13 ACCOUNTING 13.1 Cost Accounting A detailed cost accounting system is essential to identify and control manufacturing costs and compare actual cost with budget. This should encompass each item of moving equipment, purchased materials, and a breakdown of manufacturing overhead costs. Detailed costs should then be summarised monthly as unit costs (per tonne cement) under various heads, eg: Cost by Process Area: Cost by Natural Expense: Quarrying & crushing Operating salaries On-site raw materials to raw milling Operating & service labour Raw milling & additives Supplies, rentals, services Blending Grinding media Burning & cooling Refractories Finish milling & additives Bulk handling & load-out Manufacturing overhead Purchased raw materials Fuel Power Sub-total Maintenance, including repair Bag premium parts & labour This allows rapid scrutiny of cost trends and abnormalities which can be further investigated, if necessary, in the detailed accounts. There is sometimes conflict between the requirements of financial and management accounting; the former preferring uniform monthly allo- cation of periodic refractory and major maintenance costs which can hide abnormal actual costs. If necessary, separate reports should be pre- pared which provide operators with more relevant information. An operating budget should be prepared before the start of each finan- cial year. Management determines projected production by month and by cement type; the limitation or ‘principal budget factor’ is usually either market or equipment capacity. Each department estimates its own detailed costs, and the combined estimate should be reviewed in the light of previous actual costs and anticipated process and cost changes. Few manufacturers operate in sufficiently stable environments to avoid significant variances. Flexible budgeting allows provision for different levels of production. Cement Plant Operations Handbook * 179 ONILNNODIVComparison with budget will indicate any variances. Variances will be due either to change in quantity or change in cost//price and, whether favourable or adverse, must be identified, explained, and, if necessary, corrected. While budget reconciliation is a valuable operations management tool, an accurate budget is also essential for cash flow management. Fixed costs apply only to fixed labour, fixed power charge, lease/rental costs, depreciation and amortisation, insurance, and taxes (other than income); virtually all other manufacturing costs are variable. Variable costs are fuel, power, materials and services and purchased raw materials. Excluding depreciation, typically 65% of manufacturing costs are variable. Overhead absorption is usually on a per tonne basis. Unless a flexible budget is employed, differences between projected and actual produc- tion must be reconciled retrospectively. Cost by type of cement should be estimated as accurately as possible in order to establish the net margin for each type. This requires identifica- tion and quantification of all associated cost elements including tra tion, product transfer, and storage costs. Special cements involving only finish milling and additives can be quite easily estimated, special clink- ers which involve intangibles such as kiln refractory life and mechani- cal wear and tear can not. Costing of spare parts and purchased materials inventories can employ various methods (FIFO, LIFO, standard cost, etc); with modern data processing, weighted average costing is probably the most satisfactory. Order levels and order quantities should be reviewed frequently. A perpetual warehouse inventory audit should be conducted and, peri- odically, obsolete items identified and segregated from the stock-list. In plants which have acquired a variety of equipment at different times and from different suppliers, it is common to find a given part sepa- rately stocked under two or more warehouse numbers; data bases are available for identifying duplications. While automatic order generation is desirable, any items costing more than some predetermined mini- 180 * Cement Plant Operations Handbookmum amount (say, $1000) should be directed for management scrutiny prior to order. An acceptable turn-over rate for maintenance parts and supplies, on a cost basis, is 1.5/year. This does not include critical, slow moving spares often carried to prevent significant business interrup- tion; such spares are better considered as insurance and assessed using risk management principles. The value of warehouse inventory should, typically, be $2-3 per tonne of annual clinker production. Major spare parts should be kept under review. Slow wearing, parts such as mill diaphragms should be monitored and ordered an appro- priate time ahead of anticipated failure. Parts subject to catastrophic fail- ure such as motors, kiln rollers, mill girth gears and fan impeller shafts require judgement to balance their high inventory cost against potential production loss. If possible, equipment should be standardised so that one spare will cover multiple units or the part can be taken from a less critical unit (eg from finish mill to raw mill); a record should be kept of which gears have been turned and how many hours they have operat- ed and contingency plans should be made for emergency repair of large shafts and rollers. Reciprocal agreements between plants with similar equipment may also be possible but advanced planning is desirable. ‘An annual capital budget should be prepared covering items and pro- jects exceeding a predetermined minimum amount (say, $50,000) which are not included in routine operating or maintenance costs. An annual capital budget may be of the order of $2-3 per tonne of production with individual items conventionally justified on capacity increase, cost reduction, maintenance, safety, quality improvement or compliance with regulation. Whether long-term maintenance items such as mill lin- ings are considered, capital or expense will depend upon company pol- icy and tax treatment. Large projects (exceeding, say $1,000,000) are conventionally considered separately. 13.2 Investment Justification Justification of plant modification and new equipment costs involves discounted cash flow, estimation of uncertainty and risk, and the oppor- tunity cost of alternative investments. Financial options pricing theory expands the yes/no decision to justify delay. Postponement may clari- fy risk and, before a project goes ahead, the present value of profits should exceed the investment cost by at least the value of deferring the option (Economist; 8 Jan 1994, pg 76). Cement Plant Operations Handbook * 181 INTRA Tate)Net present value reduces future costs and revenues to present value using an assumed ‘discount rate’. Internal rate of return takes the sum of future benefits, after tax, and calculates the interest at which the total equals present project or acqui- ion cost. Many companies have a minimum or ‘hurdle rate’ for investments to be considered and this must, at least, exceed the after tax cost of money. The margin of excess should vary with the perceived risk involved. Payback is a crude measure comprising project cost divided by antici- pated annual revenues or savings. This ignores discount rate but is use- ful for periods of less than 3 or 4 years. 13.3 Project Cost Estimation Cost estimating ranges from preliminary conceptual estimates to defin- itive contract pricing. Conceptual estimates can be obtained by tech- niques such as cost-capacity scaling based on the known cost of a similar project of different capacity. [cost 1/cost 2] = [size t/size 2]* An R value of 0.65 may be used for first approximations, though a com- prehensive list of values for various types of equipment and tasks is given by Remer & Chai (Chemical Engineering Progress; 8/1990, pg 77) Alternatively, if equipment cost is known it can be doubled (or some other experience based factor applied) to yield an approximate installed cost. At this level of refinement, annual maintenance costs equal to 10% of equipment cost may be assumed. Another useful reference, unfortu- nately not recently revised, is Spon’s International Construction Costs Handbook (E & F N Spon, London, 1988) which gives unit and compar- ative costs for 32 countries. More detailed costing is obtained from materials and equipment lists to which unit costs can be applied with appropriate estimates for engi- neering, permitting, commissioning, etc. Ultimately, definitive costs are developed based on specific bids by equipment suppliers and contractors. Except for the simplest projects, even with a firm turnkey price, there will be scope changes and addi- 182 * Cement Plant Operations Handbooktions which demand contingency funding. 13.4. Profit & Loss Statements With some variation in terminology (income /earnings/ profit), state- ments are expressed: Sales revenues - cost of sales + — Gross profit - distribution costs ~ administrative expenses EBITDA - depreciation/amortisation + Operating income + other income - interest payable - foreign exchange adjustments ~ tax » Net income before extraordinary items Net income Retained income + +/- extraordinary items lends 4 EBITDA is "Earnings before interest, tax, depreciation and amortisa- tion". The term ‘trading income’ is used more or less interchangeably with operating income. Cash flow is an important concept because a company can be profitable and insolvent at the same time. Cash flow is variously defined and is determined from the ‘Statement of Cash Flow’: Cash inflow = New borrowing + Funds from new equity + Operating income + Sale of assets Cash outflow = Dividends paid + Tax paid + Purchase of assets Net cash flow = Cash inflow - Cash outflow Increase in working capital coe Cement Plant Operations Handbook * 183 ONILNNODIV