COST CONCEPTS

DEFINITIONS AND TERMINOLOGIES

SOME DEFINITIONS
COST : It is the sum total of all expenses incurred (direct) or attributable(indirect), actual or notional to realize an objective. FIXED COST : The part of cost that tends to be constant in totality at all level of production within the capacity of existing plant. VARIABLE COST : The part of cost which is directly proportional in totality to the volume of production with in the capacity of the plant.

Note : A cost element may not be purely fixed or purely variable in nature it is called semi variable and has some fixed and some variable component.

SOME DEFINITIONS
PRICE : The consideration customer discharges for the each unit of goods. NET SALES REALISATION: (NSR) : Price selling and distribution expenses statutory payments. CONTRIBUTION : NSR Variable Cost GROSS MARGIN : Total contribution Total cost (excluding interest and depreciation) NET MARGIN : Gross Margin Depreciation Interest

A TYPICAL PROFIT AND LOSS ACCOUNT

INCOME
SALES LESS EXCISE DUTY INTERNAL CONSUMPTION INTEREST EARNED OTHER REVENUES

EXPENDITURE
RAW MATERIAL SALARY & WAGES STORES AND SPARES POWER AND FUEL REPAIR AND MAINTENANCE FRIEGHT OUTWARDS OTHER EXPENSES INTEREST DEPRECIATION

PROFIT BEFORE TAX

PROVISIONS FOR TAXES

PROFIT AFTER TAX

A TYPICAL BALANCE SHEET

SOURCES OF FUND
SHARE CAPITAL L.T. LOANS & DEBENTURES SURPLUSES CURRENT LIABILITIES SHORT TERM LOANS SUNDRY CREDITORS

APPLICATION OF FUND
FIXED ASSETS Less DEPRECIATION INVESTMENTS CURRENT ASSETS INVENTORY SUNDRY DEBTORS CASH & BANK UNWRITTEN OFF LOSS

ELEMENTS OF COST- A COST SHEET

1. 2. Material cost (V) Operating cost :
a. b. c. d. e. f. Lab our (F) Power and fuel (V) Operating consumable (V) Repair and Maintenance (F) Direct services (F) apportioned as per use Stores /spares (F) 3. Over Heads : (F) apportioned on fixed basis a. Works over head b. Non works over head 4. Depreciation ( F) based on policy

5.

Interest

a. On working capital b. On long term investments Note : CDBI = (1) + (2) + (3)

WORKS COST : CDBI + Int on WC

SOME FEATURE OF COST SHEET

PRODUCT WISE and PROCESS WISE MATERIAL COST TRANSFERRED FROM PREVIOUS UNIT CONTAINS ALL COST UPTO PREV PROCESS INTEREST AND DEPRECIATION IS TRANSFRED WITHOUT ADDING OVER HEAD APPORTIONMENT USUALLY FIXED RATIO SERVICES SHARE BASED ON ACTUAL USE USING A PREDETMINED CRITERION

ELEMENTS OF MAINTENANCE COST IN SAIL PLANTS

FOR A PRODUCT : EXPRESSED AS PER UNIT OUTPUT

MAINTENANCE LABOUR MAINTENANCE SPARES MAINTENANCE CONSUMABLES** REPAIR AND LABOUR CONTRACTS INTERNAL CONSUMPTION IN MAINT. SHARE OF MAINTENANCE SERVICES

TOTAL MAINTENANCE COST OF A PLANT SAIL POLICY

SPARES, CONSUMABLES (MAINT) , REPAIR CONTRACTS , JOB CONTRACTS OF ALL PRODUCTION UNIT and TOTAL EXPENDITURE OF MANITENANCE SERVICES (CENTRALIZED)

IS DIVED BY TOTAL CRUDE STEEL PRODUCTION

NOTE ON SAIL MAINTENANCE COST

EXPRESSED AS PER TON OF CRUDE STEEL MAINTENANCE LABOUR IS EXCLUDED COST OF MAINTENANCE IN UTILITY SERVICE UNITS, POWER PLANT NOT INCLUDED INTEREST ON SPARES INVENTORY NOT AVAILABLE SEPARATELY OVERHEADS DUE TO MAINTENANCE DEPARTMENT NOT AVAILABLE SEPARATELY AS SUCH SHARE OF OVERHEADS, INTEREST, DEPRECIATION NOT CONSIDERED

COST CONTROL AND COST REDUCTION IN MAINTENANCE

 COST CONTROL IS RESTRICTING THE COST INCURRENCE WITH RESPECT TO SOME NORM OR STANDARD COST COST REDUCTION IS STRIVING FOR REDUCTION IN COST WITHOUT ANY REFERENCE TO ANY NORMS WITHOUT SACRIFICING QUALITY, PRODUCTION, DELIVERY,SAFETY AND MORAL COST REDUCTION STARTS WHERE COST CONTROL ENDS

COST CONTROL vrs COST REDUCTION

COST CONTROL IN MAINTENANCE

BUDGETARY CONTROL
SEPARATE BUDGET FOR CONSUMTION AND PROCUREMENT. DEPARTMENT WISE, MONTH WISE, EXPENSE HEAD WISE DISTRIBUTION AND CONTROL IN ISSUE AND INDENT ANNUAL PLANNING AND CONTROL COMPUTERIZED SYSTEM

SOME COST REDUCTION MEASURES

CENTRALIZED PROCUREMENT OF COMMON SPARES AND CONSUMABLES STANDARDISATION AND RATIONALIZATION MAKE OR BUY DECISION IMPORT SUBSTITUTION ECONOMIC PURCHASE
QUANTITY SELECTION VENDOR SELECTION LEAD TIME FOLLOW UP

IN MAINTENANCE

INVENTORY MONITORING AND CONTROL

INTANGIBLE COST IN MAINTENANCE

IS THAT ALL ABOUT MAINTENANCE COST?

WHO IS RESPOSIBLE FOR
THE COST OF DOWN TIME ? COST OF BAD WORKMANSHIP? MAINTENANCE INDUCED PROBLEMS? (CAN WE DENY?) STOCK OUT SITUATION OF ESSENTIAL CONSUMABLES LIKE BEARINGS, LUB OIL MISTIMED PROCUREMENT OF SPARES ?

HOW THESE COSTS ARE ACCOUNTED FOR ?

COST SHEET

COST OF DOWN TIME

COST OF QUALITY DEGRADATION COST OF SLOW PROD RATE COST OF OVER MAINTENANCE

MAINTENANCE COST IN THE COST SHEET IS JUST TIP OF AN ICE BERG

DOWN TIME ON ACCOUNT OF

MAINTENANCE BREAK DOWN DUE TO LACK OF PREVENTIVE MAINTENANCE LACK OF OR WRONG INSPECTION NON AVAILABILITY OF SPARES, DEFECTIVE SPARE MAINTENANCE INDUCED PROBLEMS OVER MAINTENANCE- FREQUENT PMs

QUALITY COST AND SLOW PRODUCTION RATE COST DUE TO MAINTENANCE BAD WORKMANSHIP WRONG ADJUSTMENT DELAYED PM DEFECTIVE SPARE WRONG DIAGNOSIS

HOW TO CONTROL AND REDUCE INTANGIBLE MAINTENANCE COST?