AN INTERIM REPORT ON

STANDARD COSTING IN CAVIN KARE PVT LTD

BY Prashant Sharma (En. No.- 11CAM00226)

CAVIN KARE PVT LTD

AN INTERIM REPORT ON
STANDARD COSTING IN CAVIN KARE PVT LTD

BY Prashant Sharma (En. No.- 11CAM00226) Name of the Organization (CAVIN KARE PVT LTD)
A report submitted in partial fulfilment of the requirements of MBA Program of The ICFAI University, Jaipur Distribution List: Faculty Guide- Mr. Sharad Kamra Company Guide- Mr. Rohit Mishra Date of Submission27/07/2012

Abstract
The Report examines the evolution of a small regional player - CavinKare Pvt. Ltd., from a oneproduct company to a multi-product company with nation-wide presence in the fast moving consumer goods (FMCG) industry in India. It discusses in detail the costing system adopted by CavinKare, which enabled its product brands to compete directly with market leaders such as HLL, P&G, Godrej, Henkel and other competitors successfully. A process costing system is a technique used within Cavin Kare Pvt Ltd to determine the total production cost of a unit of merchandise. It is particularly used in environments where production passes through multiple cost centers. For example, production within a large corporation may require that product move through more than one department, such as procurement, manufacturing, quality assurance and distribution. Each of these departments has its own budget. As a result, a process costing system must be in place to compile the respective costs undertaken by each group. The implementation of a process costing system comes with many advantages. Identify the cost components of a product made by company: the cost of materials, labor, and overhead. A major focus for managerial accountants is determining product cost.1 Managers need to know the cost of their products for a variety of reasons. For example, costplus pricing is a common business practice.2 Product costing is also used to control business operations. It is useful in answering questions such as: Are costs higher or lower than expected? Who is responsible for the variances between expected and actual costs? What action can be taken to control the variances?

Executive Summary
A primary objective in manufacturing a product is to minimize unit cost while achieving certain quality specifications. Almost all products can be manufactured with a variety of inputs that would generate the same basic output and output quality. The input choices that are made affect the standards that are set. It can develop standards for costs and other performance criteria to ensure consistent improvement. It provides feedback to managers by comparing dimensions of actual service predetermined measures.

The methodology adopted was:

Data collection:
Primary data: Data which is collected on our own is called primary data. A. I used to collect the data from their internal sources i.e. SAP (System Application Program) which is ERP program used as a software for their internal working. i) Data analysis: The data is used to analyze through material variance report, process order status, conversion cost reports of CavinKare, Hardwar. B. Personal interaction with company guide. C. Discussion with other officials. D. Group discussion and suggestions E. Companys policies and circulars. Secondary data: Already existing data is called secondary data. It has been collected by the following methods: A. Companys website. B. Articles in companys internal newsletters/periodicals.

C. Books & Others sources.

Data analysis: The data was analyzed through material variance report, process order status,
conversion cost reports of CavinKare, Hardwar. Based on the data analyzed it was recommended to observe deviation from standard cost but also measure performance of the company and this is carried out from followings

Performance measurements:

(a) Production volume ratio = standard hours of actual output/ Budgeted hours of output x 100

(b) Efficiency ratio = standard hours of actual output/ Actual hours worked x 100

(c) Capacity usage ratio = actual hours worked/ Budgeted hours of input x 100

Limitation of the study:

It is the responsibility of the employees working in accounts function that the procedures put in place are practiced in its entirely & without any deviations. So a trainee is not supposed to involve directly in process which includes real data because its confindential information of finance for company. It can be done under guidance and practical interpretation basis on last used data. Its give practical but small view of costing process, not a complete and depth study.

Objectives

1. To analyze the procedure to be followed while preparing the annual budget. 2. To analyze the variances occurred in various segments of company 3. To study standard costing of materials, labor and overheads and how to set these standards. 4. To understand significance of variance analysis to curtail cost associated with cost components 5. To study performance measurement through variance analysis 6. To study significance of standard cost in budget preparation

Profile of CavinKare
Success is a journey not a destination. began with a young mind choosing the road less taken. In 1983 with a single product, started out as a small partnership firm. The Company that began its journey as Chik India Ltd was renamed as Cavin Kare Pvt. Ltd (CKPL) in 1998. With innovative Entrepreneur C.K. Ranganathan at the helm, emerged into a successful business enterprise. Smart marketing and clear product positioning not only ensured CavinKare's growth but also helped the company broaden its product portfolio extensively. The company now markets ten major brands. Over the years, has achieved a competitive edge with sound understanding of mass marketing dynamics. The company offers quality Personal care (hair care, skin care, home care) and Food products borne out of a keen understanding of consumer needs and keeping up company's the values of innovation and customer satisfaction. Today,, having established a firm foothold in the national market, is increasing its popularity in the international arena. A dedicated Research & Development center, equipped with latest equipment and technologies, constantly supports the various divisions in their endeavor. The Company, which primarily relied on contract manufacturing for many years, has now set up its own world class plant at Haridwar to cater to the demand of both domestic and international market. Group has crossed a turnover of 11000 million INR in 2011-2012. The Company has employee strength of around 3000, an all India network of 5351 Stockiest catering to about 25 lakh outlets nationally. astute professionalism, innovative products and consistent quality are results of its significant corporate practice.

Products and brands owned by Cavin care India:

Hair care -Chik shampoo, Nyle Active Herbal shampoo, Meera Badam shapoo, Indiac Hair colorant Ethinic care - Meera hair wash powder, Karthika herbal hair powder, Meera herbal hair oil Skin care - Fairever, Spinz talc, Spinz Deodorants, Nyle cold cream, Nyle lotion Home care - Tex, ToppMopp etc. Food division- Ruchi pickles, Chinnis pickles, Chinnis masala, Ruchi Gulab Jamun Mix.

Contact details of Cavin care India

Corporate and Registered Office CavinKare Pvt. Ltd. CavinVille, No.12, Cenotaph Road, Chennai - 600 018. Email: corpcomm@cavinkare.com Research & Development Centre

CavinKare Private Limited Research & Development Centre, No 12, Poonamalee Road, Ekkatuthangal, Chennai - 600 097 Regional Offices CavinKare Private Limited Regional Office South, No 12 Cenotaph Road, Chennai - 600 018 CavinKare Private Limited Regional Office West, 202 Landmark Arcade, Louiswadi , Thane (w) - 400 604 CavinKare Private Limited Regional Office North, 205-207 Vikas Deep Building, Lakshmi Nagar District Centre, Delhi - 110 092. CavinKare Private Limited Regional Office East, A D 252, Sector 1, Salt Lake City, Kolkata - 700 064. Manufacturing Plant CavinKare Pvt Ltd, Plot no.16, 17, Sector - 4 IIE, SIDCUL Ranipur Haridwar - 249403

RESPONSIBILITY & AUTHORITY

It is the responsibility of the employees working in accounts function that the procedures put in place are practiced in its entirely & without any deviations.

Costing Section:
Activities undertaken in costing area: A. Variance analysis for all finished goods (FG) &semi finished goods (SFG). i) Ensure the detailed analysis of all variance for all FG & SFG production orders created during JC (Journey Cycle). #[1 JC -28 days] B. Variance settlement C. Process order closing without any error D. BOM (Bills Of Material) Analysis E. Costing run: updating of conversion costs. F. Product Costing (Recipe creation & run costing) JC wise & at the time of New Code opening G. Standard Costing run at monthly basis H. Prepare MIS & Reports: Finance Reports, Costing Review includes Brands wise costing, Conversion/Kg Trends, Operational parameters, Variance showing reports- brand wise, product wise, input material wise.

Commercial taxation:
Activities undertaken in Commercial Taxation area: A. Excise related work i) ii) iii) iv) Preparation & Submission of monthly excise return Coordinate with excise authorities for export & dispatch/ planning department. Filling of other required document to excise authorities as and when required. Maintenance and filling of excise return.

B. Sales Tax work i) Preparation & filling of annual sales tax return.

C. Work contract tax

D. Others i) c forms / forms 31/16 (Road permits)

Accounting:
A. Accounts and Finance works i) ii) iii) iv) v) Funds management Payment to vendor Ensure closing at regular time intervals. Scrutiny of all GL code (heads) & review the same Vendor reconciliation of RM (Raw Material) & PM (Packing material).

B. Material and other Sales Accounting i) ii) iii) Processing & scrutiny of TDS/ TCS/ & WCT accounting. Accounting of RM/PM & Purchase Returns. Accounting of DM water & Bulk scrap recovery.

C. Vendor payment i) Preparation of cheques to make payments

D. Bank reconciliation E. Reciepts from various scrap customers F. Cash i) ii) Daily cash payments Cash receipts

G. GR(Goods Receipt)/ IR(Invoice Receipt) of revenue and capital vendor H. GR for all purchases I. Purchase Orders J. Revenue & Capital vendor reconciliation K. Raising of Debit notes

Costing System in CavinKare Pvt Ltd.

Standard Costing
The standard cost is defined as the estimated or predetermined cost of performing an operation or producing a good or service, under normal conditions, where special or extraordinary factors, that may affect performance are absent. A standard cost means a target cost that should be attained. They are used as target-costs and are developed from historical data analysis or from time and motion studies. The standard cost is usually compared to the actual cost to measure the performance of a given costing department or operation. Actual cost is defined as the total amount of materials, labor costs, and any directly associated overhead costs that can be charged to a specific project. The standard cost takes into consideration a standard value and uses that figure to track the usage of resources. This is usually represented in the form of either hours or the number of units consumed, and can identify variance between the production and consumption. However the actual cost is concerned only with the costs incurred during the course of the project, and not the units produced. Both the costs are different, but are often used to evaluate the profitability of a given project. Variances are the difference between the standard cost and actual cost. The variances indicate the inefficiencies that have to be investigated. Standard costs are associated with a manufacturing company's costs of direct material, direct labor, and manufacturing overhead. Instead of assigning the actual costs of direct material, direct labor, and manufacturing overhead to a product, many manufacturers assign the expected or standard cost. Hence a manufacturer's inventories and cost of goods sold will begin with amounts reflecting the standard costs, not the actual costs, of a product. Manufacturers still have to pay the actual costs. Standard costing and the variances is a valuable management tool. Therefore if a variance arises the management becomes aware that manufacturing costs have differed from the standard (planned, expected) costs. It is a technique which uses standards for costs and revenues for the purpose of control through variance analysis. It is an extension of standards set for machine time, labor time and material usage by the application of standard machine cost per hour, standard wage rates and standard prices of material, standard cost includes standard overheads.

Definitions:
Standard Costing may be defined as a technique of cost accounting which compares the standard cost of each product or services with the actual cost to determine the efficiency of the operation, so that any remedial action may be taken immediately According to CIMA London Standard Costing is, the preparation & use of standard costs, their comparison with actual costs & the analysis of variances to their causes & points of incidences

Basically there are two groups of standards: 1. Quantity Standard: It should be determined on the basis of engineering and technical specifications and should not be revised frequently. 2. Price Standard: It should be set on the basis of forecast of market trends and should essentially require periodic revision.

Costing Terminology
Expenses on an income statement are considered product or period costs. Product costs are those costs assigned to an inventory account that eventually become part of cost of goods sold. Examples of manufacturing product costs are raw materials used, direct labor, factory supervisors salary, and factory utilities. In a manufacturing company, product costs are also called manufacturing costs. In a service company, product costs are also accumulated as inventory (such as the cost of an audit or of a will). Period costs are those costs recorded as an expense in the period they are incurred. Selling expenses such as sales salaries, sales commissions, and delivery expense, and general and administrative expenses such as office salaries, and depreciation on office equipment, are all considered period costs. In a manufacturing company, these costs are often referred to as non-manufacturing costs. There are three categories of manufacturing costs: direct materials, direct labor, and overhead.

Direct Materials are those materials (including purchased parts) that are used to make a product and can be directly associated with the product. Some materials used in making a product have a minimal cost, such as screws, nails, and glue, or do not become part of the final product, such as lubricants for machines and tape used when painting. Such materials are called indirect materials and are accounted for as manufacturing overhead. Direct Labor is the cost of the workers who make the product. The cost of supervisory personnel, management, and factory maintenance workers, although they are needed to operate the factory, are classified as indirect labor because these workers do not use the direct materials to build the product. Manufacturing Overhead Costs include indirect materials, indirect labor, and all other manufacturing costs. Depreciation on factory equipment, factory rent, factory insurance, factory property taxes, and factory utilities are all examples of manufacturing overhead costs.

Together, the direct materials, direct labor, and manufacturing overhead are referred to as manufacturing costs. The costs of selling the product are operating expenses (period cost) and not part of manufacturing overhead costs because they are not incurred to make a product.

Cost of Goods Manufactured Schedule

The cost of goods manufactured schedule is used to calculate the cost of producing products for a period of time. The cost of goods manufactured amount is transferred to the finished goods inventory account during the period and is used in calculating cost of goods sold on the income statement. The cost of goods manufactured schedule reports the total manufacturing costs for the period that were added to work-in-process, and adjusts these costs for the change in the work-inprocess inventory account to calculate the cost of goods manufactured.

Accounting by Manufacturing Companies

The accounting cycle is the same in a manufacturing company, merchandising company, and a service company. Journal entries are used to record transactions, adjusting journal entries are used to recognize costs and revenues in the appropriate period, financial statements are prepared, and closing entries are recorded. Raw material purchases are recorded in the raw material inventory account if the perpetual inventory method is used, or the raw materials purchases account if the periodic inventory method is used.

Closing Procedure
At the end of the cycle, the closing entries are prepared. For a manufacturing company that uses the periodic inventory method, closing entries update retained earnings for net income or loss and adjust each inventory account to its period end balance. A special account called Manufacturing Summary is used to close all the accounts whose amounts are used to calculate cost of goods manufactured. The manufacturing summary account is closed to income summary. Income summary is eventually closed to retained earnings. The manufacturing accounts are closed first.

ANALYSIS:

COST OF FINISHED GOODS

Material Cost Conversion Cost
Standard Cost
Over/Under Recovery

+
BOM Quantity
Material Variance

Consumption booked by production

Actual Cost through bills

Cost of finished goods includes material cost & conversion cost. Standard of material cost can be set according to the BOM quantity & actual is that which is booked by the production department as consumption. Difference between these two is known as material variance. Conversion cost includes five components i.e. Labor, Utilities, Power, Depreciation, & Overheads. Standard cost of these components are set on the basis of analysis of past budgets& actual which is come in the form of bills. Difference between these two is over recovery or under recovery.

For Example:
FG Codes BOM Qty.
TOTAL 5199769

BOM Value
3858001

Actual Cons.
5192920

Actual Cons Value

3842167

Variance

Var. Value
15834.26

IN0005B11

6849.774

Interpretation: BOM Quantity is more than the actual consumptions cost booked by the production it means it is the favorable variance.

Variance Analysis
Variance analysis is a control technique. The control process involves comparison of actual costs (AC) with the standard costs (SC). Variances represent the difference between actual cost (AC) and standard cost (SC). These are basically related to performance deviations. If AC is less than SC, it is a sign of efficiency and the difference is termed favorable /positive. If it is more than SC,it is a sign of inefficiency and the difference is reffered to as n unfavorable/negative. Analysis of Standard Vs Actual consumption Over/Under variance both should be properly evaluated & analyzed during the o process. Variances need to be informed to the managemen at regular intervals. management

Cost Variance
The cost variances relate to the costs of a manufacturing enterprise. The three elements of the costs of such an enterprise are: Material Cost Variance (MCV) Labour Cost Variance (LCV) Overhead Cost Variance (OCV)

Material Cost Variance Price Variance Quantity Variance

Yield Variance

Mix Variance

Material Cost Variance

Material cost variance is the difference between the standard cost of materials and the cost of materials actually incurred. MCV = Standard Cost of Material Consumed for Actual Production Actual Cost MCV on per unit basis MCV = (SQ*SP*AO)-(AQ*AP*AO) MCV on aggregate basis MCV = (TSMC-TAMC)

Where; SQ = Standard usage of material per unit SP = Standard price of material per unit AO= Actual output(FG) in units TSMC = Total standard cost of actual output AQ = Actual usage of materials per units AP = Actual price of materials per units TAMC = Total actual cost incurred

Reconciliation: Material Cost Variance = Material Price Variance + Material Quantity Variance.

Material Price Variance

Material price variance is the difference between the actual price paid for purchase of material and the standard price.

When actual price exceeds standard price, the variance is unfavorable (U/A): Favorable (F) results when standard price is greater than actual price. There will be no variance if both the prices are equal. When, AP > SP Unfavorable AP < SP Favorable AP = SP No Variance

Material price variance = (SP-AP)*AQ

For the facts; in example the MPV would be:(Rs15 Rs20)*220kg = Rs220 (Unfavorable)

Responsibility for MPV MPV is mainly the responsibility of the purchase officers who are in change of making the entire purchases of the firm.

MATERIAL USAGE OR QUANTITY VARIANCE (MUV)

Material Usage Variance occurs when actual usage of materials differs from standard usage. Material usage variance = [(SQ for Actual Output)-(AQ)]*SP

For example, the MUV would be: = [(2*100) - (2.2*100)]* Rs 14 = Rs 280 (Unfavorable)

Since the actual consumption of materials is more than the standard quantity required for producing 100 units of output, the MUV is unfavorable. Responsibility for MUV The overall responsibility for this variance lies with the production personnel. Material Usage Variance: 1) Material Mix Variance = Standard Cost of Standard Mix Standard Cost of Actual Mix 2) Material Yield Variance = SYR [Actual Yield Standard Yield]
SYR = Standard Yield Rate, i.e. standard cost per unit of standard output.

Reconciliation: Material Usage Variance = Material Mix Variance + Material Yield Variance.

LABOUR COST VARIANCE (LCV)

Labour cost variance is the difference between the standard labour costs and the actual labour costs. This variance is the main variance in case of labour and arises due to the difference between the standard labour cost for actual production and the actual labour cost. The following formula is used for computation of this variance:
Labour Cost Variance = Standard Labour Cost for Actual Production Actual Labour Cost

LCV on per unit basis:LCV = (SH*SR*AO) - (AH*AR*AO) LCV on aggregate basis:LCV = (TSLC - TALC)

Where, SH = Standard labour hours required per unit SR = Standard wage rate per hour AO = Actual output(FG) achieved during the period AH = Actual labour hours spent per unit AR = Actual wages rate per hour TSLC = Total standard labour cost of actual output TALC = Total actual labour cost of actual output

OVERHEAD VARIANCES
The overhead variances show the difference between the standard overhead cost and the actual overhead cost. In case of direct material and direct labour variances, there is no question of dividing them into fixed and variable as the direct material and direct labour costs are variable. However, in case of overheads, it is necessary to divide them into fixed and variable for computation of variances. We will take up the fixed overhead variances first and then the variable overhead variances.

I.

Fixed Overhead Variances:

Fixed Overhead Cost Variance: FOCV= Std. fixed overhead for actual production- Actual fixed overheads Fixed Overhead Expenditure Variance: FOEV= Budgeted fixed overheads- Actual fixed overheads Fixed Overhead Volume Variance: FOVV= [SR(Std. Qty.- Actual Qty)] Fixed Overhead Efficiency Variance: [SR(Std. Production- Actual Production)] Fixed Overhead Capacity Variance: [SR(Std Qty- Budgeted Qty)] Fixed Overhead Revised Capacity Variance: [SR(Std Qty- Revised Budgeted Qty.)] Fixed Overhead Calendar Variance: [SR(Budgeted Qty- Revised Budgeted Qty)]

II.

Variable Overhead Variance:

Variable Overhead Cost Variance: Std. Variable overhead for actual production- Actual variable overhead Variable Overhead Expenditure Variance: Std. variable overheads for std production- Actual variable overhead Variable Overhead Efficiency Variance: [SR(Std Qty- Actual Qty)]

Budget:
Budget is a financial and/or quantitative statement, prepared and approved prior to a defined period of time of the policy to be pursued during that period for the purpose of attaining a given objective. It may include income, expenditure and employment of capital.

Preparation of Budget estimates:

Preparation of budget on the basis of expenditure incurred in previous years. Analysis and review of all direcy cost written last year actual projected estimates and production trend Analysis and review of indirect cost and all the other elements of cost.

Conversion Cost: The sum of direct wages, direct expenses and overhead cost of
converting raw materials to the finished stage or converting a material from one stage of production to the other.

Conversion Cost Components

Labour Power Overhead Utility Depreciation

Components of budget are fixed cost, depreciation, labour, cost, utilities, power, and fuel.
1) Fixed Cost- Fixed cost are associated with inputs that do not fluctuate in response to changes in the total activity or output of the firm within relevant range of volume but fluctuate beyond that range. Cavinkare pvt ltd includes following charges as fixed costBank Charges Pantry & Canteen Expenses Professional Charges Expenses Factory Maintenance Insurance Stock at godowns Insurance assets A/C Lab expenses and glass wares a/c Salaries Printing, Stationary & Consumable a/c Consumable a/c (Computers) Bonus a/c Conveyance reimbursement a/c Company contribution to PF a/c Leave travel allowance a/c Fax charges Guest House Expenses Freight expenses Courier expenses Xerox expenses Rate & Taxes Birthday gift After totaling all the fixed charges the total is divided by the breakeven volume, this is done to get fixed cost per ton, then it is divided by 1000 to get fixed cost per kg and this rate would remain same for the rest of the year.

There are chances that the entire item will not be sold in the year, so in that case Cavinkare take contingencies margin of 5% to recover the fixed cost.

2) Depreciation- The rate of the depreciation is taken from actual rate determined. Depreciation is charged accordingly the equipments used in Common use and Shampoo, Talc, Cream manufacturing etc. Then depreciation of common assets is used to divide in remain assets depreciation used in production. If a machine produced more than one product then rate is divided among all of them and it is called common depreciation rate . After calculating total depreciation it is divided by the volume of the product and then it is converted into rate per kg. Depreciation is calculated on Book value of Assets + Future Planning(CWIP) on basis of depreciation rate defined in Company Law.

3) Labour Cost- Labour cost is variable component under budget. Labour cost (per shift) is calculated as follows: No. of Labour required x Per labour cost. To calculate labour cost, firstly it should be determined that how many mandays (1 manday= 8 hrs by a worker) will be required to produce FG per shift and then required production per shift (a shift= 8 hrs) with impact of efficiency. In the labour cost includes wages of casual labour only. In this company labour cost per manday is rs.218,so std. labour cost is determined basis on that. Lets take an example of calculating labour cost of a SKU (CHIK-25gm): o Mandays(labour) required- 6 o Output per minute- 90 o Minute per shift- 480 (60x8) o Efficiency- 70% o Minutes per shift (Effective)- 336 (480x70/100) o Fills(pcs.) per shift- 30240 (336x90) o Output in kg.- 756 (30240x25/1000) o Labour cost per manday- 218 o Total labour cost per shift- 1308 (218x6) o Cost per kg.- 1.73 (1308/756) o Cost per pc.- 0.04 (1308/30240)

Labour used in: Bulk production Packaging Raw Material Handling

4) Utilities- Utilities include maintenance related part. It includes boiler, pasteurizing, compressed air, vaccum pump, steam, chilling, DM water, soft water etc. Costing of all the above is done separately, then all are added to get the total cost of utilities. Then total utility is divided by the produced output (production) to get the cost per ton and then converted into rate per kg.

5) Power- Power includes two variables: -Internal use of electricity (DG) -External use of electricity (EB) In CKPL, DG consumption is assumed one hour on daily basis. Cost of power includes that cost which is used in production or directly used at machines.

Function of Costing Section

Product Costing Costing of product by absorption of cost by direct allocation or apportionment of all cost incurred. Classification of expenses Classification of expenses (As recorded in financial accounts) on different product through direct allocation / apportionment / absorption. Cost Estimates Preparation and periodical review of recovery rate of the whole Conversion Cost includes: Labour Cost Power Utility Depreciation Overhead Comparison of actual cost with estimates to assist management in cost control/ revision of norms. MIS Preparation of various MIS like Production Report, Material / fuel consumption report, machine and labour utilization report etc. Inventory Valuation Valuation of WIP and Finished Goods at periodic intervals, including physical verification, in accordance with the companys policy. Scrap Note

This document is raised by the concerned department while delivering scrap to the concerned holding cell of stores Department. With the prior approval as decided. Elements of Manufacturing Overheads Indirect labour, indirect material, depreciation, power and fuel , repair & maintenance, and other indirect expenses etc., which cannot be directly allocated, but can be apportioned or absorbed which constitute the manufacturing overhead.

Review of factory expenses/ overheads At periodical intervals, actual expenditure and manufacturing overheads applied shall be reviewed and where the difference is significant, the same shall be absorbed in proportion to the manufacturing overheads applied among different areas. This will have the effect of absorbing all the overhead expenditure.

ACTIVITIES PERFORMED UNDER COSTING PROCESS:

1. Cost updation in the system 2. Analyzing the cost booked and its variances in process orders 3. Variance settlement and closure of process orders 4. Product cost and presentation to management 5. Updating the system for sale price (MRP) & assessable value for excise duty declaration.

PROCESS ORDER CIRCLE

Planning

End (Close)

Production

Account

Store(Mat. issued & posted)

Dispatch

Production(Mat. receipt & Posted)

Quality

Finished Goods

PROCESS TO BE FOLLOWED

Planning Dept. issue process order (through SAP)

Receiving PO by Production Dept.

Material requisition to store by dispending team (both RM & PM)

Booking into SAP as per std. consumption by Production team

Receive material by Production team

Issue material by Store

Closing of all Process Orders

Calculate variances SAP vs Physical

OBSERVATIONS/FINDINGS:
1. While setting standard, standard cost setting team should consist of accountants, engineers, personnel administrators, purchase department, and production managers and their combine efforts to set standards based on experience, expectations and engineering study. 2. While determining the standard cost of raw materials, it has been found out that wastage is considered in bulk instead of every raw material. 3. Standard cost of raw material should be determined by analysis of market trend and past data along with supplier conversion cost but it should also include incidental cost of materials. Incidental cost is considered but in different head so it will not reflect true picture of standard cost of raw material.

OTHER OBSERVATIONS:
1. Huge inventories kept for write off in the plant. Those inventories associated with high inventory carrying cost which include insurance, building cost, manpower cost and cost of capital. 2. Packaging materials are purchased on the basis of lead time and cost involved at supplier end. It should also consider scientific model of lot sizing while purchasing materials.

SUMMARY/CONCLUSIONS:
1. Company has been set standard cost of material, labour and overhead but need to incorporate things which have been suggested above. 2. Material Usage Variance is discussed at the end of every JC and action plan is framed to eliminate deviations. 3. Company used to focus on Material Price Variance also cause of fluctuations in price is as important as material wastage and company do better monitor over the price. 4. Wastage of each raw material used to incorporate in the BOM. It is based on material balance technique. 5. Financial Report has been also prepared at end of every JC which includes labour, overheads. 6. Continuous training imparted to each and every employee to make aware about standard and variance. JC refers to the journey cycle which is of 28 days. 13 JC covered under financial year. Ist JC is started on 1st April & ended at 28th April.

BIBLOGRAPHY: 1. Cost & Management Accounting (ICWAI Module) 2. SAP (ERP Program of company) 3. www.cavinkare.com