The subject matter discuss in details about the cost accounting being practiced in a thermal power station for calculating the actual cost of generation of electricity. The cost centres and the cost affecting factors alongwith steps to reduce the cost of generation are described in the presentation. The PPMS system adopted can be further be well designed by any power plant engineer.

1. COST ACCOUNTING, COST CONTROL
AND COST REDUCTION
IN THERMAL POWER PLANTS
Manohar Tatwawadi
Total output power solutions
9372167165
PUNE, MAHARASHTRA

2. Management Accounting
• Management Accounting covers
• Financial Accounting,
• Cost Accounting
• Revaluation Accounting,
• Budgetary Control,
• Inventory Control,
• Statistical Methods
• Interim Reporting,
• Taxation,
• Office Services (MIS- Management Information Services) and
• Internal audit system
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3. FINANCIAL ACCOUNTING
• Financial Accounting is mainly used for an
instrument to record transactions of the business
to satisfy the requirements imposed by fiduciary
relationship between the business and its owners
as well as third parties connected with business
such as creditors, financial institutes etc.
• Basic function is limited to recording, classifying
& summerising the business transactions of only
financial character through Trial Balance, Income
Statement and Balance Sheet.
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4. COST ACCOUNTING
• Cost Accounting is the process of accounting for
costs.
• It embraces the accounting procedures relating to
recording of all incomes and expenditures and
the preparation of periodical statements and
reports with the object of ascertaining and
controlling the costs.
• It is, thus, the formal mechanism by means of
which the cost of products or services are
ascertained and controlled.
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5. Objectives of Cost Accounting
Main objectives of cost accounting can be summerised as follows :
• Determining Selling price : Cost accounting collects costs related
to individual product & services connected to such product,
which plays main role in deciding selling price.
• Determining & controlling efficiency : Cost accounting : Cost
accounting involves a study of various operations used in
manufacturing a product or providing a service. It facilitates
measuring of efficiency of organisation, station, unit and section
as well as means of increasing efficiency.
• Facilitating preparation of financial & other statements : The
third objective of cost accounting is to produce statements at
such short intervals as the management may require. Financial
Accounts are prepared only once at the year end and it shall be
of no use for current decision-makings by the management.
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6. Objectives of Cost Accounting
• Providing basis for operating efficiency : Cost
accounting helps the management in formulating
operating policies. These policies may relate to
any of following matters:-
i) Determination of cost-volume-profit
relationship
ii) Shutting down or operating at a loss
iii) Making or buying from outside suppliers
iv) Continuing with the existing plant and
machinery or replacing them by improved &
economic ones.
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7. Elements of Cost
• There are three broad elements of cost :
– Material (Direct material or Indirect material),
– Labour (Direct Labour or Indirect Labour and
– Expenses (Direct expenses or Indirect expenses)
• Direct Material comprises of all materials which becomes an
integral part of the finished product and which can be conveniently
assigned to specific physical units.
• Direct Labour comprises of all labours, which takes active and
direct part in the production of particular commodity.
• Direct Expenses are those, which can be directly allocated to
specific cost centers or cost units.
• The term OVERHEAD includes indirect material, indirect labour and
indirect expenses.
• Thus all indirect costs are overheads.
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8. MANUFACTURING ORGANISATIONS
A manufacturing organisation can be broadly
divided into three divisions:
• Factory or Works where production is done,
• Office and administration, where routine as
well as policy matters are decided and
• Selling and Distribution where product is
finally sold & distributed to customer.
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9. Components of total cost
• Prime Cost : It consists of costs of direct
material, direct labour and direct expenses.
• Factory Cost = Prime Cost + Factory Overhead
(It is also known as Works cost, production
or manufacturing Cost)
• Cost of Production = Works Cost + office &
administrative Overheads
• Cost of Sales = Cost of production + Selling &
distribution Overheads
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10. COST SHEETS
• The cost sheets are prepared for historical cost data or for
estimated cost data.
• Ascertainment of future costs and making comparisons
with the past records help the management in fixing up the
selling prices of the products.
• Several important decisions can also be taken by the
management regarding profit planning, production and
marketing strategy, etc.
• The preparation of Cost sheets call for special knowledge of
cost accounting and well trained personnel for giving
appropriate treatment to computation of profit, raw
material stock and also to stock of work in progress while
preparing statement of total production cost.
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11. CLASSIFICATION OF COSTS
Fixed, variable and semi-variable costs
• The cost, which does not vary but remains constant within given
period of time and range of activities in spite of the fluctuations
in production, is known as fixed cost.
• The cost which varies directly in proportion to every increase or
decrease in the volume of output or production is known as
variable cost.
• The cost, which does not vary proportionately but
simultaneously cannot remain stationary at all times is known as
semi-variable cost.
Product costs and period costs : Costs, which become part of the
cost of the product, are called “Product Costs” and costs, which are
not associated with production, are called “Period costs”.
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12. CLASSIFICATION OF COSTS
• Direct Costs and Indirect costs
• Decision driven costs : Some costs are specifically
attributed to particular decision. The decision may lead to
either profit or loss. It may result into comparatively better
or worst outcomes than those predicted. Abnormal loss or
abnormal profit can be associated with specific decision.
For example, the TPS has purchased a combustion catalyst
to mix with coal in anticipation to improve heat rate. But
after actual use, there is no improvement in heat rate. It is
decision driven cost/ loss.
• Relevant costs and irrelevant costs : Relevant Costs are
those, which would be changed by the managerial decision.
While irrelevant costs are those, which would not be
affected by the decision.
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13. CLASSIFICATION OF COSTS
• Shut down costs and sunk costs : Due to some temporary
difficulties like shortage of raw material, non-availability of
labour etc, sometimes operations may have to be
suspended for a period. During this period although no
work is done, yet certain fixed costs, such as, rents,
electricity, insurance, depreciation, maintenance etc. for
the entire plant will have to be incurred. Such costs are
known as shut down costs.
• Sunk costs are historical costs or past costs. These are the
costs, which have been created by a decision made in the
past that cannot be changed by any decision that will be
made in future. These cost are irrelevant for decision-
making.
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14. Sunk Cost Example
• The TPS purchased a machine for Rs. 30,000. The machine
has an operating life of 5 years without any scrap value.
Soon after making purchase the management of TPS feels
that the machine should not have been purchased since it
cannot yield the operating advantage originally
contemplated. Of course, it is now expected to result in
saving in operating costs of Rs. 18,000 over the period of 5
years. The machine can be sold immediately for Rs. 22,000.
• In taking the decision whether machine should be sold or
be used, relevant amounts to be compared are Rs. 18,000
in a cost saving over 5 years and Rs. 22,000 that can be
realized by selling the machine. Rs 30,000 invested in
machine is not relevant & is a sunk cost.
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15. CLASSIFICATION OF COSTS
• Opportunity Costs : The Opportunity cost refers to the
advantage, which has been foregone on account of not
using the facilities in a manner originally planned.
• Example : If TPS is to decide whether to provide certain
amount of steam at offered cost for some other
operations instead of generation of electricity. Then in
such decision, the revenue which could fetch by
generating electricity by such steam is the opportunity
cost which, should be taken into account for evaluating
the profitability of using such steam for other purpose.
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16. COST REDUCTION AND COST
CONTROL
• Cost Reduction and Cost Control are two
different concepts.
• Cost Control has achieving the cost target as
its objective while cost reduction is directed
to explore the possibilities of improving the
targets themselves.
• Thus cost control ends when targets are
achieved while cost reduction has no visible
end. It is a continuous process.
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17. COST REDUCTION AND COST
CONTROL
• AREAS OF IMMEDIATE ATTENTION
1. Daily Declared OLC for Unit and Station.
2. Economics of Unscheduled Interchanges.
3. Fixed Cost/ Variable Cost/ Consideration
4. Asset / Reliability Concept/ Availability
Monitoring.
5. Daily Cost of sectional works, processes/
services.
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18. COST REDUCTION AND COST
CONTROL
• FOCUS ON LONG RANGE PLANNING
• Flexible Budgeting, Inventory, Purchase policy
• Contract Monitoring/ Outsourcing
• Pricing Strategy/ Transfer Pricing Concepts
• Merit Order Stack Monitoring/ On Line Bidding
• Monitoring External Environment & Changes
in Internal Environment through SWOT
analysis & Strategic Planning.
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19. COST REDUCTION TECHNIQUES
The following are some important cost reduction
techniques.
1. Costing & Value Chain Analysis.
2. Standardisation, simplification & Quality Control.
3. Job study, work study and Motion study.
4. Budgetary Control.
5. Inventory Control.
6. Value Engineering & Learning curve effect.
7. Job evaluation and Merit Rating.
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20. Costing & Value Chain Analysis
• The first step is to establish Cost Accounting System and
standardize the basic routine functions of cost collection, cost
analysis & cost reporting.
• The Costing System as being practiced in some Generating
Stations recognizes division of power generation activities in any
station into different process centers and service centers. Each
process center, which is either unit wise or stage wise, is further
divided into sub process centers (SPC). Every SPC has number of
systems and area wise locations on which different operation &
maintenance activities are done. The data of cost of manpower
(direct, indirect & idle), material (Raw Materials, Spares &
consumables) and contracts deployed on each of these activities
based on defect card raised by Operating staff is collected
through entries in PPMS (Power Plant Monitoring System)
software in Works Planning System.
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21. Cost Centers & Service Centers.
PROCESS CENTRE SERVICE CENTRE
0110 Coal Handling Plant 0001 Boiler Maintenance
0210 Raw Water Intake System 0002 Turbine Maintenance
0310 Pre Treatment Plant 0003 CHP (Mech. Maint.)
0410 Soften Water Plant 0004 CHP (Elect. Maint.)
0510 D.M. Plant 0005 Vehicle Maint
0610 Hydrogen Generating Plant 0006 Elect. Maint. (Main Plant)
0710 Milling Plant 0007 Testing
0810 Boiler And Auxiliaries 0008 Instrumentation Control
0910 Fuel Oil Handling Plant 0009 Civil Maintenance
1010 Turbine & Generator 0011 Water Treatment Plant (M)
1110 CW System
1210 Ash Handling Plant
1310 Common Technical Services
1410 Township
1510 Administration
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22. REPORTS
• The reports in three standard formats for the
costs incurred on respective heads daily are
generated and cost of generation can be used
for calculation of cost of generation.
• The plan for such implementation needs to be
strategically approved and responsibility
needs to be assigned to such specially
constituted team with cost-benefit impacts of
such implementation as a special project.
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23. TARGET STEPS
1. Preparation of Flow chart for every process & its SPC.
Identifying assets in such process centers and standard
systems in each SPC. Calculation of asset for each process
center & service center.
2. Covering all activities through job/ defect card system.
Establishing daily routines in all operation sections for
proper defect card entries & daily monitoring of permits
issued & cleared.
3. Establishing of daily routines of work Plan, Job Completion
Sheets and Sectional daily Cost analysis.
4. Establishing entries of important machines running,
standby, under permit timings through PPMS.
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24. TARGET STEPS
5. Establishing Centralised Purchase/ Work Order on line
monitoring process through centralised dispatch information
& bills receipt system.
6. Establishing on line inventory/ stores with on line issues
against defect cards.
7. Establishing Contract monitoring through daily contract work
allotments & on line monitoring of RA Bills through PPMS.
8. Establishing on line time management system & salary linking
to costing tasks.
9. Establishment of On Line daily & periodic Costing System and
value chain of primary & support activities.
10. Making available full Management Information System for
decision making at all levels of management.
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25. Standardisation, simplification &
Quality Control
• Technical Parameters : Generation, Availability
Factor, PLF, Heat Rate, Specific Fuel Consumption,
Auxiliary Consumption, Annual/ Capital Overhaul
outages.
• Elements of Cost of Generation : Fixed Cost &
Variable cost Contribution, Cost contribution by
Process centers & Service centers, Variance
analysis, Standard cost deviations.
• Station as a Profit Center : Return on asset, Merit
Order Stack Position, ABT performance, Technical
performance, Liquidity Performance.
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26. Contribution of Responsibility Centers
in Value Chain of Profit Center
• Job study, work study and Motion study
Defining all jobs through Work Instructions : Creating environment for scientific
analysis of job, Time bound review till satisfactory yield is ensured from job methods.
Continuous Process of Job enrichment : Identifying frequency of failures, Minimising
repeat works, improving work methods, definining jobs with respect to processes/
individual responsibilities.
• Budgetary Control
Resource gap analysis & Capital Budgeting exercise : Identifying resource
requirement, resource allocation & measures to bridge resource gap at sub section/
section level, Comparative study of in-house means & outsourcing avenues.
Fixed v. Flexible Budgets : Continuous review of budget in changing environmental
aspects, linking with Long Range Planning.
Scientific Decision Techniques : Use of statistical models, standardizing decision-
making process, Study of impact of decision.
Budget Control Organisation : Establishment of continuous budget monitoring
exercise and internal audit features.
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27. Contribution of Responsibility Centers
in Value Chain of Profit Center
• Inventory Control
Establishing On Line Purchases, Inventory & Audit trail : Complete on line & totally
computerized system of purchase activities, works measurement process and receipt
& issue pricing strategies.
Scientific evaluation of Inventory Management Quality : The stores at sectional level
to be manned by trained staff with internal auditing arrangements, Establishing
standard stores practices.
• Value Engineering & Learning curve effect
Devising means to enrich the value of services & operating practices: Establishing
quality control with periodic review at highest level to ensure fruitful results,
comparing with standard practices adopted by market leaders and competitors.
Considering use of Learning Curve Effects: Planning effective means of on job training,
devising means of cashing the effect of learning curve.
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28. Job evaluation, Merit Rating &
Performance Monitoring
Job Evaluation:- Proper Job evaluation will lead to the
employees satisfaction and will increase the production
efficiency. It will also improve the performance of the
employees.
Merit Rating:- The merit rating will enhance the employees
interest in the production and will help in achieving performance
targets.
Benchmarking Performance : Establishing organisation for
proper benchmarking of performance.
The benchmarking of performance Quality and Reliability factor
will lead to the higher benchmarks for increasing the
performance of the system and reducing the cost of generation.
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