ANALYSIS OF PRODUCT COSTING

A client having more than 11 operational plants and more than 400 products. They have been using Oracle as their ERP system. With Oracle, the client had implemented only finance module, production & inventory valuation was done through Excel. Account & finance team used to compile the data related to production and inventories from the production department. Inventory valuation was done based on the standard costing defined at time of implementation of the plants or starting of the new product even though it was older than 20-25 years. 

Analysis 

We have compiled the data like production, sales, average sells price during the year of the each product. Also collected data for raw material consumption, power consumption and labour utilisation including repair maintenance of each plant, all the variable cost and identified some other variable overheads related to particular products and plants. There were some products which needs to be process repeatedly to improve strength of the product. 

Method used by client 

Client was using the standard costing method define at the time of new plant or introduction of new product. There was a standard allocation of raw material labour power fuel and other overheads were allocated based on the production or labour hours utilisation. 

Method used by our team 

We have processed the data collected from client, it includes data standardization, data processing and data analysis. Following processes done for each important component of the production and raw material valuations. 

Raw material consumption 

First we have derived raw material cost per unit. Raw material cost per unit includes average cost of acquisition during the year, i.e. purchase price, transport cost, directly allocable taxes, other cost directly allocable to each such product, if any. Then, Raw material consumption i.e. quantity per unit of finished product for each product was compiled. We have identify raw material used for each product separately including one of the finished goods was raw material for other product. We have derived For, each finished goods product raw material cost per unit is calculated. 

Labour and staff salary 

We have listed out staff and labour employed at each plant and further detailing we have linked labour to each product. Then we have prepared labour cost directly allocable to each plant or each product and identified labour cost for unit for each product. From, total labour cost allocable to each product is identified and labour cost per unit is calculated. Admin Staff and other labour cost which are not directly allocable to specific plant and product are categorized as indirect cost and added to other overhead pool. 

Power and fuel 

The client has own power production facilities. Our team has prepared detailed working of power consumption at each plant and including a detailed utilization of plant capacity by each product based on the working hour used to manufacture all such products. We have derived total cost of power consumption at each plant. Based on that power consumption for each product is calculated. 

Other overhead directly allocable 

Our team has analyse the profit and loss account line items and after detailed discussion with production and plant incharge, we have identified other overheads which were directly allocable to some of the products and some of the plants. All such overhead expenses are not routine in nature but they were required in some of the production or some of the plants, they are not allocable to all the products and all the plants. Our team has identify basis of utilization of all such overheads and allocated each product and identified per unit cost of other overheads for each finished goods product. 

Indirect overheads 

From the profit and loss account, we have identified all overhead which were indirect in nature. Based on the production, sales numbers and labour utiliation and power utilisation, we have identified method to allocate all indirect overheads for each plant and product separately. First indirect overheads are allocated to plants and then to each product cost per unit. 

Re-calculation of Costing by our team: 

Based on the data gathered and working prepared for each component of cost of production, Our team has calculated cost of production for each product. 

Comparison of costing and actual sales price: 

For each product sales during the year, we have compared average sales price of each product with cost of production. 

Audit findings and obserations: 

1. Some more than 90 products were sold during the year at price lower than the cost of production. 
2. Some more than 40 products were being priced at abnormal profit level and resulted in uncompetitive in the market. And there was huge reduction in sales of all such products. 
3. Inventory valuation method has direct impact on top and bottom line of the financials. 
4. After our audit findings management has implemented revised product costing standards and in next 3 years of time, numbers of profit margin, net profit have drastically changed from the 3 years back numbers.