COSTING FOR A SPINNING MILL
INTRODUCTION:
It is better to review the basics concepts, costing
methods and techniques and elements of costing before we work
out a costing for a spinning mill.
Cost accounting is a system of determining the costs of
products or services. It has primarily developed to meet the
needs of management. It provides detailed cost information
to various levels of management for efficient performance of
their functions.
Financial accounting provides information about profit ,
loss, cost etc., of the collective activities of the business as
a whole. It does not give the data regarding costs by
departments, products, processes and sales territories etc.
Financial accounting does not fully analyze the losses due to
idle time, idle plant capacity, inefficient labour, sub-standard
materials, etc. Cost accounting is not restricted to past. It is
concerned with the ascertainment of past, present and expected
future costs of products manufactured or services supplied. Cost
accounting provides detailed cost information to various levels
of management for efficient performance of their functions.
"A cost is the value of economic resources used as a
result of producing or doing the things costed"
Cost is ascertained by cost centres or cost units or by
both.
For the purpose of ascertaining cost, the whole organisation
is divided into small parts of sections. Each small section is
treated as a cost centre of which cost is ascertained.
A cost centre is defined as " a location, person, or item of
equipment(or group of these) for which costs may be ascertained
and used for the purpose of control. A cost accountant
sets up cost centres to enable him to ascertain the costs he
needs to know. A cost centre is charged with all the costs that
relate to it. The purpose of ascertaining the cost of cost
centre is cost control. The person in charge of a cost
centre is held responsible for the control of cost of that
centre.
Cost unit breaks up the cost into smaller sub-divisions
and helps in ascertaining the cost of saleable products or
services. A cost unit is defined as a " unit of product ,
service or time in relation to which cost may be ascertained or
expressed." For example in a spinning mill the cost
per kg of yarn may be ascertained. Kg of yarn is cost unit.
In short Cost unit is unit of measurement of cost.
METHODS OF COSTING:
Method of costing refers to the techniques and
processes employed in the ascertainment of costs. The method of
costing to be applied in a particular concern depends upon the
type and nature of manufacturing activity. Basically
there are two methods of costing
1.Job costing: Cost unit in job order costing is
taken to be a job or work order for which costs are separetely
collected and computed.
2.Process costing: This is used in mass production
industries manufacturing standardised products in continuous
processes of manufacutring. Cost are accumulated for each
process or department. For spinning mills , process costing
is employed.
TECHNIQUES OF COSTING:
These techniques may be used for special pupose of
control and policy in any business irrespective of the method of
costing being used there.
Standard costing: This is the valuable technique to
control the cost. In this technique, standard cost is
predetermined as target of performance and actual performance is
measured against the standard. The difference between
standard and actual costs are analysed to know teh reasons for
the difference so that corrective actions may be taken.
Marginal costing: In this technique, cost is divided into
fixed and variable and the variable is of special interest and
importance. This is because, marginal costing regards only
variable costs as the costs of products. Fixed cost is
treated as period cost and no attempt is made to allocate or
apportion this cost to individual cost centres or
cost units.
Cost Ascertainment is concerned with computation of actual
costs. Ascertainment of actual costs reveals unprofitable
activities losses and inefficiencies .
Cost Estimation is the process of predetermining costs
of goods or services. The costs are determined in advance of
production and precede the operations. Estimated costs are
definitely the future costs and are based on teh average of the
past actual costs adjusted for future anticipated changes
in future. Cost estimates are used in the preparation of the
budgets. It helps in evaulating performance. It is used in
preparing projected financial statements. Cost estimates may
serve as targets in controlling the costs.
CLASSIFICATION OF COSTS:
Costs are classified into direct costs and indirect
costs on the basis of their identifiability with cost units or
processesses or cost centres.
DIRECT COST: These are the costs which are incurred for and
conveniently indentified with a particular cost unit, process or
equipment. For a spinning mill, costs of rawmaterial used,
packing material, freight etc are direct costs
INDIRECT COST: These are general costs and are incurred for
the benefit of a number of cost units, processes or
departments. These costs cannot be conveniently identified with
a particular cost unit or cost centre. In a spining mill, power
cost, administrative wages, managerial salaries, materials used
in repairs etc are indirect costs.
The terms direct and indirect should be used in relation to
the object of costing. An item of cost may be direct cost in one
case and the same may be indirect in the other case.It is the
nature of business and the cost unit chosen that
will determine whether a particular cost is direct or indirect.
FIXED AND VARIABLE COSTS; Costs behave differently when level
of production rises or falls. Certain costs change in sympathy
with production level while other costs remain unchanged. As
such on the basis of behaviour or variability, costs are
classifed into fixed, variable and sem-variable.
FIXEDCOSTS; These costs remain constant in "total" amount
over a wide range of activity for a specified period of time.
They do not increase or decrease when the volume of
production changes.
VARIABLE COSTS: These costs tend to vary in direct proportion
to the volume of output. In other words, when volume of
output increases, total variable cost also increases and
vice-versa.
ELEMENTS OF COST: A cost is composed of three elements i.e.
material , labour and expense. Each of these elements may
be direct or indirect.
| DIRECT COST |
INDIRECT COST |
| Direct material |
Indirect material |
| Direct labour |
Indirect labour |
| Direct expenses |
Indirect expenses |
COSTING FOR A SPINNING MILL - Cost Accounting - Page 2
MATERIAL COST:
DIRECT MATERIAL is that which can be conveniently
identified with and allocated to cost units. Direct materials
generally become a part of the finished product. For example,
cotton used in a spinning mill is a direct material.
INDIRECT MATERIAL is that which can not be
conveniently identified with individual cost units. In a
spinning mill, engineering department spares, maintenance
spares, lubricating oils, greases, ring travellers etc
LABOUR COST:
DIRECT LABOUR cost consists of wages paid to workers directly
engaged in converting raw materials into finished
products. These wages can be conveniently identified with a
particular product, job or process.
INDIRECT LABOUR is of general character and cannot be
conveniently identified with a particular cost unit. In
other words, indirect labour is not directly engaged in the
production operations but only to assist or help in proudciton
operations. For example in a spinning mill, the number of
maintenance workers, no of workers in utility department
etc
EXPENSES; All costs other than material and labour are termed
as expenses.
DIRECT EXPENSES are those expenses which are specifically
incurred in connection with a particular job or cost unit.
Direct expenses are also known as chargeable expenses.
INDIRECT EXPENSES can not be directly identified with a
particular job, process and are common to cost units and cost centres.
PRIME COST = Direct material +Direct labour + Direct
expenses
OVERHEAD = Indirect material + Indirect labour + Indirect
expenses
TOTAL COST = PRIME COST + OVERHEAD
ADVANTAGES OF COST ACCOUNTING:
- It reveals profitabale and unprofitable activities.
- It helps in controlling costs with special techniques
like standard costing and budgetary control
- It supplies suitable cost data and other related
information for managerial decision making such as
introduction of a new product, replacement of machinery with
an automatic plant etc
- It helps in deciding the selling prices, particularly
during depression period when prices may have to be fixed
below cost
- It helps in inventory control
- It helps in the introduction of a cost reduction
programme and finding out new and improved ways to reduce
costs
- Cost audit system which is a part of cost accountancy
helps in preventing manipulation and frauds and thus
reliable cost can be furnished to management
ESSENTIALS OF A GOOD COST ACCOUNTING SYSTEM:
- The method of costing adopted. It should be suitable to
the industry
- It should be tailor made according to the requirements
of a business. A ready made system can not be suitable
- It must be fully supported by executives of various
departments and every one should participate in it
- In order to derive maximum benefits from a costing
system, well defined cost centres and responsibility centres
should be built within the organisation
- controllable and uncontrollable costs of each
responsiblity centre should be separately shown
- cost and financial accounts may be integrated in order
to avoid duplication of accounts
- well trained and educated staff should be employed to
operte the system
- It should prepare an accurate reports and promptly
submit teh same to appropriate level of management so that
action may be taken without delay
- resources should not be wasted on collecting and
compiling cost data not required. Only useful cost
information should be compiled and used whenever required.
CASE 1. Project costing for a
POLY/COTTON PLANT with autodoffing and link to autoconer:(IN
INDONESIA)
Following information is required to work out a costing for a
new plant:
- The average count of the plant
- Capacity of the plant - No of spindles to be installed
and the number of back process and winding machines required
- Investment on machineries
- Investment on land
- Investment on building
- working capital required
- product lay out, the count pattern
- Selling price of individual counts
- rawmaterial cost(including freight, duty etc)
- packing cost per kg of yarn
- freight per kg of yarn
- direct labour cost
- indirect labour cost
- fixed power cost
- variable power cost
- spares consumption
- administration costs
- selling overheads
Let us work out a project cost:
For this , i have used the details of the modern
mill which is running in Indonesia from year 2000
STEP NO.1: Contribution to be calculated. In general
for a spinning mill ,contribution per kg ofa particular
count is calculated to work out the economics
for a new project as well as for a running mill.
Cotribution = selling price - direct cost
Direct cost for a spinning mill includes rawmaterial
price, packing cost, freight. All other costs are either
fixed costs or semi variable costs. The other costs can not be
conveniently allocated to per kg of a particular count.
The basic idea of a new project or a running plant is
to maximise this contribution. Because once the plant is
designed, spares cost, power cost, administration cost,labour
cost etc almost remain constant. There will not be significant
changes in these costs for different count patterns if
the plant is utilisation is same.
COSTING FOR A SPINNING MILL - Cost Accounting - Page 3
The following table gives the details of count pattern,
selling price, rawmaterial price, packing cost and contribution
per kg of different counts for a particular period ( year 2000).
This is just an example , one should understand that the selling
price, rawmaterial price and all other costs keep changing.
THis is the reason why costing is important for a running mill.
All the costs are changing. Some costs change every month, some
once in a year. Therefore costing plays a major role
to run the plant efficiently.
| count |
no. of spls |
no of mcs |
prdn/mc |
prdn kgs/day |
raw material cost/kg |
packing cost /kg |
freight per kg |
commn 2% on selling price |
selling price / kg |
contribn per kg |
| 20s CVC |
4480 |
4 |
1109 |
4436 |
1.456 |
0.046 |
0.051 |
0.04 |
2.2 |
2674 |
| 24s CVC |
4480 |
4 |
881 |
3525 |
1.456 |
0.046 |
0.051 |
0.05 |
2.3 |
2470 |
| 30s CVC |
5600 |
5 |
679 |
3394 |
1.456 |
0.046 |
0.051 |
0.05 |
2.4 |
2712 |
| 30s TC |
4480 |
4 |
679 |
2716 |
1.240 |
0.046 |
0.051 |
0.04 |
2.15 |
2091 |
| 36s TC |
6720 |
6 |
552 |
3315 |
1.240 |
0.046 |
0.051 |
0.05 |
2.4 |
3365 |
| |
|
23 |
|
17385 |
|
|
|
contrbn/ day |
13312 |
In the above table, all the costs are in US$. The ringframes
are with 1120 spindles per machine with automatic doffing and
link to autoconer. Packing cost is based on indonesian packing
material prices for carton packing.
The ultimate aim of the project is to maximise the
contribution. Looking into the cotribution per kg of yarn,
the project should produce only 36s TC. But in this project they
have considered 5 different counts. Because
- yarn market is not stable. It needs a lot felxibility
- customers are not same, the price depends on the
customers
- the end uses are not same, the price depends on the
enduse
- this unit exports 80% of the yarn, it can not depend on
one country, eg. 36sTc is only for Philippines market, it
can not be sold in Malaysia, eventhough the quality is good
- the count pattern depends upon the market requirement
and the major counts in the market, not only on the
contribution
- A linear programming technique can be used to maximise
the contribution, considering all market constraints, and
production constraints.
- flexibility needs more investment and more day to day
expenses, if a project has to be more flexible, it has to
invest more money on infrastructure
- the major factor which will make the project feasible
with less felexibility is YARN QUALITY in a spinning mill
- Since this is a critical step for a new project,
management should be clear about their Yarn quality ,
Flexibility required for marketing and should make use of
Linear Programming Techniques to find out the best product
mix to maximise the contribution.
STEP NO. 2: To work out the Total Investment cost (
machineries, accessories, land and builidng, humdification and
electrical instruments)
The following table gives the requirement of produciton
machines. To calculate the number of back proess and winding
drums required, a detailed spin plan should be worked out
with speeds and efficiencies to be achieved in each
machine.
While calculating the no of machines required,
m/c utilisation, m/c efficiency , waste percentage, twist
multipliers, delivery speeds etc should be considered
properly. These factors should be decided based on yarn
quality required, end breakge rates and the capacity of machine.
INVESTMENT ON MACHINERY
| MACHINERY |
NO. OF MCS |
RATE / MC |
TOTAL COST |
| Trutzschler Blowrrom line for cotton |
1 line |
416,640 |
416,640 |
| Trutschler Blowrrom line for Polyester |
1 Line |
321,365 |
321,365 |
| Trutshcler DK-903 cards |
22 |
92,500 |
2,035,000 |
| Rieter RSB-D30 draw frames (with
autoleveller) |
6 |
|
1,648,000 |
| Rieter double delivery drawframe |
10 |
| Rieter unilap |
2 |
| Rieter E62 combers |
10 |
| Howa speed frames with overhead blower |
7 |
144530 |
1,011,710 |
| Ring frames with autodoffer |
23 |
148,960 |
3,426,080 |
| winding machines ( 26 drums per mc) |
23 |
93,200 |
2,143,600 |
| Roving transport ( manual) |
1 |
150,000 |
150,000 |
| Argus fire system |
1 |
50,000 |
50,000 |
| |
|
|
|
| |
|
TOTAL |
11,202,395 |
Some of the following points can be considered while deciding
the machines.
From the above table it is clear that, 23 ringframes with
1120 spindles are working with auto doffing and with link to
autoconer. The major advantage of this automation is to reduce
labour and to reduce the problems related to material handling.
One has to really work out the benefits achieved because of this
and the pay back for the extra investment.
Drawframe contributes a lot to the yarn quality and the
ringframe and winding machine working. It is always better to go
in for the best drawframes like RSB-D30 drawframes with
autoleveller. It is not wise to buy a cheaper drawframe
and save money.
It is always better to keep excess carding and autoleveller
drawframes, so that flexibility of the project is also
maintained. If the coarser counts contributes more and the
market is good, overall production can be increased. If the
market is for finer count, both the machines (carding and
drawframes)can be run at slower speeds, which will surely
contribute to yarn quality.
Speeds of speedframe , combers and ringframes do not affect
the yarn quality as it is affected by card and drawframe speeds.
Blow room capacity should be utilised to the maximum, as it
consumes a lot of power ,space and money.
Ringframe specification should be perfect, because the
working performance and power consumption of the ringframe
depends on the specifications like, lift, ring dia, no of
spindles etc. Ring frame specification should be decided
to get the maximum production per spindle and to reduce the
power consumed per kg of yarn produced by that
spindle. Because the investment cost and the power consumption
for the ringframe is the highest in a spinning mill.
INVESTMENT ON ACCESSORIES:
The following table gives the details of the
accessories like cans for carding, rawframe, bobbins, trollies
etc
| ACCESSORIES |
NO. OF MCS |
RATE / MC |
TOTAL COST |
| Carding cans 36" x 48" |
120 |
160 |
19,200 |
| comber cans 24" x 48" |
350 |
85 |
29750 |
| Drawframe cans 20" x 48" |
1100 |
53 |
58,300 |
| Identification bands 20" |
400 |
1.2 |
480 |
| Identification bands 24" |
50 |
1.8 |
90 |
| Roving and spinning bobbins |
|
|
36,000 |
| Plastic crates |
400 |
6 |
2,400 |
| trolleys |
|
|
10,000 |
| Cone trolly |
80 |
200 |
16,000 |
| Fork lift |
1 |
27,000 |
27,000 |
| hand truck |
3 |
1000 |
3,000 |
| |
|
|
|
| |
|
TOTAL |
202,220 |
SERVICE AND MAINTENANCE EQUIPMENTS:
The following table gives the details about the
investments required on service and maintenance equipments
| SERVICE AND MAINTENANCE EQUIPEMENTS |
NO OF MCS |
RATE/MC |
TOTAL PRICE |
| Cots buffing machine and accessories |
1 |
20000 |
20000 |
| Card room accessories |
1 set |
60,000 |
60,000 |
| Spindle oil lubricator |
1 |
4000 |
4000 |
| Clearer roller cleaning machine |
1 |
3000 |
3000 |
| Vacuum cleaner |
5 |
3000 |
15000 |
| pneumatic cleaners |
6 |
500 |
3000 |
| Weighing balance |
3 |
2000 |
6000 |
| Strapping machine |
2 |
2000 |
4000 |
| Premier autosorter |
1 |
2500 |
2500 |
| Premier uster tester |
1 |
45000 |
45000 |
| Premier strength tester |
1 |
45000 |
45000 |
| premier fiber testing |
1 |
45000 |
45000 |
| Premier Classidata |
1 |
25000 |
25000 |
| Erection charges |
|
|
150000 |
| |
|
TOTAL |
427500 |
Card service machines like Flat tops clipping
machine and flats grinding machine are very important for yarn
quality. One should not look for cheaper machine. It is always
better to go for reputed manufacturers like GRAF,
HOLLINGSWORTH etc.
Rubber cots contributes a lot to yarn quality. Bad buffing in
ring frame can increase the imperfections by 15%. Poor
quality of buffing in drawframe and speedframes can affect both
production and quality. It is better to go for the best cots
mounting machine and cots buffing machine.
HUMIDIFICATION AND ELECTRICAL EQUIPMENTS:
The following table gives the details about the investments
required on umdification and electrical istruments
| Electrical installation including
transformer, incoming and outgoing panels, bus duct,
capacitor, etc for 3800 KVA |
350,000 |
| Cables |
125,000 |
| Compressor, Dryer and pipe lines |
180,000 |
| humidifaction system |
767,000 |
| chillers |
176,000 |
| Ducting and installation for
humidification system |
125,000 |
| workshops, hydrant and other equipments |
100,000 |
| |
|
TOTAL
|
1,823,000
|
In indonesia, most of the units use PLN power and some of the
spinning mills use Gensets. A detailed costing has to be done to
compare the cost per unit to decide, Whether to use the
PLN power or to go in for Gensets. while working out the costing
finance cost on investment , overhauling cost, running cost,
efficiency of the machine should be considered for cost
caluculation in the case of Genset. In case of PLN power, the
losses due to power interruption( based on the area data),
finance cost on initial investment, md charges, unit
charges to be considered. It is better to use 50% PLN and
50 % own generation.
The following table gives the details about
land and builiding investments
| Land cost |
200,000 |
| Land development |
40,000 |
Factory building Including Service ally
192 x 62 meters
11,712 Square meter @ 120 usd/sq meter
|
1,405,440 |
| Road and others |
40,000 |
TOTAL
|
1,445,440 |
STEP NO.3: To calculate the expenses ( labour, power,
stores,working capital, insurance etc)
WorWorking capital = 3,000,000
LABOUR:The following table gives the details about
labour requirement
| DEPARTMENT |
No of people required |
| Production |
140 |
| packing |
15 |
| maintenance |
30 |
| utility |
17 |
| administration and personal dept |
20 |
| |
|
Total no of people required per day
|
222 |
| wages at 50 usd/month including bonus
and insurance |
111,00 |
| other facilities at 35 % |
3,885 |
| salaries for managerial staff |
10000 |
| Other facilities at 35 % |
3500 |
| |
|
Total labour cost / month
|
28485 |
POWER: The following table gives the details about the power
| Total units(KWH) produced (consumed)per
day |
69559 |
| Unit cost (cost / KWH) |
0.03 |
| Total production in Kgs |
17,390 |
| KWH/ Kg of yarn |
4.0 |
| TOTAL POWER COST /DAY |
2087 |
SPARES:The following table shows the spares cost, repair ,
and insurance
| spares cost at usd 8/1000 spindle shift |
222,566d |
| repairs and other overheads |
200,000 |
| Insurance at 0.175% on investment and
working capital |
31320 |
| TOTAL cost per year |
453886 |
STEP NO.4: PAY BACK CALCULATION
| DETAILS |
IN USD |
| INVESTMENT: |
|
| Land and building |
1,444,440 |
| Machinery, accessories & service
equipments |
11,832,115 |
| Electrical and Humidification ducts |
1,823,000 |
| |
|
TOTAL INVESTMENT
|
15,099,555 |
| |
|
| WORKING CAPITAL |
3,000,000 |
GRAND TOTAL
|
18,099,555 |
| |
|
| RECURRING EXPENDITURES PER DAY |
|
| Salaries and Wages |
949.5 |
| Power cost |
2087 |
| Stores , repairs and insurance |
1260.8 |
TOTAL
|
4297.3 |
| |
|
| INTEREST CALCULATION (per day) |
|
| On capital 8% |
3355.5 |
| on working capital 9% |
750 |
| |
|
| TOTAL EXPENSES INCLUDING INTEREST |
8402.8 |
| |
|
| TOTAL CONTRIBUTION PER DAY |
13312 |
| NET PROFIT( before depreciation &
taxation) |
4909.2 |
| PAY BACK PERIOD |
8.54 years |
