Product Costing Recipe Spice

Transcription

1 Product Costing Recipe Spice Adeel A. Siddiqui 2012 Shan Foods (Private) Ltd. was founded in 1981 in a single room as Shan Masala. Later, due to its popularity, the company was named Shan Foods. It has presence in more than 50 countries today and deals in several broad categories of offerings. Shan Foods has capitalized on the changing market trends and consumer tastes and through product trials, it has made sure to churn out offerings that are best in line with consumer tastes. Shan Foods Private Limited Korangi Industrial Area, Karachi, Pakistan

2 Letter of Acknowledgement To whom it may concern. This Letter is to acknowledge the efforts and sincerity, offered by the course instructor Mr. Muhammad Rizwan Siddiqui, to teach the subject and guide. The accomplishment of this report is a result of a combine effort made by the reported and the reporting individuals, during the term spring The objective to write this report is to learn the method of product costing used by an FMCG producer, in this case Shan Foods Private Limited. I hereby acknowledge that I may not be able to understand and write the content of this report without sincere guidance from Mr. Abdul Gaffar (CFO, Shan Foods Private Limited) and his associates, as well. Gracias, Adeel A. Siddiqui

3 Letter of Transmittal To, Muhammad Rizwan Siddiqui, Institute of Business Management, Dear Sir, I am submitting this report along with a presentation on the Product Costing method used by Shan Foods Private Limited, for Bombay Biryani, from Recipe Mix, on Tuesday, dated 24 th April The Purpose of this report is to provide you content on the basis of which you are able to assess my understanding and comprehension about the course title Introduction to Managerial and Cost Accounting. The Content of this report is based on the information provided by Shan Foods Private limited, for the purpose. Moreover the data and information acquired from Shan Foods Private Limited has been structured and elaborated so that it can deliver its intended objectives. The Report also discusses the manufacturing process and its vitals, for the selected product. Gracias, Adeel A. Siddiqui

4 List of Figures Figure 1: Manufacturing Process Flow Chart... 6 Figure 2: Product Flow (Bombay Biryani Masala)... 8 List of Tables Table 1: COP Report RM Warehouse Table 2: COP Report Grinding Facility Table 3: COP Report Packaging Facility Table 4: COP Report Dispatch Teminal Table 5: Consolidated Cost of Goods Manufactured Table of Contents Introduction... 2 Product Range... 2 Organization Management... 3 Planning and Reporting... 3 Selected Product... 4 Manufacturing Process... 4 Manufacturing Process (Flowchart)... 6 Costing Method... 7 Costing... 9

5 Product Costing Recipe Spice Introduction Introduction Shan Foods (Private) Limited is a Food products Manufacturing and Marketing Organization. It was founded in 1981 in a single room as Shan Masala. Later, due to its popularity, the company was named Shan Foods. It has presence in more than 50 countries today and deals in several broad categories of offerings. Shan Foods has capitalized on the changing market trends and consumer tastes and through product trials, it has made sure to churn out offerings that are best in line with consumer tastes. A huge part of their sales consist of Recipe Mix Category. Recipe Mix Category consists of 64 variants, classified into 9 ranges. The share of products from Biryani Range in the Recipe Mix Category Sales is significantly larger than any other range, and it is due to the popularity of Shan Bombay Biryani Masala. This report is to understand the costing methods Shan Foods has adopted, for the regular SKU (60 gm Pack), of Bombay Biryani Masala. Product Range Shan Foods have a brand portfolio of two brand names, Shan and Delve, which are further sub divided into several categories and ranges of different variants of products. Primarily, it is important to understand the broad categories of offerings by Shan Foods. Following is a summarized list. Shan Variants Recipe Mix 64 Plain Spices 16 Oriental Recipe 10 Arabic Recipe 7 Salt 2 Pickle 7 Paste 3 Sauces 5 Rice 5 Vermicelli 1 Delve Deserts Jelly Crystals 4 Custard Powders 3 Pudding Mix 3 Page 2

6 Product Costing Recipe Spice Organization Management Organization Management Shan Foods strongly practice Kaizen approach for continuous improvement and was able to reduce labor dependency by implementing technological advancements, process automation, process re-engineering and strong BPR Strategies. These activities have not resulted in any significant reduction in their labor cost, as the sophistication of the process require skilled and expensive labor, irrespective of the fact that the count of labor is reduced remarkably, while it is benefiting them by controlling wastages and quality standards. For few production processes they are able to achieve Six Sigma. The Production Facilities are less labor intensive, while they are striving to automate their warehousing as well. Shan Foods adheres to the Lean Manufacturing philosophy, and still striving to completely implement JIT in the production and delivery process. They are focused to find ways to limit the warehousing costs, but due to several External factors, they have to keep material and finish goods inventory. They have projected 20% reduction in production cost, if JIT is completely implemented. Planning and Reporting Production budgeting and tentative planning is done annually, on the basis of Sales forecast and SNOPs, considering possible working days, excluding Preventive Maintenance Schedules, which is revised on quarterly basis and monitored on daily basis. Shan Foods product costing is based on a mix of estimated, evaluated (budgeted) and actually expenses. Production, SNOPs and Costing report are generated and produced in management committee meetings, every week on Monday, in which the management also critically evaluates the effectiveness and efficiency of AOPs. Shan Foods management strongly adheres to maintain the compliance of SNOPs, AOPs and FY Objectives. They have an Oracle 11 g BI, Production Planning, EAM, ERP, MRP, SCM + Inventory, HRM, Financials, SR, PM, CMMS, Strategist and CRM, integrated and customized modules to support their reporting system. All reports are auto generated and can be flexibly customized by the reported, himself, according to his ease. They are focused to completely deploy a paperless environment, which is a part of their Green Program. This kind of reporting and analyzing support from MIS virtually helped them in reducing administrative expenses as well. Page 3

7 Product Costing Recipe Spice Selected Product Selected Product To understand the costing method, adopted by Shan Foods Private limited, I selected a Regular SKU (60 gm Pack) of Bombay Biryani, from Recipe Mix Range. Recipe Mix Range consists of 64 different variant with 4 to 8 different SKU s for each. All these products and SKU s have different cost associations, while the costing methods are the same, in this specific category. The Selling Price of this Product is PKR 35, at a Net Income level of 35~40%. Manufacturing Process Significantly, Shan Foods operates a highly machinery intensive and automatic processing facility. They claim that they have eliminated direct human hand interfaces with the product, after sterilization process. The Manufacturing process of the selected product is divided into twelve sub processes, which are performed in four departments, listed as follows. The following list also contains the percentage of COGM these departments incur, for this particular product, if we don t accumulate the cost. Department Process(s) %age COGM RM Warehouse 52 Quality Classification 10.4 Sterilization 31.2 Cold Storage and Warehousing 10.4 Grinding Facility Chopping 1.81 Cryogenic Grinding 9.06 Sifting Classification 1.81 Temp Regulated SILO Storage 3.63 Recipe Batching 1.81 Blending Packaging Facility 21.5 Polly Filling 5.02 Packaging & Cartooning Dispatch Terminal 4.75 Finish Good Warehousing 4.75 Every unit production is conducted in a batch, sized at 15 tons, but the costing unit is 1 unit of product, therefore total units of the selected product, in a batch is 250,000 units. The departments have been optimized to produce one batch a day, individually. Therefore entire Supply Chain s normal Page 4

8 Product Costing Recipe Spice Manufacturing Process capacity is 250,000 units a day (8 continuous working hrs); weak links have been strengthened by continuous Capacity Enhancement Programs and OEE. On the basis of above evaluations, we can assume that the average production period for a batch of 250,000 units is 4 working days, which is 32 working hrs, and 7,812.5 units are produced every hour. All Transportation of goods is conducted during the night shift. All inventories are operated on FIFO. They can t practice JIT, due to the uncertain availability of Raw Material, circumstantial uncertainty, economic, social and political conditions. There are five quality checks in the process. These checks are integrated either in line or by automate sample delivery system (To QC and R&D), to assess following standards. Tests Methods Time Required (hr) Quality Manual Classification inline Classification Grinded Mesh Size Composites 0.25 Contamination Microbiological/accelerated ageing Testing 24 Ratio Chromatography 4 Product Sensory Testing Penal 4 Quantity Check ware system (Auto) inline Polly Leaks Pressure testing Conveyors (Auto) inline Packaging Manual inline These standards are immediately checked after the setting process. If the production doesn t meet the required standards, there is a procedure for any set of results, which is executed accordingly. Few may result in reprocessing, other may in spoilage. The wastage of RM is negligible, while spoilage comprises of packaging material, significantly, whereas, the reprocessing costs are negligible and wastage costs are adjusted in the departmental costs. They have deployed an effective wastage control mechanism, which has enabled them to reduce wastages to the levels, mentioned in the following list. Department Normal Spoilage (Wastage) RM Warehouse 0.1 ~ 0.5% Grinding Facility 0.01 ~ 0.1% Packing Facility 0.1 ~ 1% DT2 0 ~ 0.1% Total Wastage 0.2 ~ 1.7% Page 5

9 Product Costing Recipe Spice Manufacturing Process (Flowchart) Manufacturing Process (Flowchart) Procurement of RM Quality Classification and Sterilizing Process Cold Storage and Warehousing Mehrunisa Warehouse Primary Quality Check (QC 1) Fails Transportation to Grinding Facility RM (S) Ingredients of Compound X Chopping, Cryogenic Grinding and Sifting Classification Process Mid Quality Check each Ingredient (QC 2) Fails Temperature Regulated SILO Storage RM (S) Compound Y Recipe Batching and Blending Process Grinding Facility Main Quality Check (QC 3) Fails IBC Storage Packaging Rolls Poly Filling Process Pressure Testing (V lock method; QC 4) Fails Hard Packets and Cartoons Packaging Facility Packaging and Cartooning Process Packaging Quality Check (QC 5) Fails Dispatching Terminal Finish Good Warehousing Figure 1: Manufacturing Process Flow Chart Page 6

10 Product Costing Recipe Spice Costing Method Costing Method For Bombay Biryani Masala, Shan Foods uses Process costing accumulation by department, with absorbing Fixed Overheads. The percentage distribution of Various Costs with respect to COGM is as follows. Cost of Goods Manufactured 100% DM DL Compound X DM 1 Compound Y DM 1 Packaging Rolls DM 2 Hard Packaging DM 2 Cartoons DM 2 RM Warehouse Grinding Packaging 60% of DM 35% of DM 4% of DM 0.8% of DM 0.2% of DM 60% of DL 20% of DL 20% of DL 35% of COGM 20% of COGM Prime Cost 55% VFOH V. IDM 2% of VFOH Spare Parts Other Material 1.5% of VFOH 0.5% of VFOH V. IDL 3% of VFOH Others Material Handling Floor Technicians 2.5% of VFOH 0.5% of VFOH V. Energy 80% of VFOH V. Maintenance 10% of VFOH V. Staff/Exec Salaries 5% of VFOH FFOH at Normal Capacity 95% of FOH 5% of COGM 40% of COGM IDM IDL Others Admin & Security Janitorial Land Cost Taxes Dep. Maintenance 15% of FFOH 5% of FFOH 2% of FFOH 17% of FFOH 10% of FFOH 10% of FFOH 25% of FFOH 20% of FFOH 55% of FFOH F. Energy 1% of FFOH Staff/Exec Salaries 5% of FFOH Misc Exp. 10% of FFOH Manufacturing Cost 100% These are rough percentages, as told by Abdul Gaffar, (CFO at Shan Foods). The Product Flow through various processes and departments, materials Page 7

11 Product Costing Recipe Spice Costing Method addition and quality checks, according to costs incurred are explained in Figure 2. DM RM X 0% RM Y 68% PR 74% HP & Cartoon 79% Processes Qaul. Check QC 1 52% QC 2 65% QC 3 74% QC 4 79% QC 5 95% Departmental 0.00% 20.00% 40.00% 60.00% 80.00% % % RM Warehouse Quality Classification Sterilization Cold Storage Grinding Facility Chopping Cryogenic Grinding Sifting SILO Recipe Batching Blending Packaging Facility Polly Filling Packaging Cartooning Dispatch Terminal FG WH Figure 2: Product Flow (Bombay Biryani Masala) FOH is 225% of DL. The FFOH, and VFOH, distribution by department is as follows. Department FFOH VFOH RM Warehouse 15% of FFOH 15% of VFOH Grinding 40% of FFOH 35% of VFOH Packaging 35% of FFOH 35% of VFOH Dispatching 10% of FFOH 15% of VFOH Page 8

12 Product Costing Recipe Spice Costing Costing We are assuming the following to make a Cost of Production reports by departments and a consolidated Cost of Goods Manufactured Statement, separately. Period = March working days (192 machine hrs) Production level doesn t meets the normal production capacity Units introduced in the process = 6,000,000 (at normal Capacity) Units Produced = 5,958,066 Spoilage at maximum level of Normal Spoilage at all inspections except QC 2 (No Spoilage at QC 2). All Departments completed their work by the end of the month Selling Price = PKR 35, Marketing and Admin Expense = 10% of Sales Profit Margin = 34.63% Therefore unit COGM = PKR Considering all the data mentioned earlier Opening and Closing inventories of FG at all departments are nil, whereas the Opening Inventories of RM/CFPD at all department is the production of the Previous Department. VFOH and FFOH for each department are as follows. o Department FFOH VFOH o RM Warehouse 6% of COGM 0.75% of COGM o Grinding Facility 16% of COGM 1.75% of COGM o Packaging Facility 14% of COGM 1.75% of COGM o Dispatch Terminal 4% of COGM 0.75% of COGM Unit Manufacturing Cost Distribution for Process Costing, without taking losses into account. Unit Manufacturing Cost DM DL VFOH FFOH CC Total RMWH Grinding Facility Packaging Facility Dispatch Terminal Page 9

13 Product Costing Recipe Spice Costing Following are Cost of Production Report for RM Warehouse, using process costing method Shan Foods Private Limited Recipe Mix Bombay Biryani Cost of Production (RM Warehouse) M a r c h 1 2 Table 1: COP Report RM Warehouse Equivalent Production Units DM 1 CC Units Introduced 6,000,000 6,000,000 Units Transferred 5,970,000 5,970,000 Normal Spoilage 30,000 30,000 6,000,000 6,000,000 Cost Charged Cost Units Rate DM 1 38,403,750 6,000, CC 21,656,250 6,000, ,060, Cost Accounting for Units Rate Total Transferred Out 5,970, ,759,700 Losses DM 1 30, ,019 CC 30, ,281 60,060,000 Page 10

14 Product Costing Recipe Spice Costing Following are Cost of Production Report for Grinding Facility, using process costing method Table 2: COP Report Grinding Facility Shan Foods Private Limited Recipe Mix Bombay Biryani Cost of Production (Grinding Facility) M a r c h 1 2 Equivalent Production Units CFPD CC Units Introduced 5,970,000 5,970,000 Units Transferred 5,964,030 5,964,030 Normal Spoilage 5,970 5,970 5,970,000 5,970,000 Cost Charged Cost Units Rate CFPD 60,060,000 5,970, CC 24,995,644 5,970, ,055, Cost Accounting for Units Rate Total Transferred Out 5,964, ,970,588 Losses CFPD 5, ,060 CC 5, ,996 85,055,644 Page 11

15 Product Costing Recipe Spice Costing Following are Cost of Production Report for Packaging Facility, using process costing method Table 3: COP Report Packaging Facility Shan Foods Private Limited Recipe Mix Bombay Biryani Cost of Production (Packaging Facility) M a r c h 1 2 Equivalent Production Units CFPD DM 2 CC Units Introduced 5,964,030 6,023,670 6,023,670 Units Transferred 5,964,030 5,964,030 5,964,030 Normal Spoilage 0 59,640 59,640 5,964,030 6,023,670 6,023,670 Cost Charged Cost Units Rate CFPD 85,055,644 5,964, DM 2 2,029,224 6,023, CC 22,901,242 6,023, ,986, Cost Accounting for Units Rate Total Transferred Out 5,964, ,739,273 Losses CFPD DM 2 59, ,091 CC 59, , ,986,109 Page 12

16 Product Costing Recipe Spice Costing Following are Cost of Production Report for Dispatch Terminal, using process costing method Table 4: COP Report Dispatch Teminal Shan Foods Private Limited Recipe Mix Bombay Biryani Cost of Production (Dispatch Terminal) M a r c h 1 2 Equivalent Production Units CFPD CC Units Introduced 5,964,030 5,964,030 Transferred out 5,958,066 5,958,066 Normal Spoilage 5,964 5,964 5,964,030 5,964,030 Cost Charged Cost Units Rate CFPD 109,986,109 5,964, CC 5,453,360 5,964, ,439, Cost Accounting for Units Rate Total Transferred Out 5,958, ,324,030 Losses CFPD 5, ,986 CC 5, , ,439,469 Page 13

17 Product Costing Recipe Spice Costing Following are Cost of Production Report for Dispatch Terminal, using process costing method Shan Foods Private Limited Recipe Mix Bombay Biryani Consolidated Cost of Goods Manufactured (Absorption) M a r c h 1 2 Table 5: Consolidated Cost of Goods Manufactured Cost of Goods Manufactured % PKR PKR 115,439,470 DM 35.00% PKR 6.78 PKR 40,403,814 Compound X 21.00% PKR 4.07 PKR 24,242,289 Compound Y 12.25% PKR 2.37 PKR 14,141,335 Packaging Rolls 1.40% PKR 0.27 PKR 1,616,153 Hard Packaging 0.28% PKR 0.05 PKR 323,231 Cartoons 0.07% PKR 0.01 PKR 80,808 DL 20.00% PKR 3.88 PKR 23,087,894 RM Warehouse 12.00% PKR 2.33 PKR 13,852,736 Grinding 4.00% PKR 0.78 PKR 4,617,579 Packaging 4.00% PKR 0.78 PKR 4,617,579 Prime Cost 55.00% PKR PKR 63,491,708 VFOH 5.00% PKR 0.97 PKR 5,771,973 V. IDM 0.10% PKR 0.02 PKR 115,439 V. IDL 0.15% PKR 0.03 PKR 173,159 Others 4.75% PKR 0.92 PKR 5,483,375 FFOH 40.00% PKR 7.75 PKR 46,175,788 IDM 10.00% PKR 1.94 PKR 11,543,947 IDL 8.00% PKR 1.55 PKR 9,235,158 Others 22.00% PKR 4.26 PKR 25,396,683 Total Manufacturing Cost % PKR PKR 115,439,470 Opening WIP PKR 0 Closing WIP PKR 0 COGM PKR 115,439,470 Opening FG PKR 0 Closing FG PKR 0 COGM Available for Sale Over & Under Applied (6,000,000-5,958,066) x 7.75 PKR 324,994 COGM at Actual PKR 115,764,464 Page 14

18 10/4/2012 Shan Foods (Private) Limited is a Food products Manufacturing and Marketing Organization. It has presence in more than 50 countries today and deals in several broad categories of offerings. A huge part of their sales consist of Recipe Mix Category. Recipe Mix Category consists of 64 variants, classified into 9 ranges. The share of products from Biryani Range in the Recipe Mix Category Sales is significantly larger than any other range, and it is due to the popularity of Shan Bombay Biryani Masala. This report is to understand the costing methods Shan Foods has adopted, for the regular SKU (60 gm Pack), of Bombay Biryani Masala. 1

19 10/4/ % 5% 10% 22% 33% 5% 3% 32% 8% 2% 4% 2% 9% 2% 10% Quality Classification Sterilization Cold Storage and Warehousing Chopping Cryogenic Grinding Sifting Classification 10% 5% 4% 0% 0% 4% 12% 2% Temp Regulated SILO Storage Recipe Batching Blending DM 1 DM 2 DL RM WH DL Grinding DL Packaging V. IDM V. IDL V. Others F. IDM F. IDL F. Others Polly Filling Packaging & Cartooning Finish Good Warehousing Procurement of RM Quality Classification and Sterilizing Process Cold Storage and Warehousing Mehrunisa Warehouse Primary Quality Check (QC 1) Fails Transportation to Grinding Facility RM (S) Ingredients of Compound X Chopping, Cryogenic Grinding and Sifting Classification Process Mid Quality Check each Ingredient (QC 2) Fails Temperature Regulated SILO Storage RM (S) Compound Y Recipe Batching and Blending Process Grinding Facility Main Quality Check (QC 3) Fails IBC Storage Packaging Rolls Poly Filling Process Pressure Testing (V lock method; QC 4) Fails Hard Packets and Cartoons Packaging and Cartooning Process Packaging Facility Packaging Quality Check (QC 5) Fails Finish Good Warehousing Dispatching Terminal DM RM X 0% RM Y 68% PR 74% HP & Cartoon 79% Processes Qaul. Check QC 1 52% QC 2 65% QC 3 74% QC 4 79% QC 5 95% Departmental 0.00% 20.00% 40.00% 60.00% 80.00% % % RM Warehouse Quality Classification Storage Grinding Facility Sterilization Cold Chopping Cryogenic Grinding Sifting SILO Recipe Batching Blending Packaging Facility Polly Filling Packaging Cartooning Dispatch Terminal FG WH 2

20 10/4/2012 Unit Manufacturing Cost DM DL VFOH FFOH CC Total RMWH Grinding Facility Packaging Facility Dispatch Terminal Equivalent Production Units DM 1 CC Units Introduced 6,000,000 6,000,000 Units Transferred 5,970,000 5,970,000 Normal Spoilage 30,000 30,000 6,000,000 6,000,000 Cost Charged Cost Units Rate DM 1 38,403,750 6,000, CC 21,656,250 6,000, ,060, Cost Accounting for Units Rate Total Transferred Out 5,970, ,759,700 Losses DM 1 30, ,019 CC 30, ,281 60,060,000 Equivalent Production Units CFPD CC Units Introduced 5,970,000 5,970,000 Units Transferred 5,964,030 5,964,030 Normal Spoilage 5,970 5,970 5,970,000 5,970,000 Cost Charged Cost Units Rate CFPD 60,060,000 5,970, CC 24,995,644 5,970, ,055, Cost Accounting for Units Rate Total Transferred Out 5,964, ,970,588 Losses CFPD 5, ,060 CC 5, ,996 85,055,644 Equivalent Production Units CFPD DM 2 CC Units Introduced 5,964,030 6,023,670 6,023,670 Units Transferred 5,964,030 5,964,030 5,964,030 Normal Spoilage 0 59,640 59,640 5,964,030 6,023,670 6,023,670 Cost Charged Cost Units Rate CFPD 85,055,644 5,964, DM 2 2,029,224 6,023, CC 22,901,242 6,023, ,986, Cost Accounting for Units Rate Total Transferred Out 5,964, ,739,273 Losses CFPD DM 2 59, ,091 CC 59, , ,986,109 Equivalent Production Units CFPD CC Units Introduced 5,964,030 5,964,030 Transferred out 5,958,066 5,958,066 Normal Spoilage 5,964 5,964 5,964,030 5,964,030 Cost Charged Cost Units Rate CFPD 109,986,109 5,964, CC 5,453,360 5,964, ,439, Cost Accounting for Units Rate Total Transferred Out 5,958, ,324,030 Losses CFPD 5, ,986 CC 5, , Cost of Goods Manufactured % PKR PKR 115,439,470 DM 35.00% PKR 6.78 PKR 40,403,814 Compound X 21.00% PKR 4.07 PKR 24,242,289 Compound Y 12.25% PKR 2.37 PKR 14,141,335 Packaging Rolls 1.40% PKR 0.27 PKR 1,616,153 Hard Packaging 0.28% PKR 0.05 PKR 323,231 Cartoons 0.07% PKR 0.01 PKR 80,808 DL 20.00% PKR 3.88 PKR 23,087,894 RM Warehouse 12.00% PKR 2.33 PKR 13,852,736 Grinding 4.00% PKR 0.78 PKR 4,617,579 Packaging 4.00% PKR 0.78 PKR 4,617,579 Prime Cost 55.00% PKR PKR 63,491,708 VFOH 5.00% PKR 0.97 PKR 5,771,973 V. IDM 0.10% PKR 0.02 PKR 115,439 V. IDL 0.15% PKR 0.03 PKR 173,159 Others 4.75% PKR 0.92 PKR 5,483,375 FFOH 40.00% PKR 7.75 PKR 46,175,788 IDM 10.00% PKR 1.94 PKR 11,543,947 IDL 8.00% PKR 1.55 PKR 9,235,158 Others 22.00% PKR 4.26 PKR 25,396,683 Total Manufacturing Cost % PKR PKR 115,439,470 Opening WIP PKR 0 Closing WIP PKR 0 COGM PKR 115,439,470 Opening FG PKR 0 Closing FG PKR 0 COGM Available for Sale Over & Under Applied (6,000,000 5,958,066) x 7.75 PKR 324,994 l 3

21 10/4/2012 4