a very important aspect in every product/ service manufacturing concern. A study on this subject would be done with the following objectives: 1. Critical evaluation of the existing cost system 2. Recommending a new technique of costing for HCMPSU 3. Preparation of cost sheet for various products for the year 2008-09 4. To analyse the losses being incurred in manufacturing various products. 1.3 SCOPE OF THE STUDY The study is extended to the accounts department of Hassan Milk Union. The data for the preparation of cost sheet has been collected for the financial year 2008-09. Most of the data has been collected from secondary sources. H.R.I.H.E, Hassan Page 1
  • 2. A Study on Formulation of Costing System 1.4 RESEARCH METHODOLOGY The study is conducted at Hassan Co-Operative Milk Producers’ Societies union Limited, Hassan over a period of 12 weeks. 1.5 DATA COLLECTION METHODS For the purpose of carrying out a detailed study on the costing system of the organization, the cost detail has to be collected. The data collected for this purpose is the secondary data which would be provided by the accounts department of the organization. 1.6 LIMITATIONS OF THE STUDY A study on this topic has certain limitations such as the costing system is a very wide topic. It is very difficult to gather the information and analysis requires a thorough knowledge. H.R.I.H.E, Hassan Page 2
  • 3. A Study on Formulation of Costing System 2.1 INTRODUCTION Modern business needs frequent cost information about business activities to plan accurately for the future, to control business results and to make a proper appraisal of the performance of persons working in the organization. The fulfillment of these goals requires details about the costs incurred and benefits (revenues) obtained which are provided by “cost accounting”. Financial accounting is developed over the time to record, summarize and present the financial transactions or events, which can be expressed in terms of money. This function was primarily concerned with record-keeping leading to preparation of Profit and Loss Account and Balance Sheet. The information obtained through financial accounts is useful to the shareholders, creditors, financial analysts, labour union, government authorities etc. However, the information generated by financial accountancy for several purposes is not sufficient for decision making in many areas, such as:  Acquisition of plant and machinery or other assets;  Determining product selection-addition or dropping or changing product combination in case of multi product company;  Determining output level;  Determining or revising prices of products;  Whether profit earned is optimum as compared with competitors as well as earlier years. The need of data for such details led to the development of cost accountancy. The Institute of Cost and Management Accountants, London, has defined cost accountancy as the “application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and ascertainment of profitability as well as presentation of information for the purpose of managerial decision- making”. Thus, it includes costing, cost accounting, budgetary control, cost control and cost audit. The Institute of Cost and Management Accountants, London, has defined costing as the ascertainment of costs. Costing includes the “techniques” and “processes” of ascertaining costs. The ‘techniques’ refers to the principles and rules which are applied for ascertaining costs of products manufactured and services rendered. The ‘process’ includes the day to day routine of determining costs within the method of costing adopted by the business enterprise. H.R.I.H.E, Hassan Page 3
  • 4. A Study on Formulation of Costing System 2.2 OBJECTIVES OF COST ACCOUNTING  To ascertain the cost of product or service rendered and enable measurement of profit by proper valuation of inventory.  To provide information for planning and control through the techniques of standard costing and budgetary control.  To provide data for periodical profit and loss accounts and balance sheets.  To reveal sources of economies in production.  To assist the management in fixation of selling price.  To provide the basis for production planning.  To analyze the data and provide suitable information to assist management in decision making.  To indicate to the management any inefficiencies and the extent of various forms of waste, whether of materials, time, expenses or in the use of machinery, equipment and tools. This may indicate appropriate remedial action. 2.3 ESSENTIALS OF A GOOD COSTING SYSTEM The law does not compel to install a costing system. However, the Government has the power to order installation of such system in such industries as the Government may deem fit. The system of costing is installed by the organizations on the grounds of its utility. A system of costing has to be designed to suit the needs of the organization. A good system of costing helps to achieve the objectives. It has the following essentials: 1. Flexibility- The system should have flexibility or adaptability to meet the changing needs of the organization. Expansion or contraction should be adopted with minimum change. 2. Integrated- It should be a well-knit integrated with financial accounting system. The original records are available under financial accounts. The need for co-relation between two cannot be over-emphasized. H.R.I.H.E, Hassan Page 4
  • 5. A Study on Formulation of Costing System 3. Promptness- Any information or report is useful only if the same is furnished regularly and without any delay. The Cost Accounting System should ensure this aspect. 4. Accuracy- The system should ensure accurate information. To ensure this, the system should provide checks to verify data compiled in a systematic manner. 5. Smooth flow of data- Coat Accounting needs flow of data from every section in the organization and also reports on the performance of individuals. The objective of this system should be properly explained. 6. Continuous review- The system should be constantly reviewed and supervised, so that it gives what is expected of it. If it is not done, the system may become static. 7. Economy- The system should be economical and should not create financial burden on the organization. 8. Comparability- The system should enable the management to compare the data with the past. It should also facilitate departmental comparison. 9. Reconciliation- The system should facilitate reconciliation between cost accountancy and financial accounting easily. 10. Simplicity- The system should be as simple as possible. 11. Standardization- Forms and procedures under this system should be standardized. 12. Management support- The management at all levels should support the system and in its operations. H.R.I.H.E, Hassan Page 5
  • 6. A Study on Formulation of Costing System 2.4 ADVANTAGES OF COST ACCOUNTING Business enterprises can derive many advantages from the cost accounting system. Some advantages are listed below:  It provides data about profitable and unprofitable products and activities. Management can take corrective actions on loss making products and make them also profitable.  Production/manufacturing methods may be improved or changed so that costs can be controlled and profits can be increased.  Cost data can be obtained and compared with the standard cost within the firm or industry.  All items of cost can be analyzed to minimize the losses and wastage emerging from the manufacturing process and reduce the costs associated with different activities.  More accurate and reliable financial accounts can be prepared promptly for use of management.  It provides cost data and information to determine the price of the product. The cost of the product is perhaps the most important determinant of product pricing.  Negotiations with government and labour unions can easily be made with the information provided by cost accounting system.  It helps management in knowing the cost of different alternatives and selecting the most advantageous course of action.  It ensures maximum utilization of physical and human resources, checks fraud and manipulations, and helps employees as well as the employer in their basic goals of getting higher earnings and maximizing the profit of the concern. H.R.I.H.E, Hassan Page 6
  • 7. A Study on Formulation of Costing System 2.5 COSTING SYSTEM The term ‘costing system’ refers to an accounting system followed to accumulate costs, to ascertain costs of products or jobs, to prepare cost information using some procedures and principles for recording of cost data. There are two basic methods of costing- job costing and process costing. Job Costing – Job costing is used in those concerns where production is carried out as per the specification of the customers. This method is popular in enterprises engaged in ship- building, house- building, machinery production and repair. Job costing has the following variants: a. Batch costing- It is used to determine the cost of a group of identical or similar products. This method can be applied for the production of nuts and bolts, medicines and components which are manufactured in distinct batches. b. Contract costing- This method of costing is used by house builders and civil contractors. c. Multiple costing- This costing method is used in those industries where the nature of product is complex such as motor cars, airplanes etc. Batch Costing- This method is used in those industries where production is done continuously, such as chemicals, oil, gas, paper etc. It has following variants: a. Single output costing- This method is used where a single item is produced and the final production is composed of homogeneous units. b. Operating costing- This is used by those organizations which render services, and do not produce any physical item, such as transport, power house, hospital etc. c. Operation costing- This costing method aims at ascertaining the costs of each operation in place of each process. H.R.I.H.E, Hassan Page 7
  • 8. A Study on Formulation of Costing System 2.6 FEATURES OF A COST ACCOUNTING SYSTEM The cost accounting system may be used by all types of business organizations- manufacturing and non-manufacturing. The cost accounting system should be practical i.e. it must be helpful to the business. The following are the essential features of a cost accounting system:  Basis for accumulating costs.  Relationship with financial accounting.  Basis of product costs. 2.7 DIFFICULTIES IN INSTALLATION OF A COSTING SYSTEM The installation of costing system in business organizations is not an easy task. There are many difficulties which are faced by an organization while setting up its costing system. 1. Opposition from existing staff. 2. Shortage of trained manpower. 3. Error in measuring requirements. 4. Non- cooperation from management. H.R.I.H.E, Hassan Page 8
  • 9. A Study on Formulation of Costing System 3.1 Industry Scenario India is called the “country of villages” where it covers nearly 70% of its total area. In this relation we can say that Indian economy is base on rural activities and their development. Therefore we have to give prime importance to the rural activities. A dairy is a place for handling milk and milk products. Technology refers to the application of scientific knowledge for practical purposes. Dairy technology has been defined as that branch of dairy science which deals with the processing of milk and the milk products on an industrial scale. In developed dairying countries such as the USA the year 1850 is seen as the dividing line between farm and factory scale production. Various factors distribute to this change in these countries such as the concentration of the population in cities where the jobs are plentiful, rapid industrialization, improvement of transportation facilities, development of machines etc., The rural areas are identified for the production, urban areas are for the processing of the milk. 3.2 Origin of Dairying in India Around 1500 BC to 2000 BC the Aryans were first to domesticate cattle. Use them for tilling their land obtain milk to be consumed as food. Again it were Aryans who priced the milk of a cow more than its meat, forbade its slaughter, created legends about it and even worshipped it. Hindus even to this day consider cow as sacred. Besides it were only the East (India/China) which domesticated buffalo as milch animal and succeeded so well that today, more than half the total production of milk in India is obtained from buffalo. Most of the farmers have one milk animal; they sell the milk through local milk contractors or middlemen. These traders have always exploited the poor and uneducated H.R.I.H.E, Hassan Page 9
  • 10. A Study on Formulation of Costing System milk producers. It was in the late forties, when integrated approach for dairy development based on farmers owned milk co-operative was first adopted at Anand. The system includes milk procurement productions and marketing through farmer co-operatives. In India, the market milk technology may be considered to have commenced in1950 with the functioning of the Central Dairy of Aarey Milk Colony and milk product technology in 1956 with the establishment of AMUL dairy, Anand. The system of collective ownership, operation and control of milk trade by farmers came to be known as ANAND PATTERN. Anand pattern has given them an opportunity to have access to the modern technology. The Brand ' ' is the household name for Pure and Fresh milk and milk products. The premises institution is NDDB and IDC for application of the Anand pattern throughout the country. The whole project under which replication was envisioned, is named as “operation flood”. The success of Anand pattern depends as establishing a strong co operative infrastructure at the grass root level, making economically viable to strengthen. Dairy industry offers employment opportunity to the people so as to help the farmers to get fair price of milk. The farmers are provided with medical facilities to their cattle. Milk is becoming an alternative life line in our rural economy. With the advent of white revolution that is “SKHEERA KRANTI” in the same pattern of Denmark and Holland. Export of dairy products plays an important role in our foreign trade. It increases the foreign exchange and national income of our country and also economic development of our country. 3.3 History of Indian milk market industry • Organized milk handling was made in India with the establishment of Military Dairy Farms • Handling of milk in co operative milk unions established all over the country on a small scale in early stages. • Long distance refrigerated rail-transport of milk from Anand to Bombay since 1945. H.R.I.H.E, Hassan Page 10
  • 11. A Study on Formulation of Costing System • Pasteurization and bottling of milk on a large scale for organized distributed was started at: Aarey - 1950 Calcutta - 1958 Delhi - 1959 Mumbai - 1961 Madras - 1963 Establishment of milk plants under the 3 year plans for dairy development all over India. They were taken up the dual object of increasing the national level of milk consumption and ensuring better returns to the primary milk producer. Now India is one of the richest milk producing country in the world. In 1999 it produced milk up to 770 lakhs tons and the milk valued up to 75000 crores and 13% of total production in the world is produced by India itself. 3.4 Dairy Industry in Karnataka 3.4.1 Background In June 1974, an integrated project was launched in Karnataka to restructure and reorganize the dairy industry on the co-operative principle and to lay foundation for a new direction in dairy development. Work on the first ever, World Bank aided dairy development project was initiated in 1975. Initially the project covered 8 southern districts of Karnataka and Karnataka Dairy Development Corporation was set up to implement the project. Dairy developmental activities was set up with dairy co operative societies at grass root level, milk unions at the middle level and dairy development corporation at state level as an apex body with the responsibility of implementing Rs.51 crores project. After the closure of operation flood II the dairy development activities which continued under operation flood III ended on 1996. The post operation flood works are financed by NDDB under different terms and conditions. H.R.I.H.E, Hassan Page 11
  • 12. A Study on Formulation of Costing System KMF has 13 Milk Unions throughout the State which procure milk from Primary Dairy Cooperative Societies (DCS) and distribute milk to the consumers in various Towns/Cities/Rural markets in Karnataka. Bangalore Belgaum Dakshina Kannada Gulbarga Shimoga Bijapur Mysore Bellary Mandya Dharwad Tumkur Kolar Hassan The Corporate Office of the Karnataka Milk Federation is located on Dr.M.H.Marigowda Road in Bangalore. The Federation has a Board consisting representatives of Milk Producers and the Government nominees. The day to day functions of the Federation is managed by a group of professional managers headed by the Managing Director Karnataka Cooperative Milk Producers' Federation Limited (KMF) is the Apex Body in Karnataka representing Dairy Farmers' Co-operatives. It is the second largest dairy co-operative amongst the dairy cooperatives in the country. In South India it stands first in terms of procurement as well as sales. One of the core functions of the Federation is marketing of Milk and Milk Products. H.R.I.H.E, Hassan Page 12
  • 13. A Study on Formulation of Costing System Mother Dairy, Bangalore, a Unit of KMF, is set up by NDDB on 7.12.1984. The Dairy which has expanded from 4LLPD to capacity of 7.00 LLPD has a unique nature of homogenising the milk and selling to its consumers through 50 Automatic Bulk Vending Booths, 83 Shoppees and 70 FRP tanks. The Dairy also caters Milk in sachets and Milk Products through its 289 retailers. The average sale of milk per day is 2.60 Lakh litres during the year 2008-09. The entire requirement of milk is procured from Kolar Milk Union. The Dairy produces Butter, Ghee, Curds, and Ice Cream & Skim Milk Powder. The activities of all the Departments at Mother Dairy are being carried out through an on- line computer system. H.R.I.H.E, Hassan Page 13
  • 14. A Study on Formulation of Costing System 3.5 PROFILE OF HASSAN CO-OPERATIVE MILK PRODUCER’S SOCIETIES UNION LTD 3.5.1 INTRODUCTION H.R.I.H.E, Hassan Page 14
  • 15. A Study on Formulation of Costing System The Union was registered on 30th March 1977 with the operational jurisdiction extended to 3 Districts namely Hassan, Kodagu &Chikkamagalur. The Dairy was setup under the Operation Flood II & III and has a processing capacity of 1.2 Lakh Litres of milk per day. The Union also has a Dairy at Kudige with a capacity of 50,000 litres per day which is the first Dairy in Karnataka State started during January 1955. The Union has three Chilling Centres at Birur, Holenarasipur and channarayapatna with chilling capacity of 20000 liters per day at Birur and Holenarasipura and 100000 liters per day at Channarayapatna. The Union also produces Ghee, Peda, Curds, Khova and Butter Milk. The Union procures on an average 4.07 Lakh litres of milk and sells 1.04 Lakh litres per day. There are 5 Bulk Milk Coolers & 46 Automatic Milk Collection Units in the Union. Hassan Dairy was established under the World Bank aid with an initial handling capacity of 60,000 KGPD and was being managed by Karnataka dairy development corporation. In the year 1987 with an idea of bringing all milk allied activities such as milk procurement, milk processing and milk marketing the Hassan dairy and the Kudige dairy (the first commission dairy plant) were handed over to Hassan Co operative Milk Producers Societies Union. The integrated system of monitoring the milk procurement, processing and marketing activities by milk producers themselves was established. 3.5.2 Mission Statement Hassan milk union aims to render the best services at normal cost to its members to increase milk production and produce good quality milk by paying remunerative price throughout the year, thereby improving their economic and social condition while ensuring high quality milk and milk products to the delighted level of the consumers at competitive price. 3.5.3 Vision Statement H.R.I.H.E, Hassan Page 15
  • 16. A Study on Formulation of Costing System The union thrives hard to adopt the modern and eco friendly technologies to produce milk and milk products of international standards to make our presence prominent in the global market. 3.5.4 Aims and Objectives Hassan Co-Operative Milk Producers’ Societies Union is completely an autonomous body consisting of representatives from milk producers as policy makers • To produce continuous and remunerative market for the surplus milk in the rural areas. • To supply quality milk to customers in the urban areas at a competitive price. • To provide the technical inputs necessary to produce good quality milk and to facilitate increase in milk yield. • To provide self employment to rural folk and to make them economically self sustainable by which the migration of rural folk to urban areas is minimized. • To prevent the role of the middle men in the milk business and to increase their returns. • To establish a bridge between rural and urban folk and to play a vital role in changing he social and economic status of the rural folk. 3.5.5 Role of Diary Co-Operative Society The dairy co operatives are organized in rural areas for the milk producers keeping in view the domestic principles and values. These societies educate, guide, and support the milk producers in dairy development activities. 3.5.6 Functioning of Diary Co-Operatives The dairy co operative function all through the year in two shifts, this will provide continuous market for the surplus milk produced and the payment for the milk supplied will be distributed to the producers on the predetermined day. Input activities include: • Veterinary services like regular vaccination H.R.I.H.E, Hassan Page 16
  • 17. A Study on Formulation of Costing System • Artificial insemination services • Supply of balanced cattle feed and fodder slips • Training facilities 3.5.7 Growth of the Union The milk union which was established in the year 1977 with 100 functional dairy co operatives collecting 10,300 Kgs of milk per day is procuring on an average 386462 Kgs per day from 1122 co operatives as on date with the increase in milk production the Hassan dairy with the initial capacity of 60,000 KGPD was expanded to 120000 KGPD during 1996.The union has also established three chilling centers with a chilling capacity of 20,000 KPD and 100000 KPD. 3.5.8 Activities of Hassan Milk Union 1. Organization of dairy co operative societies: As at the end of March 2010, 1197 societies have been registered. Out of functional societies, 330 women societies are functioning. 2. Membership Enrolment: As on 31st March 2010 173396 members have been enrolled of which 71046 are small farmer48866 are marginal farmers, 22199 are agriculture labourers and 31285 are other big farmers. 3. Milk procurement activities: The present average milk procurement from 1122 milk societies is 386462 Kgs/day. 3.5.9 Product Profile Milk is marketed under Nandini brand name in different types. The pricing adopted is mainly on four categories namely: • Double Toned Milk – Rs 14 /1000ml • Toned Milk – Rs 16 /1000ml • Standardized (homogenized) Milk – Rs 18 /1000ml H.R.I.H.E, Hassan Page 17
  • 18. A Study on Formulation of Costing System • Full Cream Milk – Rs 20 /1000ml Apart from this, milk is marketed in 3 variants- • Nandini Goodlife with 3.5% fat and 8.5% SNF • Nandini Smart with 1.5% fat and 9% SNF • Nandini Goodlife Slim with 0.5% fat and 9% SNF Types of milk and milk products marketing by HAMUL Nandini Toned Milk H.R.I.H.E, Hassan Page 18
  • 19. A Study on Formulation of Costing System Karnataka’s most favorite milk, Nandini Toned Milk is a Fresh and pure milk containing 3.0% fat and 8.5% SNF. Available in 500ml and 1 liter packs. Better to use within a day from the date of pack. Maximum Retail Price is Rs. 13/- per liter. Nandini Homogenized Toned Milk Nandini Homogenized Milk is pure milk containing 3% Fat and 8.5% SNF. This is homogenized and pasteurized. Consistent right through, it gives you more cups of tea or coffee and is easily digestible. Available in 500 ml packets H.R.I.H.E, Hassan Page 19
  • 20. A Study on Formulation of Costing System Nandini Full Cream Milk Nandini Full Cream Milk, Contains 6% Fat and 9% SNF. A rich, creamier and tastier milk, ideal for preparing home-made sweets and savouries- available in 500ml and 1 litre packs. MRP Rs. 15/- per litre Good life Cow's pure milk, UHT processed, bacteria free in a tamper-proof tetra-fino pack which keeps this milk fresh for 60 days without refrigeration until opened. Available in 500 ml Fino and in 200ml bricks at premium stores across the state. H.R.I.H.E, Hassan Page 20
  • 21. A Study on Formulation of Costing System Smart Cow's pure milk, homogenized, double toned UHT processed milk bacteria free in a tamper proof tetra fino pack which keep the milk fresh for 60days without refrigeration until opened. At present the milk is being directly home delivered on request. Available in 500ml pack. Slim Cow's pure milk, homogenized, Skimmed. UHT processed milk bacteria free in a tamper proof tetra-fino pack which keep the milk fresh for 60 days without refrigeration until opened. Nandini Goodlife slim skimmed milk is 99.5% fat free. Available in 500ml Fino and in200ml bricks at premium stores across the state. H.R.I.H.E, Hassan Page 21
  • 22. A Study on Formulation of Costing System Shubham Buffalo's milk, 100% pure pasteurized processed and packed hygienically. This milk has 5% fat and 9% SNF. Available in 500ml and ltr, packs Mysore pak Fresh and tasty, Nandini Mysore Pak is made from quality Bengal Gram, Nandini Ghee and Sugar. It's a delicious way to relish a sweet moment. Available in 250gms.PP container shrink packed to preserve freshness. Can be kept for 7 days.advised to consume fresh to enjoy its excellent taste Nandini Curd Nandini Curd made from pure milk. It’s thick and delicious giving you all the goodness of homemade curds. Available in 200 grams and 500 grams packs. Nandini butter is rich smooth and delicious. Nandini Butter is made out of fresh pasteurized cream. Rich taste, smooth texture and the rich purity of cow’s milk, makes any preparation a delicious treat. Available in 100 grams, 200grams and 500grams cartons both salted and unsalted. H.R.I.H.E, Hassan Page 22
  • 23. A Study on Formulation of Costing System Nandini Ghee A taste of purity, Nandini Ghee made from pure butter. It is fresh and pure with a delicious flavor. Hygienically manufactured and packed in a special pack to retain the goodness of pure ghee, having Shelf life of 6 months at ambient temperatures. Available in 200ml, 500ml, 1000ml, sachets and also in 5lts tins and 15.0 kg tins. Nandini Butter Nandini spiced buttermilk is a refreshing health drink. It is made from quality curds and is blended with fresh green chillies, green coriander leaves, asafetida and fresh ginger. Nandini spiced butter promotes health and easy digestion. It is available in 200ml packs and is priced at most competitive rates, so that it is affordable to all sections of people. Nandini Butter Milk Nandini butter milk is Rich, smooth and delicious. Available in 100 grams (salted), 200 grams and 500 grams cartons both salted and unsalted. H.R.I.H.E, Hassan Page 23
  • 24. A Study on Formulation of Costing System Cheese Delicious Cheese, processed with utmost care to ensure the smooth and rich taste of pure cheese. It's highly nutritious an excellent source of milk proteins and a rich source of calcium. Need to be kept under refrigeration. Available in 100gms carton Paneer Pure and tasty dishes with Nandini Paneer! A fresh, nutritive product made by coagulating pure milk, it is an excellent source of milk protein. Nandini paneer is ideal for vegetarian dishes such as mutter paneer, sag paneer and various other dishes.Refrigerated storage in preferable. Available in 200gms pack, specially packed in a five layer film and vacuum packed to preserve its quality. Bulk packings are also available. H.R.I.H.E, Hassan Page 24
  • 25. A Study on Formulation of Costing System Flavored milk Sterilized flavored milk, a nutritious and healthy drink and an all-season wholesome drink available in five different flavors - pineapple, rose, badam, pista and natural orange. Apart from refreshing energy. Available in 200ml Nandini Peda No matter what you are celebrating! Made from pure milk, Nandini ‘Peda’ is a delicious treat for the family. It is maintained at room temperature, for approximately 7 days. Available in 250grams pack containing 10 pieces each. Gulab jamon mix H.R.I.H.E, Hassan Page 25
  • 26. A Study on Formulation of Costing System Great way to those soft and juicy jamoon treats at home! Nandini Gulab Jamoon Mix is made from Nandini skimmed milk powder, maida, soji and Nandini Special Grade Ghee. Available in 100gms and 200 gms standy pouch with a five layer foil lamination shelf life of 6 months Khova Khova is prepared out of fresh milk. It is an ideal base to prepare delicious sweets at home like peda, Gulab Jamoon, Kalakand, Burfi, Gajar Halwa and the like. Nandini Khova gives you a high nutritive value with large quantities of muscle building proteins, bone forming minerals and energy giving fat and lactose. To be kept under refrigeration available in 200gms vaccum packed in a special five layer pocu film Khova is also available in bulk pack for marriages and other functions Milk powder H.R.I.H.E, Hassan Page 26
  • 27. A Study on Formulation of Costing System Enjoy the taste of pure milk! Skimmed milk powder made from pure milk, processed and packed hygienically. Available in 50gms, 200gms, 500gms, 1kg and 25kg pack Cashew Burfi Prepared using quality Cashew nuts, Khova and Ghee. It leaves a lingering Cashew flavor in your mouth. Available in 250 gm in a P.P.Box, shrink wrapped to preserve its freshness .shelf life 12 days Nandini Basan Ladoo It is a delicious indigenous product prepared from pure Ghee, Gramflour and sugar added with cashews. Available in 250 Gms pack containing 6 Pieces. Shelf life 1 month. Nandini bite H.R.I.H.E, Hassan Page 27
  • 28. A Study on Formulation of Costing System A unique sweet. Cocoa based. Nandini Bite is a three-in-one sweet prepared by using Mysorepak, Khova and dremed with Almond. Available in 25 gm Aluminium foil packing. Shelf life 12 days Nandini Set Curd NANDINI SET CURD, thick and highly nutritive curd is made from 3% Toned Milk with added imported bacterial cultures, filled into 200gm and 400gm cups and allowed to set into curds. Imported bacterial cultures constitute curd forming bacteria of high genetic abilities and release antimicrobial substances into curd imparting disease resistance to consumers( probiotic characteristic). The curd apart from therapeutic in nature has very high shelf-life and can be kept for 15 days in refrigerator without curds becoming sour. NANDINI SET CURD is competitively priced at Rs.7 per 200gm cup and at Rs.13 per 400gm cup. Shelf life 15 days in refrigerator without curds becoming sour H.R.I.H.E, Hassan Page 28
  • 29. A Study on Formulation of Costing System 3.5.10 ORGANIZATION STRUCTURE BOARD OF DIRECTORS - CHAIRMAN MANAGING DIRECTOR (C.E.O.) ADMINISTRATI PERSONEL ON MANAG E ASSISTANCE PROCUREMEN PRODUC TION MENT INFOR DEPARTMENT FINANCE PURCHASE T & INPUT (Dairy Plant) MARKE TING MATION Sr. Staff SYSTEM A- B- C-2 D-69 E-27 F-2 G-3 1 15 3 5 5 H-3 H.R.I.H.E, Hassan Page 29
  • 30. A Study on Formulation of Costing System 3.5.11 Personnel Department Administration Deputy Manager Establishment (Personnel) Training/ Legal Cell Domestic Enquiry Administrative officer Officer in charge Assistant Manager Office superintendent Support staff It plays a crucial role in an organization which is always referred as the strength of the organization. Recruitment: Recruitment is made as per the cader strength approved by Registrar of co operatives. And the said cader strength is within the preview of co operative act and rules. Reservation policies of the government are being followed for recruitments. Whenever Union goes for recruitment the necessary steps are being taken as per the guidelines stated in its Bye law and proper advertisement will be given in the State News papers for the posts required and all the processes are made as per Govt. norms and Suitable candidates will be called either for written test or interview or both. H.R.I.H.E, Hassan Page 30
  • 31. A Study on Formulation of Costing System Training: Hassan Milk Union is having training facilities for its employees at various reputed training centers and for new employees, they will be facilitated with one month on the job training at their respective areas. CTI (Central training institute), a unit of KMF, Bangalore, is one of the best training centers having its own facilities with residential facilities providing training to skilled and unskilled employees as well. Management development program to middle level management officers of the milk union on various subjects related to dairy, marketing, administration and procurement and input. In addition to this, Hassan Milk Union deputes its officers and personnel for different technical and non technical training in the following training centers: • SRDTC(Southern regional demonstration and training center) for both technical and non technical training. • Mansinh institute of training, Mahsana, Gujrat, only for technical training. • Vaikunt Mehta institute, Pune. For management development programmes. • Institute of rural management, Anand. • Regional institute of co operative management, BANG • CII- Confederation of Indian industries, institute for quality- for food industrial platforms are created. Orientation programme: The new employees are given 3 to 4 days orientation training program at CTI, Bangalore, and a unit of KMF. This particular training is given to the newly recruited employees irrespective of their cader. Employee promotion: It is clearly stated in the cadre and strength document which is approved by registrar of co-operative societies. The employee promotion is dependent on the merit and seniority basis. It is the mandatory method followed. To decide on this, the employee education, obedience, carrying of the job and attendance are taken into consideration. H.R.I.H.E, Hassan Page 31
  • 32. A Study on Formulation of Costing System Record maintenance: Hassan Milk Union is having well establishment section under the administration department which maintains and updates records and other details of each employee with individual record book and file. Leave: Casual leave of 15 days per year and for new entrants 1 day per month for one year is followed. Employees of the Hassan Milk Union are eligible for 30 days earned leave in each year during their service and also once in 2 year block period they will be given the option facility for surrender of leave of one month and to avail the encashment facility. The accumulation of leave days at present is restricted to 240 days. HPL (Half pay leave) facilities are available. If any accident takes place during the working hours the special leave is given: • Special leave: the rabies leave is given for the infected dog bite. And also the blood donation leave for 1 day is given. • Maternity leave: on condition, with payment. • Extra-ordinary leave: depending on the service or any major health issues. Conveyance Allowance: The Hassan Milk Union is providing conveyance allowance to its employees who are having two wheeler vehicles and commuter charges for those who are dependent on public transport per month is fixed. Uniform: Uniform will be provided to the employees who are working in the factory and this facility is extended to only up to the cader of Technical Officers. Transfer: The transfer facilities are given. It is in the hands of Managing Director. If the transfer is on the request, employee is not entitled for cash benefits but if it is not on request, he is entitled for cash benefits. Retirement: The retirement age is 60 years. But on health grounds there is a consideration. And the 3 months prior notice is a must before leaving the job anytime before the retirement. H.R.I.H.E, Hassan Page 32
  • 33. A Study on Formulation of Costing System Retirement benefits: A salary of 15 days per year of completed years of service is given. 3.5 lakhs ceiling is applicable and all the gratuity announcements are according to government notifications. Provident fund is as per the government norms. 12.5% toward provident fund contribution per the entire employee. 3.5.12 Production Department: Every morning by 9.30am, the scheduled is drawn depending on the consolidation of all the information from different units. Entire milk has to dispatched before the next raw milk comes in. All the availability options should be weighed and instant decisions have to be taken. Presently the day to procurement on an average comes up to 2,50,000 litres per day. All the indents are moved there by 11am and this has to be intimated to the packing division. Packing material purchase is based on the integrated business plan. The rolls have to be weighed and bought out because by the end of the month the statement has to be prepared if the loss is 2% over and above the loss is recovered from the suppliers. If the loss is >1% and <2% that loss is recovered from the packing contractor. For each and every product the organization has fixed some standard. For 500ml it is 45-55 micron. For 1000ml it is 55-65 micron. This comes in pre-printed rolls but the date of packing, batch number and machine number is printed on the time of packing. After the packing being done, it is handed over to the finished goods section then dispatch starts. The longest route is Hassan to Kudremukh (180km) through an insulated vehicle. The document from the last point has to be bought back. No credit services. Day to day payments is being made. Only for milk pourers it is 7 days and sometime it even goes up to 15 days. The statement is being made deducting the commission and the next day’s indent also has to be collected. In case of any eventualities other than natural calamities, it is accepted. Suppose any negligence, accidents penalty is fixed. H.R.I.H.E, Hassan Page 33
  • 34. A Study on Formulation of Costing System 3.5.13 Marketing Department: Marketing should be considered as the core business function in this competitive world as it establishes, develops, and commercializes long term customer relationships and helps in meeting organizational goals. Pricing is a federal policy and KMF decides the marketing price of the milk end the milk products. KMF has adopted pricing mainly on four categories namely: • Double Toned Milk – Rs 14/100ml • Toned Milk – Rs 16/1000ml • Standardized (homogenized) Milk – Rs 18/1000ml • Full Cream Milk – Rs 20/1000ml As Hassan Milk Union is procuring 4 lakhs milk per day and its local market requirement is 1.2 lakhs Kgs/day. As such the excess milk is being sent to sister unions and Interstate federations and balance if any will be sent for conversion into butter and SNP. 3.5.14 Procurement Department: The milk co operative societies will be organized in villages where there is excess milk production. The extension staff of the union will visit the villages and conducts the survey about the village population, animal population and the availability of the surplus milk and report to the office for consideration. The office will issue necessary instructions to organize the societies. Then the first Gramasabha meeting will be conducted and select the promoters to promote the Dairy cooperative in the village and with the permission of Registrar of Cooperative with the recommendation of Milk union the Village Chief promoter will permitted to collect the share capital and with all fulfilment of required norms then proposal will be sent to registrar of co operative department for registration. On registration, milk co operative society will be commissioned and starts procuring milk from the producers. The milk procured will be transported through trucks to nearby chilling centers and dairy where milk is processed further. The society will be provided with veterinary services, AH services, feed and fader services, training and extension services. H.R.I.H.E, Hassan Page 34
  • 35. A Study on Formulation of Costing System The village dairy Cooperatives will receives payments for the milk supplied to Union once in a week and the same will be distributed among its produce members every week and day is fixed which is convenient to the concerned village. 3.5.15 Stores/ Purchase Department: Purchase Purchase/stores Officer Sub staff Hassan Milk Union is having a separate purchase department and purchases are made based on the requirements of various department and purchases are made as per the relation laid out. Hassan Milk Union is having full pledged stores which supplies materials to various based on the indents or requirements and the people who are working in the stores are very well worked in inventory management. Both purchase and store departments are working under the supervision of manager dairy. Stores: The storage place for almost all necessary goods which come into the factory premises: But here the store is the place where all these are there: 1. Packing materials 2. Stationery 3. Spares 4. Oil and lubricants H.R.I.H.E, Hassan Page 35
  • 36. A Study on Formulation of Costing System 5. sugar 6. Testing chemicals 7. Cleaning acids 8. Uniforms and Shoes 9. Cans for societies 10. Ledgers The activity takes place in stores: Requisition letter: First the manager of concerned department depending upon the need for the goods sends a requisition letter to the manager dairy and then once approved the same reaches the stores in charge, the purchase section places an order. Purchase order: But for the goods regular nature depending upon the stock level, the stores in charge takes up the responsibility to place order and have the materials ready when ever required. Here in the co operative sector as per the transparency act if the goods and where the capital expenditure is involved, the enquire letters are sent the suppliers and who ever quotes the least and also with quality gets the order. And the same purchase order copy goes to 1. the supplier 2. the store in charge 3. Accounts section 4. concerned user section Purchase order also includes 1. Mode of payment after and before supply 2. Terms and conditions(taxes) 3. Delivery period 4. Mode of dispatch Invoice: Against the purchase order the concerned supplier gives the invoice. Once the invoice is received the cross checking of materials as per the specifications purchase order is done. The concerned department communicated about the goods and the H.R.I.H.E, Hassan Page 36
  • 37. A Study on Formulation of Costing System concerned person gives a user section remark on the quality of the product. Hence the goods received note is sent to concerned user section 3.5.16 MIS Management Information System Assistant Manager System Officer Support Staff The main activity of the MIS department in the organization is to act as the information source for all the levels of management for the decision making in different situation. Hence to say the integration of information from all the departments for the decision making for all the three levels which exist in the organization: 1. Top level 2. Middle level 3. Lower level The information collected from the dairy and various chilling units on on-line and information collected from Marketing on every day will be processed and send to KMF every day and also monthly procurement and input wing and the data related to artificial insemination and progress achieved in Fodder and Feeds division are collected and H.R.I.H.E, Hassan Page 37
  • 38. A Study on Formulation of Costing System necessary information will be prepared and sent to various department as well will be submitted to CEO and other section heads to enable them to take necessary action and also with the help of these data MIS department will prepare the annual Targets to the Dept of Procurement and Input and Marketing. Also, all these data is given to the MIS department and the integration on monthly basis is taken up and the report as sent to the managing director and same place before the monthly meetings held of all the milk unions. 3.5.17 Finance Department Source of finance to start KMF and its units is from World Bank channels through agreement between NDDB under Tripartite agreement between NDDB, KMF and Government of Karnataka. Now, source of funds are share capital and realization from sale proceeds of milk and milk products. As on 31.03.2010 the paid up capital was 765.32 lakhs and 218.03 lakhs loan was taken for operating. H.R.I.H.E, Hassan Page 38
  • 39. A Study on Formulation of Costing System H.R.I.H.E, Hassan Page 39
  • 40. A Study on Formulation of Costing System 3.5.18 Production Department: The dairy works in 3 shifts to receive milk in the morning and evening shifts. The milk received from DCS in cans will be tested for quality and weight is recorded. The payment will be made based on the quality and the quantity. The milk received in tankers will be weighed and tested and pumped into chiller and stored in insulator storage tank. The local market needed quantity will be pasteurized and stored in insulated HMST for packing toned milk, double toned milk and standardized homogenized milk. Apart from this, union also produces ghee, peda, flavored milk, curds and butter milk. The excess fat in the milk will be separated in the form of cream and issued for butter making. The cream breaks into butter and butter milk where butter is issued for ghee making and butter milk is tested for fat/COB (clout on boiling) and it will be reprocessed or will be drained out. Based on the market demand, butter is drawn for ghee production and same will be packed as per requirement. 3.5.19 Channels of Distribution The network of distribution of milk was founded to be very systematic and has made distinct role in the successful marketing of milk. The processed and pasteurized milk is first packed and stored and then distributed to the target customers. Processing and manufacturing Storage Dealers or Retailers Consumer H.R.I.H.E, Hassan Page 40
  • 41. A Study on Formulation of Costing System Power The KPTCL supplies the power up to 325 kilo watts per month. In case of shortage in supply diesel generator is used. Vehicle The union owns 5 milk tankers. In addition to this, it has one car, and two jeeps. 3.5.20 ACHIEVEMENTS • Hassan milk union is procuring milk from all the 13 taluks of three districts and selling quality milk in all the taluks and small towns. • The union and all the dairy co operatives are being managed by the democratically elected boards from among the milk producers. • The technical input to dairy co operatives and the dairy plants are managed by well trained, committed professionals and technical team. • 91% of the milk co operative societies are operating under profit • The union has successfully implemented the animal induction program for SC ST and OBC since 1996 with the financial assistance from central and state governments and rendered direct loans to the beneficiaries at lower interest rates. • 254 women dairy co operatives (as on May 2009) have been organized since 1997 under support training and education program(STEP) • The union has also implemented mini dairy scheme and bring entrepreneurial environment in the rural area. • The union has set up Artificial insemination facilities for dairy co operatives. • The union has rendered emergency veterinary services round the clock. • The union has implemented foot and mouth disease control program(FMDCP) H.R.I.H.E, Hassan Page 41
  • 42. A Study on Formulation of Costing System • Fertility camps are being conducted once in three months by inviting experts in the field. • The union supplies quality fodder slips and seeds through the year and facilitates the availability of green fodder. • The union is insuring the life of milk producers and dairy co operative staff with the co ordination from Life Insurance Corporation and National insurance company since 1997-1998 under “samajika suraksha yojana”. • The union has launched the “YESHASHVINI” program to the milk producers wherein the milk producers are provided with the best available medical facility at free of cost. • Smokeless chula have been provided to the milk producers with an intention of improving the health of rural women folk. • The union has successfully implemented the Total energy management program and Total quality management program (quality excellence from cow to consumer) since 2001 respectively. • Quality awareness programs are being conducted regularly for school children, house wives and consumers. • The union has got ISO 9001:2000 certification from TUV India, Mumbai. • The union has got Energy Conservation Award H.R.I.H.E, Hassan Page 42
  • 43. A Study on Formulation of Costing System 3.5.21 SWOT Analysis Strengths • Procurement and Input( P&I) network • Goodwill • ISO 9001:2000 certified • Second largest producer • Vast market Weaknesses • WTO standards • Advertisement execution in its early • Early stages of automation and computerization Opportunities • Enter rural market • Neutraceuticals • Exports Threats • Entry of big players • WTO standards • Government policies H.R.I.H.E, Hassan Page 43
  • 44. A Study on Formulation of Costing System 4.1 HASSAN DAIRY: DIFFERENT ACTIVITIES AND COSTS INVOLVED Hassan dairy in fact a liquid milk plant which pasteurizes milk and market it in local market as well as nearby areas. It also fulfill its commitments for inter dairy dispatches. The various activities and their costs involved in the process are as follows: 4.1.1 PROCUREMENT AND INPUT Hassan Milk Union procures milk dairy co-operative societies (DCS), its chilling centres and in scarcity through inter dairy. Two axis pricing are followed here. Milk is procured in cans through contracted vehicles from DCS, while tankers are used for transporting milk from chilling centres and inter dairies. Input facilities like veterinary services, drugs, feed and fodder are provided by union to enhance the milk production. Costs involved in procurement and input 1. Cost of milk 2. Procurement transport cost ( for DCS milk only) 3. Manpower ( supervisory and extension work expenses) 4. Input expenses like veterinary, drugs etc. 5. Chilling centre expenses 6. Transportation expenses from chilling centres and inter dairies 4.1.2 RECEPTION AND PROCESSING DCS milk is received at dock and chilled immediately for further processing. Milk from chilling centres and inter dairies is already chilled, therefore directly taken into RAW MILK TANK (RMT). Milk is pasteurized and standardized as per production planning. Excessive fat in the form of cream is used for ghee making. Costs involved in reception and processing 1. Manpower required for reception and processing 2. Stores items like chemicals, detergent, spares, oils and lubricants 3. Repair and maintenance expenses 4. Quality control expenses H.R.I.H.E, Hassan Page 44
  • 45. A Study on Formulation of Costing System 5. Steam 6. Electricity 7. Refrigeration 8. Water 9. Depreciation of plant and machinery 10. Other expenses 4.1 3 MANUFACTURING OF PRODUCTS Liquid milk (sachet milk) Sachet milk is standardized for 3.5% FAT and 8.5% SNF. This milk is packed in 1 litre and half litre pack and supplied for local sales and nearby cities. Cost involved in sachet milk 1. Cost of standardized and pasteurized milk 2. Repair and maintenance of sachet machine and air compressors 3. Stores items 4. Electricity 5. Refrigeration/cold storage expenses 6. Water 7. Cost of pouch film used Inter dairy dispatches The composition of milk varies as per requirement by different dairies. Some milk is also transferred to its own unit Kudige. However milk accounting is done as inter dairy sales. Costs involved in inter dairy dispatches The only cost involved is cost of raw milk or pasteurized milk. H.R.I.H.E, Hassan Page 45
  • 46. A Study on Formulation of Costing System Ghee The excess fat recovered during standardization of milk is mainly used for ghee making. Fat recovered by separation of COB+ve and churning of curdled milk is also used for the process. Cream is curdled in butter churn and the butter is heated in ghee kettle for ghee preparation. Ghee packed in 200 ml, 500 ml and one litre sachets as well as in 15kg tins. Costs involved in the process • Cost of good cream, COB +ve milk and curdled milk • Repair and maintenance of the equipments • Stores items like detergents, muslin cloth etc. • Steam required in butter melting and in ghee kettle • Electricity • Refrigeration for sprinkling chilled water on butter churn • Cost of packaging: Tins, ghee bottles and corrugated boxes • Water Peda Presently a very little quantity of peda is prepared. A steam vat is used for the purpose. The approximate composition of Peda is FAT, SNF and 6% sugar. It is packed in parchment paper cover. Costs involved in peda making • Cost of the milk • Steam required in steam vat • Sugar • Packaging ( parchment paper bag ) 4.1.4 SELLING AND DISTRIBUTION The main task of marketing personnel is dealing with city supply and sales in nearby areas. For local sales some vehicles have been hired. Some procurement vehicles are also engaged in distribution in nearby areas. Tankers are used for inter dairy sales. H.R.I.H.E, Hassan Page 46
  • 47. A Study on Formulation of Costing System S.D costs involved in sachet milk sales • Distribution cost( hired vehicles ) • Parlor expenses • Advertisement • Commission on sales S.D expenses involved in I/D sales More or less transportation expenses are involved (tanker expenses) S.D. expenses involved in ghee sales • Hired vehicle expenses • Advertisement • Parlour expenses • Commission on sales 4.1.5 ADMINISTRATION To carry out all the activities smoothly administration plays a vital role. Establishment, finance and accounts, MIS, stores, security, time office, canteen and horticulture are included in administration. Costs involved in administration • Manpower • Staff welfare • Post and telegraph • Consumables • Telephone expenses • Interest on capital • Depreciation of office building • Other miscellaneous expenses H.R.I.H.E, Hassan Page 47
  • 48. A Study on Formulation of Costing System 4.2 EXISTING SYSTEM OF COSTING AT HASSAN DAIRY 4.2.1 COST FORMAT In Hassan Co-Operative Milk Producers Societies Union ltd., cost sheet used has following features. 1. This cost sheet is only meant for costing liquid milk. Ghee and peda costing is not being done. 2. Material cost is calculated by summing cost of milk produced through DCS and inter dairies, procurement transport cost(PTC), AI and drugs, salaries of P and T wing and chilling centres expenses and then deducing the cost of excess fat recovered in form of ghee and cost of milk issued for product(peda) manufacturing from that total. Opening and closing balances of milk are also taken into accounts. Ghee is valued at inter dairy rates ie., rs.40 per kg, material cost is calculated per litre of milk. 3. Processing cost per litre is calculated by adding processing expenditures like salaries and wages, consumables chemicals, detergents and spares, services of powers fuel, maintenance of plant and machinery, depreciation of plant and machinery and other miscellaneous expenses like vehicle expenses etc. this sum of processing expenditures is divided by total quantity( in litre ) of milk produced. 4. Administration cost is composed of salaries, welfare expenses like uniform, canteen etc., communication, vehicle maintenance, interest on capital, depreciation of buildings, office equipments and some other miscellaneous expenses like computer charges, audit fee, bank charges etc. for arriving unit administration cost, the total expenses are divided by total sales. 5. Selling and distribution expenses include packing materials, crates, transportation cost for administration, depreciation of distribution vehicles, machinery/equipments, services for parlour, commission on sales and other charges like agmark, unit cost for selling and distribution is calculated by dividing the total cost incurred to total sales. H.R.I.H.E, Hassan Page 48
  • 49. A Study on Formulation of Costing System 6. The total cost of production per litre is calculated by unit costs of materials, processing, administration and selling and distribution. 4.2.2 ADVANTAGES OF THE SYSTEM 1. It involves less reporting from different department 2. Time required in preparing monthly cost statement is less 3. It gives quick results 4. It involves less computations 4.2.3 DISADVANTAGES OF THE SYSTEM 1. The costing only meant for costing liquid milk and does not give an idea of cost of ghee and peda 2. The costing of liquid milk is also ambiguous as it does not give separate cost figures for sachet milk and inter dairy dispatches. 3. The cost of milk per litre does not give any indication about its composition which makes this figure with no significance. 4. All the fixed costs and variable costs are clubbed together which does not give clear indication of cost of the production, particularly operational cost and this may lead to faulty decision endangering the viability of the organization. 5. While calculating material cost valuation of ghee at inter dairy rates is not logical and violate the accounting principles of inventory valuation. 6. Existing cost sheet does not exercise any control as the unit cost, for particular activity is sum of fixed and variable cost, so the operational efficiency cannot be measured for a particular activity which is only reflected in unit variable cost. H.R.I.H.E, Hassan Page 49
  • 50. A Study on Formulation of Costing System 7. While calculating material cost, DCS milk and inter dairy receipts are clubbed together, which gives a false low procurement and input expenses per litre of milk reserved. In fact all P and I expenses should be attributed to DCS milk. 8. In case of processing cost the expenses of processing section, sachet and product section are clubbed together to calculate the cost of liquid milk. 9. In case of selling and distribution expenses inclusive of packaging material is not at all logical particularly adding cost of ghee film and corrugated boxes in costing of milk is a gross mistake and lead to enormous confusion. 10. As in case of inter dairy sales or stock transfer to Kudige, the role of marketing people is very less. Their energies are being used mainly for local sales but by giving all credit of their sales and transfers and their unit selling and distribution cost gives a false picture of their efficiency. In fact selling and distribution expenses should be allocated to local sales only. 11. Finally, the present system of costing is vague and leads no where. The unit cost figure does not even tell that whether the milk is packed or loose and what is its composition. Their current system also is not useful in decision making as it does not give separate operation cost of different product. This system also does not give performance criteria for different activities nor does it give base for inventory valuation. So there is a lot of scope for improvement. 4.3 PROPOSED SYSTEM OF COSTING 4.3.1 Adoption of variable costing After observing many flaws in the existing system of costing and considering organization needs, the variable costing system was found most suitable for the union. In the existing system, absorption costing has been followed which does not give any clear picture of operational costs involved in various products. Variable costing could be a better solution. H.R.I.H.E, Hassan Page 50
  • 51. A Study on Formulation of Costing System 4.3.2 Advantages of variable costing and contribution approach 1. Variable costing provides the operational cost of individual product. In the short run, if a product recovers more than its variable costs, it is making contribution to overall profit. In this way management can decide whether a product should be dropped. 2. Contribution-margin ratio often helps management decide on which product to push and which is de-emphasized. 3. Variable costing aid to production planning and help in decision making regarding how to use a given set of resources (men, material and machine) most profitably. 4. Variable costing is extremely helpful in milk unions where selling prices here are firmly established, because the principal problem for the management is how much variable cost is allowable and how much volume can be obtained. 5. Variable costing will also help in performance evaluation of various cost centres as per unit variable cost reflects their efficiency. 6. Variable costing also act as cost control tool as it is a controllable cost which motivate the cost centres for cost reduction. 7. It will give a base to union for price bargaining with Karnataka milk federation, the apex body who fixes the price for milk and products. 4.3.3 Disadvantages of the System 1. It is an expensive technique to maintain records and staff for cost ascertainment 2. Limited applicability 3. Not reliable 4.3.4 Other provisions As considering some very specific feature of the organization provisions of absorption costing are also made. As Hassan milk union has separate unit “Kudige” H.R.I.H.E, Hassan Page 51
  • 52. A Study on Formulation of Costing System which received the milk from Hassan dairy for catering city supply. The unit prepares its own P and L accounts as pricing of these stock transfers require absorption costing as milk union want to realize total cost incurred. 4.4 PROCEDURE OF COSTING 4.4.1 Studying the need of the organization Existing system of costing is very rare and only meant for liquid milk costing, fixed cost and variable cost clubbed together which do not give any idea about pricing, production planning and cost control. Organization wants costing of individual products like sachet milk, inter dairy milk, stock transfer to Kudige, ghee and peda. To know operational cost will also be of great significance for organization in price bargaining with KMF, cost control and production planning. Separate costing for stock transfer to Kudige would give them a base to charge the cost as they cant charge project from its own unit. Cost centre wise unit variable cost would produce a clear picture of operational efficiency of different cost centres. Presently, ghee is valuated at inter dairy prices to arrive at cost of liquid milk which is not logical variable costing would provide the cost of ghee produced which could be used for inventory valuation. 4.4.2 Identification of cost centres and service centres Based on the nature of services provided following cost/responsibility centres are identified Milk procurement It can be further divided as follows • Direct milk procurement at dock • Raw chilled under received from chilling centres • Inter dairy receipts • Technical inputs H.R.I.H.E, Hassan Page 52
  • 53. A Study on Formulation of Costing System Milk processing It includes milk reception at dock, pasteurization, standardization etc Sachet It includes the manufacturing sachet milk. Cost of operations and maintenance of sachet filling machine, air compressors and crate washer is included here. Product Ghee and peda making comes under this cost centre Inter dairy and Kudige disposals There is cost, related to inter dairy dispatches are considered for arriving cost per kg of inter dairy dispatches. Service departments again can be identified on the basis of the nature of the service they provide. Following are the service departments. There is no separate engineering department at Hassan dairy. Boiler, refrigeration, electrical etc are independent sections. Therefore all are cost centres. Boilers Service of this section ie., steam is used at reception dock, processing and product section. Accordingly cost apportionment can be made. Refrigeration This section provides services to processing and sachet section, cost apportionment can be done in between these two users departments. Electricity This department serves to almost all the cost centres and service centres. Besides, purchasing the electricity, it is generated also. Maintenance/engineering H.R.I.H.E, Hassan Page 53
  • 54. A Study on Formulation of Costing System Services of this section are mainly utilized in processing and product sections. Main costs involved are of spares and lubricants. Borewell/ETP This section also provides water to almost all users as well as service sections. Marketing This department takes up the selling and distribution of the liquid milk and products. Main emphasis is on sachet milk marketing. Administration All services related to finance and accounts, stores, administration and horticulture are included here. There is a little element of variable cost, so all these cost are considered as fixed. 4.4.3 Cost identification After identification of cost centre sand service centers, the next step is identification of expenses pertaining to each activity. The expenses are of fixed as well as variable in nature. As the main emphasis is put on variable costing instead of absorption costing, so identification of these two costs separately becomes important. It is emphasized that deeper we go in identification of direct expenses, more accurate will be the costing. Direct costs like purchase cost of the milk, procurement, transportation cost, consumable stores items, spares, repairs and maintenance can be easily identifiable with different activities but estimation of utilities like steam, water, electricity and refrigeration become difficult when sub meters at various activities are not provided. However, some technical mean can be used for the estimation of the utilities. Fixed costs like salaries and benefits, depreciation, interest on loans and other fixed administrative costs are kept separate, which further can be used for determination of break even points and net projects. 4.4.4 Cost allocation of service departments Cost of service departments like electricity, refrigeration and water, can be measured through technical mean. As in case of electricity, total 1WH used by individual H.R.I.H.E, Hassan Page 54
  • 55. A Study on Formulation of Costing System activity would give a base for apportionment of the cost. Unit cost per KWH could be calculated by dividing total expenses (variable) incurred to number of KWH/units produced. In case of refrigeration, total k.cal heat extracted by a particular activity or section can be on allocation base. Unit cost of k.cal again can be calculated by dividing total expenses of refrigeration with total kcal produced. Cost of steam can be allocated on the basis of steam consumption at various equipments/activities condensate collection at each equipment will give the steam consumption for a particular activity like pasteurized section, ghee making etc. estimation of water consumption for various activities is difficult as the consumption varies with the availability and measurement is also cumbersome. So an empirical approach has been taken. Various sectional heads in charge of bore well section can be discussed for approximate water consumption at various activities and accordingly water cost can be allocated to various sections. Cost per kilo litre can be arrived by dividing total cost of bore well section with total kilo liter water drawn. For estimation of maintenance cost, it can be directly identified through log book which clearly indicates the use of spares, oils and lubricant at various departments separately. So this cost can be identified directly. Cost of marketing is mainly composed of distribution cost (transportation), parlour expenses, advertisement etc., these costs are common both for sachet milk and products and for the allocation of these variable costs a suitable base is required. Total realization seems most suited allocation bases. Administration expenses are mainly fixed in nature so no need of allocation, however to be recovered from total contribution from all the products. 4.4.5 Determination of pre split off cost Dairy products are joint products and up to a certain split off point they accumulate costs which are difficult to separate. The pre split off cost of milk includes purchase cost of milk, procurement transport cost, chilling cost and pasteurization cost. Again we are including only variable costs. P and T activity expenses are also included in pre split off costs as in case of Hassan milk union. These vary with the level of activity like more the viable DCS or functional DCS more will be the procurement and naturally more will be the P and I expenses like drugs, veterinary expenses, AI etc. processing costs in case of pre split off costs are mainly of costs of utilities ie., steam, electricity, refrigeration and water. 4.4.6 Product/disposal-costing H.R.I.H.E, Hassan Page 55
  • 56. A Study on Formulation of Costing System For product costing, total variable cost of various products are calculated. But for that purpose cost of milk used is required which can be obtained by allocating pre split off cost to various products and disposals. As Hassan Milk Union follows two axis formulas for milk pricing, it seems reasonable to allocate presplit off cost on the basis of the Equivalent fat units (EFU) used by different products/disposals. Other variable costs involved in product costing are cost of utilities, repair and maintenance, consumables and packaging materials. Selling and distribution cost for individual product should be computed separately. Selling and distribution cost can be arrived on the basis of sales only. The procedure would give separate cost figures for sachet milk, inter dairy dispatches, stock transfer to Kudige unit, ghee and peda. All fixed costs of administration, processing, procurement and marketing should be clubbed together and can be used to get BEP and net profit by using “CONTRIBUTION APPROACH”. As Hassan Milk Union has a special feature in the form of its own unit Kudige, which takes milk from Hassan dairy to meet their demand for local sales. Hassan dairy cannot earn profit from its own unit, but on the other hand they went to recover all the cost of the milk, including fixed costs. For that purpose, allocation of the fixed cost over different products/disposal becomes essential. As in” contribution approach” all fixed costs are charged against sales and these are non inventor able. Total realization of individual products will be the appropriate allocation base. So we can arrive at unit variable cost as well as unit fixed cost for individual products. This approach would be useful in both of the market environment be competitive and monopoly. Unit variable cost would be helpful in product planning, price decision and cost central, while unit fixed cost would give a base in price fixation in case of monopoly situation. 4.5 IMPLEMENTATION OF THE SYSTEM For the implementation purpose, the data related to cost are collected 2008-09. the data are classified into fixed and variable cost and variable cost were identified with different activities. 4.6 DETERMINATION OF THE PRE SPLIT OFF COST Material cost is determined by the milk procured, procurement transport cost (PTC), cost of P and I activities, chilling centre expenses and cost of inter dairy receipts (cost sheet: materials) H.R.I.H.E, Hassan Page 56
  • 57. A Study on Formulation of Costing System Processing cost is arrived by taking up cost of consumables, chemicals, detergents, repair and maintenance and most significantly cost of utilities ie., steam, electricity, refrigeration and water. For processing cost see cost sheet B. addition of these two costs give us the presplit off cost of the milk value of opening balance of the milk which is already pasteurized and don’t need any further processing is added in pre split off cost(see cost sheet c) 4.7 PRODUCT COSTING Share of presplit off cost plus the post split off costs give the product cost. For the apportionment of presplit off cost, we choose base as the no. of EFU in particular product or disposal. Cost per EFU is calculated by dividing total cost of presplit off cost with no. of EFU present in presplit milk. The formula for EFU is, Equivalent fat unit = fat + 2/3*SNF After apportioning the presplit off cost to sachet milk, I/D milk dispatches, stock transfer to Kudige, ghee and peda, post split off cost is taken into account.(see cost sheet C) 4.7.1 SACHET MILK Costs involved in sachet milk are mainly utility cost and packaging cost. Other costs are repair and maintenance, stores items etc. Air compressor and crate washer are associated equipment with sachet filling machine. Operational cost of these two is also included here. Power consumption in sachet is mainly air compressor run. However crate washer use steam. Again utility costs are decided by technical means (see cost sheet D). for packaging pouch film (LDPE) is used. 4.7.2INTER DAIRY DISPATCHES Costs involved here are cost of standardized milk and transportation expenses. Milk is taken through tankers. Transportation cost is taken through tankers log book. 4.7.3 GHEE For arriving on cost of ghee various costs involved in process were considered like presplit off cost i.e., cost of good cream, COB+ve milk, and curdle milk is taken into H.R.I.H.E, Hassan Page 57
  • 58. A Study on Formulation of Costing System account. Other costs involved were steam, electricity and water cost, consumables cost (all are post split off costs). Ghee is packed din glass bottles of 500 Gms. That cost also attributed to ghee. Corrugated boxes are used to pack 12kgs of ghee (24 bottles) 4.7.4 PEDA Presently a little quantity of peda is being manufactured because of the capacity constraint. However, costing of the peda was also done. It is packed in the parchment paper bag (25gm each) 4.8 EXISTING COST SHEET AT HASSAN DAIRY SL.NO PARTICULARS HASSAN DAIRY(qnty in liters) I QUANTITY PARTICULARS: 1.0 OPENING STOCK 24342 1.1 pasteurized whole milk 24342 1.2 RSM prepared 1.3 RCN prepared 1.4 Processed milk for marketing 2.0 RECEIPT/PROCESSING 2068073.5 2.1 Raw milk received/procured Good milk 2023695.0 Inter dairy COB+ve 6288.0 Good milk from DCS Curds 1884.0 Milk std. to reduce SNF% in milk/flush gain 36206.5 2.2 RSM prepared 2.3 RCM prepared 2.4 total quantity of milk processed 3.0 concerned commodities used 3.1 S.N.F 3.2 butter oil 3.3 white butter H.R.I.H.E, Hassan Page 58
  • 59. A Study on Formulation of Costing System 4.0 DISPOSALS 2068194.5 4.1 quantity of sold milk I/D 8020.0 1041279.0 Local 963251.0 4.2 quantity of milk used for products 394.5 4.3 sourage and curdling loss cream extracted 47078.0 4.4 handling loss 5.0 CLOSING STOCK 24221.0 pasteurized whole milk 24221.0 raw milk RSM prepared RCM prepared Sl.no Particulars qty value Cost/ltrs II EXPENDITURE/COST PARTICULARS 1.0 materials 1992395.0 kq 8586373.51 4.42 1941103.0 ltr 1.1 opening stock of milk 24342 120645.60 pasteurized milk raw milk 1.1.1 butter milk 1.2 cost of milk procured I/D, 2031867.0 8678355.55 DCS 1.3 cost SMP/ butter oil/white butter used 1.4.1 procurement transport 518632.48 1.4.2 p&I wing activities 1.5 salary/wages including 376050.15 ESI., PF, bonus, etc of p and i wing Chilling centre H.R.I.H.E, Hassan Page 59
  • 60. A Study on Formulation of Costing System 1.6 consumables, electricity 33863.53 and repairs of PC/CC 1.7 depreciation of plant and machinery, building 1.8 less realizable value of 1.9 Excess fat recovered(ghee) 24221 968840.00 COB+ve separated 1.9.1 Milk used for products 3945 2840.40 1.9.2 Closing stock of milk 34198 169493.40 1.9.3 Sourage and curdling milk 1.9.4 Handling loss 518867.72 2.0 PROCESSING 2031867.0kg 0.26 1974603ltrs 322541.76 2.1 salary, bonus of staff employees, ESI 8092.12 2.2 consumables, chemicals and detergents excluding packaging material 110242.00 2.3 services of power, fuel, wastage 17569.27 2.4 maintenance of plant and machinery 59000.00 2.5 Depreciation of plant and machinery 1422.57 2.6 others 3.0 ADMINISTRATION 2012550.0kg 709888.69 0.36 1955831.00ltrs 197259.41 3.1 salaries 51051.98 3.2 welfare expenses 25958.78 3.3 communication( postage, telephone and stationary) 362124.50 3.4 vehicle maintenance 22550.00 3.5 interest on capital 50944.10 H.R.I.H.E, Hassan Page 60
  • 61. A Study on Formulation of Costing System 3.6 dep. Of building, office equipments 3.7 building, taxes, insurance, stipends, uniforms etc. 3.8 others 803653.99 4.0 SELLING & 1955831.00 0.41 DISTRIBUTION 392231.73 4.1 packing & distribution materials( files, bottles and crates) 137273.68 4.2 salaries, bonus, wages 168276.18 4.3 transportation for distribution 21750.00 4.4 dep. & distribution vehicles, equipment/machinery 12565.00 4.5 services for parlour 67966.90 4.6 commission on sales 3591.00 4.7 AGMARK charges/others TOTAL COST/LTRS 5.45 rs 4.9 ESTIMATION OF ELECTRICITY CONSUMPTION FOR VARIOUS RESPONSIBILITY CENTRES H.R.I.H.E, Hassan Page 61
  • 62. A Study on Formulation of Costing System 1. Estimation of cost of electricity per unit Electrical section provides services to various sections in the form of electrical supply. Here, electricity is purchased as well as generated. In case of purchased electricity unit cost is not fixed. It is based on a number of criteria like maximum contracted demand, consumption in late hours, peak demand, actual consumption etc. For calculating unit cost of electricity, purchase expense and generation expenses of electricity are clubbed together and divided with total units of electricity used. Only variable expenses are taken into account In the year 2008-09 Total consumption of electricity 2158932.00 Power charges 11681996.34 Unit cost of electricity 11681996.34/2158932.00 = 5.41 rs 2. Estimation of cost of electricity for various responsibility centres Apportionment of electrical charges to various activities becomes difficult in the absence of submeters. So far a fair computation an empirical approach is adopted which is as follows a. computation of operating load of each equipment/activity like reception, pasteurization, separation, packaging, ghee making, borewell, refrigeration, boilers etc. b. computation of running hours of each equipment of a particular activity per day. However in case of some activities log book is maintained like refrigeration which can furnish data on any time. Here, personal observation and discussions with sectional heads is required. K.W.H consumption can be calculated as follows K.W.H = load in H.P * operating hours * 0.8 * 0.746 Where 0.8 is the efficiency and 0.746 is the conversion factor Efficiency depends on the maintenance and age of the equipment which can be varied. Cost of electricity consumed in various processes is then calculated multiplying KWH consumption with unit cost of electricity. 1. COST SHEET A: MATERIALS H.R.I.H.E, Hassan Page 62
  • 63. A Study on Formulation of Costing System quantity Var.cost Unit var.cost Materials 121812756.0 1626058886.39 13.35 1.DCS milk 1.1 milk purchased 121812756.0 1575757984.95 12.94 1.2 p and I expenses 7790809.63 0.06 1.2.1 procurement transport cost(ptc) 42510091.81 0.35 1.2.2 p and I activities 1.2.3 chilling centre expenses 2.0 inter diary receipts 0.00 2.1 milk received 0.00 2.2 transport expenses 0.00 2. COST SHEET B: CHILLING COST quantity Var.cost Unit var.cost Chilling 121812756.0 16486073.40 0.14 1.consumables,chemicals, Detergents etc (Stores 121812756 3601134.53 0.03 items) 2. repairs and maintenance 121812756 5581454.90 0.05 3. utilities 3.1 steam 3.2 refrigeration 121812756 5812718.00 0.05 3.3 electricity 121812756 1490765.97 0.01 3.4 water 3.5 other expenses (vehicle expenses) H.R.I.H.E, Hassan Page 63
  • 64. A Study on Formulation of Costing System 3. COST SHEET C: PROCESSING COST Particulars quantity Var.cost Unit var.cost Processing 65834228.1 11660325.25 0.18 3 1.consumables,chemicals, Detergents etc 65834228.1 3434799.17 0.05 (Stores items) 3 2. repairs and maintenance 1975026.84 3. utilities 3.1 steam 65834228.1 761341.99 0.01 3 3.2 refrigeration 65834228.1 4726741.00 0.07 3 3.3 electricity 65834228.1 762416.25 0.01 3 PRE SPLIT OFF COST AND APPORTIONMENT quantity Var.cost Unit var.cost Total pre split off cost 122063303.0 1657941511.04 13.58 1. A+B 121812756.0 1654205285.04 13.58 2. opening balance 250547.0 3736226.00 14.91 H.R.I.H.E, Hassan Page 64
  • 65. A Study on Formulation of Costing System 1. APPORTIONMENT OF PRE SPLIT OFF COST Allocation base: Equalent fat unit (EFU) : EFU = Fat+2/3 of SNF Total EFU available: Fat 5095140.15 SNF 6899646.40 Total solids 11994786.55 1657941511.04 138.22 Cost of milk Unit cost of Disposal/product Quantity EFU used milk used 1. sachet milk/Curds/Butter 39845085 3783741.55 522995732.6 13.13 Milk 2. I/D milk 68121020 6671564.70 922155973.1 13.54 4. ghee 219620 217423.80 30052718.5 136.84 a. For Conversion 13769160 1312282.96 181386170.6 13.17 b. cob+ve milk c. curdled milk 5. peda 101133 9776.19 1351283.006 13.36 122056018.1 1657941877.9 3 11994789.20 2 H.R.I.H.E, Hassan Page 65
  • 66. A Study on Formulation of Costing System 2. COST SHEET D: PRODUCT COSTING quantity Var.cost Unit cost A. cost of sachet milk 39845085 558373550.19 14.01 1.cost of milk used(from cost sheet C) 13.13 39845085 522995732.63 SMP used 72000 8600799.83 2. repair and maintenance 1992254.26 3. stores(excluding packaging material) 1587404.09 4. utilities 4.1 steam 51709.16 4.2 electricity 268504.26 4.3 water(5%) 4.4 refrigeration/cold storage 1237394.68 5.cost of packaging pouch film 21639751.28 0.54 B. cost of ghee 574903 87274033.2 151.81 1. cost of cream cob+ve and curdled milk(from cost sheet c) 219620 30052718.5 136.84 Cost of butter used 436432 52134226.01 119.46 2. repair and maintenance 439240 3. stores 660303 4. utilities 4.1 steam 586256.18 4.2 electricity 814226.00 4.3 water Cost of ghee loose 5.0 cost of packaging 574903 2587063.50 4.50 5.1 ghee bottles with caps 5.2 corrugated boxes C. cost of peda 22600 1693526.62 74.93 1.cost of milk used (from cost sheet C) 101133 1351283.01 13.36 2. ingredients like sugar 139563.54 3. stores 33900 4. steam consumption 89579.07 5. others 11401.00 6. packaging cost/ exp. 67800.00 3.00 H.R.I.H.E, Hassan Page 66
  • 67. A Study on Formulation of Costing System 3. COST SHEET E: SELLING AND DISTRIBUTION EXPENSES quantity Var.cost Unit cost 1. S.D expenses for sachet milk 39845085 21048974.75 0.53 1.1 hired vehicle for distribution (allocation base: total realisation) 19823508.00 1.2 parlour expenses(base: TOT realization) 93496.15 1.3 advertisement 1131970.6 1.4 Commission 1.5 CraTS(85%) 2. S.D expenses for I/D sales 2.1 tanker expenses 3. S.D expenses for ghee 574903 1034708.25 1.80 3.1 hired vehicle for distribution 970210 (allocation base: total realisation) 3.2 parlour expenses 4920.85 (base: TOT realisation) 3.3 advertisement 59577.4 3.4 Commission 4. total S.D expenses 168274 7. COST SHEET F: FIXED COSTS AND APPORTIONMENT Amount Rs. H.R.I.H.E, Hassan Page 67
  • 68. A Study on Formulation of Costing System 1.salaries wages 99852841.00 2.rent rates and taxes 1090622.00 3.interest and bank charges 1558036.00 4.vehicle maintenance 1389518.00 5.depreciation 13330439.00 6.administration 8684100.00 Total fixed cost 125905556.00 APPORTIONMENT OF THE FIXED COST Disposal/product Quantity Sales(value) Share of fixed Unit fixed cost cost 1. sachet milk 39845085 631590531.20 42145226.26 1.0577 2. I/D milk 68121020 982243283.75 65543834.80 0.9622 3. ghee 574903 90865001.37 6063305.03 10.5467 4. peda 22600 3068524.03 204758.67 9.0601 5. Butter & SMP 1440862 179059805.96 11948431.24 8.2926 8. PRODUCT COSTING Quantity Var.cost Unit cost A. cost of Converted products 1949294 232853993.21 119.46 H.R.I.H.E, Hassan Page 68
  • 69. A Study on Formulation of Costing System 1.cost of milk used(from cost sheet C) 13769160 181386170.64 13.17 2. Tanker hire charges 14497466.00 3. stores(excluding packaging material) 4. utilities 4.1 Conversion charges 34614333.00 4.2 Storage charges 555789.00 4.3 water(5%) 4.4 refrigeration/cold storage 0.00 5.cost of packaging pouch film 1800234.57 5.1 FINDINGS 1. Existing reporting system seems to be inadequate H.R.I.H.E, Hassan Page 69
  • 70. A Study on Formulation of Costing System Presently at Hassan dairy the costing system is not adequate. it renders no help in product costing, cost control and decision making. Adoption of variable costing system as suggested will pave way for better decision making related to price fixation, product planning, and cost control and performance evaluation. 2. Capacity constraints and equipment choice for peda making Peda prepared here has good quality and good market potential. But capacity constraint comes in the way. The capacity of peda making pan is very small and requires higher consumption of steam. 3. Lack of well defined responsibility centres Presently, the different responsibility centres are not well defined for the proposed costing system, proper identification of the responsibility centre/cost centre is foremost requirement. 4. After considering the fixed cost, Unit gain of peda, sachet milk is positive Unit gain on sachet milk = 0.25 Unit gain on peda = 51.78 5. After considering the fixed cost, unit gain is negative in case of I/D sales, conversion stock and ghee Unit gain on I/D sales = -0.08 Unit gain on conversion stock = -6.10 Unit gain on ghee = -1.3 H.R.I.H.E, Hassan Page 70
  • 71. A Study on Formulation of Costing System 5.2 SUGGESTIONS ADOPTION OF VARIABLE COSTING SYSTEM Contribution approach helps us in selection of product mix. Standard cost sheet has been designed for the purpose with supporting cost sheets. Illustration shows that local sales of ghee and peda generate good contribution to fixed costs so priority should be given to these products. The system also gives the unit price of milk transferred to Kudige, which includes element of fixed cost, also the fixed cost is charged here against the sales only. IDENTIFICATION OF RESPONSIBILITY CENTRES Presently, the different responsibility centres are not well defined for the proposed costing system, proper identification of the responsibility centre/cost centre is foremost requirement. For example, in case of a plant, processing section and product section is clubbed together, for costing of ghee and peda, product section should be treated as a separate cost centre. Expenses related to different cost centres should be shown separately in accounts. IMPROVEMENT IN INFORMATION SYSTEM Cost system requires information collection. The quality of information plays an important role in final cost figure. Information system of any organization should have communicative authenticity. Improper information will lead to improper behavior and decisions and would mislead to management. Responsibility for information quality must lie with the source of information. Existing reporting system at Hassan dairy seems to be very inadequate. For example, service departments like boiler, refrigeration, electricity, maintenance, bore well, transport etc., are not aware about their cost and total expenses so cost control and performance evaluation becomes out of question. Most of the cost centres do not maintain any record of receipts and utilization of spares, consumable store items, which makes the estimation of total expenses for that cost control difficult and thereby costing. Stores also not sending any monthly material consumption at different cost centers (cost centre wised). In transport section details regarding tanker movement for chilling centers and inter dairy receipt/dispatches have not been furnished, which are badly needed for product H.R.I.H.E, Hassan Page 71
  • 72. A Study on Formulation of Costing System costing. In maintenance section no records are kept for material consumption at different cost centers. After taking into accounts all these follows: standard information collection formats have been designed which will help in estimating total expenses ad unit expenses for every cost centres. These formats are cost sheet water, cost sheet electricity, cost sheet refrigeration and cost sheet steam. Certain formats are designed for stores for furnishing information about material consumed by different section. These efforts would improve the information flow which in turn would prove effective in accurate cost estimation. DELEGATION OF RESPONSIBILITY Presently, the information collection and summarization is associated with accounts department. It should be delegated to various cost centers. Proposed system envisaged delegation by designing information collection formats which have to be fulfilled by cost centres. This arrangement would lead to a speedy information flow and less burden on accounts department. MAINTENANCE OF THE RECORDS In the existing system, many responsibility centres don’t maintain records like log book, material and spare consumption register, repair and maintenance register and packaging material consumption register, log book for air compressor run should be maintained at sachet and ghee section. Separate register for transfer movements for I/D receipts should be kept. This arrangement would lead to more accurate costing. EMPHASIS ON LOCAL SALES OF PEDA Contribution margin is much higher in case of peda, which is locally sold as shown in illustration. Therefore, for maximizing the profit more emphasis should be given on local sales of peda which bring higher prices than I/D sales. CAPACITY CONSTRAINTS AND EQUIPMENT CHOICE FOR PEDA MAKING A series of some bigger pans would be a good choice to increase capacity of the system without affecting the quality as well as the steam consumption per kg of peda will H.R.I.H.E, Hassan Page 72
  • 73. A Study on Formulation of Costing System also be reduced. The contribution margin in case of peda is good enough to go for higher production. IDENTIFICATION OF COST REDUCTION AREAS If we arrange all the expenditure head in the descending order we would find that more than 80% of controllable expenses are contributed by about 25% of expenditure heads. Therefore top management should concentrate on these 25% expenses for proper monitoring and cost reduction. LDPE film, diesel, ghee bottles, coal, semen, procurement transportation charges, electricity etc., are the areas where more concentration is needed to identify the cost reduction measures. H.R.I.H.E, Hassan Page 73
  • 74. A Study on Formulation of Costing System CONCLUSION Existing reporting system at Hassan dairy seems to be very inadequate. For example, service departments like boiler, refrigeration, electricity, maintenance, bore well, transport etc., are not aware about their cost and total expenses so cost control and performance evaluation becomes out of question. Most of the cost centre does not maintain any record of receipts and utilization of spares, consumable store items, which makes the estimation of total expenses for that cost control difficult and thereby costing. Stores also not sending any monthly material consumption at different cost centers (cost centre wised). In transport section details regarding tanker movement for chilling centers and inter dairy receipt/dispatches have not been furnished, which are badly needed for product costing. In maintenance section no records are kept for material consumption at different cost centers. After taking into accounts all these follows: standard information collection formats have been designed which will help in estimating total expenses ad unit expenses for every cost centres. These formats are cost sheet water, cost sheet electricity, cost sheet refrigeration and cost sheet steam. Certain formats are designed for stores for furnishing information about material consumed by different section. The costing system of any organization helps to ascertain the overall costs incurred in the organization. Cost sheet should showcase the operating efficiency and identify the various deficiencies in operation of various departments. In order to cope up with the inadequate costing system, variable costing system is being proposed to the organization. This system of costing develops an individual cost sheet for various departments of the organization and also for various products being manufactured here. This helps to identify the various costs incurred for individual products and to identify the areas where costs of manufacturing can be controlled so as to reduce the per unit cost of each product and to increase the profits on individual products and organization as a whole. H.R.I.H.E, Hassan Page 74
  • 75. A Study on Formulation of Costing System BIBLIOGRAPHY 1. Choudry and Chopde, “Cost Accounting”, Ninth Edition, Sheth Publishers Pvt. Ltd, Pg no- 7-12 and 15-17 2. Jawahar Lal, “Cost Accounting”, Third Edition, Tata McGraw-Hill Publishing Company Limited, Pg no- 5-8 and 11-16 3. S.N.Maheshwari and S.K. Maheshwari, “Accounting for Management”, First Edition, Vikas Publication House Pvt Ltd, Pg no – 3.16-3.27 Websites • kmf.org • google.com • wikipedia.com • scribd.com • khoj.com H.R.I.H.E, Hassan Page 75