CAMA END TERM PROJECT

Submitted by: Submitted to:

Kanchan Keshri (18PGDM216) Dr. Gauri Shankar
Khushboo Hanujra (18PGDM217)

Neha Jain (18PGDM221) Person Contacted:

Neha Singhal (18PGDM222) Mr. Narendra Kumar Joshi

Shruti Agrawal (18PGDM238) Head of Sales Department

Suyash Joshi (18PGDM244) Rauzagaon Chini Mills

05241-234363
INDUSTRY: Sugar
GROUP: Balrampur Chini Mills
FIRM UNDER STUDY: Rauza Gaon Chini Mills (a unit of Balrampur Chini Mills Ltd.)

ABOUT THE GROUP:

India is the second largest sugar producer and the largest sugar consuming country in the
world; Balrampur Chini Mills Limited is one of India’s largest integrated sugar manufacturing
companies.

The Company’s 10 factories in Uttar Pradesh possess:

• An aggregate cane crushing capacity of 76,500 tonnes per day
• Distilleries possessing an aggregate capacity of 360 kilolitres per day
• Saleable co-generation capacity of 163.20 megawatts

ABOUT THE FIRM:

Rauzagaon Chini Mill is a unit of Balrampur group of sugar industries which comprises of 10
such factories. It is located in Faizabad district of Uttar Pradesh and is directly connected with
cities like Barabanki, Lucknow, Sultanpur, Gorakhpur etc. The firm is known to be a quality
sugar producer and has been an initiator in bringing in high quality standards like introducing
sulphur less Sugar, doing away with usage of animal bones and installing smoke filters in
chimneys to name a few.

The firm has been duly concerned towards creation of shared value by continuously
conducting “krishi sammelan” and working very closely with farmers by supervising their
produce and offering them high yielding seeds, fertilizers and machineries to enhance their
productivity.

The major areas of firm include production of:

1. Sugar

2. Molasses

3. Bagasse

4. Electricity

The firm’s produce enjoys a great reputation in the market due to its high quality and therefore
sells @ 2-3 rs. higher than the competitors and still gets preferred by the customers.
USAGE OF MARGINAL COSTING IN DECISION MAKING

Although the contacted person was reluctant to share the technique followed, but we got to
know that the firm pays due importance to ascertainment of marginal cost as they have a direct
effect on the profitability. The firm calculates overheads on the basis of production done. The
overheads are directly proportional to the production done. Hence the firm does not have much
control on overhead costs.
As told by Mr. Joshi, recovery plays a major role in determining the
production quantity and recovery itself depends upon the quality of produce/ raw material i.e
Sugarcane. Recovery as discussed above is the quantity of sugar produced per 100 kg of
sugarcane used, expressed in percentage term. And this recovery increases if the produce is
of high quality.
In order to ensure that the sugarcanes so received are qualitative, the firm helps farmers right
from the time they sow the seed by:
1.making the best quality seed available to them
2.continuously monitoring the crop’s growth
3.supplying highly efficient fertilizers
4.renting out machineries
5.help in preventing the crop from damage.
The firm also undertakes various knowledge sessions to teach highly efficient farming
techniques to farmers and hence making them more productive.

On the basis of our interaction, we got to know that the current recovery rate is 10% i.e 10 kg
sugar being produced per 100 kg of sugarcane used. It falls under a low recovery rate. The
overheads approximated towards 100 kgs of sugar production amount to 3500 rs including
transportation cost etc.
Which means that if the recovery is 10%, the per kg cost of sugar would be around 35rs which
forms the base of pricing too. And If the recovery gets improved, the quantity of sugar
produced increases hence the per unit cost of production falls therefore the cost per kg falls
too. Hence, the firm only has a limited control over its marginal costs. Sometimes when the
weather is not much favourable, it affects the crop yield and cost ultimately rises. Therefore,
the firm finds it difficult to have a very clear picture of costs and the units that will be produced
until the production starts hence specific calculation of margin of safety etc are not taken much
into consideration.
 USAGE OF STANDARD COSTING IN DECISION MAKING

Standard costing is an important subtopic of cost accounting. Rather than assigning the actual
costs of direct material, direct labor, and manufacturing overhead to a product, many
manufacturers assign the expected or standard cost, Rauzagaon Chini Mill being one of them.

As explained by Mr. Joshi, Their production season begins

from November and continues till April, the whole production process is assigned a standard
or expected cost before the production begins in November. Once the production has started,
cost of each particular like direct material, direct labor, etc is recorded and maintained for
future purposes.

However, Things usually don’t go as planned due to various circumstances that arises
throughout the production journey. For example, a policy decision to increase inventory can
harm a manufacturing manager's performance evaluation. Increasing inventory requires
increased production, which means that processes must operate at higher rates. When (not
if) something goes wrong, the process takes longer and uses more than the standard labor
time. As a result there are almost always differences between the actual costs and the
standard costs, and those differences are known as variances.

Once the production season is over (i.e. on May) an analysis of costs is done in order to
understand the business better and make wise decisions for future. The actual costs are
compared against the standard costs set by the firm and difference between the two is noted
down.

Once the comparison is done between the standard and actual cost, a report is prepared
stating all the production activities undertaken, actual cost involved, expected cost, cost
distribution etc. which is then sent to their top level management for further analysis .The
variances recorded in the cost of production are explained in this report which helps the firm
to identify the loopholes in the standard costing process. The advantages for these reporting
and analysis process are as follows:

 Improved cost control.

 More useful information for managerial planning and decision making.
 More reasonable and easier inventory measurements.
 Cost savings in record-keeping.
 Possible reductions in production costs.

Together the whole process helps the firm to achieve productivity and making wiser
decisions in future.

PRICING OF SUGAR

The price of the product has a direct effect on the success of the business. Though pricing
strategies can be complex, the basic things to be considered are :
  All prices must cover not only the costs but also the profits
 The most effective way to reduce the prices is to lower costs
 Review prices regularly to assure that they reflect the dynamics of cost, market
demand, response to the competition, and profit objectives
 Prices must be established to assure sales

In a sugar industry cane cost is the major component of cost of production which in turn affects
the pricing of sugar. Therefore, it is important to understand the Sugarcane Pricing Policy so
as to understand the basic costs involved.
Sugarcane pricing policy:
The pricing of sugarcane is governed by the statutory provisions of the Sugarcane (Control)
Order, 1966 issued under the Essential Commodities Act (ECA), 1955
Statutory Minimum Price (SMP) was replaced with the Fair and Remunerative Price (FRP);
amendment of the Sugarcane (Control) Order, 1966 on 22.10.2009
FRP is announced at the recommendations of the Commission for Agricultural Costs and
Prices (CACP)
Factors for fixation of FRP of sugarcane:

As per our conversation with Mr. Joshi, recovery plays a major role in determining the
production quantity and the pricing of sugar. Recovery depends upon the quality of raw
material i.e. Sugarcane in this case. Recovery as discussed above is the quantity of sugar
produced per 100 kg of sugarcane used, expressed in percentage term. The recovery
increases if the produce is of high quality and quantity. The lesser the recovery the higher will
be the price of sugar in order to cover the costs. On an average, the recovery rate for Rauza
Gaon Chini Mill is 10% and the highest is 12%.

Government Regulation and Indian Sugar Mill Association:

Government intervention also plays an important role in determining the pricing strategies.
Although, there hasn’t been much intervention by the government but there are instances
wherein this intervention is needed – excess production, storage issue, etc. In case of excess
production, in order to clear the stock, the mills might sell sugar at Rs.25-27, below their cost,
this would affect the healthy competition in the market. To prevent this the government
intervenes and sets a minimum price.This intervention is temporary in nature.
Other factors that are considered at the time of determining the cost are as follows:
1. Physical Parameters
a. Cane planning
b. Recovery
c. Transporation
2. Conversion Cost
3. Repair and maintenance

CONTROL OF COST: LABOUR

The control of labour cost needs the management of the labour behaviour. Therefore,
the management ought to study human behaviour, performance of labour, time in which
the work is done, labour turnover, labour approach so as to control the labour cost.
Labour cost:
Costs of remuneration, such as wages, salaries, commissions, overtime, bonus etc.
1. Direct Labour Cost: Wages or salaries paid to labourers who are directly engaged in
converting raw materials into finished products.

2. Indirect Labour Cost: Indirect labour is not directly engaged in the production of
goods but only to assist or help in production of goods or services. Examples:
 Foremen’s salary
 Cleaner’s salary and wages
 Gatekeepers’ salary
 Salary of time keeping department
 Tools operator’s wages
 Store keeping department salary
In our interaction with Mr. Joshi about the labours and employees engaged in the production,
we got to know that there have been fixed labour mainly the indirect labours who are
involved in the managerial positions or in the supervision of the direct labours (Foremen) and
contractual labours who are employed as per the contract and these are directly involved in
manufacturing sugar in the mills.
Also in our discussion with him, he explained that the workmen or the contractual labours
work in the shifts. One shift comprises of 8 hrs and in a day 3 shifts are operational. 1st shift
starts at 6 in the morning and is operational till 2 pm and 2nd shift starts from 2pm and ends
at 10 pm. From 10pm there is a night shift which is operational until 6 am. So, a set of
workmen work in one of the shifts, i.e., 8 hrs a day. Moreover, he told us that there is a
holiday on Sunday.
Although the contacted person was reluctant to share the actual and exact wages paid to
their employees, but we got to know that the firm takes due care of the labours, i.e., the
workmen or the contractual labours as well as other employees working in the firm. The
union of labour is extremely satisfied with the wages provided. They pay the contractual
labours keeping in mind the minimum wages set by the government for the
workmen/contractual labours and other labours’ wages are decided by the management
which he was reluctant to share.
Also, there is the provision of overtime if the labour works more than the time allotted. The
overtime expenses are kept separate from the salary expenses, as this requires closer
control than wages.
The hours and wages records are maintained in the same order as the budget details for the
simplification.
Afterwards, the actual wage bill is compared with the budget, management being notified
only of variations therefrom, which acts as a time saving factor for the management
Apart from that, in the area of labour control, the supervisors must see that available labour
are made best use of and the data furnished for requirement and utilisation are factual and
accurate.