MANAGEMENT ACCOUNTING MID

TERM PROJECT
PROJECT REPORT ON COST ANALYSIS
ON SETUP OF SOFT DRINK

IQ

PGDM BATCH 2009-11

SUBMITTED TO: DR. RITESH SRIVASTAVA

Submitted by:
SACHIN POPLI

(SEC A)
 ACKNOWLEDGEMENT

The satisfaction and euphoria that accompany the successful completion of

any task would be incomplete without mentioning the name of the people
whose constant guidance and encouragement has crowned all our efforts
with success.

I would like to thank Dr. Ritesh Srivastava for his critical appraisal,
comments and suggestions which helped me in maintaining the right
direction for my project and making it meaningful. I am also grateful to MR
ASHISH SHARMA who helped us in providing all the important costing details.
I am also obliged to all those people who directly or indirectly helped me in
accomplishing this project.

At last I would like to thank my batch mates, who have tried their level best
to contribute and helped me in performing this type of study and in
completion of the project.

Most especially a special thanks to our family and friends.

And to GOD, who made all things possible.

 CONTENTS

 INTRODUCTION

 OBJECTIVE

 PROCESS OF MANUFACTURING

 COST SHEET

 ANALYSIS OF THE COST SHEET

 SWOT ANALYSIS
MEANING OF COST
The INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS, LONDON, has
defined cost as ‘the amount of expenditure (actual or notional) incurred on or
attributable to a given thing’. Thus,cost can be termed as the amount of
resources given up in exchange for some goods orservices. In other words
“Cost is a foregoing, measured in monetary terms, incurred or potentially to
be incurred to achieve a specific objective.”

ELEMENTS OF COSTS
One of the main objects of cost accounting is to present the analysis of the
total cost of production in such a manner as to provide the maximum
information useful to the business. The analysis and classification of costs is
basically made with reference to factors on which expenditure is incurred.
These factors are known as ‘elements of cost’. The various elements of cost
are:-

1) Material Cost

2) Labor Cost

3) Expenses
4)overhead

MATERIAL COST
‘Material Cost’ refers to the cost of commodities supplied to an undertaking
e.g., cost of yarn and dyes supplied to an undertaking engaged in the
manufacture of cloth, cost of leather, thread, nails and shoe polish supplied
to an undertaking engaged in the manufacture of shoes etc. Material cost
may be further sub-divided into:-

(a) DIRECT MATERIAL COST:- Direct material cost means the cost
of materials which can be identified with and allocated to the cost
centres or cost units e.g. cost of wood in case of furniture, cost of
cotton in case of cotton yarn, cost of yarn in case of cloth, cost of iron
in case of machinery. This main feature of direct materials is that these
enter into and form part of the finished product.

(b) INDIRECT MATERIAL COST:- It refers to the material cost which

cannot be allocated but can be apportioned to or absorbed by cost
centres or cost units. These are the materials which cannot be traced
as part of the product and their cost is distributed among the various
cost centres or cost units on some equitable basis. Examples of
indirect material are coal and fuel for generating power, cotton waste,
lubricating oil and grease used in maintaining the machinery, materials
consumed for repair and maintenance work, dusters and brooms used
for cleaning the factory, etc.

LABOUR COST

Labour cost refers to the cost of remuneration of the employees of an

undertaking e.g., wages, salaries, commission etc. Labour cost may be
sub- divided into:-

(a) DIRECT LABOUR COST (or Direct Wages):- It refers to

labour cost which can be identified with and allocated to cost
centres or cost units. It includes the remuneration paid for
converting the raw-material into finished products or for altering the
construction composition or condition of the product manufactured
by an undertaking e.g., wages paid for spinning yarn in case of
spinning mill, wages paid for weaving cloth in case of cloth mill.

(b) INDIRECT LABOUR COST (or Indirect Wages):- It refers

to the labour cost or wages which cannot be allocated but can be
apportioned to or absorbed by cost centres or cost units e.g., salary
paid to factory manager, salary paid to factory supervisor or
foreman etc.
EXPENSES

Expenses refer to the cost of services provided to an undertaking

and the notional cost of the use owned assets (i.e., depreciation of
owned factory building, depreciation of office building, depreciation
of showroom building, depreciation of plant and machinery etc.
Expenses are sub-divided into:-

(a) Direct Expenses (or Chargeable Expenses) :- These are the

expenses (other than direct material cost and direct labour cost)
which can be identified with and allocated to cost centres or cost
units e.g., royalities paid on the basis of output, hire charges of
special plant and machinery , carriage and freight on direct
materials purchased if such carriage and freight have not been
added to the cost of materials.

(b) Indirect Expenses :- Expenses which cannot be allocated but can

be apportioned to or absorbed by cost centres or cost units e.g.,
rent, rates, taxes and insurance of factory building, factory
lighting, repairs to factory building, depreciation of plant and
machinery, repairs to machinery etc., are known as indirect
expenses.

Overhead:-
It may be referred as the cost of indirect material, indirect labour, and such other
expenses, which cannot be conveniently charged direct to specific cost centre or
cost units.

Classification of overhead:-

FACTORY OVERHEAD OR WORKS OVERHEAD:-

Factory overhead includes all the indirect costs incurred in the
factory in connection with manufacturing operations. Factory
overhead comprises the cost of indirect materials, cost of
indirect labour and all other indirect expenses which are incurred
in the running of the factory or works, e.g., lubricating oil, cotton
waste for cleaning the machinery, coal, gas and fuel, wages of
store-keeper, wages of time-keeper, salaries of foreman and
factory supervisors, factory rent, factory rates and insurance,
depreciation of owned factory building etc.

OFFICE AND ADMINISTRATION OVERHEAD: - These

include all indirect costs relating to the direction, control and
administration of an undertaking. In other words, office and
administration overhead refers to general office expenses and
expenses of administration and control of business e.g., office
rent, office rates and insurance, depreciation of owned office
building, office lighting, depreciation of office furniture, office
stationary, audit fee, director’s remuneration, salary of general
manager, bank charges etc.

SELLING AND DISTRIBUTION OVERHEAD:- These include

all indirect costs which are incurred for promoting sales and
retaining the customers and for delivering the goods after their
 manufacture to the consumers, e.g., cost of advertisement, rent,
rates, taxes and insurance of show room building, depreciation of
owned show-room building, show-room lighting, salary of sales
manager, salaries of salesmen, commission on sales, carriage on
sales, packing charges, salary of warehouse-keeper, running and
maintenance of delivery vans.

INTRODUCTION
Soft drinks are enormously popular beverages consisting primarily of
carbonated water, sugar, and flavorings. Nearly 200 nations enjoy the sweet,
sparkling soda with an annual consumption of more than 34 billion gallons.
Soft drinks rank as America's favorite beverage segment, representing 25%
of the total beverage market. In the early 1990s per capita consumption of
soft drinks in the U.S. was 49 gallons, 15 gallons more than the next most
popular beverage, water.

The roots of soft drinks extend to ancient times. Two thousand years ago
Greeks and Romans recognized the medicinal value of mineral water and
bathed in it for relaxation, a practice that continues to the present. In the
late 1700s Europeans and Americans began drinking the sparkling mineral
water for its reputed therapeutic benefits. The first imitation mineral water in
the U.S. was patented in 1809. It was called "soda water" and consisted of
water and sodium bicarbonate mixed with acid to add effervescence.
Pharmacists in America and Europe experimented with myriad ingredients in
the hope of finding new remedies for various ailments. Already the flavored
soda waters were hailed as brain tonics for curing headaches, hangovers,
and nervous afflictions.

Pharmacies equipped with "soda fountains" featuring the medicinal soda

water soon developed into regular meeting places for local populations.
Flavored soda water gained popularity not only for medicinal benefits but for
the refreshing taste as well. The market expanded in the 1830s when soda
water was first sold in glass bottles. Filling and capping the gaseous liquid in
containers was a difficult process until 1850, when a manual filling and
corking machine was successfully designed. The term "soda pop" originated
in the 1860s from the popping sound of escaping gas as a soda bottle was
opened.

New soda flavors constantly appeared on the market. Some of the more
popular flavors were ginger ale, sarsaparilla, root beer, lemon, and other fruit
flavors. In the early 1880s pharmacists experimented with powerful
stimulants to add to soda water, including cola nuts and coca leaves. They
were inspired by Bolivian Indian workers who chewed coca leaves to ward off
fatigue and by West African workers who chewed cola nuts as a stimulant. In
1886 an Atlanta pharmacist, John Pemberton, took the fateful step of
combining coca with cola, thus creating what would become the world's most
famous drink, "Coca-Cola". The beverage was advertised as refreshing as
well as therapeutic: "French Wine Cola—Ideal Nerve and Tonic Stimulant." A
few years later another pharmacist, Caleb Bradham, created "Pepsi-Cola" in
North Carolina. Although the name was a derivation of pepsin, an acid that
aids digestion, Pepsi did not advertise the beverage as having therapeutic
benefits. By the early 20th century, most cola companies focused their
advertising on the refreshing aspects of their drinks.

As flavored carbonated beverages gained popularity, manufacturers

struggled to find an appropriate name for the drinks. Some suggested
"marble water," "syrup water," and "aerated water." The most appealing
name, however, was "soft drink," adapted in the hopes that soft drinks would
ultimately supplant the "hard liquor" market. Although the idea never stuck,
the term soft drink did.

Until the 1890s soft drinks were produced manually, from blowing bottles
individually to filling and packaging. During the following two decades
automated machinery greatly increased the productivity of soft drink plants.
Probably the most important development in bottling technology occurred
with the invention of the "crown cap" in 1892, which successfully contained
the carbon dioxide gas in glass bottles. The crown cap design endured for 70
years.

The advent of motor vehicles spawned further growth in the soft drink
industry. Vending machines, serving soft drinks in cups, became regular
fixtures at service stations across the country. In the late 1950s aluminum
beverage cans were introduced, equipped with convenient pull-ring tabs
and later with stay-on tabs. Light-weight and break-resistant plastic bottles
came into use in the 1970s, though it was not until 1991 that the soft drink
industry used plastic PET (polyethylene terephthalate) on a wide scale.

Soft drink manufacturers have been quick to respond to consumer

preferences. In 1962 diet colas were introduced in response to the fashion of
thinness for women. In the 1980s the growing health consciousness of the
country led to the creation of caffeine-free and low-sodium soft drinks. The
1990s ushered in clear colas that were colorless, caffeine-free, and
preservative-free.
ABOUT COMPANY
Our company O2 is a premier one. It is one of the growing beverage
company in INDIA, manufacturing SOFT DRINK,JUICES and CHIPS. The
distinctiveness of our products has established us as the most acknowledged
manufacturer of beverage products. Our impeccable quality product cost
effective production process, voluminous experience of the market and
prompt delivery shall fetch us tremendous customer response. At O2 PVT
LTD, quality is a way of life. Quality consciousness is ingrained in our work
culture and business operations. Product processing is done under hygienic
conditions and stringent quality check measures are in place at different
stages of production and supply. The work culture of our organization is
focused on high performance, innovation, entrepreneurship and
empowerment.
Our Product
We are producing IQ soft drink .Absolute hygienically proven and
tested quality checks are undertaken at every level of the production
process, in order to make sure that only quality proven products are
dispatched in the market. From procurement of raw materials to the
preparation and packaging of the finished products, stringed quality is
ensured.

OBJECTIVES

 To setup a unit for manufacturing of softdrink.

 To ascertain the various costs that goes into starting such a business.

 To spend within the limit of Rs. 50 lakhs to 1 crore (for a small scale
industry).
 To prepare a cost sheet of all the costs to be incurred.

 To analyze the cost sheet and come to a conclusion regarding the

viability of the business.

To do SWOT analysis of the

CONTENTS OF IQ SOFT DRINK

Enjoy contains basic ingredients including carbonated water, high

fructose corn syrup, sugar, colorings, phosphoric acid, citric acid and
natural flavors. These ingredients are explained as under:-

1) HIGH FRUCTOSE CORN SYRUP: - Fructose corn syrup comprises any

of a group of corn syrups that has undergone enzymatic processing
to convert its glucose into fructose and has then been mixed with
pure corn syrup (100% glucose) to produce a desired sweetness.
The most widely used types of high-fructose corn syrup are: HFCS
55 (mostly used in soft drinks), approximately 55% fructose and
45% glucose; and HFCS 42 (used in many foods and baked goods),
approximately 42% fructose and 58%glucose. HFCS-90,
approximately 90% fructose and 10% glucose, is used in small
quantities for specialty applications, but primarily is used to blend
with HFCS 42 to make HFCS 55.

2) COLORINGS: - Colorings is added to the drink to change its color.

The drink “enjoy” due to these added colors is BLACK in color.

3) PHOSPHORIC ACID:-Phosphoric acid is used to acidify the drink but

not without controversy regarding its health effects. It provides a
tangy or sour taste.

4) CITRIC ACID: - Citric acid is a natural preservative and is also used

to add an acidic, or sour, taste to the drink. Citric acid exists in
greater than trace amounts in a variety of fruits and vegetables,
most notably citrus fruits. Lemons and limes have particularly high
concentrations of the acid; it can constitute as much as 8% of the
dry weight of these fruits (about 47 g/L in the juice).The
concentrations of citric acid in citrus fruits range from 0.005 mol/L
for oranges and grapefruits to 0.30 mol/L in lemons and limes.
 These values vary depending on the cultivar and the circumstances
in which the fruit was grown.
5) NATURAL FLAVORS: - Flavor is the sensory impression of a drink,
and is determined mainly by the chemical senses of taste and
smell. The flavor of the drink, as such, can be altered with
natural or artificial flavor ants.

Flavorant is defined as a substance that gives another

substance flavor, altering the characteristics of the solute,
causing it to become sweet, sour, tangy, etc.

The Manufacturing
Process
Most soft drinks are made at local bottling and canning companies. Brand
name franchise companies grant licenses to bottlers to mix the soft drinks in
strict accordance to their secret formulas and their required manufacturing
procedures.

Clarifying the water

• 1 The quality of water is crucial to the success of a soft drink. Impurities, such
as suspended particles, organic matter, and bacteria, may degrade taste and
color. They are generally removed through the traditional process of a series
of coagulation, filtration, and chlorination. Coagulation involves mixing a
gelatinous precipitate, or floc (ferric sulphate or aluminum sulphate), into the
water. The floc absorbs suspended particles, making them larger and more
easily trapped by filters. During the clarification process, alkalinity must be
adjusted with an addition of lime to reach the desired pH level.

Filtering, sterilizing, and dechlorinating the water

• 2 The clarified water is poured through a sand filter to remove fine particles
of floc. The water passes through a layer of sand and courser beds of gravel
to capture the particles.
• 3 Sterilization is necessary to destroy bacteria and organic compounds that
might spoil the water's taste or color. The water is pumped into a storage
tank and is dosed with a small amount of free chlorine. The chlorinated water
remains in the storage

• tank for about two hours until the reaction is complete.

 • 4 Next, an activated carbon filter dechlorinates the water and removes
residual organic matter, much like the sand filter. A vacuum pump de-aerates
the water before it passes into a dosing station.

Mixing the ingredients

• 5 The dissolved sugar and flavor concentrates are pumped into the dosing
station in a predetermined sequence according to their compatibility. The
ingredients are conveyed into batch tanks where they are carefully mixed;
too much agitation can cause unwanted aeration. The syrup may be sterilized
while in the tanks, using ultraviolet radiation or flash pasteurization, which
involves quickly heating and cooling the mixture. Fruit based syrups
generally must be pasteurized.
• 6 The water and syrup are carefully combined by sophisticated machines,
called proportioners, which regulate the flow rates and ratios of the liquids.
The vessels are pressurized with carbon dioxide to prevent aeration of the
mixture.

Carbonating the beverage

• 7 Carbonation is generally added to the finished product, though it may be

mixed into the water at an earlier stage. The temperature of the liquid must
be carefully controlled since carbon dioxide solubility increases as the liquid
temperature decreases. Many carbonators are equipped with their own
cooling systems. The amount of carbon dioxide pressure used depends on
the type of soft drink. For instance, fruit drinks require far less carbonation
than mixer drinks, such as tonics, which are meant to be diluted with other
liquids. The beverage is slightly over-pressured with carbon dioxide to
facilitate the movement into storage tanks and ultimately to the filler
machine.

Filling and packaging

• 8 The finished product is transferred into bottles or cans at extremely high

flow rates. The containers are immediately sealed with pressure-resistant
closures, either tinplate or steel crowns with corrugated edges, twist offs, or
pull tabs.
• 9 Because soft drinks are generally cooled during the manufacturing process,
they must be brought to room temperature before labeling to prevent
condensation from ruining the labels. This is usually achieved by spraying the
containers with warm water and drying them. Labels are then affixed to
bottles to provide information about the brand, ingredients, shelf life, and
safe use of the product. Most labels are made of paper though some are
 made of a plastic film. Cans are generally pre-printed with product
information before the filling stage.
• 10 Finally, containers are packed into cartons or trays which are then shipped
in larger pallets or crates to distributors.

PERFORMA OF COST SHEET

COST SHEET

Period……………….
Output……………

PARTICULARS OF ITEMS TOTAL(Rs.P.) PER

UNIT(Rs.P.)
Direct Materials Consumed - -
Direct Wages - -
Direct Expenses - -
PRIME COST xxx xxx
Factory Overhead - -
 FACTORY COST(WORKS xxx xxx
COST)
Office and Administration - -
Expenses
COST OF xxx xxx
PRODUCTION
Selling and Distribution - -
Expenses
TOTAL COST xxx xxx

EXPLANATION

(a) Direct Material Cost+ Direct Wages+ Direct

Expenses=Prime Cost
(b) Prime Cost+ Factory Overhead=Factory Cost
(c) Factory Cost+ Office and Administration
Overhead=Office Cost
(d) Office Cost+Selling and distribution
Overhead=Total Cost
(e) Total Cost+Profit=Selling Price

PREPARATION OF COST SHEET

The following are the various cost incurred by the

company for the production of ‘IQ’ Drinks:-

Rs. Rs.
Raw Materials 13,00,0 Direct Wages 15,00,0
00 00
Indirect Wages 10,00,0 Factory Rent 3,00,00
00 0
Factory Lighting 6,00,00 Factory Heating 1,00,00
 0 0
Motive Power 60,000 Haulage 95,000
Director’s 70,000 Director’s 1,10,00
Fees(Works) Fees(Office) 0
Factory Cleaning 2,00,00 Sundry Office 87,000
0 Expenses
Factory 1,80,00 Office Stationary 1,07,0
Stationary 0 00
Loose Tools 85,000 Office Rent and 80,000
Written Off Taxes
Water Supply 95,000 Factory 65,000
Insurance
Legal Expenses 55,000 Direct Expenses 1,00,00
0
Rent of 1,00,00 Depreciation of 70,000
Warehouse 0 Machinery
Depreciation of 60,000 Depreciation of 65,000
office building Delivery Vans
Bad Debts 70,000 Advertising 13,00,0
00
Sales 1,70,00 Upkeep of 80,000
Department 0 Delivery Vans
Salaries
Commission on 75,000 Bank Charges 72,000
sales

The total output for the period has been 9, 60,000

bottles.

COST SHEET
 Period: September, 2009
Output:11,60,000 bottles

PARTICULARS TOTAL PER

BOTTL
E
COST
Raw Materials 13,00,0 1.12
00
Direct Wages 15,00,0 1.29
00
Direct Expenses 1,00,00 0.086
0
PRIME COST 29,00, 2.50
000
Factory Overhead:
Indirect Wages
10,00,000
Factory Rent
3,00,000
Factory Lighting
6,00,000
Factory Heating
1,00,000
Motive Power 60,000
Haulage
95,000
Directors Fees(Works)
70,000
Factory Cleaning
2,00,000
Factory Stationary
1,80,000
Loose Tools Written off 85,000
Water Supply
95,000
Factory Insurance
65,000
Depreciation of Machinery
70,000
29,20,0 2.51
00
FACTORY COST 58,20, 5.01
000
Office Overhead:
Director’s Fees(Office)
1,10,000
Sundry Office Expenses
87,000
Office Stationary
1,07,000
Office Rent and Taxes
80,000
Legal Expenses
55,000
Depreciation of Office Buildings 60,000
Bank Charges
72,000
5,71,00 0.49
0
COST OF PRODUCTION 63,91, 5.50
000
Selling and Distribution Expenses:
Rent of Warehouse
1,00,000
Bad Debts
70,000
Sales Department Salaries
1,70,000
Commission on Sales
75,000
Depreciation of Delivery Vans 65,000
Advertising
13,00,000
Upkeep of Delivery Vans 80,000
17,85,0 1.53
00
TOTAL COST 81,76, 7.03
000

ANALYSIS
The idea of starting a soft drink unit in the India seems to be a profitable
business venture. The total estimated cost of the project is RS 81,76,000

The present production capacity is 11, 60,000 bottles.This can be

increased in future as per the demand in the market. The finished product
shall be sold to the retailers directly with no inventory carrying cost and
warehousing cost.

We have proposed to sell each bottle at a price of RS10.Thus the profit

earned from finished product will be Rs2.97per bottle. As the company is
newly established it will take time to develop such a demand, that in future it
can earn more profits. Thus the project seems to be a profitable venture.

COMPARATIVE COST SHEET

Period: September, 2009
Output:11,60,000 bottles

PARTICULARS PEPSI’ O2’S

S PER PER
 BOTT BOTTL
LE E
COST COST
Raw Materials 1.10 1.12
Direct Wages 1.25 1.29
Direct Expenses 0.081 0.086
PRIME COST 2.43 2.50
Factory Overhead:
Indirect Wages
Factory Rent
Factory Lighting
Factory Heating
Motive Power
Haulage
Directors Fees(Works)
Factory Cleaning
Factory Stationary
Loose Tools Written off
Water Supply
Factory Insurance
Depreciation of Machinery
2.47 2.51
FACTORY COST 4. 5.01
90
Office Overhead:
Director’s Fees(Office)
Sundry Office Expenses
Office Stationary
Office Rent and Taxes
Legal Expenses
Depreciation of Office Buildings
Bank Charges
0.50 0.49
COST OF PRODUCTION 5.40 5.50
Selling and Distribution Expenses:
Rent of Warehouse
Bad Debts
Sales Department Salaries
Commission on Sales
Depreciation of Delivery Vans
Advertising
Upkeep of Delivery Vans
1.50 1.53
TOTAL COST 6.90 7.03

SWOT ANALYSIS
STRENGTHS WEAKNESS

• Technological advanced machinery. • Limited resources as the industry is

• Superior product quality. small scale.
• Talented workforce • Domestic player
• Low cost

OPPORTUNITIES THREATS
• Major Competitive threats being a
• Development of quality products new market player
• Improvement of production and • Water
financial efficiency.
• Further reduction in cost