COSTING FOR A SPINNING

MILL
INTTRODUCTION:

It is better to review the basics

concepts, costing  methods and techniques and elements
of costing before we work out
a costing for a spinning mill.

Cost accounting is a system of

determining the costs of products or services. It has
primarily developed to meet the
needs of management.  It provides detailed cost
information to various levels of
management for efficient performance of their functions.

Financial accounting provides

information about profit , loss, cost etc., of the collective
activities of the business
as a whole. It does not give the data regarding costs by
departments, products, processes
and sales territories etc. Financial accounting does
not fully analyse the losses due to
idle time, idle plant capacity, inefficient labour, sub-
standard materials, etc. Cost
accounting is not restricted to past. It is concerned with the
ascertainment of past,
present and expected future costs of products manufactured or
services supplied. Cost
accounting provides detailed cost information to various levels
of management for
efficient performance of their functions.

"A cost  is the value of

economic resources used as a result of producing or doing the
things costed"

Cost is ascertained by cost centres

or  cost units or by both.

For the purpose of ascertaining

cost, the whole organisation is divided into small parts
of sections. Each small section
is treated as a cost centre of which cost is ascertained.  
A cost centre is
defined as " a location, person, or item of equipment(or group of these)
for which
costs may be ascertained and used for the purpose of control.  A cost
accountant sets
up cost centres to enable him to ascertain the costs he needs to know.
A cost centre is
charged with all the costs that relate to it. The purpose of ascertaining
the cost
of  cost centre is cost control.  The person in charge of a cost centre is held
responsible for the control of cost of that centre.

Cost unit  breaks up the cost

into smaller sub-divisions and helps in ascertaining the
cost of saleable products or
services. A cost unit is defined as a " unit of product ,
service or time in relation
to which cost may be ascertained or expressed."   For example
in a spinning mill
the cost per kg of yarn may be ascertained. Kg of yarn is cost unit.  In
short 
Cost unit is unit of measurement of cost.

METHODS  OF COSTING:

Method of  costing refers to

the techniques and processes employed in the
ascertainment of costs. The method of costing
to be applied in a particular concern
depends upon the type and nature of manufacturing
activity.   Basically there are two
methods of costing

1.Job costing:   Cost unit in job order costing is

taken to be a job or work order for which
costs are separetely collected and computed.
2.Process costing:  This is used in mass production industries
manufacturing
standardised products in continuous processes of manufacutring. Cost are
accumulated
for each process or department. For spinning mills , process costing  is
employed.

TECHNIQUES OF COSTING:

These techniques  may be used

for special pupose of control and policy in any business
irrespective of the method of
costing being used there.

Standard costing:  This is the valuable technique to control

the cost. In this technique,
standard cost is predetermined as target of performance and
actual performance is
measured against the standard.  The difference between standard
and actual costs are
analysed to know teh reasons for the difference so that corrective
actions may be taken.

Marginal costing: In this technique, cost is divided into

fixed and variable and the variable
is of special interest and importance. This is
because, marginal costing regards only
variable costs as the costs of products. 
Fixed cost is treated as period cost and no
attempt is made to allocate or apportion this
cost to individual cost centres   or cost
units.

Cost Ascertainment is concerned with computation of actual costs. Ascertainment

of
actual costs reveals unprofitable activities  losses and inefficiencies  .

Cost Estimation  is the process of predetermining costs of goods or services. The

costs are determined in advance of production and precede the operations.
Estimated costs
are definitely the future costs and are based on teh average of the
past  actual
costs adjusted for future anticipated changes in future. Cost estimates
are used in the
preparation of the budgets. It helps in evaulating performance. It is
used in preparing
projected financial statements. Cost estimates may serve as
targets in controlling  
the costs.

CLASSIFICATION OF COSTS:

Costs are classified into direct

costs and  indirect costs on the basis of their
identifiability with cost units or
processesses or cost centres.

DIRECT COST: These are the costs which are incurred for
and conveniently indentified
with a particular cost unit, process or equipment. For a
spinning mill, costs of
rawmaterial used, packing material, freight etc are direct costs

INDIRECT COST: These are general costs and are incurred

for the benefit of  a number of
cost units, processes or departments. These costs
cannot be conveniently identified
with a particular cost unit or cost centre. In a spining
mill, power cost, administrative
wages, managerial salaries, materials used in repairs etc
are indirect costs.

The terms direct and indirect

should be used in relation to the object of costing. An item
of cost may be direct cost in
one case and the same may be indirect in the other case.It
is the nature of business and
the cost unit chosen  that  will determine whether a
particular cost is direct
or indirect.

FIXED AND VARIABLE COSTS; Costs behave differently when level of

production rises or
falls. Certain costs change in sympathy with production level while
other costs remain
unchanged. As such on the basis of behaviour or variability, costs are
classifed into fixed,
variable and sem-variable.

FIXEDCOSTS; These costs remain constant in

"total" amount over a wide range of
activity for a specified period of time.
They do  not increase or decrease when the
volume of production changes.

VARIABLE COSTS: These costs tend to vary in direct

proportion to the volume of  output.
In other words, when volume of output increases,
total variable cost also increases and
vice-versa.

ELEMENTS OF COST: A cost is composed of three elements i.e.

material , labour and
expense. Each of these elements  may be direct or indirect.

DIRECT COST INDIRECT COST

Direct material Indirect material
Direct labour Indirect labour
Direct expenses Indirect expenses

MATERIAL COST: 

DIRECT MATERIAL  is that which

can be conveniently identified with and allocated to
cost units. Direct materials
generally become a part of the finished product. For example,
cotton used  in a
spinning mill is a direct material.

INDIRECT MATERIAL is that  

which can not  be conveniently identified with individual
cost units.  In a
spinning mill, engineering department spares, maintenance spares,
lubricating oils,
greases, ring travellers etc

LABOUR COST:

DIRECT LABOUR cost consists of

wages paid to workers directly engaged in converting 
raw materials into finished
products. These wages can be conveniently identified with a
particular product, job or
process.

INDIRECT LABOUR is of general

character and cannot be conveniently identified with a 
particular cost unit. In
other words, indirect labour is not directly engaged in the
production operations but only
to assist or help in proudciton operations.  For example in
a spinning mill, the
number of maintenance workers, no of  workers in utility department
etc
 

EXPENSES; All costs other than material and labour

are termed as expenses.

DIRECT EXPENSES are those expenses

which are specifically incurred in connection with
a particular job or cost unit. Direct
expenses are also known as chargeable expenses.

INDIRECT EXPENSES can not be

directly identified with a  particular job, process and are
common to cost units and
cost centres.

PRIME COST = Direct material

+Direct labour + Direct  expenses

OVERHEAD = Indirect material +

Indirect labour + Indirect expenses

TOTAL COST = PRIME COST + OVERHEAD

ADVANTAGES OF COST ACCOUNTING:

It reveals profitabale and

unprofitable activities.
It helps in controlling costs with
special techniques like standard costing and
budgetary control
It supplies suitable cost data and
other related information for managerial decision
making such as introduction of a new
product, replacement of machinery with an
automatic plant etc
It helps in deciding the selling
prices, particularly during depression period when
prices may have to be fixed below cost
It helps in inventory control
It helps in the introduction of
  a cost reduction programme and finding out new and
improved ways to reduce costs
Cost audit system which is a part of
cost accountancy helps in preventing
manipulation and frauds and thus reliable cost can be
furnished to management

ESSENTIALS OF A GOOD COST ACCOUNTING

SYSTEM:

The method of costing adopted. It

should be suitable to the industry
It should be tailor made according
to the requirements of a business. A ready made
system can not be suitable
It must be fully supported by
executives of various departments and every one
should participate in it
In order to derive maximum benefits
from a costing system, well defined cost
centres and responsibility centres should be
built within the organisation
controllable and uncontrollable
costs of each responsiblity  centre should be
separately shown
cost and financial accounts may be
integrated in order to avoid  duplication of
accounts
well trained and educated staff
should be employed to operte the system
 It should prepare an accurate
reports and promptly submit teh same to appropriate
level of management so that action may
be taken without delay
resources should not be  wasted
on collecting and compiling cost data not required.
Only useful cost information should be
compiled and used whenever required.

CASE 1.  Project costing for a

   POLY/COTTON  PLANT with
autodoffing and link to autoconer:(IN INDONESIA)
Following information is required
to work out a costing for a new plant:

The average count of the plant

Capacity of the plant -  No of
spindles to be installed and the number of back
process and winding machines required
Investment on machineries
Investment on land
Investment on building
working capital required
product lay out, the count pattern
Selling price of individual counts
rawmaterial cost(including freight,
duty etc)
packing cost per kg of yarn
freight per kg of yarn
direct labour cost
indirect labour cost
fixed power cost
variable power cost
spares consumption
administration costs
selling  overheads

Let us  work out a project cost:

For this , i have used the details of

  the modern mill which is running in Indonesia from 
year 2000

STEP NO.1: Contribution to be calculated.  In

general for a spinning mill ,contribution per
kg  ofa particular count is calculated
   to work out the economics for a new project as
well as for a running
  mill.

Cotribution = selling price -

direct cost

Direct cost for a spinning mill

includes  rawmaterial price, packing cost, freight.  All other
costs are either
fixed costs or semi variable costs. The other costs can not be
conveniently allocated to
per kg of a particular count.

The basic idea of a new project or

a running plant  is to maximise this contribution.
Because once the plant is
designed, spares cost, power cost, administration cost,labour
cost etc almost remain
constant. There will not be significant changes in these costs  for
different count
patterns if  the plant is utilisation is same.
The following table gives the
details of count pattern, selling price, rawmaterial price,
packing cost and contribution
per kg of different counts for a particular period ( year
2000). This is just an example ,
one should understand that the selling price, rawmaterial
price and all other costs keep
changing.  THis is the reason why costing is important for
a running mill.  All
the costs are changing. Some costs change every month, some  once
in a year.
  Therefore costing plays a major role to run the plant efficiently.

commn
no. no raw selling
prdn packing freight 2% on contribn
count of of prdn/mc material price /
kgs/day  cost /kg per kg selling per kg
spls mcs cost/kg kg
price
20s
4480 4 1109 4436 1.456 0.046 0.051 0.04 2.2 2674
CVC
24s
4480 4 881 3525 1.456 0.046 0.051 0.05 2.3 2470
CVC
30s
5600 5 679 3394 1.456 0.046 0.051 0.05 2.4 2712
CVC
30s
4480 4 679 2716 1.240 0.046 0.051 0.04 2.15 2091
TC
36s
6720 6 552 3315 1.240 0.046 0.051 0.05 2.4 3365
TC
    23   17385       contrbn/ day 13312

In the above table, all the costs

are in US$. The ringframes are with 1120 spindles per
machine with automatic doffing and
link to autoconer. Packing cost is based on
indonesian packing material prices for carton
packing.

The ultimate aim of the project is

to maximise the contribution.  Looking into the
cotribution per kg of yarn, the
project should produce only 36s TC. But in this project they
have considered 5 different
counts. Because

yarn market is not stable. It needs

a lot felxibility
customers are not same, the price
depends on the customers
the end uses are not same, the price
depends on the enduse
this unit exports 80% of the yarn,
it can not depend on one country, eg. 36sTc is only
for Philippines market, it can not be
sold in Malaysia, eventhough the quality is good
the count pattern depends upon the
market requirement and the major counts in the
market, not only on the contribution
A linear programming technique can
be used to maximise the contribution,
considering all market constraints,  and
production constraints.
flexibility  needs more
investment and more day to day expenses, if a project has to
be more flexible, it has to
invest more money on infrastructure
the major factor which will make the
project feasible with less felexibility is YARN
QUALITY in a spinning mill
Since this is a critical step for a
new project, management should be clear about
their  Yarn quality ,  Flexibility
required for marketing and should make use of Linear
 Programming Techniques  to find
out the best  product mix  to maximise the 
contribution.

STEP NO. 2: To work out the Total Investment cost (

machineries, accessories, land and
builidng, humdification and electrical instruments)

The following table gives the

requirement of produciton  machines. To calculate the
number of back proess and
winding drums  required, a detailed spin plan should be
worked out with  speeds
and efficiencies to be achieved in each machine.

While calculating the no of

  machines required, m/c utilisation, m/c efficiency , waste
percentage, twist
multipliers, delivery speeds etc  should be considered properly.  These
factors
should be decided based on yarn quality required, end breakge rates and the
capacity of
machine.

INVESTMENT ON MACHINERY

MACHINERY NO. OF MCS RATE / MC TOTAL COST

Trutzschler Blowrrom line for cotton 1  line 416,640 416,640
Trutschler Blowrrom line for
1 Line 321,365 321,365
Polyester
Trutshcler DK-903 cards 22 92,500 2,035,000
Rieter RSB-D30 draw frames (with
6
autoleveller)
Rieter double delivery drawframe 10   1,648,000
Rieter unilap 2
Rieter E62 combers 10
Howa speed frames with overhead
7 144530 1,011,710
blower
Ring frames with autodoffer 23 148,960 3,426,080
winding machines ( 26 drums per
23 93,200 2,143,600
mc)
Roving transport ( manual) 1 150,000 150,000
Argus fire system 1 50,000 50,000
       
    TOTAL 11,202,395

Some of the following points can be considered while

deciding the machines.

From the above table it is clear that, 23 ringframes

with 1120 spindles are working
with auto doffing and with link to autoconer. The major
advantage of this
automation is to reduce labour and to reduce the problems related to
material
handling. One has to really work out the benefits achieved because of this and
the
pay back for the extra investment. 
Drawframe contributes a lot to the yarn quality and the
ringframe and winding
machine working. It is always better to go in for the best
drawframes like RSB-D30
drawframes with autoleveller. It is not wise to buy  a
cheaper drawframe and save
money.

It is always better to keep excess carding and

autoleveller drawframes, so that
flexibility of the project is also maintained. If the
coarser counts contributes more
and the market is good, overall production can be
increased. If the market is for
finer count, both the machines (carding and drawframes)can
be run at slower
speeds, which will surely contribute to yarn quality.

Speeds of speedframe , combers and ringframes do not

affect the yarn quality as it
is affected by card and drawframe speeds.

Blow room capacity should be utilised to the maximum, as

it consumes a lot of
power ,space and money.

Ringframe specification should be perfect, because the

working performance and
power consumption of the ringframe depends on the specifications
like, lift, ring
dia, no of spindles etc. Ring frame specification should be decided
  to get the
maximum production per spindle and to reduce the power consumed
  per kg of
yarn produced by that spindle. Because the investment cost and the power
consumption for the  ringframe is the highest in a spinning mill.

INVESTMENT ON ACCESSORIES:

The following table gives the

details of  the accessories like cans for carding, drawframe,
bobbins, trollies etc

ACCESSORIES NO. OF MCS RATE / MC TOTAL COST

Carding cans  36" x 48" 120 160 19,200
comber cans 24" x 48" 350 85 29750
Drawframe cans 20" x 48" 1100 53 58,300
Identification bands 20" 400 1.2 480
Identification bands 24" 50 1.8 90
Roving and spinning bobbins     36,000
Plastic crates 400 6 2,400
trolleys     10,000
Cone trolly 80 200 16,000
Fork lift 1 27,000 27,000
hand truck 3 1000 3,000
       
    TOTAL 202,220

 
SERVICE AND MAINTENANCE EQUIPMENTS:

The following table gives the

details about  the investments required on service and
maintenance  equipments

SERVICE AND MAINTENANCE

NO OF MCS RATE/MC TOTAL PRICE
EQUIPEMENTS
Cots buffing machine and accessories 1 20000 20000
Card room accessories 1 set 60,000 60,000
Spindle oil lubricator 1 4000 4000
Clearer roller cleaning machine 1 3000 3000
Vacuum cleaner 5 3000 15000
pneumatic cleaners 6 500 3000
Weighing balance 3 2000 6000
Strapping machine 2 2000 4000
Premier autosorter 1 2500 2500
Premier uster tester 1 45000 45000
Premier strength tester 1 45000 45000
premier fiber testing 1 45000 45000
Premier Classidata 1 25000 25000
Erection charges     150000
    TOTAL 427500

Card service machines like

  Flat tops clipping machine and flats grinding machine are
very important for yarn
quality. One should not look for cheaper machine. It is always
better to go for reputed
manufacturers like  GRAF, HOLLINGSWORTH etc.

Rubber cots contributes a lot to

yarn quality. Bad buffing in ring frame can increase the
imperfections by 15%.  Poor
quality of buffing in drawframe and speedframes can affect
both production and quality. It
is better to go for the best cots mounting machine and
cots buffing machine.

HUMIDIFICATION AND ELECTRICAL

EQUIPMENTS:

The following table gives the

details about the investments required on  humdification
and electrical istruments

Electrical installation including

transformer, incoming
and outgoing panels, bus duct, capacitor, etc for 3800 350,000
KVA
Cables 125,000
Compressor, Dryer and pipe lines 180,000
humidifaction system 767,000
chillers 176,000
 Ducting and installation for humidification
system 125,000
workshops, hydrant and other equipments 100,000
   
TOTAL 1,823,000

In indonesia, most of the units use

PLN power and some of the spinning mills use
Gensets. A detailed costing has to be done to
compare the cost per unit  to decide,
Whether to use the PLN power or to go in for
Gensets. while working out the costing 
finance cost on investment , overhauling
cost, running cost, efficiency of the machine 
should be considered for cost
caluculation in the case of Genset. In case of PLN power,
the losses due to power
interruption( based on the area data), finance cost on initial
investment,   md
charges, unit charges to be considered. It is  better to use 50% PLN and
50 % own
generation.

The following table gives the

details about land and builiding investments

Land cost 200,000

Land development 40,000
Factory building Including Service ally 192
x 62
meters 1,405,440
11,712 Square meter @ 120 usd/sq
meter
Road and others 40,000
TOTAL 1,445,440

STEP NO.3: To calculate the expenses ( labour, power, stores,working capital, insurance
etc)

Working capital = 3,000,000

LABOUR:The following table gives the details about

  labour requirement

No of people
DEPARTMENT
required
Production 140
packing 15
maintenance 30
utility 17
administration and personal dept 20
   
Total no of
people required per day 222
 

wages at 50 usd/month including

111,00
bonus and
insurance
other facilities at 35 % 3,885
salaries for managerial staff 10000
Other facilities at 35 % 3500
   
Total
labour cost / month 28485

POWER: The following table gives the details about

the power

Total units(KWH) produced

69559
(consumed)per day
Unit cost (cost / KWH) 0.03
Total production in Kgs 17,390
KWH/ Kg of yarn 4.0
TOTAL POWER COST /DAY 2087

SPARES:The following table shows the spares cost,

repair , and insurance

spares cost at usd 8/1000 spindle

222,566
shift
repairs and other overheads 200,000
Insurance at 0.175% on
31320
investment and
working capital
TOTAL cost per year 453886

STEP NO.4: PAY BACK CALCULATION

DETAILS IN USD
INVESTMENT:  
Land and building 1,444,440
Machinery, accessories & service
equipments 11,832,115
Electrical and Humidification ducts 1,823,000
   
TOTAL INVESTMENT 15,099,555
   
WORKING CAPITAL 3,000,000
GRAND
TOTAL 18,099,555
    
RECURRING EXPENDITURES PER DAY  
Salaries and Wages 949.5
Power cost 2087
Stores , repairs and insurance 1260.8
TOTAL 4297.3
   
INTEREST CALCULATION (per day)  
On capital 8% 3355.5
on working capital 9% 750
   
TOTAL EXPENSES INCLUDING
INTEREST 8402.8
   
TOTAL CONTRIBUTION PER DAY 13312
NET PROFIT( before depreciation & taxation) 4909.2
PAY BACK PERIOD 8.54 years