Question

Select a manufacturing company and become familiar with its products. Describe the company, its products, and the specific manufacturing costs it incurs. Categorize each cost into the three manufacturing cost categories and state if the costs are variable, fixed, or mixed. Explain how you came to your conclusions.

Answer 1

We can take the example of Cement Manufacturing Company.

-Types of Products of Cement Industry: Cement is one of the basic materials in construction. Cement is classified into various categories based on its composition and specific end uses. Cement is classified as either portland, blended, or specialty cement.

1. Portland cement

Portland cement is the most common type of cement. It’s a basic ingredient of concrete. Portland cement is a mixture of limestone and clay. It’s ground and burnt at a very high temperature to form clinker. The clinker is ground into a fine powder. There are different types of portland cement. Each kind of portland cement has a different chemical composition. However, the manufacturing process is the same for each kind of portland cement.

2. Blended cement

In order to produce blended cement, certain natural or man-made compounds such as sandstone are mixed with portland cement and ground together. Blended cement is more suitable for certain applications compared to portland cement. This cement is used for large concrete works such as dams.

3. Specialty cement

Specialty cement has several unique properties. It’s used in specific applications like urgent repairs and super high strength applications.

-Now, we will get to know about the three manufacturing cost categories: Manufacturing cost is the sum of costs of all resources consumed in the process of making a product. The manufacturing cost is classified into three categories: direct materials cost, direct labor cost and manufacturing overhead.

1. Direct materials cost: Direct materials are the raw materials that become a part of the finished product. Manufacturing process adds the value to the raw materials by doing various operations to maintain a deliverable product. There are many operations that can be applied to raw materials such as welding, mixing, pouring, cutting and painting, threading.

2. Direct labor cost: The direct labour cost is the cost of workers (Skilled, Semi-Skilled, Unskilled) who can be easily identified with the unit of production.

3. Manufacturing overhead: Manufacturing overhead is any manufacturing cost that is neither direct materials cost or direct labor cost. Manufacturing overhead includes all charges that provide support to manufacturing of the finished product from the raw material.

-Specific manufacturing costs that cement companies incurs to produce cements are as follows:

1. Power and fuel Cost(Manufacturing Overhead):

The cement industry relies on power and its fuel. Power and fuel costs account for approx 25-30% of the price of cement when it’s sold. As a result, power and fuel have a major impact on the company’s operating expenditure.Different varieties of fuel—diesel, coal and lignite—are used in the process. Cement plants require different amounts of power based on the heat treatment process that’s being used. This cost will be categorized as Mixed Cost i.e. Semi variable since this cost depends on the production of cement also some of the power and fuel cost will be fixed irrespective of the production.

2. Limestone and Raw material Cost (Direct Material):

The second major component in the production of cement is the cost of raw materials. The most primary raw material that’s used is limestone. Raw materials account for around 40% of the cost of sales. Cement plants are generally located near limestone reserves because limestone can’t be transported to long distances. Apart from limestone, other raw materials used in the cement industry are fly ash gypsum etc. This cost will be categorized as Variable Cost since this cost depends on the volume production of cement.

3. Transportation cost (Manufacturing Overhead):

In the cement sector, the manufacturing facilities and end-user markets are considerable distances from each other. Cement plants are located near limestone reserves. As a result, cement has to travel a considerable distance to reach the end-users. Since cement is a low-value, high-volume commodity, transporting it to the end-user accounts for a significant portion of the cost for cement manufacturers—it constitutes almost 10% of the cost of sales. This cost will be categorized as Variable Cost since this cost depends on the volume production of cement and these expenses will rise and fall with the efforts you make to increase sales.

4. Salaries and Wages(Direct Labour): Piece rate wages earned, Incentive wages earned, Overtime wages earned; (d) Earnings of casual labour etc. are the expenses of the company towards labour. This cost will be categorized as Variable Cost since this cost depends on the volume production of cement.

Note: Since the question is widely subjective,The answer is solely based on the prudence and knowledge and has been solved accordingly.