COST ANALYSIS REPORT Grasim Industries Limited | Management Accounting – CIA 2 | Submitted By S. Hari Prasath 1220716 Section V --------------------------------------------------- Submitted To Latha Ramesh Assistant Professor-Finance Christ University Institute of Management |

Introduction
Grasim Industries Limited, a flagship company of the Aditya Birla Group, ranks among India's largest private sector companies, with a consolidated net revenue of Rs.216 billion and consolidated net profit Rs.22.8 billion (FY 2011). Starting as a textiles manufacturer in 1948, today Grasim's businesses comprise viscose staple fibre (VSF), cement, chemicals and textiles. Its core businesses are VSF and cement, which contribute to over 90 per cent of its revenues and operating profits. The market capitalization is INR 92 Crores.
The Aditya Birla Group is the world’s largest producer of VSF, commanding a 21 per cent global market share. Grasim, with an aggregate capacity of 333,975 tpa has a global market share of 10 per cent. It is also the second largest producer of caustic soda (which is used in the production of VSF) in India.
In cement, Grasim through its subsidiary UltraTech Cement Limited ("UltraTech") has a capacity of 52 million tpa and is a leading player in India. In July 2004, Grasim acquired a majority stake and management control in UltraTech. One of the largest of its kind in the cement sector, this acquisition catapulted the Aditya Birla Group to the top of the league in India.
Grasim has a strong presence in fabrics and synthetic yarns through its subsidiary, Grasim Bhiwani Textiles Limited (GBTL), and is well known for its branded suitings, Grasim and Graviera, mainly in the polyester - cellulosic branded menswear.
Grasim caters to international fashion houses in the USA and UK supplying fabric to them for manufacturing of garments, which are available in some of the largest retail chain stores. Table 1. Product Mix Product | Installed capacity | | | Viscose staple fibre | 333,975 tpa | VSF, joint venture — Birla Jingwei Fibres Company Ltd. | 70,000 tpa | Grey cement (through its subsidiary, UltraTech) | 52 million tpa | White cement (through its subsidiary, UltraTech) | 560,000 tpa | Ready-mix concrete plants (through its subsidiary, UltraTech) | 79 plants | Chemicals (Caustic Soda) | 258,000 tpa | Textiles (Yarn) | 8832 spindles | Textiles (through its subsidiary, Grasim Bhiwani Textiles Ltd.) (Fabric) | 148 looms | Textiles (through its subsidiary, Grasim Bhiwani Textiles Ltd.) (Yarn) | 35,808 spindles | Rayon grade pulp | | Harihar, Karnataka | 70,000 tpa | AV Cell Inc. (Joint venture) | 122,500 tpa | AV Nackawic Inc. (Joint venture) | 189,000 tpa | Domsjö Fabriker (Associate) | 210,000 tpa |

Cost Analysis

Table 2. Cost structure as percentage of total cost Type of Cost | FY12 | FY11 | FY10 | FY09 | Raw Material Cost | 27.17 | 27.15 | 25.58 | 28.23 | Employee Benefit Expenses | 6.97 | 7.43 | 7.49 | 6.80 | Power and Fuel | 27.65 | 26.33 | 24.86 | 26.80 | Freight and Handling Expenses | 19.68 | 20.93 | 19.40 | 16.74 | Manufacturing Expenses | 8.49 | 8.89 | 9.67 | 9.12 | Administration, Selling and Distribution Expenses | 9.14 | 9.3 | 12.16 | 12.07 |

Table 3 . Components of Manufacturing Expenses Manufacturing Expenses | Components of Expense | FY12 | FY11 | FY10 | FY09 | Consumption of Stores, Spare Parts and Components and Incidental Expenses | 708.18 | 688.72 | 650.24 | 563.46 | Consumption of Packing Materials | 604.57 | 459.11 | 415.17 | 394.12 | Processing Charges | 37.4 | 43.6 | 47.61 | 95.36 | Repairs to Buildings | 52.27 | 49.74 | 49.98 | 31.61 | Repairs to Machinery | 274.81 | 232.81 | 207.04 | 194.16 | Total | 1677.23 | 1473.98 | 1370.04 | 1278.71 |

Table 4 . Components of Administration, Selling and Distribution Cost Administration, Selling and Distribution Expenses | Components of Expense | FY12 | FY11 | FY10 | FY09 | Advertisement and Sales Promotion | 532.67 | 434.47 | 419.49 | 363.38 | Insurance | 39.21 | 30.74 | 26.43 | 24.72 | Rent (Including Lease Rent) | 90.23 | 73.32 | 50.44 | 47.38 | Rates and Taxes | 117.05 | 109.39 | 120.62 | 96.66 | Research Contribution and Expenses | 12.23 | 8.58 | 4.93 | 5.88 | Donations | 15.61 | 16.08 | 34.2 | 25.92 | Directors’ Fees | 0.27 | 0.23 | 0.52 | 0.67 | Directors’ Commission | 36 | 36 | 15 | 12 | Miscellaneous Expenses | 961.62 | 833.24 | 1051.39 | 1115.04 | Total | 1804.89 | 1542.05 | 1723.02 | 1691.65 |

Figure 1 Raw material cost as percentage of Total Cost

Figure 2 . Employee Benefit Expenses as percentage of Total Cost

Figure 3 . Power and Fuel as percentage of Total Cost

Figure 4 . Freight and Handling Expenses as percentage of Total Cost

Figure 5 . Manufacturing Cost as percentage of Total cost

Figure 6 . Administration,Sellning and Distribution cost as percentage of total cost

Input costs increased sharply. Pulp cost up 35%, Sulphur cost up 119%, Energy cost up 17%. The major concern is the rise in energy costs which adds pressure to the profit margin. Weak rupee has added to the increase in raw material costs.

Management’s Initiative to Control Cost
The continued availability of natural resource for current needs and future growth requirements is a key risk. In the VSF business, a high level of backward integration in pulp and caustic mitigates the risk of non-availability of input material for existing capacity. For the expansion projects, securing pulp supplies is a thrust area. In this regard, the acquisition of stake in Domsjo will help. Caustic soda capacity of 183,000 tons is being set up to meet its captive need.
On the energy front, indigenous coal availability continues to be insufficient to meet the current and growing demand in the country. Cement business operations are dependent on the continuous availability of quality coal at economical prices. Towards this objective, entering into long-term contracts, securing coal blocks and linkages are top priority.
The Company is also making efforts to increase the use of alternative fuels in its operations. Cement business has sufficient limestone reserves at its existing facilities. It is on the continuous look out for sourcing of additional limestone reserves for enhancing the existing plant life as well as for future expansion. Acquisition of land for expansion programme is a key challenge, both in terms of time and cost.

Mandatory Cost Audit Report
The Ministry of Corporate Affairs has issued two circulars in May 2011 making cost audit mandatory for some selected industries. All listed companies and companies with turnover exceeding Rs 100 Crores, operating in any of the following industries will be covered under mandatory cost audit effective from April 1, 2011 * Cement, * Tyres and Tubes, * Steel Plant, * Steel Tubes and Pipes * Paper * Insecticides.
Hence it is mandatory for the cement and pulp division of Grasim Industries to submit their Cost Audit Reports to the Registrar of Companies and SEBI. The cost audit reports are not available for the public.
Cost Audit Policies Followed
Inventories are valued at the lower of cost and net realisable value. The cost is computed on weighted average basis. In case of sale of raw material/stores the proceeds are credited to their respective heads. Cost of finished goods and process stock include cost of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. In the absence of cost, waste/scrap is valued at estimated net realisable value. Obsolete, defective, slow moving and/or unserviceable inventories, if any, are duly provided for.
Short-term employee benefits and contribution to defined contribution plans are recognised as an expense on accrual at the undiscounted amount in the Statement of Profit and Loss. The Provident Fund contribution as specified under the law is paid to the Provident Fund set up as an irrevocable trust by the Company or to the Regional Provident Fund Commissioner. The Company is liable for any shortfall in the Fund assets based on the Government specified minimum rates of return. Such shortfall, if any, is recognised in the Statement of Profit and Loss. Long-term employee benefits including deferred post-employment benefits are recognised as an expense, at the present value of the amounts payable determined using actuarial valuation techniques. Actuarial gains and losses in respect of post-employment and other long-term benefits are charged to the Statement of Profit and Loss. Gratuity is funded with an approved fund. Possible Cost Centres Since the Grasim industries as a whole is considered the various cost centres can be the different units dealing with different products. 1. Viscose Staple Units 2. Cement Units 3. Chemical Units 4. Textile Unit VSF Units The units at different geographical locations can in turn be different cost centres. 1. Harihar 2. Nagda 3. Karach The Research and Development Centres at various places also be cost centres 1. Grasim Forest Research Institute, Harihar 2. Birla Research Institute for Applied Sciences (BRI), Nagda 3. Textile Research Application Development Centre (TRADC) at Kharach The Different departments can also be treated as cost centres. * Steeping Process * Recovery Department * CS2 Plant * H2SO4 Plant * Captive Power Plant * Baling Department * Quality Department * Non-destructive Testing Department

Cement Units The geographic location of different Cement manufacturing units can be cost centres. Table 5 Cement units - location Location of units | | UltraTech
Grey cement:
Composite plants:
Jawad (Madhya Pradesh), Rawan (Chhattisgarh), Shambhupura (Rajasthan), Malkhed (Karnataka), Reddipalayam (Tamil Nadu), Kotputli (Rajasthan), Tadipatri (Andhra Pradesh), Hirmi (Chhattisgarh), Jafrabad (Gujarat), Kovaya (Gujarat), Awarpur (Maharashtra)
Grinding units:
Bhatinda (Punjab), Hotgi (Maharashtra), Panipat (Haryana), Aligarh (Uttar Pradesh), Dadri (Uttar Pradesh), Magdalla (Gujarat), Ginigera (Karnataka), Ratnagiri (Maharashtra), Jharsuguda (Odisha), Arakkonam (Tamil Nadu), Durgapur (West Bengal), Ajman (UAE), Abu Dhabi (UAE), Bahrain, Bangladesh
Clinker Plant:
Ras Al Khaimah, UAE
Bulk Terminals:
Bengaluru (Karnataka), Hyderabad (Andhra Pradesh), Navi Mumbai (Maharashtra), Mangalore (Karnataka), Colombo (Sri Lanka) | 52 million tpa | Ready-mix concrete plants | 101 plants | White cement:
Kharia Khangar (Rajasthan) | 560,000 tpa | The different cost centres in each unit are 1. Procurement of raw materials 2. Raw Milling - preparation of raw materials for the pyroprocessing system 3. Pyroprocessing - pyroprocessing raw materials to form portland cement clinker 4. Cooling of portland cement clinker 5. Storage of portland cement clinker 6. Finish Milling 7. Packing and loading Conclusion The Company needs to minimize its input costs especially power by setting up captive power plants adequate to support its energy needs. It can also back integrate to cater to the raw material needs by setting up pulp manufacturing units. It can reduce the indirect costs by increasing the utilisation of capacity which is just 78%. References 1. Grasim Industries Annual Reports. Retrieved from http://www.grasim.com/investors/downloads 2. Informtion on Cost Auditing. Retrieved from http://members.icwai.org/members/CAR/car-about.asp