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Financial Accounting& Costing - Prof. L.N. Chopde A STUDY ON THE COST OF MANUFACTURING CORRUGATED CARTON 1 | Page

Accounts - Cost of Manufacturing Corrugated Carton

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Text of Accounts - Cost of Manufacturing Corrugated Carton

Financial Accounting& Costing- Prof. L.N. Chopde




Submitted byAdil Khan eMBA Div A Roll No. 4 MET AMDC

A report submitted to the Institute in partial fulfilment of the requirement for the award of PG eMBA

Under the guidance of: Prof. L.N. Chopde (Faculty Financial Accounting)

METs Asian Management Development Centre


PREFACEI am extremely honoured in preparing this project report based on Costing Fundamentals and its basic principles. The topics have been arranged in a proper sequence for easy understanding and application of the same. The project has been prepared in view to analyse the costing of manufacturing corrugated cartons. The experience was one of a kind and was really helpful in understanding the different aspects pertaining to Costing of producing a corrugated carton. I would like to take this opportunity to thank our Prof. L.N. Chopde to have given me this opportunity. The report provides a detailed study on the various types of costs and how are these used in a manufacturing unit. I have mentioned the breakup of the various costs incurred in producing a corrugated carton. This report also provides with the original cost sheet of the company I visited i.e. Busy Bee Packaging Pvt Ltd. showing the cost involved in manufacturing corrugated cartons and how various types of Costs are applied in a manufacturing unit. I hope the readersfind the project report interesting, easy to comprehend and useful.



This project has helped me in understanding the basic and crux of CostAccounting and the managerial aspects of accounting business. It was a very knowledgeable and encouraging experience which has givenme an opportunity to learn, explore, analyse and understand the various aspects of Costing and its application in a manufacturing unit. I would like to thankProf. L.N. Chopde for providing me with constant support and guidance for carrying out the project work and for his invaluable guidance, time and advice. Finally, I would especially like to thank Mr Mohiyuddin Sheikh (Director, Busy Bee Packaging Pvt Ltd) for all his help in providing me with all the information relating to the company.


EXECUTIVE SUMMARY A complete explanation on the fundamentals and basic principles of Costing The different types of cost are explained. The various elements of costs arementioned in detail along with its importance and usage. A flow chart diagram showing the determination of total cost. Cost Sheet Meaning & explanation, Purpose, Components and the format of a Cost Sheet with the distribution of various cost elements. About the packaging company in India, case study on the company visited and their Cost Sheet.



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The basis of any manufacturing establishment starts with handling of the costing & finance to understand and analyse the amount of initial investment required to setup the plant/factory. Definition of Costing: It is defined as, The amount of expenditure, actual or notional, incurred on or attributable to a given thing. It is a system of computingcost of production or of running a business, by allocating expenditure to various stages of production or to different operations of a firm. There are different kinds of costing however as we are analysing and understanding the costing of a manufacturing unit the cost taken into consideration is the cost on the basis of behaviour which can be further classified in to 1. Fixed Cost 2. Variable Cost 3. Semi-Variable Cost 1. Fixed Cost: It is that part of the total cost which remains constant irrespective of output up to the capacity limit. It is also known as Period Cost or Stand-by Cost. This is created by the management and is a contractual obligation. For example, rent of premises, taxes and insurance, salaries to staff etc come under fixed cost7|Page

2. Variable Cost: This is the other part of the total cost which changes as per the change in the output. It is directly proportionate to the output, so if the output is increased the variable cost will also increase and is concerned with the product. Therefore it is also called as the product cost. For example, direct material, direct labour, direct expenses etc. 3. Semi-Variable Cost: It is also referred to as semi-fixed or partly variable cost. It remains constant up to a certain level and then registers change afterwards. These costs vary in some degree with volume but not in direct or same proportion. Such costs are fixed only in relation to specified constant conditions. For example, repairs and maintenance of machinery, telephone charges, maintenance of building, supervision, professional tax, etc.

Elements of Cost Element means nature of items. A cost comprises of three elements i.e. material, labour and expenses. Each of these three elements can be classified into Direct Costs & Indirect Costs. 1. DIRECT COSTS It is the cost which is directly charged to the product which is being manufactured. It is further sub-divided in to


a. Direct Material: It is the cost of the basic raw material used for the manufacturing a product. Every finished product requires raw materials to convert them into finished goods. For example, pulp required in producing paper, steel for furniture etc. b. Direct Wages/Labour: It is the amount paid to the workers who engage in the manufacturing unit to convert raw materials in to finished goods. This amount is known to the manufacturer and hence directly charged in the costing of the product. c. Direct Expenses: It is the amount of expense which is directly chargeable to the product manufactured or which may be allocated to the product directly. For example, architects /surveyors fees, designers, excise duty etc. 2. INDIRECT COSTS It is the part of the total cost where the cost cannot be identified and charged directly to the product. It is sub-divided in to 4 elements a. Indirect Material: Also known as expenses material, it is that part of the cost which cannot be identified directly to the product. For example, tools for general use, stationary, lubricants for machinery etc.


b. Indirect Labour: The amount paid to workers who are not engaged in the manufacturing unit is called Indirect Labour. Wages of workers in the sales department, security/supervision department etc c. Indirect Expenses: It is the cost of giving service to the production department which includes factory expenses, administrative expenses etc. d. Overheads: The aggregate of all the indirect expenses is known as Overheads. It includes all manufacturing and non-manufacturing supplies and services. It cannot be associated with a specific product. It arises due to the overall operations of the business. Overheads can be classified further on the basis of their functions i.e. 1. Factory Overheads 2. Administrative Overheads 3. Selling and Distribution Overheads 1. Factory Overheads: It is the aggregate of all the factory expenses incurred in connection with manufacture of a product These are incurred in connection with running of factory It includes the items of expenses viz., factory salary, work managers salary,10 | P a g e

factory repairs, rent of factory premises, factory lighting, lubricants, factory power, drawing office salary, haulage (cost of internal transport) depreciation of plant and machinery unproductive wages, estimation expenses, royalties loose tools w/off, material handling charges, time office salaries, counting house salaries etc. 2. Administrative Overheads: It is the aggregate of all the expenses as regards administration It is the cost of office service or decision making It consists of the following expenses: Staff salaries, office premises, office conveyance, printing and stationery and repairs and depreciation of office premises and furniture etc. 3. Selling and Distribution Overheads: It is the aggregate of all the expenses incurred in connection with sales and distribution of finished product and services It is the cost of sales and distribution services. Selling expenses are such expenses, which are incurred in acquiring and retaining customers. It includes the following expenses a) Advertisement b) Show room expenses c) Traveling expenses d) Commission to agents e) Salaries of Sales office

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4. Distribution Overheads: It includes all those expenses, which are incurred in connection with making the goods available to customers. For example packing charges,loading charges etc Determination of the Total Cost The Total Cost of a product consists of various elements of cost which have the quality of coherence. All the elements of cost can be grouped and re-grouped. The process of determining the cost is shown below with the help of a flow chart



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COST SHEET:For determination of total cost of production a statement showing the various elements of cost is prepared. This statement is called as a statement of cost or cost sheet. Cost sheet is a statement, which provides for the assembly of the detailed cost of the total cost of job operation or order. It brings out the composition of total cost in a logical order, under proper classifications and subdivisions. The period covered by the cost sheet may be a week, a month or so. Separate columns are provided to show the total cost and cost per unit. In case of multiple products a separate cost sheet may be prepared for each product. Alternatively, separate columns of total cost and unit cost may be provided for each product in the same cost sheet. A cost sheet is prepared under output or unit costing method.

Purpose of Cost Sheet Cost sheet serves the following purposes: 1. It gives the breakup of total cost under different elements. 2. It shows total cost as well as cost per unit 3. It helps comparison with previous years. 4. It facilitates preparation of tenders or quotations 5. It enables the management to fix up selling price 6. It controls cost.

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Format of a Cost SheetCOST PER UNIT (Rs.)

PARTICULARS Opening stock of raw materials + Purchases + Carriage inward + Custom duty and Octroi etc - Closing stock of raw materials Direct material Direct wages Direct expenses/ direct overheads PRIME COST Factory overheads (all the factory expenses) - scrap value + opening work in progress - closing work in progress






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FACTORY COST Office and administration cost ( all office expenses) XX



COST OF PRODUCTION + opening stock of finished goods - closing stock of finished goods


COST OF GOODS SOLD Selling and distribution overheads (all selling and distribution expenses) XX







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COMPONENTS OF COST SHEETA complete explanation on the various components of a cost sheet are mentioned below Prime Cost It consists of direct material, direct wages and direct expenses. In other words Prime cost represents the aggregate of cost of material consumed, productive wages, and direct expenses. It is also known as basic, first, flat or direct cost of a product. Direct Material Direct materials are those materials which enter into and form part of the product. For example, leather in shoes, wood in furniture etc. direct materials are also called process material or prime cost material. It includes a) All materials especially purchased or requisitioned for a particular process, jobor production order, b)All components, either purchased or internally manufactured c)All materials passing from one process of operation to the subsequent process d)All primary packing materials e.g. cardboard boxes, cartons etc. Direct material means cost of raw material used or consumed in production. It is not necessary that all the material purchased in a particular period is used in production. There is some stock of raw material in balance at opening and closing of the period. Hence, it is necessary that the cost of opening and closing stock of material is adjusted in the material purchased. Opening stock of material is added and closing stock of raw material is deducted in the material purchased and we get material consumed or used in production of a product. Material Consumed = Material purchased + Opening Stock of material Closing stock of material16 | P a g e

Direct Wages It refers to the cost of wages paid to operatives who directly involved in altering the construction, composition or condition of the product manufactured by a concern. When a concern does not manufacture but instead renders service, the term direct wages refers to the cost of wages paid to those who directly carry out the service e.g. wages paid to the drivers of a bus in transport service. Direct wages are also called direct labour, productive labour or prime cost labour. Direct Expenses/ Direct Overheads Direct expenses are those expenses which are neither direct materials cost nor direct wages but are directly identifiable with a job, process or operation. Direct expenses are also known as chargeable expenses, prime cost expenses, process expenses or productive expenses. Direct expenses are those expenses that lead a job or contract. Example of direct expenses is a)Hire charges of a special equipment required in production b)Cost of special pattern, drawing or layout c)Expenses leading to the receipt of a contract d)Maintenance cost of special tools required for the execution of a job. Prime Cost = Direct Material + Direct Wages + Direct Expenses Factory Cost In addition to prime cost it includes works or factory overheads. Factory overheads consist of cost of indirect material, indirect wages, and indirect expenses incurred in the factory. Factory cost is also known as manufacturing cost.

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Indirect Materials Indirect materials are those materials which cannot be treated as a part of the product. Example of indirect materials is a) Fuels, lubrication oils etc required for operating and maintaining plant & machinery b)Small tools of general use, c)Materials consumed for repairs and maintenance work d)Sundry stores used in the factory. Indirect Wages Indirect wages represent the cost of labour employed in the works or factory which is ancillary to production i.e. wages which cannot be directly identified with a job, process or operation, are generally treated as indirect wages. Example of indirect wages is a)General indirect labour such as supervisors etc b)Wages paid to maintenance workers c)Idle time wages, overtime, night shift, bonus, miscellaneous allowances to labour etc. Indirect Expenses Indirect expenses are those expenses which cannot be charged to production directly and which are neither indirect materials cost nor indirect wages are regarded as indirect expenses. E.g. rent, rates & taxes; insurance; canteen expenses; repairs and maintenance; power; lighting etc. Factory Cost = Prime Cost + Factory Overheads

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Total Cost and Cost Sheet If office and administrative overheads are added to factory cost, total cost of production is derived at. Office and Administration Overheads Office and administration overheads refers to the cost of formulating policy, directing and controlling the operations of an undertaking which is not directly related to production, selling, distribution, research or development. E.g. of office and administrative overheads include: a) Salaries paid to office staff, accountants, directors etc b) Maintenance of administrative buildings, c) Rents, rates, taxes and depreciation of office buildings, d) Postage, stationery, telephone, e) Office supplies and expenses, f) General administration expenses etc. Total Cost of Production = Factory Cost + Office & Administration Overheads

Cost of Goods Sold It is not necessary, that all the goods produced in a period are sold in the same period. There is stock of finished goods in the opening and at the end of the period. The cost of opening stock of finished goods is added in the total cost of production in the current period and cost of closing stock of finished goods is deducted. Cost of goods sold = Total cost of production + Opening stock of finished goods Closing stock of finished goods

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Total Cost (Cost of Sales) Addition of Selling & Distribution Overheads to the total cost of production gives you the Total Cost. Selling and Distribution Overheads Selling cost is the cost of seeking to create and stimulate demand and of securing orders. Distribution cost is the cost of the sequence of the operations which begins with making the packed product available for dispatch and ends with making the reconditioned returned empty packages available for re-use. Thus selling and distribution cost are the costs which are incurred to reach goods in saleable condition into the hands of the customers. E.g. a) Salaries and commission paid to salesman and sales manager, b) Expenses on advertisement, c) Salaries paid to warehouse staff, d) Rent, rates, taxes and depreciation of sales offices and warehouses etc. Total Cost = Cost of goods sold + Selling & Distribution Overheads Sales If the profit margin is added to the total cost, sales are arrived at. Excess of sales over total cost is termed as profit. When total cost exceeds sales, it is termed as Loss. Sometimes profit is calculated on the basis of given information in percentage of cost or sales. In such a situation, the amount is assumed 100 in which the percentage is calculated. Sales = Total Cost + Profit

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CASE STUDY ON PACKAGING COMPANYINTRODUCTION TO THE PACKAGING INDUSTRY IN INDIA Indian Packaging industry with a growth of more than 15% p.a. accounts for USD 14 Billion. This shows the immense potential in the industry. This growth is expected to be doubled in next two years and figures indicate towards a change in the industrial and consumer set up. Packaging today, has grown in importance and is regarded as vital marketing tool. It enhances product value and helps expand market within and outside country. The packaging industry can be characterized as global and fast growing industry.With a rapid growth in markets like Food, beverage, pharmaceutical, cosmetics and textile has provided momentum for the need of packaging as all these sectors need specialized packaging. Availability of most of the raw material in abundance that is required in packaging industry such as paper, plastic, board, glass, metal adds to the further growth of industry. Paper & Paperboard Production in India, 2003 to 2008(Figures in million tonnes)8.1 6.5 5.6 5.9 5.9 Installed Capacity Production

7.4 6.2 5.2 6.4







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Corrugated boxes are similar to a cardboard but the major difference is due to the durability and you do not have to worry about damaging your goods when you are using corrugated boxes. It is widely used for packaging in various industries such as Pharmaceutical Companies, Food Industry etc because of the quality and safety of the boxes as it is made with eco-friendly materials. These boxes are sometimes known as brown boxes and widely used for packaging fresh vegetables and fruits too. The material used in making these boxes is fibrous pulp extracted from pine trees. Talking about the advantages, these materials do not have sharp edges which might harm you while youre transporting these boxes or packing goods in it.With corrugated boxes as packaging, you can ensure your goods inside will be delivered without any damage to the product. This is because the boxes have three or more layers of cardboard and prevents movement during long journeys. The layers actually resist shocks and jerks during transportation as it works as a cushion to your goods. The final outer layer is the fluting medium that maintains the whole durability of the box; it can retain extreme heat and pressure. Paper & Paperboard Production & Consumption(Figures in million tonnes)21.0


13.9 14.0 8.3






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Corrugated boxes have smooth surfaces so you can print label stickers and stick it on them. Not only does it make it easier for the packaging company but it also enhances the look of the carton. Another advantage of using corrugated boxes for your business is these boxes are manufactured throughout the year. Weather and changesin the environment have no effect on these boxes. For business this is extremely important for smooth operation of your production and services!

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ABOUT THE COMPANY (BUSY BEE PACKAGING PVT LTD)Busy Bee Packaging PrivateLtd; have been manufacturing corrugated boxes since the past 40 years. They have a reputation for providing optimum and high quality cartons, competitive pricing and fast delivery(within few hours). Busy Bee Packaging PrivateLtd supplies to different industries such as,Pharmaceutical Industry, Liquor Industry, FMCG Companies,Heavy duty shippers. It assures that apart from supplying boxes,Busy Bee Packaging Private Ltd is also a much needed partner which helps in your company's growth. Their daily production consists of minimum 15000 cartons per day with a turnover of approximately 2.5 crores p.a. Their factory is owned outright and is located in Virar East with manpower of around 30 - 35workers. At present, they own 2 high end machines and have ordered a 3rd machine to increase their production capacity to approx. 22000 cartons per day due to the increasing demand by industries mainly Pharmaceutical, Food and FMCG Companies. COST INVOLVED IN PRODUCING A CORRUGATED BOX There are various materials used in the production of a box and the accordingly the price of box varies as per the quality, size, thickness and the material printed. As per my basic knowledge on the cost involved, the common and basic materials used are as follows - Kraft or Thick Paper like Cardboard - Colouring / Ink - Printing& Pasting24 | P a g e



Cost/box (Rs.)

Amt- 100 boxes (Rs.)

Direct material Direct wages Labours Wages (100 units x 1hr x 140) Direct expenses Carriage inward Prime Cost 15,000 29,000 14,000

Workplace overhead Service labour Managers salary 11,000 22,500

Works cost


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Office and Administration Stationery Printing Staff salary Electricity charges 500 400 25,000 18,000

Telephone charges Cost of goods sold Selling and distribution Advertising expenses

14,000 25,000


Cost of Sales Profit @ 25%

150,400 37,600



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www.indiastudychannel.com COST ACCOUNTING PROF. L.N. CHOPDE Website - Research India Analysis

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