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1 CHAPTER IV COST STRUCTURE ANALYSIS

2 CHAPTER IV COST STRUCTURE ANALYSIS INTRODUCTION This is an age of mass production as a result of which competition in every industry is cut-throat. Therefore, it is utmost importance for a company not only to increase the sales of its products but also to ensure that its increase in the sale of its operation related to production, administration and sales are economical. There are only two ways to maximize the profit of every organization. (i) To maximize the sales price and (ii) To maximize the cost of production. Cost analysis is a significant tool in cost management. Analysis of cost is necessary for comparison over the years for cost control and cost planning. Cost is the amount of expenditure incurred on or attributable to a specified article, product or activity. Appropriate classification of cost is important to identify the cost components like any other industries; the weightage of different components on the total cost is different for the cement industry. Some of the major cost constituents are raw materials consumed, power and fuel, salaries and wages, overhead and finance. For the present study overhead cost is further classified into other manufacturing expenses, administrative expenses, selling and distribution expenses, each component of cost has been expressed as a percentage of net sales. The present study attempts to analyze the cost structure in the cement companies for the study. The ratio based on sales is important indicators of the operational efficiency of a manufacturing enterprise. A low ratio is favourable. A high ratio indicates that only a relatively small percentage share of sales is available for meeting financial liabilities. The ratios computed for the cost analysis are: (i) Ratio of Raw material Consumed to Net Sales (Raw material consumed / Net Sales X 100) (ii) Ratio of Power and Fuel cost to Net Sales (Power and Fuel Cost / Net Sales X 100)

3 (iii) Ratio of Wages and Salaries to Net Sales (Wages and Salaries / Net Sales X 100) (iv) Ratio of Manufacturing Cost to Net Sales (Manufacturing cost / Net Sales X 100) (v) Ratio of Selling and Administration Cost to Net Sales (Selling and Administration Cost / Net Sales X 100) (vi) Ratio of Depreciation Cost to Net Sales (Depreciation / Net Sales X 100) (vii) Ratio of Financial Charge to Net Sales (Financial Charge / Net Sales X 100) 1. RATIO OF RAW MATERIAL CONSUMED TO NET SALES Raw Material occupies an important position with regard to the availability and economic production of a finished product. Hence the raw material cost has to be assessed for making decision. Raw materials consumption consists of the amount spent on various types of raw materials consumed during the course of manufacturing further the figure has been arrived at by adding the cost of opening stock of raw materials to purchase of raw material and deducting the stock of closing stock. It also includes the amount spent on Octroi, Carriage inwards, as well as stores consumed, etc.

4 TABLE 4.1 RAW MATERIAL COST AS PERCENTAGE OF NET SALES (Values in Percentage) Year/Company ACC ICL SCL MCL JKL BCL Industry Average Mean S.D C.V Compiled and calculated from the data published in CMIE. The ratio of Raw material consumed to Net Sales has been presented in Table 4.1. The average raw material cost to Net Sales ratio of the entire study was percent, whereas the average raw material cost of ACC was percent, which was the highest ratio among the units under the study. While the raw material cost of ICL was percent, which was the lowest ratio among all units study. The average raw material cost of BCL, JKL, SCL and MCL were 16.59, 16.61, and percent respectively. Whereas the co-efficient of variation (C.V) of JKL was percent, which was the highest variation among the units under the study. While the C.V. of ICL was percent, which was the lowest variation among all units under the study. The C.V. of BCL, SCL, ACC and MCL were 20.35, 12.85, and percent respectively

5 ANALYSIS OF VARIANCE RATIO OF RAW MATERIAL CONSUMED TO NET SALES TABLE 4.1 (a) ANOVA - TEST Source of Variation SS df MS F F critical value Between Groups Within Groups Total * Significant at 5 percent level Ho: There is no significant difference in the ratio of raw material consumed to net sales among the sample companies. With a view to test the significant of variance of the ratio of raw material consumed to net sales among the sample companies under the study, the F test has been applied. Table 4.1 (a) shows that the calculated value of F ratio comes to between the companies. The table value of F at 5 percent level of significance for V 1 =5 and V 2 =54 are The calculated value of F is more than the table value. Therefore, the hypothesis is rejected. This shows that the difference in the ratio of raw material consumed to net sales in the companies under the study was significant.

6 CHART 4.1 RAW MATERIAL COST AS PERCENTAGE OF NET SALES Percentage Year ACC ICL SCL MCL JKL BCL

7 2. RATIO OF POWER AND FUEL COST TO NET SALES Electricity expenses in Cement Industry play a vital role. For the purpose of analysis any expenses related to electricity and for other fuel have been considered under this head. Ratio of power and fuel cost to Net Sales has been presented in Table 4.2. TABLE 4.2 POWER & FUEL COST PERCENTAGE OF NET SALES (Values in Percentage) Year/Company ACC ICL SCL MCL JKL BCL Industry Average Mean S.D C.V Compiled and calculated from the data published in CMIE. The average power and fuel cost to net sales ratio of the entire study was percent, whereas the average power and fuel cost of ICL was percent, which was the highest ratio among the units under the study. While the power and fuel cost ratio of ACC was percent, which was the lowest among all units under the study. The average power and fuel cost to net sales ratio of BCL, JKL, SCL and MCL was 28.80, 28.53, and percent respectively. The co- efficient of variation (C.V.) of SCL was percent, which was the highest variation among the units under the

8 study. While the C.V of MCL was 9.90 percent which was the lowest variation among all the units under the study. The C.V value of ACC, BCL, JKL and ICL was 20.73, 12.32, and percent respectively. ANALYSIS OF VARIANCE RATIO OF POWER AND FUEL COST TO NET SALES TABLE 4.2 (a) ANOVA - TEST Source of Variation SS df MS F F critical value Between Groups Within Groups Total * Significant at 5 percent level Ho: There is no significant difference in the ratio of power and fuel cost to net sales among the sample companies. With a view to test the significance of variance of the ratio of power and fuel cost to net sales among the sample companies under the study, F test has been applied. Table 4.2 (a) shows that the calculated value of F ratio comes to between the companies. The table value of F at 5 percent level of significance for V 1 =5 and V 2 =54 are 2.38; the calculated value of F is more than the table value. Therefore, the hypothesis is rejected. This shows that the difference in the ratio of power and fuel cost to net sales in the companies under the study was significant.

9 CHART- 4.2 POWER & FUEL COST PERCENTAGE OF NET SALES Percentage Year ACC ICL SCL MCL JKL BCL

10 3. RATIO OF WAGES AND SALARIES TO NET SALES The amount paid to employees by way of salaries, wages, bonus, gratuities and contribution towards the provident funds, superannuation funds, family pension scheme, gratuity funds have been classified as salaries and wages in the present study. TABLE 4.3 WAGES AND SALARIES COST AS PERCENTAGE OF NET SALES (Values in Percentage) Year/Company ACC ICL SCL MCL JKL BCL Industry Average Mean S.D C.V Compiled and calculated from the data published in CMIE. The ratio of wages and salaries cost to net sales has been presented in Table 4.3. The portion of this cost to net sales is very low. It ranged from 4.67 percent to 7.54 percent throughout the entire study. The average wages and salaries cost to net sales ratio of the entire study was 6.65 percent. Whereas the average wages and salaries cost to net sales ratio of BCL was percent which was the ratio among the units under the study and ratio of SCL was 3.71 percent which was the lowest among all units under the study. The average wages and salaries cost to net sales of ACC, JKL, ICL and MCL was

11 6.62 percent, 6.19 percent, 6.93 percent and 4.95 percent respectively. Whereas, the co- efficient of variation (C.V.) of ICL was percent. This was the highest variation among the units under the study, while the C.V. of MCL was percent which was the lowest variation among all the units under the study. The C.V of ACC, BCL, JKL and SCL was percent, percent, percent and percent respectively. ANALYSIS OF VARIANCE- RATIO OF WAGES AND SALARIES TO NET SALES TABLE 4.3 (a) ANOVA - TEST Source of Variation SS df MS F F critical value Between Groups Within Groups Total * Significant at 5 percent level Ho: There is no significant difference in the ratio of wages and salaries to net sales among the sample companies. With a view to test the significance of variance of the ratio of wages and salaries cost to net sales among the sample companies under the study, F test has been applied. Table 4.3 (a) shows that the calculated value of F ratio comes to between the companies. The table value of F at 5 percent level of significance for V 1 =5 and V 2 =54 are The calculated value of F is more than the table value. Therefore, the hypothesis is rejected. This shows that the difference in the ratio of wages and salaries cost to net sales in the companies under the study was significant.

12 CHART WAGES AND SALARIES COST AS PERCENTAGE OF NET SALES Percentage Year ACC ICL SCL MCL JKL BCL

13 4. RATIO OF MANUFACTURING EXPENSES TO NET SALES To change the raw materials to finished goods ready for sale requires expenditures for labour and for a great variety of other manufacturing costs are of three classes viz., materials, direct labour and manufacturing overhead (or) manufacturing expenses. Manufacturing overhead (or) manufacturing expenses, includes all costs incurred in production that cannot be classified as material or direct labour manufacturing overhead includes among other things, indirect materials and labour, indirect taxes, repairs and upkeep of the factory. The indirect taxes include excise duty charged at the time of production by the central government. TABLE 4.4 MANUFACTURING COST AS PERCENTAGE OF NET SALES (Values in Percentage) Year/Company ACC ICL SCL MCL JKL BCL Industry Average Mean S.D C.V Compiled and calculated from the data published in CMIE.

14 The ratio of manufacturing cost to net sales has been presented in Table 4.4. The average manufacturing cost to net sales ratio of the entire study was 8.97 percent. Whereas the average manufacturing cost to net sales ratio of BCL was percent, which was the highest ratio among the units under the study. While the manufacturing cost to net sales ratio of ICL was 3.30 percent, which was the lowest among all the units under the study. The average ratio of manufacturing cost to net sales of ACC, JKL, SCL and MCL was 9.22 percent, percent, 7.79 percent and 9.75 percent respectively. Whereas the Co- efficient of Variation (C.V.) of ICL was percent, which was the highest variation among the units under the study. While the C.V of ACC was 7.18 percent, which was the lowest variation among all the units under the study. The C.V. of BCL, JKL, SCL and MCL was 9.35 percent, percent, percent and percent respectively. ANALYSIS OF VARIANCE- RATIO OF MANUFACTURING COST TO NET SALES Source of Variation TABLE 4.4 (a) ANOVA - TEST SS df MS F F critical value Between Groups Within Groups Total * Significant at 5 percent level Ho: There is no significant difference in the ratio of manufacturing cost to net sales among the sample companies. With a view to testing the significance of variance of the ratio of manufacturing cost to net sales among the sample companies under the study the F test has been applied. Table 4.4 (a) shows that the calculated value of F ratio comes to between the companies. The table value of F at 5 percent level of significance for V 1 =5 and V 2 =54 are The calculated value of F is more than the table value. Therefore, the hypothesis is rejected. This shows that the difference in the ratio of manufacturing cost to net sales in the companies under the study was significant.

15 CHART MANUFACTURING COST AS PERCENTAGE OF NET SALES

16 5. RATIO OF SELLING AND ADMINISTRATION COST TO NET SALES Selling and administration expenses include the amount spent during the course of sales, boosting the sales and delivery of goods sold has been termed as selling and distribution expenses. The expenses related to advertisement, commission to selling agents and other incentive and service charge, delivery charges, freight and transportation, etc., are covered under the above head. The expenses relating to office and general administration of companies like the director s fees, auditor s remuneration, legal expenses, rent, rates, taxes and depreciation of office building and equipment have been grouped as administrative and other expenses. TABLE 4.5 SELLING & ADMINISTRATIVE COST AS PERCENTAGE OF NET SALES (Values in Percentage) Year/Company ACC ICL SCL MCL JKL BCL Industry Average Mean S.D C.V Compiled and calculated from the data published in CMIE. Table 4.5 reveals the ratio of selling and administration cost to net sales. The average selling and administration cost to net sales ratio of the entire study was

17 22.61 percent, whereas the average ratio of selling and administration cost to net sales of ICL was percent, which was the highest ratio among the units under the study. While the average selling and administration cost to net sales ratio of BCL was percent, which was the lowest among all the units under the study. The average selling and administration cost to net sales ratio of ACC, JKL, SCL and MCL was percent, percent, percent and percent respectively. Whereas the Co-efficient of Variation (C.V.) of JKL was percent which was the highest variation among the units under the study. While the C.V. of ICL was 6.17 percent, which was the lowest variation among all the units under the study. The C.V. of ACC, BCL, SCL and MCL was 6.63 percent, percent, percent and 9.32 percent respectively. ANALYSIS OF VARIANCE- RATIO OF SELLING AND ADMINISTRATION COST TO NET SALES TABLE 4.5 (a) ANOVA - TEST Source of F critical SS df MS F Variation value Between Groups Within Groups Total * Significant at 5 percent level Ho: There is no significant difference in the ratio of selling and administration cost to net sales among the sample companies. With a view to test the significance of variance of the ratio of selling and administration cost to net sales among the sample companies under the study, the F test has been applied. Table 4.5 (a) shows that the calculated value of F ratio comes to between the companies. The table value of F at 5 percent level of significance for V 1 =5 and V 2 =54 are The calculated value of F is more than the table value. Therefore, the hypothesis is rejected. This shows that the difference in the ratio of selling and administration cost to net sales in the companies under the study was significant.

18 CHART- 4.5 SELLING & ADMINISTRATIVE COST AS PERCENTAGE OF NET SALES

19 6. RATIO OF DEPRECIATION COST TO NET SALES Depreciation is the reduction in the value of fixed asset due to its use, wear and tear or obsolescence. Depreciation Policy, as a matter of fact, is of considerable factor to the financial manager because of its impact on profitability, its size in relation to total cost of operation, its effect on rate of return on investment and finally its relation to replacement policy. Depreciation is the systematic allocation of the cost of capital equipment to the revenues. The accounting process for this gradual conversion of fixed assets to expense is called depreciation. Usually depreciation may be calculated either based on written down value method or straight line method. The choice of the method of depreciation has important consequences for financial management. TABLE- 4.6 DEPRECIATION COST AS PERCENTAGE OF NET SALES (Values in Percentage) Year/Company ACC ICL SCL MCL JKL BCL Industry Average Mean S.D C.V Compiled and calculated from the data published in CMIE. The ratio of depreciation cost to net sales has been presented in Table 4.6. The average depreciation cost to net sales ratio of the entire study was 7.85 percent,

20 whereas the average depreciation cost to net sales ratio of SCL was percent, which was the highest ratio among the units under the study. While the average depreciation cost to net sales ratio of BCL was 3.43 percent, which was the lowest among all the units under the study. The average ratio of ACC, JKL, ICL and MCL was 5.03 percent, 3.56 percent, 6.79 percent and 8.20 percent respectively. Whereas the Co- efficient of Variation (C.V.) of JKL was percent, which was the highest variation among the units under the study. While the C.V. of ACC was percent which was the lowest variation among all the units under the study. The C.V. of BCL, SCL, ICL and MCL was percent, percent, percent and percent respectively. ANALYSIS OF VARIANCE- RATIO OF DEPRECIATION COST TO NET SALES Source of Variation TABLE 4.6 (a) ANOVA - TEST SS df MS F F critical value Between Groups Within Groups Total * Significant at 5 percent level Ho: There is no significant difference in the ratio of depreciation cost to net sales among the sample companies. With a view to test the significance of variance of the ratio of depreciation cost to net sales among the sample companies under the study, the F test has been applied. Table 4.6 (a) shows that the calculated value of F ratio comes to 8.27 between the companies. The table value of F at 5 percent level of significance for V 1 =5 and V 2 =54 are The calculated value of F is more than the table value. Therefore, the hypothesis is rejected. This shows that the depreciation cost to net sales in the companies under the study was significant.

21 CHART DEPRECIATION COST AS PERCENTAGE OF NET SALES

22 7. RATIO OF FINANCIAL CHARGES TO NET SALES Indian Cement Industry structure indicates that most of the companies meet their financial needs through equity, preference, loans and debentures. So the portion of financial charges in the cost structure of industry has played vital role in the performance of the companies. Expenses related to interest and other financial charges have been considered under this head for the purpose of the study. TABLE 4.7 FINANCIAL CHARGES AS PERCENTAGE OF NET SALES (Values in Percentage) Year/Company ACC ICL SCL MCL JKL BCL Industry Average Mean S.D C.V Compiled and calculated from the data published in CMIE. The ratio of financial charges to net sales has been presented in Table 4.7. The average ratio of financial charges to net sales of the entire study was 9.11 percent, whereas the average ratio of financial charges to net sales of ICL was percent, which was the highest ratio among the units under the study. While the average ratio of

23 financial charges to net sales of BCL was 3.79 percent, which was the lowest among all the units under the study. The average ratio of financial charges to net sales of ACC, JKL, SCL and MCL was 4.54 percent 14.04, percent, 7.89 percent and 9.43 percent respectively. Whereas the Co-efficient of Variation (C.V.) of the JKL was percent which was the highest variation among the units under the study. While the C.V. of ICL was percent, which was the lowest variation among all the units under the study. The C.V. of ACC, BCL, SCL and MCL was percent, percent, percent and percent respectively. ANALYSIS OF VARIANCE- RATIO OF FINANCIAL CHARGES TO NET SALES TABLE 4.7 (a) ANOVA - TEST Source of Variation SS df MS F F critical value Between Groups Within Groups Total * Significant at 5 percent level Ho: There is no significant difference in the ratio of financial charges to net sales among the sample companies. With a view to test the significance of variance of the ratio of financial charges to net sales among the sample companies under the study, F test has been applied. Table 4.7 (a) shows that the calculated value of F ratio comes to 6.10 between the companies. The table value of F at 5 percent level of significance for V 1 =5 and V 2 =54 are The calculated value of F is more than the table value. Therefore, the hypothesis is rejected. This shows that the more difference in the mean ratio of financial charges to net sales in the companies under the study was significant.

24 CHART FINANCIAL CHARGES AS PERCENTAGE OF NET SALES

25 CONCLUSION From this chapter it is concluded that the cost structure of sample companies were not uniform and varied from company to company. The mean ratio of raw material cost as percentage of net sales in ACC, power and fuel cost as percentage of net sales in ICL, wages and salaries cost as percentage of net sales in BCL, manufacturing expenses as percentage of net sales in BCL, selling and administration cost as percentage of net sales in ICL, depreciation cost as percentage of net sales in SCL, financial charges as percentage of net sales in ICL were above the industry average. Hence, these companies should give proper attention to reduce the cost by adopting the technology of the companies where the cost of production is low.

OVERHEAD COST STRUCTURE ANALYSIS OF OIL REFINERIES

OVERHEAD COST STRUCTURE ANALYSIS OF OIL REFINERIES 7.1 Introduction 7.2 Overheads 7.2.1 Classification of overhead 7.3 Total cost analysis 7.4 Direct overhead to total cost of sampled units 7.5 Indirect