Ma Project Sachin

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MANAGEMENT ACCOUNTING MID

TERM PROJECT

PROJECT REPORT ON COST ANALYSISON SETUP OF SOFT DRINK

IQ

PGDM BATCH 2009-11

SUBMITTED TO: DR. RITESH SRIVASTAVA

Submitted by:

SACHIN POPLI

(SEC A)


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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.


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CONTENTS

INTRODUCTION

OBJECTIVE

PROCESS OF MANUFACTURING

COST SHEET

ANALYSIS OF THE COST SHEET

SWOT ANALYSIS


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MEANING OF COST The INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS, LONDON, hasdefined cost as the amount of expenditure (actual or notional) incurred on orattributable to a given thing. Thus,cost can be termed as the amount of resources given up in exchange for some goods orservices. In other wordsCost is a foregoing, measured in monetary terms, incurred or potentially tobe incurred to achieve a specific objective.

ELEMENTS OF COSTSOne of the main objects of cost accounting is to present the analysis of thetotal cost of production in such a manner as to provide the maximuminformation useful to the business. The analysis and classification of costs isbasically made with reference to factors on which expenditure is incurred.

These factors are known as elements of cost. The various elements of costare:-

1) Material Cost

2) Labor Cost

3) Expenses


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4)overhead

MATERIAL COST

Material Cost refers to the cost of commodities supplied to an undertakinge.g., cost of yarn and dyes supplied to an undertaking engaged in themanufacture of cloth, cost of leather, thread, nails and shoe polish suppliedto an undertaking engaged in the manufacture of shoes etc. Material costmay be further sub-divided into:-

(a) DIRECT MATERIAL COST:- Direct material cost means the costof 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 ironin case of machinery. This main feature of direct materials is that theseenter into and form part of the finished product.

(b) INDIRECT MATERIAL COST:- It refers to the material cost whichcannot be allocated but can be apportioned to or absorbed by costcentres or cost units. These are the materials which cannot be tracedas part of the product and their cost is distributed among the variouscost 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


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consumed for repair and maintenance work, dusters and brooms usedfor cleaning the factory, etc.

LABOUR COST

Labour cost refers to the cost of remuneration of the employees of anundertaking e.g., wages, salaries, commission etc. Labour cost may besub- divided into:-

(a) DIRECT LABOUR COST (or Direct Wages) :- It refers tolabour cost which can be identified with and allocated to costcentres or cost units. It includes the remuneration paid forconverting the raw-material into finished products or for altering theconstruction composition or condition of the product manufacturedby 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 refersto the labour cost or wages which cannot be allocated but can beapportioned to or absorbed by cost centres or cost units e.g., salarypaid to factory manager, salary paid to factory supervisor orforeman etc .


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EXPENSES

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

(a) Direct Expenses (or Chargeable Expenses) :- These are theexpenses (other than direct material cost and direct labour cost)which can be identified with and allocated to cost centres or costunits e.g., royalities paid on the basis of output, hire charges of special plant and machinery , carriage and freight on directmaterials purchased if such carriage and freight have not beenadded to the cost of materials.

(b) Indirect Expenses :- Expenses which cannot be allocated but canbe apportioned to or absorbed by cost centres or cost units e.g.,rent, rates, taxes and insurance of factory building, factorylighting, repairs to factory building, depreciation of plant andmachinery, repairs to machinery etc., are known as indirectexpenses.

Overhead:-


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

OFFICE AND ADMINISTRATION OVERHEAD : - Theseinclude all indirect costs relating to the direction, control andadministration of an undertaking. In other words, office andadministration overhead refers to general office expenses andexpenses of administration and control of business e.g., officerent, office rates and insurance, depreciation of owned officebuilding, office lighting, depreciation of office furniture, officestationary, audit fee, directors remuneration, salary of generalmanager, bank charges etc.

SELLING AND DISTRIBUTION OVERHEAD :- These includeall indirect costs which are incurred for promoting sales andretaining the customers and for delivering the goods after their


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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 salesmanager, salaries of salesmen, commission on sales, carriage onsales, packing charges, salary of warehouse-keeper, running andmaintenance of delivery vans.

INTRODUCTIONSoft 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 mostpopular beverage, water.

The roots of soft drinks extend to ancient times. Two thousand years agoGreeks and Romans recognized the medicinal value of mineral water andbathed in it for relaxation, a practice that continues to the present. In thelate 1700s Europeans and Americans began drinking the sparkling mineralwater for its reputed therapeutic benefits. The first imitation mineral water inthe 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 inthe hope of finding new remedies for various ailments. Already the flavoredsoda waters were hailed as brain tonics for curing headaches, hangovers,and nervous afflictions.

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

New soda flavors constantly appeared on the market. Some of the morepopular flavors were ginger ale, sarsaparilla, root beer, lemon, and other fruit


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flavors. In the early 1880s pharmacists experimented with powerfulstimulants to add to soda water, including cola nuts and coca leaves. Theywere 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. In1886 an Atlanta pharmacist, John Pemberton, took the fateful step of

combining coca with cola, thus creating what would become the world's mostfamous drink, "Coca-Cola". The beverage was advertised as refreshing aswell as therapeutic: "French Wine ColaIdeal Nerve and Tonic Stimulant." Afew years later another pharmacist, Caleb Bradham, created "Pepsi-Cola" inNorth Carolina. Although the name was a derivation of pepsin, an acid thataids digestion, Pepsi did not advertise the beverage as having therapeuticbenefits. By the early 20th century, most cola companies focused theiradvertising on the refreshing aspects of their drinks.

As flavored carbonated beverages gained popularity, manufacturersstruggled to find an appropriate name for the drinks. Some suggested

"marble water," "syrup water," and "aerated water." The most appealingname, however, was "soft drink," adapted in the hopes that soft drinks wouldultimately 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 bottlesindividually to filling and packaging. During the following two decadesautomated machinery greatly increased the productivity of soft drink plants.Probably the most important development in bottling technology occurredwith the invention of the "crown cap" in 1892, which successfully containedthe 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 drinkindustry. Vending machines, serving soft drinks in cups, became regularfixtures at service stations across the country. In the late 1950s aluminumbeverage cans were introduced, equipped with convenient pull-ring tabsand later with stay-on tabs. Light-weight and break-resistant plastic bottlescame into use in the 1970s, though it was not until 1991 that the soft drinkindustry 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 thecountry led to the creation of caffeine-free and low-sodium soft drinks. The1990s ushered in clear colas that were colorless, caffeine-free, andpreservative-free.


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ABOUT COMPANY Our company O2 is a premier one. It is one of the growing beveragecompany in INDIA, manufacturing SOFT DRINK,JUICES and CHIPS. Thedistinctiveness of our products has established us as the most acknowledgedmanufacturer of beverage products. Our impeccable quality product cost

effective production process, voluminous experience of the market andprompt delivery shall fetch us tremendous customer response. At O2 PVTLTD, quality is a way of life. Quality consciousness is ingrained in our workculture and business operations. Product processing is done under hygienicconditions and stringent quality check measures are in place at differentstages of production and supply. The work culture of our organization isfocused on high performance, innovation, entrepreneurship andempowerment.


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Our ProductWe are producing IQ soft drink .Absolute hygienically proven andtested quality checks are undertaken at every level of the productionprocess, in order to make sure that only quality proven products aredispatched in the market. From procurement of raw materials to thepreparation and packaging of the finished products, stringed quality isensured .

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).


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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


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CONTENTS OF IQ SOFT DRINK

Enjoy contains basic ingredients including carbonated water, highfructose corn syrup, sugar, colorings, phosphoric acid, citric acid andnatural flavors. These ingredients are explained as under:-

1) HIGH FRUCTOSE CORN SYRUP: - Fructose corn syrup comprises anyof a group of corn syrups that has undergone enzymatic processingto convert its glucose into fructose and has then been mixed withpure corn syrup (100% glucose) to produce a desired sweetness.

The most widely used types of high-fructose corn syrup are: HFCS55 (mostly used in soft drinks), approximately 55% fructose and45% 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 blendwith 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 butnot without controversy regarding its health effects. It provides atangy 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 ingreater than trace amounts in a variety of fruits and vegetables,most notably citrus fruits. Lemons and limes have particularly highconcentrations of the acid; it can constitute as much as 8% of thedry weight of these fruits (about 47 g/L in the juice).Theconcentrations of citric acid in citrus fruits range from 0.005 mol/Lfor oranges and grapefruits to 0.30 mol/L in lemons and limes.


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These values vary depending on the cultivar and the circumstancesin 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 andsmell. The flavor of the drink, as such, can be altered with

natural or artificial flavor ants.

Flavorant is defined as a substance that gives anothersubstance flavor, altering the characteristics of the solute,causing it to become sweet, sour, tangy, etc.

The ManufacturingProcess

Most soft drinks are made at local bottling and canning companies. Brandname franchise companies grant licenses to bottlers to mix the soft drinks instrict accordance to their secret formulas and their required manufacturingprocedures.

Clarifying the water

1 The quality of water is crucial to the success of a soft drink. Impurities, suchas suspended particles, organic matter, and bacteria, may degrade taste andcolor. They are generally removed through the traditional process of a seriesof coagulation, filtration, and chlorination. Coagulation involves mixing agelatinous precipitate, or floc (ferric sulphate or aluminum sulphate), into thewater. The floc absorbs suspended particles, making them larger and moreeasily trapped by filters. During the clarification process, alkalinity must beadjusted 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 gravelto 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 storagetank and is dosed with a small amount of free chlorine. The chlorinated waterremains in the storage

tank for about two hours until the reaction is complete.


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

Mixing the ingredients

5 The dissolved sugar and flavor concentrates are pumped into the dosingstation in a predetermined sequence according to their compatibility. Theingredients are conveyed into batch tanks where they are carefully mixed;too much agitation can cause unwanted aeration. The syrup may be sterilizedwhile in the tanks, using ultraviolet radiation or flash pasteurization, whichinvolves quickly heating and cooling the mixture. Fruit based syrupsgenerally 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 themixture.

Carbonating the beverage

7 Carbonation is generally added to the finished product, though it may bemixed into the water at an earlier stage. The temperature of the liquid mustbe carefully controlled since carbon dioxide solubility increases as the liquidtemperature decreases. Many carbonators are equipped with their own

cooling systems. The amount of carbon dioxide pressure used depends onthe type of soft drink. For instance, fruit drinks require far less carbonationthan mixer drinks, such as tonics, which are meant to be diluted with otherliquids. The beverage is slightly over-pressured with carbon dioxide tofacilitate the movement into storage tanks and ultimately to the fillermachine.

Filling and packaging

8 The finished product is transferred into bottles or cans at extremely highflow rates. The containers are immediately sealed with pressure-resistantclosures, either tinplate or steel crowns with corrugated edges, twist offs, orpull tabs.

9 Because soft drinks are generally cooled during the manufacturing process,they must be brought to room temperature before labeling to preventcondensation from ruining the labels. This is usually achieved by spraying thecontainers with warm water and drying them. Labels are then affixed tobottles to provide information about the brand, ingredients, shelf life, andsafe use of the product. Most labels are made of paper though some are


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made of a plastic film. Cans are generally pre-printed with productinformation before the filling stage.

10 Finally, containers are packed into cartons or trays which are then shippedin larger pallets or crates to distributors.

PERFORMA OF COST SHEET

COST SHEET

Period.Output

PARTICULARS OF ITEMS TOTAL(Rs.P.) PERUNIT(Rs.P.)Direct Materials Consumed - -Direct Wages - -Direct Expenses - -

PRIME COST xxx xxxFactory Overhead - -


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FACTORY COST(WORKSCOST)

xxx xxx

Office and AdministrationExpenses

- -

COST OFPRODUCTION xxx xxxSelling and DistributionExpenses

- -

TOTAL COST xxx xxx

EXPLANATION

(a) Direct Material Cost+ Direct Wages+ DirectExpenses=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 thecompany for the production of IQ Drinks:-

Rs. Rs.Raw Materials 13,00,0

00Direct Wages 15,00,0

00Indirect Wages 10,00,0

00Factory Rent 3,00,00

0Factory Lighting 6,00,00 Factory Heating 1,00,00


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0 0Motive Power 60,000 Haulage 95,000DirectorsFees(Works)

70,000 DirectorsFees(Office)

1,10,000

Factory Cleaning 2,00,000 Sundry OfficeExpenses 87,000

FactoryStationary

1,80,000

Office Stationary 1,07,000

Loose ToolsWritten Off

85,000 Office Rent and Taxes

80,000

Water Supply 95,000 FactoryInsurance

65,000

Legal Expenses 55,000 Direct Expenses 1,00,000

Rent of Warehouse

1,00,000

Depreciation of Machinery

70,000

Depreciation of office building

60,000 Depreciation of Delivery Vans

65,000

Bad Debts 70,000 Advertising 13,00,000

SalesDepartmentSalaries

1,70,000

Upkeep of Delivery Vans

80,000

Commission onsales

75,000 Bank Charges 72,000

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

COST SHEET


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

PARTICULARS TOTAL PERBOTTLECOST

Raw Materials 13,00,000

1.12

Direct Wages 15,00,000

1.29

Direct Expenses 1,00,000

0.086

PRIME COST 29,00,000

2.50

Factory Overhead:Indirect Wages10,00,000Factory Rent3,00,000Factory Lighting6,00,000Factory Heating

1,00,000Motive Power 60,000Haulage95,000Directors Fees(Works)70,000Factory Cleaning2,00,000Factory Stationary

1,80,000Loose Tools Written off 85,000Water Supply95,000Factory Insurance65,000Depreciation of Machinery


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70,00029,20,0

002.51

FACTORY COST 58,20,

000

5.01

Office Overhead:Directors Fees(Office)1,10,000Sundry Office Expenses87,000Office Stationary1,07,000Office Rent and Taxes80,000Legal Expenses55,000Depreciation of Office Buildings 60,000Bank Charges72,000

5,71,000

0.49

COST OF PRODUCTION 63,91,000

5.50

Selling and Distribution Expenses:Rent of Warehouse1,00,000Bad Debts70,000Sales Department Salaries1,70,000Commission on Sales75,000Depreciation of Delivery Vans 65,000Advertising13,00,000Upkeep of Delivery Vans 80,000

17,85,000

1.53


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TOTAL COST 81,76,000

7.03

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

The present production capacity is 11, 60,000 bottles. This can beincreased in future as per the demand in the market. The finished productshall be sold to the retailers directly with no inventory carrying cost andwarehousing cost.

We have proposed to sell each bottle at a price of RS10.Thus the profitearned from finished product will be Rs2.97per bottle. As the company isnewly established it will take time to develop such a demand, that in future itcan earn more profits. Thus the project seems to be a profitable venture.

COMPARATIVE COST SHEETPeriod: September, 2009Output:11,60,000 bottles

PARTICULARS PEPSIS PER

O2SPER


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BOTTLECOST

BOTTLECOST

Raw Materials 1.10 1.12

Direct Wages 1.25 1.29Direct Expenses 0.081 0.086PRIME COST 2.43 2.50Factory Overhead:Indirect WagesFactory RentFactory LightingFactory HeatingMotive Power

HaulageDirectors Fees(Works)Factory CleaningFactory StationaryLoose Tools Written off Water SupplyFactory InsuranceDepreciation of Machinery

2.47 2.51FACTORY COST 4.

905.01

Office Overhead:Directors Fees(Office)Sundry Office ExpensesOffice StationaryOffice Rent and TaxesLegal ExpensesDepreciation of Office BuildingsBank Charges

0.50 0.49COST OF PRODUCTION 5.40 5.50

Selling and Distribution Expenses:Rent of WarehouseBad DebtsSales Department Salaries


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Commission on SalesDepreciation of Delivery VansAdvertisingUpkeep of Delivery Vans

1.50 1.53 TOTAL COST 6.90 7.03

SWOT ANALYSIS


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STRENGTHS

Technological advanced machinery. Superior product quality. Talented workforce Low cost

WEAKNESS

Limited resources as the industry issmall scale.

Domestic player

OPPORTUNITIES

Development of quality products Improvement of production and

financial efficiency. Further reduction in cost

THREATS Major Competitive threats being a

new market player Water

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Ma Project Sachin