Costing evaluation for better productivity control

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Waste paper based paper mill costing and profitability evaluation fundamentals

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Costing evaluation for better productivity control

  1. 1. Costing Evaluation for Better Productivity Control By: D K Singhal Sumit Agarwal Chandpur Enterprises Ltd. Chandpur deveshksinghal@gmail.com Shree Badri Kedar Papers Ltd. Nazibabad July, 16-17, 2009, IPPTA Zonal Seminar, Jaipur.
  2. 2. Costing…….…(Is it a way?)  Waste paper  Recovery (Yield)  Net Waste Paper Cost  Conversion  Total Cost  Selling Price  Margin :Rs.9.00 :80% :Rs.11.25 :Rs. 8.75 :Rs.20.00 :Rs.21.00 :Rs. 1.00
  3. 3. Fundamental Difference with Conventional Accounting  Approach In conventional accounting, approach is methodological. In the proposed system, the approach is more flexible. The management decides whether to take into account various aspects like excise, freight, commission, depreciation etc.
  4. 4. Fundamental Difference with Conventional Accounting  Capital Investment As an asset in account books OR as money spent, for which a return will be available for the time to come. Depreciation- Value of asset decreases with time, but not as per the actual resale value. Depre-ciat-ion! Sometimes, it may cause Depre-ss-ion (?)
  5. 5. Fundamental Difference with Conventional Accounting  Inputs Considered as consumed in account books. Considered as and when actually consumed in present case. Partial consumption may be accepted. Store virtually not considered as a part of mill operations. Example: Wire life of 6 month. – 31 March, 1 September, 1 April – 1 April, 1 September, 31 March One Wire Three Wire
  6. 6. Fundamental Difference with Conventional Accounting  Product Considered sold when an invoice is raised. Considered sold to finished stock godown as and when produced. Virtually, one may assume that finished stock godown is an intermediate customer.
  7. 7. Fundamental Difference with Conventional Accounting  Taxation MODVAT is considered amount received. If input taxes are more, this amount only adds up in account books. Cost of input is considered as landed cost.
  8. 8. Fundamental Difference with Conventional Accounting  Inward Freight Considered as a separate head. Is clubbed with the item procured.
  9. 9. Fundamental Difference with Conventional Accounting  Rounding Off Account books must tally rupee by rupee and paisa by paisa. Remember your accounts department lost in books for just a couple of rupees mismatch? Minor rounding can be done. For an invoice value of Rs.3,67,539.47, it may be taken as 3,70,000 or something else. After all, this is just a tool to know where do we stand.
  10. 10. Development of Benchmarks  Yield of Waste Paper Depending on past experience, a yield figure is accepted for every grade of waste paper and product. A separate account is maintained for different grades of waste paper, considering daily consumption and purchase. In case the physical estimated stock varies significantly from that in account, the yield figure is modified.
  11. 11. Development of Benchmarks  Sample Calculation Newsprint 40.956 T ONP (@88% yield) Cream Wove 18.749 T ONP (33%, @82% yield) Office Record (33%, @78% yield) Old Books (34%, @82% yield) 40.956/0.88 46.541 0.33*18.749/0.88 0.33*18.749/0.78 0.34*18.749/0.82 7.031 7.932 7.774
  12. 12. Sample Account for Waste Paper Sl. Waste Paper Opening Balance Received Consumed Closing Balance 1 Newsprint 120786 18740 53572 85954 2 Office Record 80326 NIL 7932 72394 3 Old Books 61742 9050 7774 63018 4 White Cuttings 24320 8800 NIL 33120 5 …. 287174 36590 69278 254486 TOTAL
  13. 13. Development of Benchmarks  Chemical Consumption  Fixed Dose Chemicals- Retention Aid, DSR etc. Consumption is proportional to production.  Fixed Purpose Chemicals- Alum, Rosin A specific consumption per ton of paper is considered, and the figure is updated as and when required.
  14. 14. Development of Benchmarks  Boiler Fuel  A specific fuel consumption figure is accepted based upon previous experience. Typical figures for bagasse may look asNormal weather Rainy weather (wet bagasse) Very cold weather  700 kg/T 850 kg/T 750 kg/T Here again, the figures may be revised after a few months of operation, if a significant difference is observed between the booked figures and actual stock position.
  15. 15. Electricity Consumption Daily consumption figures from energy meter (Grid Power).  Actual consumption of Diesel (Electricity from DG)  Use diesel consumption X cost of diesel X DG maintenance factor  Increased boiler fuel consumption figure (Own Turbine) Cost of (total fuel – fuel required for process) Cost of turbine maintenance
  16. 16. Daily Consumables Electrical: Fuses, Relays, contactors etc.  Mechanical: Bearings, Nut, Bolt, Grease, Lubricants, LPG, Oxygen, welding rods etc.  Packing: Hessian, Core Plug, Labels etc.  Misc.: …. 
  17. 17. Fixed Expenses (Process) Wire  Felt  Rolls Coating & Grinding  Screen Baskets etc.  Replacement of Equipments  Continuing Process Up-gradation   Fixed or Variable cost? Wire (Rs.75 pmt or Rs.1,00,000 per month)………………...You Decide!
  18. 18. Fixed Expenses (General) Salary & wages  Interest of financial institution  Licensing etc.  Car, Petrol, Travel, etc.  Telephone   These are generally fixed, often with a minor variation.
  19. 19. Fixed Expenses Cost of process fixed expenses may be considered as on per ton basis or per day basis.  Cost of general fixed expenses may be taken on per day basis. 
  20. 20. Effect of Price Fluctuation An averaged base price is considered for the whole month or so.  After that, the base price may be revised according to actual conditions.  For seasonal items (like bagasse, old copy) this price may be considered as fixed for the whole year.  Because the product prices are not going to change frequently as per the prices of these items. 
  21. 21. Input Cost  The sum of all input costs is taken as input cost.
  22. 22. Product Cost The cost of product is considered as if the product packed is being sold to market.  In other words, we may consider the finished product godown as a ghost customer. 
  23. 23. Monitoring Period For most of the cases, it has been found that daily monitoring gives practically accurate results.  After a month or so, the profit statement can be cross checked by collecting more realistic data as indicated in next slide. 
  24. 24. Sample Input Calculation Sl. 1 2 3 4 5 A 1 2 3 4 5 6 Inputs Newsprint Office Record Old Books White Cuttings …. Waste Paper Weight Rate 53572 7932 7774 NIL 9 15 13 17 69278 Value 482148 118980 101062 0 702190 B Retention Aid AKD Rosin Alum UF Resin … Chemicals 14 400 100 245 185 175 29 29 4.5 18 2450 11600 2900 1102.5 3330 0 21383 C Boiler Fuel 48495 1.5 72742 D Electricity 34500 4.25 146625 E Packing Material 15000 F Consumables 25793 G Fixed Expenses 120000 TOTAL Input 1077939
  25. 25. Sample Output & Profit Calculation TOTAL Input Production Newsprint Cream Wove … … TOTAL Output Profit/Loss (Rs.) Profit/Ton (Rs./Ton) 1077939 40956 18749 59705 17 24 696252 449976 1146228 68289 1.14
  26. 26. Cross Check      Product cost = sum of product costs for the whole period. Product cost = Closing value of product in stock + Product actually sold in rupees – Opening value of product in stock !!! Base price same for the period In case of substantial difference, check for the base price for its correctness. Similarly, the inputs are to be checked.
  27. 27. Outcome      In which grade of paper the profit is more? For lighter basis weight, the product prices are on a little higher side. Is the price difference proper? Can a furnish change be considered to reduce input cost? What would be the monetary gain? In case the production is increased, the impact on profit increase is slight, normal or very high? In case machine had a poor run due to more joints, what happens to profits?
  28. 28. Thank You.

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