COST AND MANAGEMENT ACCOUNTING IN

PRACTISE: AN INDUSTRYSPECIFIC
PERSPECTIVE
Ayurveda Industry

Avi Gupta
Divesh NA
Sarthak Sharma
Sheena Singh –
Shilpi Sharma – PGP/24/419
Table of Contents
Executive Summary...............................................................................................................................2

Introduction...........................................................................................................................................3

Global Scenario.....................................................................................................................................4

Indian Scenario......................................................................................................................................4

General Production Process...........................................................................................................5

Cost Analysis...............................................................................................................................6

Cost Classification:...................................................................................................................6

Cost Behaviour:........................................................................................................................7

Cost Calculations:.....................................................................................................................8

Manufacturing Department....................................................................................................................9

Equipments used..................................................................................................................................11

Support Department.............................................................................................................................12

Expert Opinion....................................................................................................................................13

Challenges and possible solutions.......................................................................................................14

References and sources........................................................................................................................15

Table of Figures
Figure 1 Major Cost heads involved.....................................................................................................6

Figure 2 Cost classification...................................................................................................................7

Figure 3 Cost behaviour........................................................................................................................8

Figure 4 Manufacturing cost classification.........................................................................................10

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Executive Summary

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Introduction
Ayurvedic knowledge is closely associated with India since over 5,000 years ago. It is claimed to
be the oldest holistic healing system. The origins of Ayurveda are believed to lie in Adharva
Veda. The Ayurvedic science of health and healing acknowledges the presence of three basic
types of energy or functional principles that a human body exhibits - vata, pitta and kaph.
Ayurveda addresses all aspects of life — the body, mind and spirit. This method of healing is
rapidly gaining popularity in domestic as well as global space as it takes into account that each of
us is unique, each has a unique mechanism of responding to situations, each possesses different
strengths and weaknesses, and hence should be treated naturally but uniquely.

Ayurvedic medicines are based on naturally occurring materials such as plants, animals extracts
and minerals, which could either be in single ingredient drugs or compound formulations. Most
of the raw materials used in the formulation of Ayurvedic products are more specifically plant-
based, hence consumption of Ayurvedic medicine does not produce any major adverse effect on
overall health, as opposed to the use of allopathic medicines. This further widens the acceptance
for Ayurvedic products in the consumer market. All the raw materials such as herbs, minerals
etc. for preparation of Ayurvedic medicines are available in India abundantly, which in turn
widens the market from producer’s perspective.

The government has incentivized and encouraged the growth of Ayurvedic market over the years
and attempted to popularize AYUSH (Ayurveda, Yoga or Naturopathy Unani, Siddha and
homoeopathy). Despite this external push, the NSSO survey has found higher inclination towards
allopathy treatment-- around 90%--in both rural and urban areas. Reportedly, only 5 to 7% usage
of ‘other’ types of treatment including AYUSH has been seen in rural and urban areas.

1. Global Scenario:

In 2015, the total output of the Global Ayurvedic Market was around $3,427 million and is
anticipated to increase with the growth rate of 16.2% and will reach $9,791 million by 2022. The
increase in demand for organic products and ayurvedic products, increase in awareness among
consumers, growing medical tourism, etc. has contributed to the growth of the Global Ayurvedic
Market. Nevertheless, there are few limitations that are restricting the growth of the industry,

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such as lack of innovation in organic products, strict regulations, and unavailability of uniform
raw materials. Asia Pacific region is expected to be the global leader in the Ayurvedic market
because of the presence of established players in this domain. In India only, Dabur, Zandu, and
Baidyanath hold more than 80% of the market share domestically.

The major countries in the export market of the herbal market include European Union (EU),
Australia, Japan, Singapore, Canada and the USA. There are some new emerging countries as
well which are entering in herbal sector products which are as follows: Argentina, China,
Indonesia, and Mexico. Mainly, pharmaceutical products are included in the herbal sector within
an international perspective. It is sub-divided into plant material extracts, cosmetics, spices,
herbs, medicinal plants, and plant materials. European countries, the USA and Japan, have been
witnessing increased adoption of herbal products for curing multiple diseases and fostering a
conducive environment for the growth of the herbal marketplace.

India uses approximately 7000 plant species, whereas the Traditional Chinese Medicine (TCM)
around 5000. Despite this, TCM is widely accepted and worth more than the Indian medicines
due to its poor state as it has been developed informally. The Indian market for herbal medicines
is estimated to be worth around $1 billion as compared to the Chinese market, which is 19 times
bigger than India’s. Hence, India should exploit this opportunity to utilize its resources and
capabilities through trademarks and patents.

2. Indian Scenario:

The total trade in the herbal market is worth around $ 120 billion worldwide. Indian exports in
the market are low because of the issues such as lack of advanced agricultural practices, large-
scale organic farming, absence of proper quality control, lack of spending in research and
development, non-standardization of products and processes, and absence of regulatory
framework.

However, India’s herbal products export had increased and was worth around $330 million in
2017-2018. It had risen with the rate of 14.2% from 2016-17. Moreover, the export of value-

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added extracts of organic products was worth around $456 million in 2017-18 and had increased
with the rate of 12.2% from 2016-17. Also, there were various steps taken by the government to
enhance the export of organic products such as AYUSH Umbrella.

General Production Process:

1. Dispensing raw material
2. Verification of material
3. Sifting of material
4. Mixing/Lubrication
5. Granulation
6. Drying and sizing
7. Compression
8. Coating
9. Testing
10. Packaging

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Cost Analysis
For the cost analysis, we’ll first try look at the cost sheet of Ayurveda Industry and try to analyse
the various cost heads mentioned -

Figure 1: Major cost heads involved

1) The first major head is Raw Materials and Labor, which includes Direct Materials
(Active Ingredients and Excipients) and Direct Labor,
2) Under packing costs, all the level 1 packaging and level 2 packaging is included, which
includes bottle costs, caps, labelling, dose caps, outer carton and main carton for
transportation,
3) Apart from that, we have testing costs, utilities, selling and administrative expenses and
transportation.

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It is also to be noted that all the costs mentioned in the cost sheet have been arrived at per-unit
from the data source itself. In general practice, all the indirect costs which includes
manufacturing and administrative overheads are apportioned to specific products based on an
allocation base and budgeted overhead rate.

Now, we’ll proceed to cost analysis.

1) Cost Classification - Cost classification means to divide the costs into direct and indirect
costs. Direct costs include those costs which can be traced to an individual cost object.
On the other hand, indirect costs include those costs which cannot be directly traced back
to individual cost objects, example - salary of a security head of a factory where cost
object is individual product.Although packaging costs are conventionally considered as
indirect costs. Although here, it includes primary packaging like bottles and caps per
medicine bottle which can be directly traced to the product.

Figure 2: Cost classification

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2) Cost Behaviour - Cost Behaviour means segregation of costs into fixed and variable
costs. Fixed costs are those costs which do not vary with the level of output. On the other
hand, variable costs are costs which vary directly with the level of output.

Figure 3 : Cost Behaviour

3) Now, we’ll proceed to the final step of cost analysis, which is calculation of prime costs,
conversion costs, total costs.

a) Prime Cost - Prime costs comprises of Direct Material + Direct Labor

(All figures in INR)
= 846 + 200 + 300 + 80 + 30 + 40 + 200
= 1696
b) Conversion Cost - Direct Labor + Manufacturing Overhead
=200 + 10 + 72 (Assumed factory utilities and testing)
= 282
c) Full Cost = Fixed Costs + Variable Costs
= 1046 + 754 + 10 + 72 + 110 + 8 = 2000

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Manufacturing Department

As mentioned in the previous section, the manufacturing of ayurvedic medicines is divided into
different stages, starting from the purchase of raw material, filtering, testing, mixing, coating,
testing, packaging, transportation, which incurs costs that are broadly classified into six
categories which are explained below:

Raw Material – Acquisition of raw material is the first step in any pharmaceutical
manufacturing process. During this step, the weight of each ingredient in the mixture is
determined according to dose, and the material is transferred into clean containers. The cost
incurred on raw material which is used in the manufacturing of the finished product is classified
as direct cost such as Tamra, Jaggery, Rajata, etc. The cost incurred on the material which are
used as a secondary product, such as cleansing agents is classified as an indirect cost. However,
in this case, it has been classified as direct cost

Equipment - Various tests are conducted to verify that the correct raw material meets the quality
specifications. For filtering, separation of foreign particles from dry powder is done through
sieving, which requires some machinery and labor. Moreover, in further processes such as
mixing, lubrication, coating, testing, packaging, etc. other equipment is also used. These costs
are classified as fixed and indirect costs. Also, the maintenance cost incurred on the machinery
and instruments is also treated as fixed and indirect costs.

Utilities – The functioning of the equipment used and other processes will incur a huge chunk of
cost on utilities and services such as power, raw water, soft water, demineralized water,
refrigeration, compressed air, effluent treatment, air conditioning, LPG, rent, etc. The costs such
as rent generally don’t depend on the number of units produced and hence classified as fixed
costs and indirect cost. However, the other costs such as raw water, refrigeration, etc vary with
output and can be classified as a variable cost.

Salaries and Wages – Records are maintained properly for each employee, showing the number
of hours he has worked with his department and batch details. The records also show the piece
rate of wages earned, incentive wages, overtime wages, etc. The cost is also incurred on the
general administration staff, which includes managers, supervisors, etc. The labor cost (which is

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part of the manufacturing process) is treated as direct costs, whereas the salaries of managers and
supervisors are classified as indirect costs.

Transportation – The firm is paying huge transportation costs which is around 36% of the total
product cost. It purchases raw material from distant suppliers and also delivers the product in
most of the Indian states, which adds to the total cost. In this case, the transportation cost is being
treated as a fixed and indirect cost. Although, during the delivery of finished products, it can also
be classified as variable cost as it will vary with the output delivered.

Other Overheads – Other costs such as depreciation, insurance of the manufacturing unit, etc. is
also covered, which is treated as indirect and fixed cost as the company has to bear it annually
irrespective of the number of units produced or even if the factory is temporarily shut down.

The above mentioned costs are classified in tabular form below:

Figure 4: Manufacturing cost classification

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Equipment required for Ayurveda Manufacturing unit

From our interview with the expert, we found that a normal ayurveda manufacturing plant
includes equipments such as:

Oil and liquids section

● High speed mixer(for tanks)

● Tables
● Liquid filtration unit
● Double Headed Liquid filling machinery
● Cap sealing machine

Capsules and Tablets section

● Air compressor and conditioner; Dehumidifier

● Blister packaging machinery
● Capsule filling and loader machine
● Sifter and Mass mixer
● Tablet Puncher Machine
● Double cone blender

Miscellaneous

● RO plant
● Lab equipment ( Precision mixing equipments)
● Balances- including 200 gms, 30 kgs, 100 kgs

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Support Department

The technical staff: The minimum specification is to hold a Certificate or a Diploma in

Ayurvedic Pharmacy, Siddha or Unani medicines method, which is laid out in Sections 151 to
160 of the Drugs and Cosmetics Act, 1945.

Laboratory staff: The laboratory staff includes University graduates, recognised by the Central
Government, in Pharmacology or Medicinal Chemistry or Chemistry or Botany.

Quality Controlling and Check:The standardisation and creation of quality profiles is far more
complex than in synthetic drugs, as ayurvedic drugs contain a variety of ingredients in one single
formulation. Besides the raw material, certain characteristics for multiple types of dosage should
be noted throughout the subsequent pharmaceutical preparations. These characters demonstrate
the product quality. Heavy metals, pesticide contaminants and aflatoxins can also be tested in
addition to microbial contamination.

Manufacturing Planning Department : These information processing activities include process

planning, master scheduling,
specifications and capacity planning. Process planning involves the sequence of individual
processing and assembly activities required to manufacture the component. The planning of
production involves logistics, usually referred to as production planning.

Administration staff: The administration department ensures smooth functioning of the plant. It
includes the Factory Administrator, accountants, Recruitment management, Equipment purchase
handling, etc. They get a fixed salary and usually have fixed timings, with overtime paid
separately over and above the fixed base salary. Their salary is indifferent with respect to the
cost object and thus it qualifies as an indirect cost.

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Expert’s Opinion
Mr. Varun Singh
Production Manager
Patanjali Ayurveda ltd,, Haridwar

Ayurveda is synonymous with the identity of India. The Government has been undertaking steps
to promote the Indian Ayurveda industry and other wellness services in the recent years.
Although we have had brands such as Baidyanath manufacturing and selling their products based
purely on Ayurveda, since over 100 years, India saw a marketing genius in the launch of
Patanjali as a business conglomerate.
This has opened the door for the potential of Ayurveda in business. Some market study blogs
even use the word “Patanjalization” to describe the strategic launch of a product range, after
deliberate recognition of USP of a product, identifying its need in the market, and taking it to a
new scale. Some market-oriented blogs have more simply put it as the method of taking variation
to standardization. This was the very business model of Patanjali, and the INR 700 crore market
of Ayurveda tapped by Baidyanath, was tapped by Patanjali at the recall value of INR 10,500
crores. The USP of Ayurvedic science has made it big in business and profits, as we witnessed
the launch of Ayurveda in the space of FMCG goods, as opposed to the traditional niche but
limiting market. Today, the Ayurveda industry is an up-and-coming industry with a market
looking up in the domestic as well as the global space. The Government of India also encourages
the industry, by way of extending financial support through easy loans for companies to set foot
in the market, due to the low social costs involved, an accepting market and the various benefits
associated with the traditional edge our nation has through the Vedic knowledge of Ayurvedic
science. The analysis on the cost accounting of the industry intends to shed some light of the
economic costs involved in the industry. 

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Challenges in Costing System in a Production Facility

Through our interaction with our expert as well as secondary researches, we were able to
ascertain some of the major challenges faced by accountants and senior leadership while trying
to implement a costing system in a production facility -

1) Lack of focus on support functions - In a production facility, support functions mentioned

above like human resources, finances, security and admin are not given adequate focus
while coming to costing systems. Major focus still remains on prime costs and
manufacturing overheads, which constitutes the major chunk,

2) Difficulty in determining the right allocation base for multiple overheads - In the
Ayurveda industry, a number of raw materials go into the making of the medicine. Some
of the materials require cold storage, while others require special lab care. For these
purposes, determining of the right allocation base becomes a challenge,

3) Inadequate Training and Focus - Costing and management accounting still remains a
sophisticated method, which is not implemented properly in factories. The senior
leadership’s focus is limited to the profit and loss statements.

Learning Outcomes and Possible Solutions

The project gave us a bird’s eye view on how a costing system works in an industry in general,
and in the Ayurveda industry in particular. We learned how the costing system in factoring is
divided into primary functions (manufacturing cost objects) and support (departmental cost
objects).
Through this project, we can recommend that the senior leadership should pay attention to
support functions and involve the departmental heads while identifying the said cost objects.
These cost objects will be really helpful while going for activity based costing.

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Additionally, managers must realise the importance of cost and management accounting, and
how it can directly and indirectly influence the P&L of the firm, while providing valuable data
for decision making at the same time.

References

1. https://www.researchgate.net/publication/264942006_Quality_Control_of_Ayurveda_Dr
ugs_-_A_Birds_Eye_View
2. Basu, P., Joglekar, G., Rai, S. et al. Analysis of Manufacturing Costs in Pharmaceutical
Companies. J Pharm Innov 3, 30–40 (2008). https://doi.org/10.1007/s12247-008-9024-4
3. http://pib.nic.in/newsite/PrintRelease.aspx?relid=187278
4. https://www.reuters.com/brandfeatures/venture-capital/article?id=49114
5. Patanjalization in India - India’s Chariot in FMCG market
http://abhishekbhate1.blogspot.com/2017/09/patanjalization-in-india-indias-chariot.html

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