Implementation of Costing System

1. Implementation of Costing System CMA V R Kedia M – 93241 80717 E Mail id – vrkedia42@hotmail.com

2. Career Planning For Cost Accountants (Apendix A)

3. 1.Why Cost Accounting System required? • Segmental Costing • Process Costing • Product Costing • Product Pricing • Selection of Product mix • Profit Planning • Profit Improvement • Profit Optimisation • Export Pricing • Customer-wise profit analysis • Make or Buy Decision • Purchase of new machine • Inventory Valuation

4. Cost Ascertainment Management Decision making Cost Analysis 2. Purpose of costing Cost Reduction/ Cost Management Cost Control Cost Reporting

5. Standard costing 3. Costing Technique Projected costing Replacement costing

6. 6. Type of Costing/ Industry 5. Marginal Cost & Contribution Technique 4. Costing concept - Value Addition - Marginal Cost & Contribution - Technique (Key limiting factor) - Total Cost & Margin - New product pricing - Export pricing - Profit planning - Profit optimization (PIP) - Job Costing - Contract Costing - Process Costing - Pharma, Chemical, Textile, etc. - Engineering - Vehicle, Auto Spares, etc. - Service Sector - IT, Transport, Telecom, etc.

7. Materiality • ABC Principle • Approximately correct vs. precisely wrong • Key limiting factor 7.Costing Principles 8. Success of Costing System • Quality of Data (Source level) • Top Management support • Promptness of Data • Accuracy vs. timeliness of Data • Manage with existing Forms • Minimum introduction of new Forms • Costing Manual

8. Product wise process sequence How to start • Organisation Profile • Process profile (process sequence) • Factory Visit • Shop floor layout • Product profile • Product-wise process sequence

9. 10. Cost Element Material cost Variable conversion cost Fixed conversion cost

10. 11.Cost Analysis • Mapping of Item-wise expense/ income under different heads from P&L statement - • - Direct to product cost • - Allocation to cost centers, FOH, AOH, SDOH, Interest • -Other activities cost - Trading, Non manufacturing etc. • -Omitted from cost

11. 12.Non cost items Abnormal & non-recurring items Abnormal Idle capacity cost, Depreciation on idle assets Previous year’s items Non operational items (trading activity etc.)

12. Check List for Cost Consultancy

13. Cost identified to products Cost allocation to cost centers (Production & Service cost centers) Absorption of cost to products (SKU-wise) 13.Costing System Introduction - Steps Calculation of cost center wise cost per unit (cost drivers) - kgs, liters, numbers, machine hours, labor hours etc. Cost apportionment to cost centers (Production & Service cost centers) Development of cost center-wise Cost Driver Service cost centers Cost apportionment to production cost centers

14. 14. Raw Material & Packing Material cost - BOM • 15. Cost center-wise Conversion Cost Calculation - Routing (labour hours, machine hours) • 16. Idle Capacity cost calculation • Normal - included in cost • Abnormal - excluded from cost

15. 17. Cost Records & Cost Audit Report

16. 18.Special points to be considered for Introducing Costing System - • 1.High speed and slow speed machine cost apportionment to products eg. TFO, packaging machine • Whether average cost? • Specific cost – cause & effect • 2.Idle machine – depreciation & other cost to be omitted • Impairment of fixed assets – omitted • 3.Chemical/ API plant – reactors of different sizes – 10 litres to 500 litres (200 nos.) • Whether average cost? • Whether capacity-wise cost? • Whether capacity group-wise cost?

17. 4.Engineering industry – fabrication job - tank / vessel manufacturing • Cycle time – 3 months to 24 months • Method of charging of interest on working capital to products? • 5.Post manufacturing cost (AOH, HO, S&D, Interest) about 40% • Segment-wise analysis • ABC Costing • 6.Interest on working capital • Method of apportionment to various products keeping in mind: • Variation in manufacturing cycle time • Credit period on raw material (import & domestic) • Varying holding time of RM inventory • Credit period on FG (Export & domestic) • Varying holding time of FG inventory • Early payment to supplier as a treasury activity

18. 7.Interest on term loan • In case of more than one plant, method of allocation of interest: • As per loan for specific plant • Overall basis • 8.Quality control cost treatment – RM, PM, FG • Based on testing time • Treatment of special tests • 9.S&D expenses • Analysis for domestic, export, Government supply • Freight cost analysis • Air or ship • Basis - weight, cubic feet area covered, selling price • 10.Sample cost in Pharma industry • Overall percent of sales price • Specific to product

19. 11.CRAMS activity in Pharma industry • 12.Sales promotion cost • Free distribution under one for one scheme • Identify to specific product • Overall percent of selling price • 13.Export benefit treatment • Product-wise, country-wise • Focus market • Star export house • DBK • DEPB – notional addition in imported raw material cost • 14.Export commission – Indian currency, foreign currency

20. 15.HO expenses – nature as per incurrence • Cost driver – gross turnover, net turnover, specific to product/ product groups • 16.IT & Communication cost analysis • Instruments for process control • ERP – software & hardware cost • Server & backup system cost • Tracking transport lorry movement • IT support given to vendor for tracking • Mobile/ laptop cost • 17.CSR cost treatment • Whether cost? • Manufacturing cost, post manufacturing cost • Apportionment to cost centers & products • Nature of activities: • Staff welfare – scholarship etc. • Hospital • Education • Village – social upliftment • Others

21. 19 Calculation on Interest of WC

22. 20.Costing & Pricing for Export Special Packing Export Incentive CIF & FOB pricing Marginal costing & Contribution Technique

23. 21.Bundling products for pricing

24. 22.Transfer pricing - Inter division/ Inter unit/ Inter company At cost Price through Negotiation Cost plus percentage profit • Market price for similar product

25. 23.Target Costing • Fixed price - Expected Profit % = Target cost.

26. 24.Techniques for cost reduction • General • Short gestation period (quick results) • Minimum gestation period • Long gestation period

27. Long gestation period Medium Gestation Period Short Gestation Period: (Quick Results) General -Cost analysis identifying ‘Waste Points’ -Cost Benefit Analysis -Operation Research Techniques. -Better Human Relations & Better Human Resources Development. -Managerial Resource Development. - Energy Audit - Optimisation of working capital Requirement - Farming out (after proper Make/Buy Study) - KAIZEN - Material substitution -Vendor development -Technical Audit -Value analysis -Standardisation -Work Study / Time &Motion Study / O & M Study -J.I.T - Superior Technology /Automation /CAD /CAM - Improved Machine lay out - Business Process Re-engineering. - Value Engineering.

28. A- Individual skill 25. Skills essential for effective Cost Accountants • Functional Knowledge/Skills • Analytical Skills • Problem solving skills • Negotiation skill • Out of the box thinking • Interpersonal skills/communication skills • Learning skills • Planning and implementation skills • Ability to handle tension/conflict • Ability to relate/understand disparate information/technology to develop new product/process/service ideas • Flexibility to work under unstructured/fast changing environment

29. B- Group Skills 25. Skills essential for effective Cost Accountants • Ability to work together • Ability to learn together • Ability to use task forces/project teams • Ability to work in unstructured situation • Ability to work with “Tight” resource base

30. C - Corporate Skills 25. Skills essential for effective Cost Accountants • Identify value creating processes and capabilities that lead to either differentiation or cost or both • Market sensing skill • Creating/setting new direction/vision • Putting in place right organizational structure/systems/physical infrastructure • Selecting the right people • Inculcating ethics/principle centred management • Encouraging SBUs /departments /functions to innovate • Establishing networks and alliances

31. 26.Case studies Jute Mills Garment Manufacturing Company Wire Manufacturing Company

32. THANK YOU