Cost analysis for management decisions

Cost Analysis for Management Decisions 154
1. Lecturer, Faculty of Commerce, LBS PG College, Jaipur.
Cost Analysis for Management Decisions
Ravikant Modi1
Abstract
Cost is the price paid for goods or services acquired from another person in concern
but for the business executive it is a significant item which must be dealt with according
to the purpose of its incurrence. The cost of a product occupy have an important
position in industrial sector. There are cornerstones of a business enterprise. If the
corner stone’s in the form of costs are out of tune the whole business structure will
cellarer under the stern of competition and technological development. A proper analyse
of costs enables an establishment to detect all source of waste in production and
marketing. It provides information of the management on the basis of which they can
control day to day operations of the industry. Costs can be classified and analysed
from the stand point of their relationship to accounting periods, behaviour, products
and departments. These components help in determining the actual cost incurred at
each level of production, which is used in reducing the cost and increasing the profit.
The determination and analysis of cost is used in cost control and effective management
decisions for maximising the profit for a particular product.
Keywords: CAGR, Conservation, Cost, Cost Structure.
he analysis of cost is eventual for the management to control the current operations
and to chalk out plans for future production and marketing of the products. Analysis
of cost data provides cost measures, which can be used in the evaluation of the economic
performance of managers, products, departments or processors. The need for such an evaluation
stern from the desire to increase the efficiency of activities. Cost measures provide an
economic criterion for the evaluation of performance in the completion of desired activities.
Objectives of the Study
Following are the main objectives of the study :
1. To study the cost components in cement industry.
2. To study the types of cost used in cement industry.
3. To define the use of cost components in cost control and management decisions.
T

Professional Panorama : An International Journal of Applied Management & Technology
155
Cost Analysis-Cement Industry in India
According to Indian Concrete Journal, “India has become the second largest cement producer
of the world after china and USA with cement production at 192 million tones.” In India
cement prices are purely a function of cartels (except in western India where cartels don’t
survive for long). As a result two things those are crucially important for a cement company
is sales tax benefits and direct costs. Sales tax incentives vary from state to state. For
examples: Tamil Nadu offers incentives in the form of exemption from sales tax for seven
years of doctoral for 14 years subject to a maximum of 100 percent of the investment
made in the project. In Andhra Pradesh “the scheme is similar but the maximum limit
is 140 percent of the project cost. In Gujarat, exemption is available for a period of seven
years.
The energy cost of cement and freight costs are the two most important elements in the
cost structure of a cement company. While, the share of energy costs has increased marginally,
freight cost has experienced a decline in its share of total operating costs. The share of
other costs such as stores and spare, manufacturing overheads and administrative expenses
has declined. The share of costs on account of material, repair and maintenance, employees
and selling expenses have more or less remained stable.
The operating cost of Indian Cement Industry has grown at a CAGR of 5% from Rs.1461
per ton in 2008-09 to Rs. 1868 per ton in 2012-13. Over the years, the shade of energy
costs has declined, while that of freight costs has seen a rise in total operating costs. Largely
due to commissioning of captive power plants, use of more energy efficient kilns by cement
manufactures, as well as increase in the share of blended cement in overall cement production.
The share of blended cement increased to 74% in 2012-13 from 57% in 2010-11. The
share of raw material costs has marginally increased due to the rise in input costs as wells
25% increase in the royalty on lime stone.
Raw material costs account for approximately 25% of the key operating cost of cement
manufacturing limestone accounts for 40% of total raw material costs, with other materials
such as gypsum, fly ash, slag, bauxite, red oxide and other consumables contributing the
remaining costs. In recent years, there has been a rise in the costs of these consumables,
which has resulted in raw material costs almost doubling over the last five years. The
cement industry has been identified as one of the top five energy intensive designated consumers
in India under the Energy Conservation Act (EC ACT), 2001. Power costs account for
approximately 15-20% of the key operating cost of cement approximately 90-100 kWh of
power are required to produce one ton of cement. Therefore, availability of stable and
continuous power supply is of critical importance to the cement industry. However, the
power demand supply scenario is grim in the country. While the demand for power grew
at a CAGR of 7% from 2008-09 to 2011-12, the supply increased at a CAGR of only
6.4% during the same period. As a result, India continuous to be deficit in power supply

156
with the power shortage in the country increasing from around 7.3% in FY 07-08 to 10.1%
2012-13.
Cost Structure
The cement industry is one of the most energy- intensive sectors within the Indian economy.
Clinker production is the most energy intensive step, accounting for nearly, 75% of the
energy used in cement production. In India, as estimated 90-94% of the thermal energy
requirement in cement manufacturing is met by coal. The remaining is met by fuel oil and
high speed diesel oil. For each kg of clinker, the cement industry on an average requires
800 K. Cal of coal for dry process and 1350 K. Cal of coal for wet process. Over the
years, there has been deterioration in the quality of coal. In particular, the ash content
has increased implying lower calorific values for coal, and in order and inefficient burning
etc. coal consumption thus increased resulting in higher fuel and transportation caste. In
order to reduce the cost of this component, these companies buy their own resources for
raw material, employees should be trained and other components such as power and fuel,
manufacturing cost, transportation cost and other operating cost so that the cost can be
controlled.
The average energy costs for cement companies have increased from Rs. 595/tonne of
cement production) in 2008-09 to Rs. 675/tonne in 2012-13. This represents a CAGR of
7.3%. The costs increased despite successful efforts by the companies to reduce specific
energy consumption in cement manufacture. Since, then the average energy cost per ton
has however declined from Rs. 610 in 2008-09 to Rs. 598 in 2012-13. Cost control measures
such as: increased reliance on imported coal greater stress on producing cement through
captive powers and focus on reducing power consumption has resulted in this development.
Cement prices have also witnessed a decline across regions due to lower off take of cement
and rise in capacity. The decline in price initially standard in the southern region.
This lead to a fall in cement prices across geographies in a phased manner. The impact
was more prominent in regions close to the southern region such as central and western
region. For examples, Hyderabad, Chennai and Mumbai have witnessed steed decline in
cement prices during 2011-12. However in spite of energy efficiencies, energy costs have
increased during 2012-13 mainly because of significant rise in cost of coal and liquid fuel.
Raw material costs have also increased because of increase in royalty on limestone from
Rs. 50 per tonne to Rs. 65 per tonnes.
1. Raw Material Cost
Cement is usually used in mortar or concrete. More, it is mixed with inert material (called
aggregate), like sand and coarse rock. Portland cement consists of compound of lime mixed
with oxides like silica, alumina and iron oxide.

157
Cement is a combination of fly ash, met kaolin, furnace slag and lime stone. Lime stone
plays an important role in cement manufacturing. It is a natural resource which is very
crucial to arrange and managed. The cost of raw material is effective by the cost of lime
stone and fly ash. The own lime stone resources helps in controlling the raw material cost.
The requirement of the raw materials depends upon the quantity of the product manufactured
and the product mix used by the plant.
The analysis of material cost indicated and increasing trend but in percentage to total cost
the trend remained uneven. On the basis of percentage to total cost ACC Ltd. and Ultra
Tech is the top most. India Cement Ltd. is the lowest consumer of raw material among
the selected cement companies. The variations between the actual figures and average
figures reflect the same position as for the overall cost figures. The trend of maximum
variation in percent to total cost in ACC Ltd. ACC Ltd. was the largest consumer of
raw material during the study period. The Jaypee Corporation Ltd. has the highest average
percentage of raw material consumption viz 25.23 percent the lowest average percentage
raw material consumption of India Cements Ltd. is 15.58%. From the above explanation
it is clear that cement companies are not working on their significant production level so
that it is important to improve the productivity to consume the maximum capacity of plant.
2. Manufacturing Costs
Manufacturing cost is the cumulative total of resources that are directly used in the process
of making various goods and products. The cost of goods manufactured amount is transferred
to the finished goods monetary account during the period and is used in calculating cost
of goods sold on the income statement. The cost of goods manufactured scheduled reports
for total manufacturing cost for the period that was dated to work in progress and adjusted
these costs for the change in the work in progress inventory account to calculate the cost
of goods manufactured.
The manufacturing expenses cover all cost from the stage of procurement of materials
to the completion of the finished products in the present study. The items of expenses
on fuel and furnace oil coal. Water laboratory, power cooling, grinding have been included
in the manufacturing expenses. The manufacturing expenses constitute the major proportion
of manufacturing expenses to total cost of production in cement companies. The analysis
of manufacturing cost indicated and increasing trend but in percentage to total cost the
trend remained uneven. The actual amount of manufacturing expenses had registered a
continuous increasing trend whereas the rode of hanger is proportions notices contrary to
it throughout the period of study. It shwos that the item of manufacturing expenses are
the increasing nature and do fluctuates with production. It is also clear from the above
analysis that the change in the proportions was due to the increase in production.

158
3. Power Fuel
This is the total annual cost associated with the ‘burn up’ of nuclear fuel exulting from
the operating of the unit. This cost is based upon the amortised costs associated with the
purchasing of uranium.
The overall expenditure on power and fueal was much fluctuated during the period of study.
The analysis of the performance in cement companies exhibits that the total cost of production
cost of goods sold and proportions of different component of cost have registered and
increasing trend thorugh-out the period of study. Although the programmer of raw material
and production of cement have also increased during the period of study. The rate of increase
in cost is higher than the growth rate of production. This had adversely affected the results
of the cement industry. It is therefore, suggested that more efforts should be made to increase
the productivity and profitability of the resources by effective control and application of
the latest technical services.
4. Administration Cost
Administration expenses includes salary and wages of office staff and other administration
related expenses as rent, electricity, rates and taxes, insurance charges director fees, director
commission and miscellaneous expenses.
5. Selling and Distribution Cost
Selling and distribution expenses include all such expenses as are incurred on selling advertising,
transportation, packaging and warehousing etc. In the present study, transportation charges,
commission on sales of the products, rebate to employees, advertisement and publicity charges,
marketing expenses included selling and distributing cost of the cement companies Ltd. during
the period of study.
The analysis of the cost performance in cement companies exhibits that the total cost of
production cost of goods sold and proportions of different component of cost have registered
and increasing trend throughout the period of the study. Although the procurement of raw
material and production of cement have also increased during the period of the study. The
rate of increase in cost is higher than the growth rate of production.
6. Other Cost
Other cost includes financial charges and other non operating expenses. The analysis of
other cost indicated on increasing trend but in percentage to total cost the trend remained
uneven. The Ambuja Cement Ltd. and ACC Ambuja is leading companies in other expenses
but on the basis of percentage to total cost ACC cement Ltd is the top most, The Ultratech
Ltd is lowest in other expenses among the selected cement companies. That means running
cost of Ambuja cement is very high and running cost of India Cement Ltd. is quite satisfactory.

159
Table Showing Various Costs During 2008-09 to 2012-13
(In Crores)
2008-09 2009-10 2010-11 2011-12 2012-13
Raw Material Cost 4391.44 5260.98 5491.38 6547.57 8445.22
Manufacturing Cost 2368.87 2770.93 4091.95 5914.23 9145.55
Power and Fuel Cost 3189.20 4790.71 5491.38 6547.57 6836.56
Administration Cost 3750.42 4163.49 4406.21 5218.82 6127.30
Selling & Distribution Cost 4669.99 5079.42 5584.40 6539.21 8906.23
Other Miscellaneous Cost 455.47 696.13 685.96 1133.96 4413.56
Approximately 60% of the global cement market is concentrated with the top 50 cement
manufacturers in the world. However, the consolidation scenario varies from country to
country and is highly dependent upon the maturity of the market while, China which produces
and consumers more than 50% of the world’s cement, is highly fragmented as the industry
continued to the demonstrates healthy growths ratios mature markets the is and Europe
which have been experiencing lower growth rates, exhibit higher degree of consolidation.
Since 2012-13, the cement industry has been suffering from sluggish demand growth, over
capacity and rise in input costs. The demand growth in Financial Year 2012-13 has fens
sluggish due to slower execution of infrastructure and housing projects led by higher rainfall
affecting construction activities, political instability in the southern region and completion
of commonwealth games related construction in the northern region. During April-September
2011-12, production and dispatches grew 4.9% YOY and 5.37 YOY respectively as against
11.9% and 11.1% respectively a year ago.
Cement prices have also witnessed decline regions due to lower off-take of cement and
rise in capacity. The decline is price initially started in the southern region. The impact
was more prominent in regions close to the southern region such as central as region.
References
1 Annual Reports of
l Ambuja Cement Ltd.
l Ultratech
l ACC
l India
l JayPee

160
2 Das Gupta, P. (2008), Advanced Study of Cost Accounting, Sultan Chand and Sons
Publishers, Delhi.
3 Sharma, S.P.(2008), Advanced Financial Management, Paradise Publishers, Jaipur,
2008.
4 Suddarshan, G. Reddy (2009), Financial Management Principles and Practice,
Himalaya Publishing House, New Delhi.

Cost analysis for management decisions

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