Costing and budgeting at Kohinoor Chemicals

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KOHINOOR CHEMICALS CO. LTD. (Tibet Beauty Soap)

Kohinoor Chemicals was established in 1956 and became a pioneer in producing high quality beauty products in Bangladesh. They introduced fully automated machineries and state-of-the-art raw materials from the world’s best known suppliers. Kohinoor Chemicals has built a high standard in manufacturing best quality cosmetics, toiletries, soap, perfume etc. Tibet is the brand name and the goodwill of Kohinoor Chemicals since 1993 when it was acquired by Orion Group. Now Tibet is the corporate brand logo of Kohinoor Chemicals and in some market sectors, it has risen as market leader.

Different types of Costs within Kohinoor Chemicals:

  1. Labor cost
  2. Raw materials
  3. Administration Expense
  4. Selling and distribution expense
  5. Machinery maintenance
  6. Electricity
  7. Water
  8. Cleaning
  9. Gas
  10. Warehouse expense
  11. Worker wages
  12. Manager salary
  13. Telephone bill
  14. Carrying expense
  15. Utilities of factory
  16. Computer Accessories
  17. Fuel for motor vehicle
  18. Newspaper, books, periodicals
  19. Packaging Materials
  20. Office maintenance
  21. Entertainment
  22. Quality testing materials
  23. Festivals bonus
  24. Stationary expense
  25. Miscellaneous expenses
  26. Consultancy fees
  27. Depreciation
  28. Internet bill
  29. Overtime
  30. Promotional Expense
  31. Mobile phone bills of directors
  32. BSTI certification
  33. Bank charges
  34. Bank Interest

Daily Cost Routine:

Daily Unit=6000

Sunday

TK

Monday

TK

Tuesday

TK

Wednesday

TK

Thursday

TK

Friday

TK

Saturday

TK

Raw materials

43500

43500

43500

43500

43500

43500

43500

Direct labor

100,800

100,800

100,800

100,800

100,800

100,800

100,800

Packing materials

5820

5820

5820

5820

5820

5820

5820

Variable factory overhead

2280

2280

2280

2280

2280

2280

2280

Fixed factory overhead

2760

2760

2760

2760

2760

2760

2760

Variable admin and selling overhead

6060

6060

6060

6060

6060

6060

6060

Fixed admin and selling overhead

17640

17640

17640

17640

17640

17640

17640

TOTAL

178,860

178,860

178,860

178,860

178,860

178,860

178,860

Raw material= 7.25×6000= 43500

Direct labor= 504 X TK 200= 100,800

Packing materials=0.97×6000= 5820

Variable factory overhead=0.38×6000= 2280

Fixed factory overhead=0.46×6000= 2760

Variable admin and selling overhead=1.01×6000= 6060

Fixed admin and selling overhead=2.94×6000= 17640

Weekly cost routine:

Week 1

TK

Week 2

TK

Week 3

TK

Week 4

TK

Raw materials

304,500

304,500

304,500

304,500

Direct labor

705,600

705,600

705,600

705,600

Packing materials

40,740

40,740

40,740

40,740

Variable factory overhead

15,960

15,960

15,960

15,960

Fixed factory overhead

19,320

19,320

19,320

19,320

Variable admin and selling overhead

42,420

42,420

42,420

42,420

Fixed admin and selling overhead

123,480

123,480

123,480

123,480

Total

1,252,020

1,252,020

1,252,020

1,252,020

Monthly Cost Routine:

Month 1

TK

Month 2

TK

Raw materials

1,218,000

1,344,000

Direct labor

2,822,400

3,951,360

Packing materials

162,960

162,960

Variable factory overhead

63840

63840

Fixed factory overhead

77,280

77,280

Variable admin and selling overhead

169,680

169,680

Fixed admin and selling overhead

493,920

493,920

Total

5,008,080

6,268,080

Month 2

Raw Materials = TK 8 X 6000 X 7 X4

= TK 1,344,000

Direct Labor = TK 280 X 504 X 4 X 7

=TK 3,951,360

In the above table, Month 1 & Month 2 illustrates two different orders of 150,000 units to be produced with in 1 month of time. The price of raw materials can sometimes rise either due to change in prices in market or change in supplier.

For example,

In Month 1 the raw materials cost TK 7.25. For second order, Kohinoor might go for a different supplier who supplies better raw materials costing TK 8. In this case the price of raw materials will differ from previous order.

There might be changes in minimum wage rate. The government might increase the minimum daily wage rate by TK 80. Therefore the wage rate will increase.

Different Costing Methods:

Job Costing:

Job costing is suitable where work is undertaken to customer’s special requirement and each order is comparatively of short duration.

Advantages:

  • Firm can produce unique or “one off” orders according to customer’s needs.
  • Workers are more likely to be motivated.
  • The organization of job production is fairly simple.

Disadvantages:

  • Labor cost will be high because production tends to be labor intensive.
  • Lead times can be lengthy.
  • Selling can also be high.
  • Ones the demand for a firm’s product rises, job production may become costly.

Example: Real estates, Auditing Firms, Custom designed vehicles, aircrafts, hospitals, etc.

Batch Costing:

The work on any product is divided into parts and each part is completed throughout the whole batch before the next operation is undertaken. There is concentration of labor skill. Capital investment is low due to high plant utilization.

Advantages:

  • It may minimize true capital expenditure.
  • Employees can focus on one task rather than the whole task.
  • Less variety of machineries required.

Disadvantages:

  • Proper planning required.
  • Workforce can be less motivated.

Process Costing:

Process cost accounting could be a term employed in accountancy to explain one technique for collection and assignment producing prices to the units made. Process price is employed once nearly identical units are mass made. It is a more efficient for companies for producing identical products.

Reasons:

  • Easy to use.
  • Products are produced in large quantities.
  • A huge number of products are produced in a given period.
  • Managers have got to maintain cost control over producing method.

Contract Costing:

Contract costing is similar to job costing. Contract costing is quotations for long term projects which will be carried out for a long period of time.

Example: Real estate, ship builders, etc.

Kohinoor Chemicals produce Tibbet Soap following batch costing, process costing and contract costing. They start producing soap, batch wise, after receiving an order. After the order is received, the production manager divides the work into different steps within the workers according to their respective field of work. The work is divided among the workers respective to their skills. This makes the process easier and less time consuming. They finish the work within the given amount of time.

Measurement of Productivity:

Measurement of productivity is very important for a business to improve control of the business so that manager can evaluate the strengths and weaknesses with n the business. Efficiency of productivity can be compared with competitors. It is also important for negotiations while discussing wages.

Measuring labor productivity can be found by dividing the output over a certain period by the number of workers employed.

Single factor:

Labor Productivity:

=

= 297.6

The calculation above shows that each worker produces an average of 297 soaps per order. This ratio can be improved in many ways. Either reducing the number of employees or labor shifting can be improved, or by training the workers to increase their efficiency or motivating the labor to boost up their confidence or offering bonus etc.

Example:

If unskilled workers are cut down keeping the most skilled workers, the efficiency can be improved.

Labor Productivity=

=

= 333.3

We can see that if unskilled labor are cut down, the skilled workers increase the labor productivity.

Multi-factor Productivity: =

=

= 0.037

If raw materials are bought from a cheap supplier yet maintain Kohinoor’s standards, the productivity will increase.

Multi-factor Productivity: =

=

= 0.042

Therefore, as the labor is cut down as well as the raw materials are bought from a cheap supplier, the Multi-factor Productivity is increased.

Quality Control:

Quality controlmay be amethodbythatentities reviewthe standardof all factorsconcernedin production. Tibet emphasis on the following aspects:

  • Physical Appearance: Tibet soap has an appealing appearance that people admires.
  • Special Features: The soap is made of 100% Vegetable Fat.
  • Brand Image: Tibet soap have a good reputation among its customers as the soap has
  • been giving good service.
  • Reputation: Kohinoor Chemicals is widely known for its array of high quality beauty

products.

  • Design: The packing design is very appealing to people.

Traditional Quality Control:

Manufacturing and production departments have been responsible for ensuring quality.

  • Satisfying Customer Needs
  • Work under condition they were likely to face
  • Operate in the way they should
  • Could be produced cost effectively

Quality Assurance:

Total Quality Management:

Quality means delighting the customer by fully meeting their needs and expectations. TQM is widely used in Japanese companies which is now adopted by many international companies. Quality assurance is a commitment by a business to maintain the quality of the production. Quality assurance involves customer demands while planning the production. To make sure every product meets the customers demand, TQM is necessary.

Features of TQM:

Quality Chain: TQM focuses on the importance of the link between customers and suppliers. This is referred as quality chains. The link is often broken at any time by one person if one piece of specification is not meeting the necessities of the customer. Failure to fulfill the necessities in any part of a high quality chain results in more failure and more problems.

Company Policy, accountability and empowerment: For maintaining quality throughout the full production process, commitment is most important. If one is not committed towards his/her work it is likely to effect the others. Therefore to ensure this does not happen, TQM’s aim is to make everyone accountable for their respective job. Lack of commitment causes problems. TQM has to start from the top management and then spread out to every employee in the business.

Teamwork: A team of TQM is the most effective way of solving a problem. This is because it involves a greater range of skills, array of ideas, a wide range of problems can be solved, it motivates moral of employees, problems across different departmentisdealtin an exceedinglyhighermanner. TQM strongly prefers teamwork through the business. It helps the employees to build trust and a better communication. Such qualities can improve monitoring and upgrade quality standard.

Consumer Views: A customer’s expectation is very important for making a product successful. TQM must be responsive to customer’s expectations. To do this, proper surveys must be carried out frequently and there also must be proper communication channels for customers to express their views.

Zero Defects: It is a management tool aimed to reduce defects in a product through prevention before it reaches to its customers. Products that are classified as zero defects are like to gain good reputation in consumer market.

Quality Circles: A quality circleis amanagement technique that enliststhe help of employeesinresolving issues associated withtheir own jobs. Circlesaremadeofworkersoperatingtogether who meet to discussissuesrelating to quality andplansolutions forimprovements. Quality circles are small group of employees lead by a supervisor or a senioremployee.Workerswho participate in quality circles,receivecoachingin formal problem solvingstrategiesandareinspiredto usethesestrategiesto specific or general companyissues. After the completion of analysis, they present their findings and solutions to the management.

BSTI Standards:

Bangladesh Standards and Testing Institution (BSTI), the only National Standards body of Bangladesh which is playing an important role in developing and promoting industrial Standardization. The Government of Bangladesh has established the Bangladesh Standards and Testing Institution (BSTI) with the merger of Bangladesh Standards Institution and the Central Testing Laboratories in 1985 through promulgating. BSTI has the responsibility of formulation of national Standards of Industrial food and chemical products. They are responsible for the quality control of the products which are ensured as per specific national standards made by the technical committee formed by BSTI.

BSTI certification can help organizations to:

  • Become cost efficient
  • Consistency
  • Improvements in quality of the products.
  • Defining roles and responsibilities

Costs of ensuring quality:

Monitoring quality with in the business is essential for development. Every company should set up quality control management for improving the quality of their products and services.

It takes time to set up the quality control management. Setting up the quality control management, the company can face different types of costs such as:

  • Time Cost
  • Cost to train staff to use it
  • Cost of setting up the system
  • Cost of time for employees to blend in the system
  • Cost of monitoring system
  • Cost if the product do not reach its expectation
  • Faulty goods
  • Cost setting the full system again if by any chance the system falls
  • Cost for training employees for TQM

http://www.bsti.gov.bd/index.html

http://www.orion-group.net/kohinoor_co.php

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