Financial Accounting&

Costing
- Prof. L.N. Chopde

A STUDY ON THE COST OF MANUFACTURING

CORRUGATED CARTON

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COST OF MANUFACTURING CORRUGATED CARTON

Submitted by
Adil 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)

MET’s Asian Management Development Centre

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 PREFACE

I 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.

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 ACKNOWLEDGEMENTS

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.

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 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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 CONTENTS

Sr. # TOPICS Page #

1. COSTING FUNDAMENTALS AND BASIC PRINCIPLES 7

2. COST SHEET 12

3. FORMAT OF COST SHEET 13

4. CASE STUDY ON PACKAGING COMPANY 21

5. ABOUT THE COMPANY - BUSY BEE PACKAGING LTD 24

6. COST SHEET OF BUSY BEE PACKAGING LTD 25

7. BIBLIOGRAPHY 27

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 COSTING FUNDAMENTALS & BASIC PRINCIPLES

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 cost

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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 –

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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.

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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 manager’s salary,

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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–

DIRECT MATERIALS

DIRECT LABOUR DIRECT EXPENSES

PRIME COST

FACTORY O/HEADS

FACTORY COST

OFFICE O/HEADS

SELLING &
COST OF PRODUCTION
DISTRIBUTIUON
O/HEADS

PRIME COST

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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 sub-
divisions. 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 Sheet

COST PER
PARTICULARS Rs. Rs.
UNIT (Rs.)

Opening stock of raw materials

+ Purchases XX

+ Carriage inward XX

+ Custom duty and Octroi etc XX

- Closing stock of raw materials XX

Direct material XX

Direct wages XX

Direct expenses/ direct overheads XX

PRIME COST

Factory overheads XX

(all the factory expenses) XX

- scrap value

+ opening work in progress XX

- closing work in progress XX

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FACTORY COST XX

Office and administration cost XX

( all office expenses) XX

COST OF PRODUCTION XX

+ opening stock of finished goods XX

- closing stock of finished goods XX

COST OF GOODS SOLD XX

Selling and distribution overheads XX

(all selling and distribution XX

expenses)

TOTAL COST/ COST OF SALES XX

Profit XX

SALES XX

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 COMPONENTS OF COST SHEET
A 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 material

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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 COMPANY

INTRODUCTION 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
7.4 7.7

6.4 6.5 Installed Capacity

6.2
5.9 5.9
5.6 Production
5.2

2003-04 2004-05 2005-06 2006-07 2007-08

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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 you’re 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
20.0

Production
13.9 14.0 Consumption

8.3 9.0

2009-10 2014-15 2019-20

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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& Pasting

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 COST SHEET OF BUSY BEE PACKAGING PVT LTD

Particulars Cost/box Amt- 100

(Rs.) boxes (Rs.)

Direct material

Direct wages

Labours Wages (100 units x 1hr x 140) 14,000

Direct expenses

Carriage inward 15,000

Prime Cost 29,000

Workplace overhead

Service labour 11,000

Managers salary 22,500

Works cost 33,500

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Office and Administration

Stationery 500

Printing 400

Staff salary 25,000

Electricity charges 18,000

Telephone charges 14,000

Cost of goods sold 25,000

Selling and distribution

Advertising expenses 5,000

Cost of Sales 150,400

Profit @ 25% 37,600

Sales 188000

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 BIBLIOGRAPHY

 www.indiastudychannel.com

 COST ACCOUNTING – PROF. L.N. CHOPDE

 Website - Research India Analysis

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