The caselet is based on the Cost Structure and various types of cost based on the Cement

Industry.The breakdown of cost is ultimate for the administration to regulate the present
operations and to inspect the tactics for forthcoming production and promotion of the products.
Examination of cost data offers cost methods that can be used in the assessment of the
commercial enactment of products, processors, managers, and departments. The requirement for
such an assessment stem out from the craving to escalate the proficiency of activities. Cost
procedures provide a commercial measure for the assessment of enactment in the completion of
anticipated actions.
The Indian Concrete Journal states clearly that, “India has become the second largest cement
producer of the world after China and USA with cement production at approximately 192
million tones.” In India, the cement costs are simply a utility of cartels (except in Western India
where it has been observed that the cartels don’t continue for long). As an outcome the two
things that are criticallyimperative for a cement company is trade tax benefits and straight costs.
Sales tax enticements differentiate in each state across the nation.For example: In the state of
Tamil Nadu,the government offers enticements in the form of immunity from sales tax for
seven years of doctoral for 14 years matter to a thoroughgoing of 100 percent of
theinvestment made in the concerned project. In the state of Andhra Pradesh, “the system is
nearly similar but the thoroughgoing limit is 140 percent of the project cost. In the state of the
Gujarat, the immunity is presented for a period of seven years.
The two most vital components in the price structure of a cement company are the freight and
the cement costs. The freight cost, in the recent times, has been found to be in decline in
accordance to the share of total operating costs while on the other hand the energy cost shares
have increased drastically. The share of the other various costs such as the spare and stores,
administrative expenses and the manufacturing overheads is been believed to be in continuous
decrement. The share of costs on account of repair, maintenance, material, employees and
selling expenditures havebeen more or less steady.
The operational cost of Indian Cement Industry has shown a marginal growth at a CAGR of 5%
from Rs.1461/ton in 2008-09 to Rs.1868/ton in 2012-13. In the recent years, it has been noticed
that the share of the energy costs has been decreased, while the share of the freight costs has
seen an emergence in total operating costs. It is mostly because of theassigning of captive
power plants, use of much more energy competent kilns by the cement manufactures,as well as
drastic surge in the share of the blended cement in the overall cement production. The share of
the blended cement has seen a surge to 74% in 2012-13 from a mere 57% in 2010-11.The share
of raw material costs has been slightly increased due to the surge in input costs as wells the
25% increase in the royalty on the limestone.
The raw material price account for approximately 25% of the major operating cost of the
cement manufacturing while on the other side the limestone accounts for 40% of total raw
material costs, with various other materials such as fly ash, bauxite, slag, gypsum, red oxide
and different other consumables elements that backs the continuing costs. In the recent years, a
surge in the prices of the above consumables, that which has caused in the raw material
pricesalmost amplifying over the last five years. The cement industry has been recognizedas
one of the top five energy concentrated titled patrons in India under the Energy Conservation
Act (EC ACT), 2001. Power prices accountsfor approximately 15-20% of the major operating
cost of the cement and approximately 90-100 kWh of power are required to produce around one
ton of cement. Hence, the obtainability of steady and nonstop power supply is of serious
prominence to the cement industry. Nevertheless, the powerplea supply scenario is grey in the
country. While, the plea for power has shown agrowth of CAGR of 7% from 2008-09 to 2011-
12, the supply has been increased at a CAGR of only 6.4% during the same time period. As a
result, India continuous to be deficit in power supply with the power shortage in the country
increasing from around 7.3% in FY 07-08 to 10.1% 2012-13.

Cost Structure of Cement Industry:

The cement industry is one among the energy-concentrated segments within the Indian
economy. Clinker production is also among the most energy concentrated step, accounting for
approximately, 75% of the energy being used in the cement production in the nation. In India,
as projected 90-94% of the thermal energy needs in cement manufacturing is being met by the
coal. The residual requirements are met by the fuel oil and the high speed diesel oil. For each
kg of the clinker, the cement business on regular needs 800 K. Cal of coal for dry processes and
1350 K. Cal of coal for wet processes. In recent years, it has been noticed that there is a
continuous decline in the superiority of the coal. In specific, the ash content has amplified
inferring lower calorific values for coal, and in order to unproductive burning etc. the coal
ingesting thus amplified resulting in higher fuel and transportation costs. In order to diminish
the cost of this module, these companies should purchase their own resources for raw material,
their workers should be trained and other elements such as power and fuel cost, transportation
cost, manufacturing cost and other various costs such as operating cost so that the cost can be
organized.
The regular energy prices for the cement companies have shown a surge from Rs.595/ton (of
cement production) in 2008-09 to Rs.675/ton in 2012-13 and this signifies a CAGR of 7.3%.
The prices have been amplified even though successful efforts by the companies to decrease
precise energy depletion in cement manufacturing sector. Subsequently, the average energy
price per ton has however shown a decrement from Rs.610 in 2008-09 to Rs.598 in 2012-13.
Various cost regulating steps such as the amplified dependence on imported coal puts a large
stress on the production of the cement through incarcerated powers and focuses on falling
power consumption has caused in this development. Cement prices have also seen a decrease
across various regions due to the lesser off take of the cement anddrastic risein its capacity.
This caused a fall in cement costs prices across the nation in a circulated and periodic manner.
The effect was more noticeable in regions close to the southern region such as central and
western region. For examples, the cities like Chennai, Hyderabad and Mumbai have seen
continuous decrease in cement prices during 2011-12. Stillin spite of energy competences,
energy costs have shown an increment during 2012-13, primarily because of substantial rise in
cost of coal and liquid fuel. Raw material prices have also shown an increment because of the
large increase in the royalty on the limestone from Rs.50 per ton to Rs.65 perton.

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Structure of Cost in Cement Companies:
The data of total price in different cement companies under study were reorganized and
categorized under the following headings:

 Raw material cost

The raw material that is consumed contains the amount spent on different varieties of raw
materials and elements consumed during manufacturing. It also contains the amount that is being
spent on octroi, carriage inwardsetc.
Cement is a mixture of lime stone, fly ash, furnace slag and met kaolin. Lime stone also plays
avital role in the manufacture of cement. Lime stone being a natural resource and is assigned to
be essential to assemble and accomplished.The price of raw material is effective by the cost of
limestone and that of the fly ash. The limestone assets help in governing the raw material cost.
The prerequisite of the raw materials being determined by the amount of the product mass-
produced and the product mix used by the plant.
The examination of material cost specified a cumulative trend but in percentage, to total cost, the
trend endured patchy. Based on the percentage to total cost ACC Ltd. and Ultra-Tech are the
topmost. India Cement Ltd. is the lowermost consumer of raw material amid the designated
cement companies. The disparities amid the actual figures and average figures imitate the same
situation as for the total cost figures. The inclination of maximum disparity in percent to the total
cost in ACC Ltd. ACC Ltd. was the major consumer of raw material throughout the study period.
The Jaypee Corporation Ltd. has the uppermost usual percentage of raw material consumption
viz. 25.23 percent the bottommost usual percentage of raw material ingestion of India Cements
Ltd. is 15.58%. From the overhead clarification, it is vibrant that cement companies are not
occupied to their specific production level, so that it is critical to recover the efficiency to devour
the maximum capability of plants.
The percentage of raw material spent to the total cost in designated cement companies for the
years from 2005-06 to 2011-12 have been planned. The percentage of raw material expended by
cement companies during the years of study told that the elements of material in overall cost have
shown an increment regularly. Nonetheless, Shree cement has been able to retain it significantly
lesser as paralleled to other companies.

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 Raw Material Consumed to Total Cost in Cement Companies

Year
Company 2005- 2007- 2008- 2009- 2010- 2011-
2006-2007
2006 2008 2009 2010 2011 2012
J.K.Cement 10.07 11.71 12.38 14.14 16.87 15.37 16.59
Madras Cement 14.55 15.32 15.16 16.9 16.43 18.4 17.01
Shree Cement 14.03 13.78 10.33 10.37 10.23 9.77 9.98
The India
11.68 12.21 11.88 11.83 13.73 13.61 15.25
Cement
Ultratech Cement 8.15 9.22 10.84 11.53 15.57 13.66 13.49
Source: International Journal of Commerce and ManagementResearch

 ManufacturingCosts

Manufacturing price is the collective total of the resources which are unswervingly used in the
procedure of making different products and goods. The price of goods manufactured sum is then
transported to the finished goods fiscal account through the period. The price of goods
manufactured programmed accounts for overall manufacturing cost for the period which was
dated to the work in movement and attuned these prices for the alteration in the work in
growthrecord account to compute the cost of goods which are manufactured.
The manufacturing expenditures covers all charge from the level of obtaining materials to the
finishing point of the finished products in the current study. Grinding,water laboratory, and
power cooling have been comprised in the manufacturing overheads. The manufacturing
costs institute the main share of manufacturing overheads to the total price of production in
the cement companies. The investigation of manufacturing prices specified an increasing
drift but in percentage, to total cost, the drift remained irregular. The real sum of
manufacturing outlays had enumerated an incessantly growing drift but the rode of the
hanger is magnitudes notices differing to it during the course of the study. It shows that the
items of manufacturing expenditures are of the aggregate nature and do alters with the
production.

 Salaries and wages

The sum paid to workers by way of wages, gratuities, salaries, bonus, and impact towards the
provident funds, gratuity funds and family annuity scheme, have been categorized as salaries and
wages in the current study. To examine the role of salaries and wages in the price arrangement, a
challenge has been made to compute its percentage to the total price. If the ratio is extraordinary
the cost-effectiveness will be truncated and vice- versa. It has chronicled disparity in both i.e.
over the year and amid the companies. Additionally, it had a continuously cumulative drift
except for the last year of the study in two companies i.e. Madras cement and Ultratech cement.

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 Salaries and wages to Total Cost in Cement Companies

Company Year

2005- 2006- 2007- 2008- 2009- 2010- 2011-

2006 2007 2008 2009 2010 2011 2012
J.K. Cement 4.56 4.54 5.63 5.98 6.56 5.67 5.71

Madras Cement 4.42 4.31 4.65 4.80 5.61 6.91 6.66

Shree Cement 5.12 4.87 3.60 4.38 5.01 5.21 5.51

The India Cement 4.99 5.14 7.14 6.34 6.93 6.68 8.53

Ultratech Cement 2.65 2.75 3.55 3.71 4.08 5.07 4.79

Source: International Journal of Commerce and Management Research

 Excise Duty

The excise duty charged at the period of production by the Government has been categorized as
excise duty. The excise duty is levied by the Central Government at the cradle of production.
This expenditure is called as a managed disbursement since this is outside the regulator of the
company and is determined bythe policies of the government. An increment in the excise duty
may tell the government’s motive to dampen the production in the industry whereas the cut in the
rates of excise duty is considered as an enticement for the industry. The role of excise duty in the
development of the total cost has been investigated by computing the percentage of excise duty
to the overall cost.

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 Excise Duty to Total Cost in Cement Companies

Company Year
2005- 2006- 2007- 2008- 2009- 2010- 2011-
2006 2007 2008 2009 2010 2011 2012
J.K. 18.75 16.54 17.99 15.52 11.79 11.87 11.81
Cement
Madras 17.51 17.94 19.48 16.44 12.45 0 0
Cement
Shree 0 0 16.21 16.10 12.07 11.18 11.70
Cement
The India 0 0 19.27 15.33 11.46 12.42 0
Cement
Ultratech 13.94 13.46 16.09 13.25 11.06 12.54 13.08
Cement
Source: International Journal of Commerce and Management Research

 Other Factory Overheads

The sum that is being spent onroyalties,inventory control, technical assistance, consumable
stores, rent,power and fuel, rates, repairs and reduction on factory building and all other expenses
linking the manufacturing procedures have been congregated as other factoryexpenses.

Other Factory Expenses to Total Cost in Cement Companies

Company Year
2005-2006 2006- 2007- 2008- 2009- 2010- 2011-2012
2007 2008 2009 2010 2011
J.K. Cement 40.02 39.38 34.23 36.74 32.91 37.77 4.73
Madras 28.2 27.87 28.42 30.67 29.41 39.32 37.80
Cement
Shree Cement 37.87 28.92 27.31 38.05 31.2 37.07 25.85
The India 49.98 48.11 28.78 33.32 31.74 30.6 34.6
Cement
Ultratech 42.13 39.93 38.07 41.59 36.07 35.53 47.52
Cement
Source: International Journal of Commerce and Management Research

 Office, Selling & Distribution Overheads:

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The outlays concerning the office and general management of companies like the director’s fees,
auditor’s payment, lawful outlays, rent, rates, taxes, and devaluation of office building and
apparatus have been assembled as office outflows. The amount expended during the course of
sales, growing the sales and distribution of goods sold has been named as selling and supply
payments.

Office & Selling Expenses to Total Cost in Cement Companies

Company Year
2005- 2006- 2007- 2008- 2009- 2010- 2011-2012
2006 2007 2008 2009 2010 2011
J.K. 18.12 22.07 23.87 21.64 25.73 23.38 53.63
Cement
Madras 29.09 29.08 26.77 25.18 28.09 25.46 28.66
Cement
Shree 21.17 16.08 17.22 21.14 21.46 17.76 31.71
Cement
The India 28.50 29.36 28.08 26.68 29.67 30.27 34.54
Cement
Ultratech 26.94 29.32 26.55 24.40 26.91 27.37 15.91
Cement
Source: International Journal of Commerce and Management Research

Table Showing Various Costs During 2008-09 to 2012-13(In Crores)

2008-09 2009-10 2010-11 2011-12 2012-13

Raw Material Cost 4391.44 5260.98 5491.38 6547.57 8445.22
Manufacturing Cost 2368.87 2770.93 4091.95 5914.23 9145.55
Power and Fuel Cost 3189.20 4790.71 5491.38 6547.57 6836.56
Administration Cost 3750.42 4163.49 4406.21 5218.82 6127.30
Selling & Distribution 4669.99 5079.42 5584.40 6539.21 8906.23
Cost
Other Miscellaneous Cost 455.47 696.13 685.96 1133.96 4413.56

Around 60% of the global cement market is resolute with the top 50 cement makers in the
world. Nonetheless, the amalgamation situation differentiates across the various countries and
is extremely hooked on the development of the market while, China which yields and devours
extra 50% of the world’s cement, is extremely disjointed as the business constantly establishes
healthy progresses proportions mature markets and the Europe that has been suffering inferior

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progress rates, display higher point of amalgamation. Since 2012-13, the cement industry has
been in woe from lethargic demand development, overfilling, and rise in input prices. The
demand growth in fiscal Year 2012-13 has been lethargic due to slower implementation of
substructure and housing schemes led by developed rainfall disturbingthe construction deeds,
political unpredictability in the southern region and conclusion of commonwealth games
correlated construction in the northern region. During April-September 2011-12, production
and dispatches grew 4.9% YOY and 5.37 YOY correspondingly as against 11.9% and 11.1% a
year ago.
Cement prices have also observed deterioration in regions due to inferior off-take of cement
and surge in volume. The deterioration in price is originally started in the southern region but
the effect was more protuberant in regions nearbythe southern region such as central region.

Suggest a solution to find and establish the scope for formulating strategies with
regard to cost structure for increasing profitability.

ANALYSIS
Five companies which are having substantial production capacity were there in the case for
ensuring equal geographical representation. A Period of seven years, i.e. 2005-06 to 2011-12 was
taken to analyze the cost structure and variations therein. ‘F’ test was applied to test the
following null hypotheses:
H0: The share of different components of cost incement manufacturing companies does not vary
substantially over the studyperiod.
H1: The share of different components of cost incement manufacturing companies does not vary
substantially across thecompanies.

The table value of ‘F’ at V1=6 and V2=25 is 2.51 and table value of ‘F’at V1=4 and V2=24 is
2.78.The computed value of ‘F’using two-way Anova was compared with its table value to test
the hypotheses and derive conclusion in this regard.
In the present case, the total cost has been taken equal to 100 every year and the ratio of every
item of total cost has been calculated. Finally, an attempt has been made to study the trend of
percentage of these individual items to draw conclusions about the direction and extent of
change in these items over the years.
Calculation:
Variance analysis between the years for raw material consumed.
Degrees of freedom is C-1=6 and n-C=25
Hence SSA(Sum of squares among groups)= 42.23923
SSW( Sum of squares within groups)=192.2417
Hence, MSA(Mean square within groups)= SSA/C-1= 7.04
MSW(Mean squares within groups)= SSW/n-C = 7.689
Hence, F stat= 0.87 and table value of F=2.78.
Therefore we have sufficient evidence to not reject null hypothesis.

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 JK Cement 10.07 11.71 12.38 14.14 16.87 15.37 16.59
Madras cement 14.55 15.32 15.16 16.9 16.43 18.4 17.01
Shree cement 14.03 13.78 10.33 10.37 10.23 9.77 9.98
The India 11.68 12.21 11.88 11.83 13.73 13.61 15.25
cement
Ultratech 8.15 9.22 10.84 11.53 15.57 13.66 13.49
cement
Average 11.696 12.448 12.118 12.954 14.566 14.162 14.464

The variance across the years and across the companies was computed for the remaining
parameters. The computed value of ‘F’ using two-way Anova has been compared with its
table value.
Variance Analysis of Cost Structure in Selected Cement Companies in India

Cost Component Variation Between Variation Between the

the Years Companies
(Value of ‘F’) (Value of ‘F’)
Raw Material Consumed 0.87 7.36
Salaries and Wages 0.89 7.41
Excise Duty 0.93 7.84
Other Factory Overheads 0.79 7.26
Administrative & Selling 0.85 7.37
Overheads

CONCLUSION:
The computed value of F for the different components of costs over the years, which is lesser
than the table value of 2.51 at the respective degree of freedom.Thus,the first hypothesis that
the share of different components of cost in cement manufacturing companies does not vary
substantially over a period of study stands accepted and the variations in share of cost
components in overall cost structure of the companies can be considered insignificant.
The findings and results of hypotheses testing concludes that the components of the total cost,
i.e., raw material consumed, salary and wages, excise duty, other factory overheads and office &
selling overheads were stable across the years in all the cement companies. On the other
hand,wide variation is evident from various analysis of the same components across the
companies. This reveals wider difference among the policies of different companies and
generalizes that the cost structure of the companies varies to greater extent. This establishes the
scope for formulating strategies about cost structure for increasing profitability.