COSTING FOR A SPINNING MILLINTRODUC TION: 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, substandard 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. In this technique.Process costing: This is used in mass production industries manufacturing standardised products in continuous processes of manufacutring. The method of costing to be applied in a particular concern depends upon the type and nature of manufacturing activity. 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. This is because. standard cost is predetermined as target of performance and actual performance is measured against the standard. 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. The difference between standard and actual costs are analysed to know teh reasons for the difference so that corrective actions may be taken. 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. CLASSIFICATION OF COSTS: . Cost estimates are used in the preparation of the budgets. Ascertainment of actual costs reveals unprofitable activities losses and inefficiencies . Standard costing: This is the valuable technique to control the cost. For spinning mills . It is used in preparing projected financial statements. cost is divided into fixed and variable and the variable is of special interest and importance. 2. Cost Ascertainment is concerned with computation of actual costs. Basically there are two methods of costing 1. marginal costing regards only variable costs as the costs of products. It helps in evaulating performance. Cost Estimation is the process of predetermining costs of goods or services.METHODS OF COSTING: Method of costing refers to the techniques and processes employed in the ascertainment of costs. Marginal costing: In this technique. Cost are accumulated for each process or department. process costing is employed. Cost estimates may serve as targets in controlling the costs.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. They do not increase or decrease when the volume of production changes. FIXEDCOSTS. process or equipment. when volume of output increases. costs of rawmaterial used. materials used in repairs etc are indirect costs. power cost. packing material. costs are classifed into fixed. The terms direct and indirect should be used in relation to the object of costing.e.Page 2 . FIXED AND VARIABLE COSTS. Costs behave differently when level of production rises or falls. In other words. total variable cost also increases and vice-versa. administrative wages.Cost Accounting .Costs are classified into direct costs and indirect costs on the basis of their identifiability with cost units or processesses or cost centres. These costs remain constant in "total" amount over a wide range of activity for a specified period of time. For a spinning mill. managerial salaries. material . DIRECT COST Direct material Direct labour Direct expenses INDIRECT COST Indirect material Indirect labour Indirect expenses COSTING FOR A SPINNING MILL . variable and sem-variable. These costs cannot be conveniently identified with a particular cost unit or cost centre. In a spining mill. labour and expense.It is the nature of business and the cost unit chosen that will determine whether a particular cost is direct or indirect. ELEMENTS OF COST: A cost is composed of three elements i. freight etc are direct costs INDIRECT COST: These are general costs and are incurred for the benefit of a number of cost units. An item of cost may be direct cost in one case and the same may be indirect in the other case. Certain costs change in sympathy with production level while other costs remain unchanged. processes or departments. As such on the basis of behaviour or variability. VARIABLE COSTS: These costs tend to vary in direct proportion to the volume of output. DIRECT COST: These are the costs which are incurred for and conveniently indentified with a particular cost unit. Each of these elements may be direct or indirect. Direct materials generally become a part of the finished product. greases. DIRECT EXPENSES are those expenses which are specifically incurred in connection with a particular job or cost unit. ring travellers etc LABOUR COST: DIRECT LABOUR cost consists of wages paid to workers directly engaged in converting raw materials into finished products. INDIRECT MATERIAL is that which can not be conveniently identified with individual cost units. In a spinning mill. job or process. cotton used in a spinning mill is a direct material. the number of maintenance workers. For example. Direct expenses are also known as chargeable expenses. PRIME COST = Direct material +Direct labour + Direct expenses OVERHEAD = Indirect material + Indirect labour + Indirect expenses TOTAL COST = PRIME COST + OVERHEAD . For example in a spinning mill. maintenance spares. engineering department spares. lubricating oils. All costs other than material and labour are termed as expenses. INDIRECT LABOUR is of general character and cannot be conveniently identified with a particular cost unit. no of workers in utility department etc EXPENSES. These wages can be conveniently identified with a particular product. process and are common to cost units and cost centres. indirect labour is not directly engaged in the production operations but only to assist or help in proudciton operations. INDIRECT EXPENSES can not be directly identified with a particular job.MATERIAL COST: DIRECT MATERIAL is that which can be conveniently identified with and allocated to cost units. In other words. ADVANTAGES OF COST ACCOUNTING: • • • • • • • It reveals profitabale and unprofitable activities. 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 . CASE 1. It should be suitable to the industry It should be tailor made according to the requirements of a business. 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 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. 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. Only useful cost information should be compiled and used whenever required. 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.No of spindles to be installed and the number of back process and winding machines required . i have used the details of the modern mill which is running in Indonesia from year 2000 STEP NO.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 . freight.Cost Accounting . The basic idea of a new project or a running plant is to maximise this contribution. COSTING FOR A SPINNING MILL .Page 3 . packing cost. administration cost.direct cost Direct cost for a spinning mill includes rawmaterial price. There will not be significant changes in these costs for different count patterns if the plant is utilisation is same.1: Contribution to be calculated. All other costs are either fixed costs or semi variable costs. power cost. 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 . In general for a spinning mill . spares cost. Because once the plant is designed.labour cost etc almost remain constant.• • • • • • • • • • • • • • • • Investment on machineries Investment on land Investment on building working capital required product lay out. The other costs can not be conveniently allocated to per kg of a particular count. 4 2. it can not depend on one country. flexibility needs more investment and more day to day expenses. rawmaterial price and all other costs keep changing. This is just an example .240 packing cost /kg 0. Therefore costing plays a major role to run the plant efficiently. and production constraints.15 2. eg. Packing cost is based on indonesian packing material prices for carton packing.456 1. if a project has to be more flexible.046 0.4 2674 2470 2712 2091 3365 13312 20s CVC 4480 24s CVC 4480 30s CVC 5600 30s TC 36s TC 4480 6720 contrbn/ day In the above table. All the costs are changing. selling price.The following table gives the details of count pattern.046 0. 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 . 36sTc is only for Philippines market. the price depends on the customers the end uses are not same. Looking into the cotribution per kg of yarn. packing cost and contribution per kg of different counts for a particular period ( year 2000). it can not be sold in Malaysia.456 1.2 2. the price depends on the enduse this unit exports 80% of the yarn. Because • • • • • • • • yarn market is not stable. some once in a year. The ringframes are with 1120 spindles per machine with automatic doffing and link to autoconer.04 0.046 0. But in this project they have considered 5 different counts. of spls no of mcs prdn/mc 4 4 5 4 6 23 1109 881 679 679 552 prdn kgs/day 4436 3525 3394 2716 3315 17385 raw material cost/kg 1. not only on the contribution A linear programming technique can be used to maximise the contribution. commn freight per 2% on kg selling price 0. all the costs are in US$. one should understand that the selling price.456 1.051 0.05 count no.04 0. It needs a lot felxibility customers are not same.240 1.046 0.3 2. the project should produce only 36s TC. considering all market constraints.05 0. Some costs change every month. THis is the reason why costing is important for a running mill.046 selling contribn per price / kg kg 2.051 0. rawmaterial price.051 0.051 0. eventhough the quality is good the count pattern depends upon the market requirement and the major counts in the market.051 0. The ultimate aim of the project is to maximise the contribution.05 0. 2: To work out the Total Investment cost ( machineries.365 92. It is always better to go in for the best drawframes like RSB-D30 drawframes with autoleveller. Flexibility required for marketing and should make use of Linear Programming Techniques to find out the best product mix to maximise the contribution. It is not wise to buy a cheaper drawframe and save money.648.000 11. STEP NO. From the above table it is clear that.640 321.600 150. humdification and electrical instruments) The following table gives the requirement of produciton machines.080 2. land and builidng. 1.960 93.000 50.500 TOTAL COST 416.710 3. These factors should be decided based on yarn quality required.000 TOTAL Some of the following points can be considered while deciding the machines. 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. waste percentage.365 2.011. INVESTMENT ON MACHINERY MACHINERY Trutzschler Blowrrom line for cotton Trutschler Blowrrom line for Polyester Trutshcler DK-903 cards Rieter RSB-D30 draw frames (with autoleveller) Rieter double delivery drawframe Rieter unilap Rieter E62 combers Howa speed frames with overhead blower Ring frames with autodoffer winding machines ( 26 drums per mc) Roving transport ( manual) Argus fire system NO. To calculate the number of back proess and winding drums required. One has to really work out the benefits achieved because of this and the pay back for the extra investment. a detailed spin plan should be worked out with speeds and efficiencies to be achieved in each machine.035.000 RATE / MC 416.000 50. end breakge rates and the capacity of machine. accessories. management should be clear about their Yarn quality . delivery speeds etc should be considered properly. Drawframe contributes a lot to the yarn quality and the ringframe and winding machine working.426. m/c utilisation.143. OF MCS 1 line 1 Line 22 6 10 2 10 7 23 23 1 1 144530 148. While calculating the no of machines required.640 321.395 1.202.000 . m/c efficiency .200 150. twist multipliers.• Since this is a critical step for a new project. no of spindles etc. bobbins. both the machines (carding and drawframes)can be run at slower speeds.000 2.000 . so that flexibility of the project is also maintained. INVESTMENT ON ACCESSORIES: The following table gives the details of the accessories like cans for carding.400 10.000 27. which will surely contribute to yarn quality.000 202.000 3.8 TOTAL COST 19. If the market is for finer count. overall production can be increased.000 16. If the coarser counts contributes more and the market is good. because the working performance and power consumption of the ringframe depends on the specifications like.220 SERVICE AND MAINTENANCE EQUIPMENTS: The following table gives the details about the investments required on service and maintenance equipments SERVICE AND MAINTENANCE EQUIPEMENTS Cots buffing machine and accessories Card room accessories NO OF MCS 1 1 set RATE/MC 20000 60. combers and ringframes do not affect the yarn quality as it is affected by card and drawframe speeds.000 1000 TOTAL 400 6 NO.300 480 90 36. trollies etc ACCESSORIES Carding cans 36" x 48" comber cans 24" x 48" Drawframe cans 20" x 48" Identification bands 20" Identification bands 24" Roving and spinning bobbins Plastic crates trolleys Cone trolly Fork lift hand truck 80 1 3 200 27. ring dia. Ringframe specification should be perfect. 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.space and money.200 29750 58.000 TOTAL PRICE 20000 60. OF MCS 120 350 1100 400 50 RATE / MC 160 85 53 1.It is always better to keep excess carding and autoleveller drawframes. Speeds of speedframe . Blow room capacity should be utilised to the maximum. lift.2 1. rawframe. as it consumes a lot of power . Because the investment cost and the power consumption for the ringframe is the highest in a spinning mill. bus duct. HUMIDIFICATION AND ELECTRICAL EQUIPMENTS: The following table gives the details about the investments required on umdification and electrical istruments Electrical installation including transformer. Rubber cots contributes a lot to yarn quality. efficiency of the machine should be considered for cost caluculation in the case of Genset. A detailed costing has to be done to compare the cost per unit to decide. most of the units use PLN power and some of the spinning mills use Gensets. It is better to use 50% PLN and 50 % own generation. Poor quality of buffing in drawframe and speedframes can affect both production and quality.000 100.000 767. One should not look for cheaper machine. capacitor. It is better to go for the best cots mounting machine and cots buffing machine. Bad buffing in ring frame can increase the imperfections by 15%. .000 In indonesia.000 TOTAL 1. finance cost on initial investment. etc for 3800 KVA Cables Compressor. Whether to use the PLN power or to go in for Gensets.000 176. md charges. HOLLINGSWORTH etc. incoming and outgoing panels.000 180. hydrant and other equipments 350. It is always better to go for reputed manufacturers like GRAF.823. the losses due to power interruption( based on the area data).000 125. running cost. while working out the costing finance cost on investment . In case of PLN power. unit charges to be considered.Spindle oil lubricator Clearer roller cleaning machine Vacuum cleaner pneumatic cleaners Weighing balance Strapping machine Premier autosorter Premier uster tester Premier strength tester premier fiber testing Premier Classidata Erection charges 1 1 5 6 3 2 1 1 1 1 1 4000 3000 3000 500 2000 2000 2500 45000 45000 45000 25000 TOTAL 4000 3000 15000 3000 6000 4000 2500 45000 45000 45000 25000 150000 427500 Card service machines like Flat tops clipping machine and flats grinding machine are very important for yarn quality. overhauling cost.000 125. Dryer and pipe lines humidifaction system chillers Ducting and installation for humidification system workshops. 000.405. insurance etc) WorWorking capital = 3. stores. power.The following table gives the details about land and builiding investments Land cost Land development Factory building Including Service ally 192 x 62 meters 1.000 LABOUR:The following table gives the details about labour requirement DEPARTMENT Production packing maintenance utility administration and personal dept No of people required 140 15 30 17 20 222 Total no of people required per day wages at 50 usd/month including bonus and insurance other facilities at 35 % salaries for managerial staff Other facilities at 35 % 111.000 1.440 11.885 10000 3500 28485 Total labour cost / month POWER: The following table gives the details about the power .000 STEP NO.445.712 Square meter @ 120 usd/sq meter Road and others TOTAL 40.00 3.3: To calculate the expenses ( labour.440 200.000 40.working capital. Total units(KWH) produced (consumed)per day Unit cost (cost / KWH) Total production in Kgs KWH/ Kg of yarn TOTAL POWER COST /DAY 69559 0.555 3.000 18.2 .000 15.0 2087 SPARES:The following table shows the spares cost.390 4.099.115 1.566d 200.8 4297.000. repairs and insurance TOTAL INTEREST CALCULATION (per day) On capital 8% on working capital 9% TOTAL EXPENSES INCLUDING INTEREST TOTAL CONTRIBUTION PER DAY NET PROFIT( before depreciation & taxation) 949.175% on investment and working 31320 capital TOTAL cost per year 453886 STEP NO.5 750 8402. repair .3 3355.000 Insurance at 0. accessories & service equipments Electrical and Humidification ducts 1.099.5 2087 1260.832.03 17.444.823.4: PAY BACK CALCULATION DETAILS INVESTMENT: Land and building Machinery.440 11. and insurance spares cost at usd 8/1000 spindle shift repairs and other overheads 222.8 13312 4909.555 IN USD TOTAL INVESTMENT WORKING CAPITAL GRAND TOTAL RECURRING EXPENDITURES PER DAY Salaries and Wages Power cost Stores . PAY BACK PERIOD 8.54 years .