COST AND MANAGEMENT

ACCOUNTING

CIA-3.1
SUBMITTED TO: Prof. Leena James

SUBMITTED BY: Shubham Bhargava- 1820331

Srijan Prasad- 1820333

  Introduction to the company

The Godrej Group is an Indian conglomerate headquartered in Mumbai, Maharashtra, India,

managed and largely owned by the Godrej family. It was founded by Ardeshir
Godrej and Pirojsha Burjorji Godrej in 1897, and operates in sectors as diverse as real estate,
consumer products, industrial engineering, appliances, furniture, security and agricultural
products. Subsidiaries and affiliated companies include Godrej Industries and its
subsidiaries Godrej Consumer Products, Godrej Agrovet, and Godrej Properties, as well as the
private holding company Godrej & Boyce Mfg. Co. Ltd.

Godrej Consumer Products Ltd (GCPL) is one of the leading Fast Moving Consumer Goods
(FMCG) companies in India. The company has five product segments namely Household
Insecticides, Soaps, Hair Colours, Liquid Detergents and Air Fresheners. The company has
manufacturing facilities at Malanpur in Madhya Pradesh, Baddi in Himachal Pradesh, Guwahati
in Assam and Namchi in Sikkim. The company has established a strong international presence
through a slew of acquisitions over the years. GCPL is among the largest household insecticide
and hair care players in emerging markets. In household insecticides, it is the leader in India and
the second largest player in Indonesia. GCPL is the leader in serving the hair care needs of
women of African descent, the number one player in hair colour in India and Sub-Saharan
Africa, and among the leading players in Latin America. GCPL ranks number two in soaps in
India. It is the number one player in air fresheners and wet tissues in Indonesia.

The company is among the largest marketer of toilet soaps in the country with leading brands
such as Cinthol, Fairglow, and Godrej No 1. Fairglow, India's first fairness soap created
marketing history as one of the most successful innovations. The company is also the leader in
the hair colour category in India. They are having a vast product range from Godrej Renew
Colourssoft Liquid Hair Colours, Godrej Liquid & Powder Hair Dyes to Godrej Kesh Kala Oil,
Nupur based Hair Dyes. Their Liquid Detergent brand EZEE is the market leader in that
category.

Godrej Consumer Products Ltd was incorporated on November 29, 2000 as a public company
and was promoted by Godrej & Boyce Manufacturing Company. The liabilities and assets
pertaining to the consumer products business of Godrej Soaps Ltd together with the factories
situated at Malanpur and Silvassa along with the marketing, selling, distribution and related
facilities have been transferred to the company with effect form April 1, 2001. Also, the
company set up a new factory at Guwahati in Assam for manufacture of hair colour and toiletries
during the year 2001-02.

 Introduction to Marginal Costing

The costs that vary with a decision should only be included in decision analysis. The marginal
cost of a product – “is its variable cost”. This is normally taken to be; direct labor, direct
material, direct expenses and the variable part of overheads. It is the technique of presenting cost
data wherein variable costs and fixed costs are shown separately for managerial decision-
making. It is simply a method or technique of the analysis of cost information for the guidance of
management which tries to find out an effect on profit due to changes in the volume of output.
These are different phrases being used for this technique of costing. Marginal costing technique
has given birth to very useful concept of contribution where contribution is given by: Sales
revenue less variable cost (marginal cost). Contribution may be defined as the profit before the
recovery of fixed costs. Thus, contribution goes toward the recovery of fixed cost and profit, & is
equal to fixed cost + profit (C = F + P).

Marginal Costing is the technique of costing fully oriented towards managerial decision making
and control. This technique can be used in conjunction with any method of cost ascertainment. It
can also be used in combination with technique such as budgeting and standard costing.
Marginal costing is helpful in determining the profitability of products, departments, process and
cost centers. While analyzing the profitability, marginal costing interprets the cost on the basis of
nature of cost.

Marginal cost in other words is variable cost. For a typical manufacturing company the following
elements of costs are variable or marginal costs:

- Direct material

- Direct wages

- Direct expenses

- Variable overheads

Thus, Marginal Cost = Prime cost + Total variable overheads

Or

Marginal Cost = Total cost - fixed cost

Production Quantity: It determines the quantity of company or retailer should order to

minimize the total inventory costs by balancing the inventory holding cost and average fixed
ordering cost.

Clearance Quantity: It is the price of goods or a service at which quantity supplied is equal to
quantity demanded, also called the equilibrium price. Another clearing quantity may be a price
below equilibrium price to stimulate demand.

Assessable Value: The value of goods taken in course for calculation of vat is called assessable
value. The concerned officer may increase often it if he finds deviations or absence of justified
co-relation between the input or purchase value and sale value.

 Techniques of marginal costing used by Godrej

1. Profit Planning:
Profit planning is the planning of future operations to attain maximum profit. Under the

technique of marginal costing, the contribution ratio, i.e., the ratio of marginal contribution to

sales, indicates the relative profitability of the different products of the business whenever there

is any change in volume of sales, marginal cost per unit, total fixed costs, selling price, and sales-
mix etc.

For Example:
Godrej manufactures a single product having a marginal cost of Re. 0.75 per unit. Fixed costs are

Rs. 12,000. The market is such that up to 40,000 units can be sold at Rs. 1.50 per unit, but any
additional sales must be made at Re. 1.00 per unit. There is a planned profit of Rs. 20,000.

How many units must be made and sold?

Contribution desired = Fixed Cost + Desired Profit

= Rs. 12,000 + Rs. 20,000 = Rs. 32,000

Contribution from 40,000 units = 40,000 x Rs. (1.50 – 0.75) = Rs. 30,000.

Additional units to be produced and sold at Re. 1.00 per unit after 40,000 units:
Contribution to be earned after 40,000 units = Rs. (32,000 – 30,000) = Rs. 2,000

New contribution per unit = Re. (1.00 – 0.75) = Re 0.25

Additional units to be produced for contribution of Rs. 2,000

= Rs. 2,000 x 100/25 = 8,000 units.

Total units to be produced to earn planned profit of Rs. 20,000

= 40,000 units + 8,000 units = 48,000 units.

2. Pricing of Products:
Sometimes pricing decisions have to be taken to cater to a recessionary market or to utilise spare

capacity where only marginal cost is recovered. For export market, sometimes full cost is loaded

to the sale price to remain competitive. Sometimes special prices are to be offered with
expansion in mind, fixation of price below cost can be made on a short-term basis.

It may be advisable to fix prices equal to or below marginal cost under the
following cases:

(i) To maintain production and employees occupied.

(ii) To keep plant in use in readiness to go ‘full team ahead’.

(iii) To prevent loss of future orders.

(iv) To dispose of perishable product.

(v) To eliminate competition of nearer rivals.

(vi) To popularize a new product.

(vii) To keep the sales of a conjoined product which is making a considerable amount of profit.

(viii) Where prices have fallen considerably or a loss has already been made.

3. Closing Down/Suspending Activities:

While taking a decision in this line, the effect of fixed cost and contribution will have to be

analysed. If the contribution is more than the difference in fixed costs by working at normal
operations, and when the plant or product is closed down or suspended, then it is desirable to
continue operation.