Cost Analysis - Fast Moving Consumer Durables Industry: Group 8

NOVEMBER 2, 2018
GROUP 8
COST ANALYSIS - FAST MOVING

CONSUMER DURABLES
INDUSTRY
PGDM 09- Section B
SAP ID Name Roll No.
80203180091 Khushboo Jain B023
80203180068 Meenal Gawande B031
80203180022 Prabhneet Bawa B042
80203180219 Rohit Zope B046
80203180215 Sanjana Wanmali B048
80203180138 Shruti Mishra B053
80203180133 Vinay Mehta B068
Fast Moving Consumer Durable Industry October, 2018
COST ANALYSIS REPORT

Consumer Durables Industry is an extremely competitive industry. All geared up and conquering
the 5th largest position in the consumer durables market, India is growing at the average rate of
15% per year. India undoubtedly is one of the largest growing electronics market in the World
and ranks 3rd largest when it comes exclusive to the TV Industry.
The companies included as a part of this analysis are : Whirl Pool, Symphony, Bajaj Electricals,
Blue Star, Voltas and BPL India.
I[A] COST STRUCTURE ANALYSIS

Major Cost Elements(attached in annexure)) : The major cost elements identified for the
industries are majorly are – Cost of Material Consumed, Salaries (wages and bonuses) , Traded
goods( as inventories at the end and beginning of the year) ,Freight and forwarding charges on
an overall basis. The costs are listed such that they comprise of (70-80)% of the total cost
 Cost of raw material consumed comprises of the highest percentage of cost in industries
like BlueStar, WhirlPool and Voltas . This cost is incurred on raw materials like steel ,
copper, plastic and other inputs, which mainly comprises of unfinished goods.
 However, through the data [Annexure], we can see that Symphony has a very less
percentage contribution cost of raw materials and a higher cost is incurred on ‘Purchase
of Stock in Trade’. This mainly refers to all the purchases of finished goods that the
company buys towards conducting its business. This indicates that symphony is more into
assembly production rather than actual manufacturing of raw materials.
 Salaries, wages and bonuses includes expense incurred in terms of the salaries paid,
contribution towards provident funds, and other employee welfare expenses.
 Salaries and wages is a major expense while the expense spent on depreciation for all the
companies is very less as compared to the salary expense, it can be concluded that the
industry is a labor oriented industry and not driven much by advanced machineries and
technology. The cost of equipment’s and machineries allocated per year is less as
compared to the cost allocated for salaries, wages and bonuses.
 Depreciation is one of the major 5 cost factors in Whirlpool industry, which depends on
the equipment used , the cost allocated per year for that particular equipment used in
that particular project. If the machine is used for more than one activities, then cost
allocation varies.
 Changes in inventory at the beginning and at the end of the year also forms one of the
major cost factors of the industry. The difference between the inventories present in the
expense sheet (i.e. Inventory at the beginning – Inventory at the end) if negative ,
1
indicates that the company produced more products than it managed to sell. The
estimated sales targets were not achieved by the company. The companies Whirlpool,
Bluestar and Voltas show such trend at some instances.
 Freight in charges incurres by Whirlpool and symphony comprising of 4-5 % are the costs
expensed in organizing shipments to several point of sales.
 Legal & Professional fees is one of the major cost incurred by BPL. However the annual
report throws less light on this expense category, this costs are with regards to defending
any disputes in the court of law, arbitration issues etc.
 AMC subcontracting cost incurred by Bluestar relates to the Annual Maintenance
contract, which is given to another company by Bluestar for maintenance and repairs of
inventories or as a part of services provided to customers.
I[B] COST CENTRE & COST UNITS

Sr No. Centre Cost Unit
1 Appliances Number of appliances of
company
2 Model Number of models of an
appliance company produces
3 Office Space Rent and facilities maintenance No. of workers in each unit,
Sq ft. occupied by each unit
4 Supplies and traded Stocks No. of stocks traded by
company
5 Production No. of units produced per day
6 Maintenance No. of Equipment requiring
service
7 Shared Marketing Materials and advertising Materials ordered by
cost program/total materials
Advertisements produced for
each program
2
II] COST DRIVERS
 Cost Drivers of the Industry

Short Term Cost Drivers affecting Revenues and Expenses
1] Gross profits are affected by economic trends in the short runs. Utilization of Industrial and
commercial facilities influence the sales volume. In times of recession or depression in the
economy the sales volume get affected adversely because of low buying power of customers.
2] Raw Material Costs : As most of the raw materials in the FMCD industry are mostly imported,
the currency fluctuation causes the raw material costs to vary. The currency risk is one of the
major cost drivers of the industry.
3]Salaries & Expenses: Cost per program varies with time required of the staff member (if
possible to allocate by program), otherwise, size of the program/ activity.
4]Depreciation: Varies with the use of equipment for a particular program.
Medium-long Term Cost Drivers affecting Revenues and Expenses
1] Government Policies & Regulations : The government has increased liberalization which has
favored foreign direct investments (FDI). Also policies such as National Electronics Mission and
digitization of television and setting up of Electronic Hardware Technology Parks(EHTPs) is
expected to create growth in this sector.
2] Disruptive technologies and concept of sustainability is changing the way of design of

Consumer Durable products. Most of the times it also requires restructuring the processes and
implementation of MIS [Informational Systems], thus contributing to costs for the industry.
3] Long term trends such as population movements and industrial development, the company’s
service area development have the potential of influencing medium to long term earnings.
3
 Cost Drivers for major Cost elements of the industry
Cost Drivers of Major costs

Cost of Raw Materials Depends on the quantity used in manufacturing and the global price fluctuations
Project Cost Depends as per the type and size of the project
Purchase of Stock in Trade Depends if the company is into assembly production or manufacturing production
Depends on hours spent by the staff member on each program / total hours
worked by the staff member (if identifiable)
Salaries,wages and Bonuses
Depends on Amount of equipment ordered by program / total equipment.
Depreciation Hours that the equipment is used by each program / total hours used.
III] OPERATING LEVERAGE CALCULATION

 For the Companies
DOL* - Degree of Operating leverage
The above table, shows Degree of Operating leverage calculated for the companies. It helps to
understand and evaluate how a company’s operating income changes with respect to a
percentage change in sales. A company’s operating leverage however involves fixed and variable
costs.
4
Company with a high degree of operating leverage has high fixed costs relative to the variable
costs. If the degree of operating leverage is high , the EBIT (earnings before interest and taxes)
experiences volatility with percentage change in sales.
 For the industry ( taking aggregate of selected companies)
The operating leverage for the Consumer durable industry, taking into account the six industries
is shown in the calculation below
IV] AUDIT REQUIREMENT OF THE INDUSTRY
In the case of unregulated category, the Ministry has named 33

“industry/sector/product/service”. The newly introduced ones include coffee and tea; milk
powder; plastics and polymers; glass; textiles; electrical or electronic machinery.
As per the amended rules, entities falling under the unregulated category and having minimum
annual turnover of Rs 100 crore would need to carry out cost audits. Other criteria would be that
aggregate turnover of the individual products or services where cost records are to be maintained
is at least Rs 35 crore.
Since the FMCD sector falls under the unregulated category (electrical or electronic machinery),
it needs to comply to these norms as well.
In the case of the industry, each selected company have an annual turnover of more than 100 cr.
Hence, it is mandatory for the FMCD industry to maintain cost audits as well as cost records.
5
[V] COST LEADER AMONGST THE INDUSTRY
In the case of the chosen companies in the FMCD industry, the Operating Income for the FY 2017
are as given below:
Voltas has the highest Operating Income of Rs. 651.02 crores, however operating margin
(Operating Income/Sales) is much lower as compared to BPL and Symphony. [ANNEXURE II]
 The income statement of the last 5 years however shows that BPL has been performing
under losses for 3 years(Profits for the period) and shows hike in Operating Income in
2017.
 However Symphony is showing an increasing trend in its profit for the period throughout
the period (2013-17), with consistent Operating Margin.
Thus ,Symphony stands as the cost leader of FMCD Industry (within the selected Industries)
6
ANNEXURE I
WHIRL POOL
SYMPHONY
BAJAJ ELECTRICALS
BLUE STAR
7
VOLTAS
BPL INDIA
ANNEXURE II
BPL INDIA INCOME STATEMENT (in Crs.)
8
SYMPHONY INCOME STATEMENT (in Crs.)

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NOVEMBER 2, 2018

COST ANALYSIS - FAST MOVING

COST ANALYSIS REPORT

I[A] COST STRUCTURE ANALYSIS

I[B] COST CENTRE & COST UNITS

II] COST DRIVERS

 Cost Drivers of the Industry

4]Depreciation: Varies with the use of equipment for a particular program.

Medium-long Term Cost Drivers affecting Revenues and Expenses

2] Disruptive technologies and concept of sustainability is changing the way of design of

 Cost Drivers for major Cost elements of the industry

Cost Drivers of Major costs

III] OPERATING LEVERAGE CALCULATION

DOL* - Degree of Operating leverage

 For the industry ( taking aggregate of selected companies)

IV] AUDIT REQUIREMENT OF THE INDUSTRY

In the case of unregulated category, the Ministry has named 33

[V] COST LEADER AMONGST THE INDUSTRY

SYMPHONY INCOME STATEMENT (in Crs.)

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