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Cost Analysis - Fast Moving Consumer Durables Industry: NOVEMBER 2, 2018
Cost Analysis - Fast Moving Consumer Durables Industry: NOVEMBER 2, 2018
The companies included as a part of this analysis are : Whirl Pool, Symphony, Bajaj Electricals,
Blue Star, Voltas and BPL India.
Cost of raw material consumed comprises of the highest percentage of cost in industries
like BlueStar, WhirlPool and Voltas . This cost is incurred on raw materials like steel ,
copper, plastic and other inputs, which mainly comprises of unfinished goods.
However, through the data [Annexure], we can see that Symphony has a very less
percentage contribution cost of raw materials and a higher cost is incurred on ‘Purchase
of Stock in Trade’. This mainly refers to all the purchases of finished goods that the
company buys towards conducting its business. This indicates that symphony is more into
assembly production rather than actual manufacturing of raw materials.
Salaries, wages and bonuses includes expense incurred in terms of the salaries paid,
contribution towards provident funds, and other employee welfare expenses.
Salaries and wages is a major expense while the expense spent on depreciation for all the
companies is very less as compared to the salary expense, it can be concluded that the
industry is a labor oriented industry and not driven much by advanced machineries and
technology. The cost of equipment’s and machineries allocated per year is less as
compared to the cost allocated for salaries, wages and bonuses.
Depreciation is one of the major 5 cost factors in Whirlpool industry, which depends on
the equipment used , the cost allocated per year for that particular equipment used in
that particular project. If the machine is used for more than one activities, then cost
allocation varies.
Changes in inventory at the beginning and at the end of the year also forms one of the
major cost factors of the industry. The difference between the inventories present in the
expense sheet (i.e. Inventory at the beginning – Inventory at the end) if negative ,
indicates that the company produced more products than it managed to sell. The
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Fast Moving Consumer Durable Industry October, 2018
estimated sales targets were not achieved by the company. The companies Whirlpool,
Bluestar and Voltas show such trend at some instances.
Freight in charges incurres by Whirlpool and symphony comprising of 4-5 % are the costs
expensed in organizing shipments to several point of sales.
Legal & Professional fees is one of the major cost incurred by BPL. However the annual
report throws less light on this expense category, this costs are with regards to defending
any disputes in the court of law, arbitration issues etc.
AMC subcontracting cost incurred by Bluestar relates to the Annual Maintenance
contract, which is given to another company by Bluestar for maintenance and repairs of
inventories or as a part of services provided to customers.
1] Gross profits are affected by economic trends in the short runs. Utilization of Industrial and
commercial facilities influence the sales volume. In times of recession or depression in the
economy the sales volume get affected adversely because of low buying power of customers.
2] Raw Material Costs : As most of the raw materials in the FMCD industry are mostly imported,
the currency fluctuation causes the raw material costs to vary. The currency risk is one of the
major cost drivers of the industry.
3]Salaries & Expenses: Cost per program varies with time required of the staff member (if
possible to allocate by program), otherwise, size of the program/ activity.
1] Government Policies & Regulations : The government has increased liberalization which has
favored foreign direct investments (FDI). Also policies such as National Electronics Mission and
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Fast Moving Consumer Durable Industry October, 2018
3] Long term trends such as population movements and industrial development, the company’s
service area development have the potential of influencing medium to long term earnings.
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Fast Moving Consumer Durable Industry October, 2018
The above table, shows Degree of Operating leverage calculated for the companies. It helps to
understand and evaluate how a company’s operating income changes with respect to a
percentage change in sales. A company’s operating leverage however involves fixed and variable
costs.
Company with a high degree of operating leverage has high fixed costs relative to the variable
costs. If the degree of operating leverage is high , the EBIT (earnings before interest and taxes)
experiences volatility with percentage change in sales.
The operating leverage for the Consumer durable industry, taking into account the six industries
is shown in the calculation below
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Fast Moving Consumer Durable Industry October, 2018
In the case of unregulated category, the Ministry has named 33 “industry/sector/product/service”. The
newly introduced ones include coffee and tea; milk powder; plastics and polymers; glass; textiles;
electrical or electronic machinery.
As per the amended rules, entities falling under the unregulated category and having minimum annual
turnover of Rs 100 crore would need to carry out cost audits. Other criteria would be that aggregate
turnover of the individual products or services where cost records are to be maintained is at least Rs 35
crore.
Since the FMCD sector falls under the unregulated category (electrical or electronic machinery), it needs
to comply to these norms as well.
In the case of the industry, each selected company have an annual turnover of more than 100 cr.
Hence, it is mandatory for the FMCD industry to maintain cost audits as well as cost records.
A company with the highest Operating Income can be said to be the cost leader for that particular industry.
In the case of the chosen companies in the FMCD industry, the Operating Income for the FY 2017 are as
given below:
Since, Voltas has the highest Operating Income of Rs. 651.02 crores, it can be considered as the cost
leader in this the FMCD industry in India.
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Fast Moving Consumer Durable Industry October, 2018
ANNEXURE
WHIRL POOL
SYMPHONY
BAJAJ ELECTRICALS
BLUE STAR
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Fast Moving Consumer Durable Industry October, 2018
VOLTAS
BPL INDIA