MANAC INDIVIDUAL ASSIGNMENT

National Aluminium company Limited

Submitted by

Susanta Kumar Sahoo

Roll No – 1811433
Section - F
1. Introduction:

In the fiscal year 2017-18, National Aluminium Company Limited had earned an operating income/ sales
turnover of 9618.31 crores and reported an operating profit of 2521.18 crores. The contribution margin is
found to be around 28%. So to analyse the factors responsible for such high profitability, I have derived the
cost structure of NALCO.

2. Cost Structure:

I took past 10 years financial details( Profit & loss statement) of NALCO and analysed using regression
to find out the fixed and variable components. As there was no mention of number of units produced during
the year, I considered “Sales turnover/ Operating income” as an independent variable as this is more
appropriate for examining cost structure because it is free of other incomes.

NALCO had fixed income of around 8% of its operating income, and 15% of its sales turn over was
accounted for direct material. Over 70% of the revenue was found to be a variable cost which means on
increasing sales; profit also rises rapidly. That makes operating leverage factor low.

High variable cost leads to low contribution margin. In this case, the variable value is not so high hence
the contribution margin ratio is about 29%. Therefore the break-even sales are as low as 2862.92 crores. That
is the reason behind the high safety margin. A very high safety margin compared to break even sales( safety
margin is about 2.5 times of the break-even sales) and good contribution margin is the reason behind the high
profitability of the company.

Manufacturing Overhead which is around 44% of the operating income majorly constitutes of Power
& Fuel cost. This may imply that there might be wastage of power in unproductive hours. But we don’t have
any specific information on that. Direct labour is around 23% of the operating income which seems to be a
variable component.

Repairing work is mostly a fixed cost both for plant and equipment as well as buildings. It seems NALCO
allocates budget for regular interval repairing of machinery. Minor changes in yearly maintenance cost may
be because of the change is the price but not in the amount of work.

3. COGM & COGS:

Cost of goods sold and the cost of goods manufactured scheduled has been created from the available
cost structure of the organisations. Cost of direct materials, cost of direct labour, manufacturing overhead
were added to find the cost of goods manufactured. In manufacturing overhead depreciation for only plant
and equipment has been taken, not the non-manufacturing manufacturing overheads. Along with that, we
have to add opening WIP and subtract closing WIP to find the COGM. Then opening finished goods were added
and closing finished goods were subtracted to derive COGS.

4. Recommendation:

The company should continue operating in the same way. Few measures like using automation equipment to
cut down some of the labour may help it in the cost of goods manufactured. Also, the company should give
focus on the reduction of wastage of power and fuel. Also, it should track the costs to the products more
accurately which will be helpful in reducing other manufacturing expenses and miscellaneous which in return
decreases COGM and increases profit.
 Cost structure (in INR Crores)

Cost drivers Y-Intercept (Variable R- Categorization Comments

(Linest) cost per square
(Fixed cost) unit)/
co.eff of
op.
Raw material 0 0.1462 0.93 Variable cost Good line fit as high R-sq
consumption
Power, Oil, Fuel 0 0.2821 0.84 Variable cost Good line fit as high R-sq
Water charge 0 0.0027 0.85 Variable cost Good line fit as high R-sq
Salaries, Wages & Bonus 0 0.1441 0.95 Variable cost Good line fit as high R-sq
Contribution to funds 0 0.0157 0.17 Variable cost Bad line fit as low R-sq
Staff welfare expense 0 0.0088 0.37 Variable cost Bad line fit as low R-sq
Stores consumed 0 0.0449 0.43 Variable cost Bad line fit as low R-sq
Repairs 219 0 0.1 Fixed cost Bad line fit as low R-sq
Other operating 0 0.0138 0.75 Variable cost Good line fit as high R-sq
expense
Distribution Expense 0 0.0221 0.55 Variable cost Bad line fit as low R-sq
Audit Expense 0 0.000068 0.79 Variable cost Good line fit as high R-sq
Other administrative 0 0.0238 0.74 Variable cost Good line fit as high R-sq
expense
Other Miscellaneous 0 0.0125 0.51 Variable cost Bad line fit as low R-sq
expenses
Repairs-Plant& 155.94 0 0.2 Fixed cost Bad line fit as low R-sq
Machinery
Repairs-Building 38.75 0 0.24 Fixed cost Bad line fit as low R-sq
Depreciation for the 417 0 0.48 Fixed cost Bad line fit as low R-sq
current year (P&E)
Other selling expense 0 0.001531 0.41 Variable cost Bad line fit as low R-sq
Depreciation in S&A 63.4 0

Total fixed cost (2018) 830.69 COG Schedule

Total variable cost (2018) 6827.518191 (in INR Crores)
Total cost (regression) 7658.208191 Direct Material 1465.31
Total operating income/sales 9618.31 Direct Labour 2261.2
Total cost(reported) 8111.01 Manufacturing OH(power, fuel,
Contribution margin 2790.79181 other man. Exp, 4278.54
miscellaneous,P&E dep)
Net Income 1507.3
Opening WIP Inventory 236.37
Operating Leverage Factor 1.85151716
(Closing WIP Inventory) 284.33
Contribution Margin Ratio 29.015%
COGM 7957.09
Break Even Point (Sales INR) 2862.92726
Opening FG Inventory 198.74
Margin of Safety 6755.38274
(Closing FG Inventory) 143.21
COGS 8012.62

References:

https://www.capitaline.com/SiteFrame.aspx?id=1