COSTING FOR A SPINNING MILL - Cost Accounting - Page 2
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
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.
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