UNIVERSITY OF PUNE

CHAPTER 1: RESEARCH DESIGN AND METHODOLOGY

(1.1) INTRODUCTION:

The Researcher has completed summer project of 60 days from 14th

may, 2010 to 14th July, 2010 as a part of curriculum of MBA course of University of
Pune, at Injectcare Parenterals Pvt. Ltd, one of the leading manufacturing
company of Dry Injection Powder.

The specialization of the researcher is in Financial Management

and Injectcare Parentarels Pvt. Ltd is a Manufacturing Company, so it was found
appropriate by the Researcher to carry out the summer project there.

The researcher has tried to Analyze the Cost of different products and evaluated the
following aspects:-

• Production Cost per Unit.

• Break Even Point (BEP in Units, Rupees)

• Margin of Safety

(1.2) OBJECTIVE OF THE STUDY:

The researcher had kept the following objectives in focus categorized into general
and specific objectives.

(1.2.1) GENERAL OBJECTIVE:

To understand the different finance related functions of an Organization, working

environment and co-ordination of staff members with each other.

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(1.2.2) SPECIFIC OBJECTIVE:

The researcher while scanning the environment of the Organization realized

that there was a great scope for cost savings in the area of Manufacturing. The
company has a huge manufacturing capacity for dry injection powder, so cost can be
reduced by utilizing the full capacity of production. The researcher observes a big
potential savings which could be generated by reduction in abnormal wastage of raw
materials and other indirect materials used for the production.

So the specific objectives are:

1. To Analyze the Cost of the different products.

2. To calculate the BEP level and Margin of safety.

3. To understand the process of applying for Advance licence for import of

duty goods

4. And provide the proper suggestions for reducing the cost, if any.

(1.3) PROBLEM STATEMENT:

The researcher found a huge potential of savings the cost of product and
increase the profit margin of the company. Hence the topic selected for the project
is:

Cost Analysis of different products and calculating the potential saving

arising specifically by utilizing the full capacity of the plant at Injectcare
parenterals Pvt. Ltd.

To study the accounts, find out the costing process for different products, to do
the cost analysis with recommendations if any.

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(1.4) SCOPE OF THE STUDY:

• Scope of the project Research was limited to the period of the project work
manufacturing process at the organisation premises.

• Among the areas of operations like production planning and scheduling, supply
chain management, maintenance management, etc as an opportunity existed to have
a huge savings out of reduction of cost in the manufacturing process by cost analysis
the researcher concentrated on the manufacturing only.

(1.5) RESEARCH METHODOLOGY:

Research is systematic process of collecting and analyzing information (data) in

order to discover new knowledge or expand or verify the existing one.

“Research comprises, defining and re-defining problems, formulating hypothesis or

suggested solutions; collecting, organising and evaluating data, making deductions
and reaching conclusions and at last carefully testing the conclusion to determine
whether they fit the formulating hypothesis.”

TYPES OF RESEARCH

Quantitative & Descriptive & Fundamental &

Qualitative Analytical Applied

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Selection of Sources of Data

There can be two main classifications of data sources:

 Primary Data.

 Secondary Data.

Primary Data:

Primary data generally gathered by the researcher for the purpose of the project
immediate at hand. When the data are collected for the first time, the responsibility
for their processing also rests with the original investigator. Ordinarily, experiments
and surveys constitute the principal sources of primary data for the purpose of the
study.

Sources Primary Data:

1. Observation.

2. Surveys.

 Personal Survey.

 Electronic and Internet survey.

 Mail survey.

3. Interviews

 Structured Interview.

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 Semi-Structured Interview

 Un-Structured Interview

4. Stores Audit

5. Quotations and invoices.

Secondary Data:

Secondary data refers to information that has been collected by someone other than
researcher for purposes other than those involved in the research project at hand.

Sources of collecting Secondary Data:

1. Books.

2. Journals

3. Dairies

4. Computer search and internet applications.

Researcher has collected data in form of Primary as well as Secondary. Through

informal interviews and observations researcher had collected data in primary form.

For secondary data researcher used organisation website www.injectcare.com and

other websites on internet.

(1.6) LIMITATIONS:

During the project tenure of 60 days, time constraint proved to be crucial

limiting factors to the study.

• The company is having the licence of manufacture the number of dry injections
but researcher took up the study on only four main regular products.

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• Also the study is limited to the project duration of 60 days and may not be
appropriate for extra collation in to longer period.

CHAPTER 2:- INTRODUCTION OF THE COMPANY

(2.1) OVERVIEW OF THE INDUSTRY

Background

“The Indian pharmaceutical industry is a success story providing employment for

millions and ensuring that essential drugs at affordable prices are available to the
vast population of this sub-continent.”
Richard
Gerster
The Indian pharmaceutical sector has come a long way, being almost non-existent
before 1970 to a prominent provider of healthcare products, meeting almost 95 per
cent of the Country’s pharmaceuticals needs.
The Industry today is in the front rank of India’s science-based industries with wide
ranging Capabilities in the complex field of drug manufacture and technology. It

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ranks very high in the third world, in terms of technology, quality and range of
medicines manufactured. From Simple headache pills to sophisticated antibiotics and
complex cardiac compounds, almost every type of medicine is now made
indigenously.
The total Indian production constitutes about 13 per cent of the world market in
value terms and, 8 per cent in volume terms.
The per capita consumption of drugs in India, stands at US$3, is amongst the lowest
in the world, as compared to Japan- US$412, Germany- US$222 and USA- US$191

Growth prospects for domestic branded formulations remain favourable

The Indian pharmaceutical industry continues to witness 12-14% growth year-on-
year driven by increasing expenditure of healthcare; changing disease profile; rising
disposable income levels and growing penetration of health insurance besides
regulatory reforms. New product introductions contribute to around 6-8% of the total

growth, with the rest being contributed by a combination of volume and price
increase.
Amongst therapeutic areas, chronic segments such as anti-diabetics, CVS, CNS and
oncology have been growing at fairly strong rates owing to changing lifestyle
patterns and have been the key drivers of growth. The key acute segments including
anti-infective, which were affected in the past owing to pricing pressure (as a result
of drug pricing control), resulting in lower growth for the industry have also in the
recent period reported stable growth. Expanding reach in under-penetrated markets
has also supported the growth of companies with a large field force presence. It is
estimated that only 35% population has access to modern medicines in the
aforementioned under-penetrated tier II/III markets. Source: Industry Research;
ICRA Estimates
The industry structure remains highly fragmented, with top ten pharmaceutical
companies accounting for only ~35% of total pharmaceutical sales. However, the
leading players continue to retain their market share owing to their strong
distribution reach, strong field force and new product launches. While the domestic
branded formulations business continues to offer high gross margin, many of the
innovator companies are now aggressively targeting this segment, which is likely to
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increase the competitive pressures. Also, potential changes in price control

mechanism remain an area of uncertainty for the industry. If the scope of price
control is expanded, there could be significant adverse impact on the profitability of
domestic branded business.
Profitability indicators remain stable for formulation entities The profitability
indicators of leading formulations companies have remained fairly stable over the
past six quarters except for marginal fluctuation during October-March 2009. As
evidenced below, slight contraction in margins during the aforementioned period
was largely on account of spike in input material prices and foreign currency
fluctuations during the same period. In spite competition, profitability in the
domestic branded business remains healthy supported by new product launches;
investments on branding; increasing presence in chronic segments and above all an
efficient operating cost structure.

Bulk Drug players faced margin contraction during the last fiscal The sample of
Active Pharmaceutical Ingredients (APIs)/Bulk Drugs companies also reported a
similar trend with fluctuation in OPBDIT margins during H2 FY09. In terms of
return indicators, bulk drug manufacturers typically generate lower return on capital
employed as compared to formulation companies owing to higher capital
investments. With bulk drug business being completely driven by scale of
operations, most Indian companies barring a few large ones are relatively small
companies, which results in high product concentration and pricing related
vulnerabilities.

Many small companies in the API segment have been struggling for survival and
offer room for consolidation within the industry. The bulk drug companies also
remain dependent on Chinese companies for certain key intermediates and there
have been instances of disruption in supplies leading to significant adverse impact on
their profitability. The Indian generic companies, traditionally a key client segment
for API manufacturers, have also backward integrated into bulk drugs (especially for
critical APIs for products targeting the developed markets) to have better control on
cost and quality, thereby limiting business for pure API players. Amongst Indian
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companies, entities like Lupin, Aurobindo Pharma, and Matrix Laboratories

(acquired by Mylan) have created a meaningful presence in API segment worldwide.
Lupin for instance commands a leadership position in the Anti-TB space and a
strong position in cephalosporin API/ intermediates and cardiovascular API. Global
trends in generics – moving away towards unbranded generics and tender
business The prospects of the generic business worldwide is supported by large
expected patent expiries in developed markets (estimated at ~$235 billion in the
period from 2010 to 2015) and growing generic penetration supported by initiatives
from Governments and Insurance Companies to control healthcare costs. While the
United States remains the largest generic market in the world with a fairly high (~65-
70%) generic penetration, the growth potential in some of the smaller developed
markets remains higher due to rapid growth in penetration expected over the medium
term.

Some developed markets, their current generic penetration and growth

potential
Country Estimated generic Comments on penetration
penetration

Japan 19% Growing, large market

France 20% Growing, large market
Spain 18% Growing
Italy 10% Growing
USA 65-70% Mature, large market
Germany 70% Mature, large market
U.K. 60-65% Mature, large market
Netherlands 50% Mature
Poland 70% Mature
Czech Republic 55% Mature
Source: Industry, company presentation.

A key concern in the developed markets is the rapid increase in healthcare costs,
which is aggravated by an ageing population. Some of these markets are shifting
away from branded generics to unbranded generics or tender market; in the process,
the pricing power of generics companies is getting rapidly eroded. Government
legislation and insurance companies are increasingly incentivizing pharmacists/

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medical practitioners and patients with lower copayments to prescribe/ substitute

branded medicine with cheaper generic alternatives. In addition, the rising
bargaining power of large distributors, retailers and insurance companies are
potential dampener to pricing power of generic companies. The generic companies
also face challenges from adoption of aggressive product life cycle management
strategies such as patent extensions, switching to OTC category, product substitution
and launch of authorized generics, which can significantly erode attractiveness of the
Para IV1 exclusivities. All these have significantly increased the costs and capped
potential upsides from patent challenges for generic companies. In the last two years,
there has been greater.

Emphasis on patent settlements by Indian generics, which significantly reduces

launch uncertainties and litigation costs and hence is a positive. These however are
likely to come under greater regulatory scrutiny in the future. Cost-effectiveness and
superior quality remains the key drivers for success in the generics business.
However first to file (FTF) opportunities and Para IV related exclusivities continue
to provide significant profit upsides in developed markets because of limited
competition during these periods. In the absence of a healthy pipeline of FTF/
exclusive products, these one-off upsides could lead to significant volatilities in
performances. Most of the large Indian companies in the past have displayed large
swings in their performance in developed markets depending on the availability of
such one-off upsides in a particular year. This volatility could be corrected only
through a strong pipeline of products to ensure steady flows of one-offs over the
years. Also, patent settlements help reduce uncertainties in costs and timing of
inflows from product launches. Service levels and product pipelines remain
extremely critical in developed markets, especially as these markets are dominated
by large distributors/ retailers that enjoy tremendous bargaining power. Clearly
while low cost is a necessary condition, it does not provide sufficient enough
differentiation in the business. Strong management focus on legal and R&D skills is
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necessary to ensure emphasis on product development of FTF/ exclusive products,

which remains a key success factor. A portfolio that includes products beyond
commodity generics is necessary to maintain healthy profitability, as competitive
pressures drive down prices by up to 99%+ post patent expiry in many products.
A strong product pipeline can go a long way in sustaining interest of large
distributors/ retailers and capturing of market share. A fewer products with
reasonable market share is a more profitable strategy than having large number of
products with insignificant market share. Further, generic companies need to develop
strong relationships with the channels to ensure an adequate market share. Also in
recent periods regulatory compliance for developed markets has been a cause of
concern for a number of companies. While most Indian manufacturers have been
able to resolve 483s/ regulatory concerns flagged by international regulatory
agencies, our discussion with industry indicates that there is likely to be some
increase in compliance cost over the near term to meet the quality norms in these
markets. The global generics companies like Teva, Mylan etc, are scaling up rapidly,

while Indian companies continue to be relatively small in comparison. The global

generics business has been undergoing steady consolidation. In the US generic
market, the top four players now account for ~61% market share as compared to
around ~35% share 10 years back. Large generic companies like Teva, Sandoz, and
Mylan have widely diversified products and a much bigger pipeline as compared to
Indian companies. The largest Indian generic players are currently around $1.5
billion in revenues – this is against $5-11 billion range for the three largest players
globally. The sheer scale of these entities and the resultant advantages may
necessitate some consolidation in the Indian generics business over the longer term.
Japanese market offers new growth avenue for Indian generic players Amongst
the key markets outside the United States and Europe, the Japanese market offers
potential to drive significant growth in the medium term. With healthcare reforms
aimed to reduce healthcare budgets and generic friendly policies being adopted by
the Japanese Government, the pharmaceutical market is gradually opening up to
generics. The current generic penetration in Japan, estimated at 6-7%, is amongst the
lowest in the world. As a result, despite being the second largest pharmaceutical
market in the world, the Japanese marketranks only as the sixth largest generic

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market. The Japanese Government has set a target of reaching a generic penetration
of 30% by 2012, implying strong growth potential in the market.

The Japanese pharmaceutical market is characterised by a complex regulatory

framework, thereby creating a high entry barrier. Thus, partnerships with local
generic companies and/or acquisitions of local companies are ICRA Rating Feature
Indian Pharmaceutical Industry ICRA Rating Services.
Emerging as the likely route to gain presence. Indian generic players have also made
inroads in the Japanese market. The generic pricing in the market however remains
favourable as compared to markets in Europe and the United States. Lupin, Ranbaxy
and Cadila Healthcare are amongst the front runners. While Lupin gained access in
the Japanese market through the acquisition of Kyowa Pharmaceuticals in 2007.
Ranbaxy is exploring opportunities of marketing its generic products through
Daiichi’s distribution network post its acquisition by the latter.

Collaborations by Indian Companies

Companies Partner Comments

Aurobindo Pharma Pfizer 100 plus oral

dosages across
NA, Europe, LA
and Asia across
CVS, CNS and
anti-infective space

Dr. Reddy’s Limited GlaxoSmithKline Plc To market its

portfolio of
products across
emerging markets
outside India,
including co-
marketing
arrangements

Strides Arcolab Pfizer Generic oncology

products, primarily
injectibles for the
US market

Claris Life sciences Pfizer Sterile injectibles

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covering anti-
infective,
antibiotics and
other critical care
products

The Leading Pharmaceutical Companies With in India

Rank Company
1. Ranbaxy Laboratories
2. Cipla
3. Dr Reddy's Laboratories
4. Sun Pharmaceuticals
5. Nicholas Piramal
6. Zydus Cadila
7. Biocon
8. Glenmark Pharmaceuticals
9. Wockhardt Ltd
10. Orchid Chemicals

Sales of major domestic Indian companies.

Domestic companies
Rank Companies Gross Sales in Gross Sales in
Name Rs Million US $ Million
1 Ranbaxy 17459 356.3
2 Cipla 10475 213.8
3 Dr.Reddy’s 9841 200.8
Lab
4 Nicholas 5667 115.7
Piramal
5 Wockardt Ltd. 5583 113.9
6 Lupin Labs 5437 110.9
7 Cadila 5087 103.8
Healthcare Ltd
8 Sun Pharma 4764 97.2
9 Alembic Ltd 4738 96.7
10 Morepan 4297 87.7

Exports

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Over 60 per cent of India’s bulk drug production is exported. India’s pharmaceutical
exports are to the tune of Rs87 billion, of which formulations contribute nearly 55
per cent and the rest 45 per cent comes from bulk drugs. In financial year 2005,
exports grew by 21 per cent.
The Indian pharmaceutical market has been forecasted to grow to as much as US$ 25
billion by 2010 as per Organization of Pharmaceutical Producers of India (OPPI)
estimates.
The export revenue now contributes almost half of the total revenue for the top three
Pharmaceutical majors: Dr Reddy’s, Ranbaxy and Cipla.
The other major exporters are Wockhardt Limited, Sun Pharmaceutical Industries
Ltd. and Lupin Laboratories

Growth Drivers
India’s population is just over one billion at present and projected to rise to 1.6
billion by 2050 and India will become the world’s most populous country. It is
estimated that by 2025, 189 million Indians will be 60 or older up from about 63
million in year 2004. This projection shows the demand of pharmaceutical drugs will
rise in coming years. The government had promised to increase public expenditure
on healthcare from 0.9 percent of GDP in 1999 to 2 per cent of GDP by 2010.
India manufactures more than 96 generic group drugs. India has excellent skilled and
educated manpower. There are 115,000 scientists with their master’s degrees and
12,000 with Ph.D. in chemistry alone pass out every year.

Vision 2020
Responsibilities and Resources would make an important beginning in the transition
of efficient and effective use of pharmaceutical in building a prosperous and healthy
India. In doing so, following issues have been identified for realizing the Pharma
Vision 2020. The Indian pharmaceutical industry shall ensure that essential drugs at
affordable prices are available to the vast population of this sub-continent and also
continue providing employment for millions

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(2.2) Company Profile:-

Introduction:-
Injectcare Parenterals Pvt. Ltd. is a company launched by a team of experts in
pharmaceutical manufacturing, quality and trading activities. The Promoters have
built a state of the art facility for Dry Powder injectable formulations and is one of
the distinguished pharma facilities in the healthcare sector of India today

Injectcare Parenterals is Engaged in the manufacturing of dry powder injections,

the Facility started production from June 2006, and the manufacturing facility is
licensed by the National Authority under the Drug and Cosmetic Act 1940 &
Rules 1945 for manufacture of Injectable formulations.

The Company holds WHO GMP Certification.

The quality systems are planned as per latest cGMP guideline and in accordance
with MHRA, MCC, TGA and US FDA requirements. All latest ICH and PIC
publications are taken into consideration while designing the facility and
equipment

I take this opportunity to introduce ICPL as manufacturer and exporter of B-

lactam & Cephalosporin Injectibles. There manufacturing facilities is as per
international standard and norms, at Vapi (Gujarat), India, follows WHO GMP

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norms and guidelines and having valid WHO GMP certification from local Drug
Authority. They have valid Certification from SGS (India) as per WHO- Geneva
guidelines.
The plan has very sophisticated fully automatic high speed dry powder filling
lines, from vial washing to final packing of finished goods. Whereas the process
controlling and the production activities are carried out under the class 100 area of
environment keeping in mind of the international norms.
Quality is the foundation upon which the company has built its reputation. Today,
they meet or exceed current Good Manufacturing Practices (cGMP) norms and
continue to invest in there people, process and equipment to ensure that they
remain an Industry leader. Quality Control performs product and material testing,
environmental monitoring, analytical method validation and stability studies.

This group is supported by in house chemical and microbiological analytical

laboratories. Quality Assurance/Quality system is responsible for batch document
reviews, standard operating procedures, material and product specification and
releases, audit management, training and change control administration. Also
ensures that equipment qualification, system validation, process simulation,
cleaning and process validation standards are applied and maintained.
Apart from own manufacturing, The Company is also engaged in manufacturing
of various product mix on behalf Indian top pharma companies on contract
manufacturing basis as well as on P 2 P basis for their domestic as well export
requirements.
The products manufactured by them are exported to various countries like Russia,
Ukraine, Uganda, Nigeria, Ghana, Tanzania, Kazakhastan, Iraq and many more.
They are looking forward for long term business association and tie-ups.

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COMPANY PROFILE:-

Basic Information
Company Name Injectcare Parenterals Pvt. Ltd. (ICPL)
Business Type Manufacturer
Address Plot No. 130 GIDC PHASE II Silvassa road vapi
(Gujrat)
Number of Employees 101-500
Company Website www.injectcare.com

Ownership and Capitals

Registered Capital US$10 Million-US50 Million
Ownership Type LLC (Limited Liability Corporation)
Legal Representative Atish Patel

Trade and Market

Total Annual Sales US$ 2.5 Million to US$ 5 Million
Volume
Export Percentage 21% to 30%
Main Market South Asia, South America, Mid East, Eastern
Asia

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Factory Information
Factory Location Vapi Gujarat India
Factory Size 10,000- 30,000 Square Meters
QA/QC In House
NO. Of Production Line 4 Lines
No. Of QC Staff 11-20 Peoples

(2.3) PRODUCT DETAILS:-

The Major Products of the Company is follows:-

Procaine Penicillin Injection

Benzylpenicillin for Injection

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Benzathine Penicillin Injection

Streptomycin Penicillin Injection

Cefotaxime

Streptomycin Penicillin Injection

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Ampicillin

Tazobactam

(2.4) Main Customer:-

• Alembic pharma
• Biochem
• Zidas
• Cipla
• Mission Riva chem.

(2.5) Main Competitors:-

• Alkem
• Elysium Pharma
• Shri Pharma

(2.6) Certification planned

1. Medicine and Healthcare products Regulatory
Agency (MHRA) – UK
2. Medicine Control Council (MCC) - South
Africa
3. WHO – Geneva
4. TGA – Australia
5. ISO – 9001

(2.7) Mission And Vision

Mission

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To exceed our customer’s expectations in quality, delivery, and cost through

continuous improvement and customer interaction.

Vision
To become the leading manufacture & distributor of Beta-Lactum Dry Powder
Injectables in South East Asia and Africa.

(2.8) Company Values

1. Achieving customer satisfaction
2. Providing high quality products and services
Providing the opportunity for our employees to realize their full
3.
potential
4. Ensuring profitable growth of the Organisation
5. Fostering a mutually beneficial relationship with all our customers

(2.9) Organisation Chart:-

Chairman

Director

General Manager Q.A Manager

Production Administration Utility Stores Q.C

Manager Manager Manager Department Manager

Assistant Executive
Manager Receptionist Senior R.M Stores
Officer & P.M
Stores
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Senior Micro-
H.R
Officer Technicians biologist
Manager
Finished
goods
Officer Accountant Operators Stores
Executive

Chemist

Operators

Workers

Management Hierarchy:-

Quality Assurance (Q.A.) Organisation Chart

Chairman

(Mr. Dilip Patel)

Directors
(Mr. Atish Patel

Mr. Ashai Patel)

General Manager
(Mr. Japal Vora)

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Quality Assurance Manager

(Mr. M.Sudhakar)

Quality Assurance Asst.

Manager (Mr. Umesh Patel)

IPQA Chemists Executive

(Ms. Pinkle Shah (Mr. Pramod Gupta)
Mr. Rajesh Kushwah
Mr. Sanjay Singh)

Quality Control (Q.C.) Organisation Chart

Chairman

(Mr. Dilip Patel)

Directors
(Mr. Atish Patel

Mr. Ashai Patel)

General Manager
(Mr. Japal Vora)

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Quality Control Manager

(Mr. Mukesh Seth)

Executive (Mr. Keyur Microbiologist

Lad) (Ms. Rita Singh
Mr. Devang Shukla
Mr. Kalpesh M. Mail)

Production Organisation Chart

Chairman

(Mr. Dilip Patel)

Directors
(Mr. Atish Patel

Mr. Ashai Patel)

General Manager
(Mr. Japal Vora)

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Production Manager
(Mr. Manoj B. Shah)

Asst. Production Manager

(Mr. Rajesh Gajera)

Washing Blending Filling Packing

Department Depatment Depatment Department

Administration Organisation Chart

Chairman

(Mr. Dilip Patel)

Directors
(Mr. Atish Patel

Mr. Ashai Patel)

General Manager
(Mr. Japal Vora)

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Purchase Accountant H.R. & Amin.

Officer/Receptionist Executive Department
(Mrs. Hetal Acharya) (Mr. Jatin Bhatt) (Mr. Mohit Desai)

Stores Organisation Chart

Chairman

(Mr. Dilip Patel)

Directors
(Mr. Atish Patel

Mr. Ashai Patel)

General Manager
(Mr. Japal Vora)

Stores Executive
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Raw Materials Finished Goods

Stores Stores
(Mr. Balwant Lad) (Mr. Jayesh Patel)

Utilities Department Organisation Chart

Chairman

(Mr. Dilip Patel)

Directors
(Mr. Atish Patel

Mr. Ashai Patel)

General Manager
(Mr. Japal Vora)

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Utility Head
(Mr. Anil Puthalath)

Utility Officer
(Mr. Ramesh Anchan)

Electricals Mechanicals Operators

(2.10) Major Achievements:-

1. 1st Prize in Good Housekeeping Competition (Year 2006).

2. 1st Prize in Good Housekeeping Competition (Year 2007).

(2.11) Future Plan:-

1. Company is planning to launch two new products in the upcoming month.

2. Company also planning to start the business in the south Africa and European
countries.

3. They are also planning to apply for the WHO- Geneva, TGA – Australia
certifications.

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CHAPTER 3:- THEORITICAL BACKGROUND

(3.1) Introduction:-
Profit planning is a function of the selling price of a unit of product, the variable cost
of making and selling the product, the volume of products units sold and finally the
total fixed costs. The COST ANALYSIS is a management accounting tool to show
the relationship between these ingredients of profit planning. A widely used
technique to study the relationship between the profit, volume and cost is break even
analysis.

Costing:-
Costing is simply cost finding. It is the process, technique and procedure of
ascertaining the costs. It includes all the principles, rules and regulations of
calculating the costs.

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Costing is the classifying, recording and appropriate allocation of expenditure for the
determination of the costs of products or services and for the presentation of suitably
arranged data for the purpose of control and guidance of the management.

(3.2) Scope or Advantages of costing/cost accounting;

• It helps to control the cost.

• It gives the Break Even point.

• It provides the adequate data to management.

• Proper classification of costs.

• It helps to analyse the losses.

• It provides the basis for cost comparison.

• Preparation of cost estimate.

• It provides the data for cost reduction.

(3.3) Classification of costs:

Cost classification means grouping of costs according to their common characteristic

“Classification is the process of grouping like facts under a common designation on

the basis of similarities of nature, attributes or relations.”

Classification of costs

Functions Behaviour Controllability Elements

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Selling Distribution
Expenses Material Labour

Fixed Variable Semi- variable

CLASSIFICATION OF COSTS

A. Functional Classification:-

1. Factory Overheads:
Factory overheads are termed as production overheads, manufacturing overheads
etc. It means indirect expenditure incurred in connection with production operations.
e.g. lubricants, factory power, depreciation etc.

2. Administration Overheads;
This consists of all expenses incurred in the direction, control and administration
of an undertaking which is not related directly to production, selling and distribution
function. e.g. General manager’s salary, audit fees etc.

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3. Selling Overheads:
It is the cost incurred for transferring the ownership of goods to the buyer. These
are the expenses incurred for promotion sales and retaining customers.e.g.
Advertisement exp, travelling exp., showroom exp etc.

B. Behaviour wise classification:

1. Fixed Overheads:
These overheads remain unaffected or fixed in total amounts by fluctuations in
volume of output.e.g. rent and rates, building depreciation, legal exp etc.

2. Variable overheads;
This is the cost which in aggregate, tends to vary in indirect proportion to changes
in the volume of output. Variable overheads per unit remain fixed.e.g. indirect
materials, power, fuel, light etc.

3. Semi-variable overheads;
These overheads are partly fixed and partly variable. In other words, such costs vary
in part with the volume of production and in part they are consistent, whether be the
volume of production. e.g. Supervisory salary, depreciation, repair and maintenance
etc.

C. Control wise classification:

1. Controllable overheads;
These are the indirect costs which may be directly controlled at a given level of
management authority. Variable overheads are generally controllable by the
departmental heads e.g indirect materials costs.

2. Un-controllable Overheads;
These are the indirect costs which cannot be influenced by the action of a specific
member of an organisation e.g. rent and taxes, office salaries etc.

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D. Element-wise Classification;

1. Indirect Materials;
In the course manufacture of a product, indirect materials do not form part of
finished product. The indirect materials are consumable items, electrodes, coolants
etc. Which are required for completion of finished products. Indirect materials cost is
the materials cost which cannot be allocated, but which can be apportioned to or
absorbed by cost centres or cost units.

2. Indirect labour:
Indirect wages are the wages and overtime paid for all labour in the factory, viz.
Helper in factory, foremen, etc. Who do not help directly in converting the raw
material into a finished product

3. Indirect expenses;
Indirect expenses are all expenses of the factory such as rent, rates, taxes power etc.
including depreciation of plant, machinery, loose tools. It also includes indirect
expenses incurred for office and selling and distribution.

Cost Sheet:
A cost sheet is a statement which shows the details regarding total cost of the job or
a product. The data incorporated in cost sheet are collected from various statements
of accounts which have been written in cost accounts, either day-to-day or regular
records. There is no fixed form for preparation of cost sheet but, in order to make the
cost sheet more useful, it is generally presented in columnar form.

Performa of Cost Sheet:

In the books of a company

Cost Sheet for the period ended...........

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Particulars Total Unit

cost Cost

Direct Materials

Add: Direct Labour

Add: Direct Expenses

PRIME COST

Add: Factory Overheads

WORKS COST

Add: Office Overheads

COST OF PRODUCTION

Add: Selling and distribution overheads

TOTAL COST

Add: Profit/Loss

SALES

Costing Systems:

Job Costing System:-

In this system, the cost object is a unit or multiple units of distinct products or
services called as job. Each job uses a different amount of resources. The product or
services is often a single unit. Job costing is also used to cost multiple units of a
distinct product, because the products and services are distinct, job-costing system
accumulate costs separately for each product or service.

Process Costing System:-

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In this system, the cost object is masses of identical or similar units of a product or
services. In each period, process costing system divides the total costs of producing
an identical or similar product or services by the total number of units produced to
obtain a per unit cost. This per unit cost is the average unit cost that applied to each
of the identical or similar units produced in that period.

Many companies have costing system that are neither pure job costing nor pure
process costing but have element of both. Costing system therefore, need to be
tailored to the underlying operations.

Example: kellgg corporation uses job costing to calculate the total cost to
manufacture each of its different and distinct type of products such as- Corn Flakes,
Crispix and froot loops- but process costing to calculate the per unit cost of
producing each identical box of corn flakes.

Contribution:-
Under the marginal costing, variable costs are considered as product costs. On the
other hand, the fixed costs are treated as period costs but not as product costs.
Therefore, only the variable costs are charged against the revenue and the result is
contribution.

That means, the difference between the total sales revenue and the total variable cost
of sales represents the Contribution.

Contribution = Total Sales – Total Variable Cost.

Or

Contribution = Total Fixed Cost + Total Profit.

Profit Volume Ratio:-

Profit Volume Ratio which is popularly known as P/V Ratio establishes the
meaningful relationship between contribution and sales revenue. Therefore, this ratio
is also called Marginal Income Ratio or Contribution to Sales Ratio.

The ratio is calculated by the following formula:

P/V ratio = Total Contribution * 100

Sales Revenue

Or

P/V ratio = Fixed Cost + Profit * 100

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Sales revenue

Or

P/V ratio = Fixed Cost – Loss * 100

Sales revenue

Break-Even Analysis:
The break even analysis is used in two ways:

One. in the narrow sense as dealing with the determination of Break Even Point.
Break-even point represents the level of activity at which the revenue from the sales
of goods and services is just equivalent to the total costs incurred to produce and sell
them. Since the revenue is equal to cost, the business entity earns no profit nor it
incur loss.

If the sales volume exceeds the break even volume even by one unit, the company
earns profit. The amount of profit is equal to the product of excess units sold (over
break-even point) and the unit contribution

Break Even Point (Units) = Fixed Cost

Unit Contribution

Break Even Point (Rs.) = Fixed Cost

P.V Ratio

Margin of Safety:-
Margin of safety represents the excess of actual or estimated sales over the break
even sales. Since it is assumed that the volume of output coincides with the volume
of sales, Margin of safety may also be computed by finding out the excess
production over the break-even point.

Formula to calculate the margin of safety;

Margin of Safety (Units) = Actual Sales Quantity – Break Even Quantity

Margin of safety (Rs.) = Actual Sales Revenue – Break Even Sales Revenue

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CHAPTER. 4 DATA PRESENTATION AND ANALYSIS

INTRODUCTION:

The researcher was much more concentrating on the COSTING SYSTEM of

the organization; he had to take many of the data by observation method which
included taking & having an informal discussion with Production Manager & line
supervisor.

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The company is manufacturing on LL method (Loan licence method), it

means the raw materials are supplied by the buyer only and they have to process it
and give back to them by charging a process cost.

The company has to follow the prices prescribed by DPCO (Drug Price
Control Order).

The company is having four line of production, its total capacity is around
1,00,00,000 vials. Company is doing job work for various companies like Alembic,
Zidus, Biochem, and Cipla etc.

There are number of products processed by the company, but researcher took the
four main products for which the company gets regular orders.

1. Benzyilpenicilline 5 mega

2. F.P.P 4 mega

3. Biotex 250

4. Ampilox c 1 gm

Companies cost sheet is given below:

Process Cost Sheet for the period ended 31st May 2010

Total Manufacturing: 40, 15,900 Vials

Total Production : 38, 57,553 Vials

Particulars Total Unit

cost Cost

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Manpower:

Contract Labours 485509 .125

Admin. Staff 532260 .137

Utilities:

Power 1413087 .366

Water 107620 .027

Gas 448603 .116

Total Process Cost 2987079 .774

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The above cost sheet shows that company is following the average costing
method. Total cost of processing is divided by the total number of vials produced in
the month of May- 2010. The costing includes the salaries of staff and contract
labours, utilities (water, power, gas).

However all the products do not take the same time for processing? Different
products require different time (more or less) for processing work as per the filling
quantity and time taken for filling the vials.

DATA PRESENTATION

PROCESS COST SHEET OF BENZYLPENICILLINE 5 MEGA

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Filled Qty: 11,37,000 Vials

Packed Qty : 11,12,600 Vials
Total Per Unit
S.No Particulars Cost Cost

FACTORY OVERHEADS

416502.3
1 POWER 6 0.3743505
132224.1
2 GAS 4 0.1188425
31720.61
3 WATER 1 0.0285103
4 DEPRECIATION 348480 0.3132123
156881.7
5 LABOUR SALARIES 4 0.1410046
8461.538
6 HOUSEKEEPING 5 0.0076052
8933.333
7 SECURITY 3 0.0080292
2307.692
8 CANTEEN 3 0.0020741
19319.38
9 QA/QC 5 0.0173642
8974.307
10 REPAIR & MAINT. 7 0.0080661
3333.384
11 UNIFORM 6 0.002996

OFFICE & ADMIN. EXP.

81886.15
12 OFFICE SALARY 4 0.0735989
3628.153
13 STATIONARY 8 0.003261
2461.538
14 TELEPHONE EXP 5 0.0022124

TOTAL COST OF 1225114.

PRODUCTION 3 1.1011274

-
PROFIT/LOSS -112514.3 0.1011274

SALES 1112600 1

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PROCESS COST SHEET OF F.P.P 4 MEGA

Filled Qty: 6,13,200 Vials

Packed Qty: 6,00,000 Vials
Per Unit
S.No Particulars Total Cost Cost

FACTORY
OVERHEADS

1 POWER 224625.546 0.37437591

2 GAS 71310.3254 0.11885054
3 WATER 17107.3694 0.02851228
4 DEPRECIATION 370260 0.6171
5 LABOUR SALARIES 79362.0481 0.13227008
6 HOUSEKEEPING 8990.38462 0.01498397
7 SECURITY 9491.66667 0.01581944
8 CANTEEN 2451.92308 0.00408654
9 QA/QC 20526.8462 0.03421141
10 REPAIR & MAINT. 9535.20192 0.015892
11 UNIFORM 3541.72115 0.00590287

OFFICE & ADMIN.

EXP.

12 OFFICE SALARY 87004.0385 0.14500673

13 STATIONARY 3854.91346 0.00642486
14 TELEPHONE EXP 2615.38462 0.00435897

TOTAL COST OF
PRODUCTION 910677.369 1.51779561

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PROFIT/LOSS -160677.37 -0.2677956

SALES 750000 1.25

PROCESS COST SHEET OF AMPILOX C 1 gm

Filled Qty: 4,98,900 Vials

Packed Qty: 4,89,250 Vials
Total Per Unit
S.No Particulars Cost Cost
FACTORY
OVERHEADS

1 POWER 182755.52 0.3735422

2 GAS 58018.1365 0.11858587
3 WATER 13918.5691 0.02844879
4 DEPRECIATION 87120 0.17806847
5 LABOUR SALARIES 18673.4231 0.03816745
6 HOUSEKEEPING 2115.38462 0.00432373
7 SECURITY 2233.33333 0.00456481
8 CANTEEN 576.923077 0.0011792
9 QA/QC 4829.84615 0.00987194
10 REPAIR & MAINT. 2243.57692 0.00458575
11 UNIFORM 833.346154 0.00170331

OFFICE & ADMIN. EXP.

12 OFFICE SALARY 20471.5385 0.04184269

13 STATIONARY 907.038462 0.00185394
14 TELEPHONE EXP 615.384615 0.00125781

TOTAL COST OF
PRODUCTION 395312.02 0.80799595

PROFIT/LOSS 142862.98 0.29200405

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SALES 538175 1.1

PROCESS COST SHEET OF BIOTEX 250

Filled Qty: 9,98,000 Vials

Packed Qty : 9,79,025 Vials
Per Unit
S.No Particulars Total Cost Cost
FACTORY OVERHEADS

365584.303
1 POWER 3 0.373416719
116059.531
2 GAS 5 0.118546035
27842.7179
3 WATER 1 0.028439231
4 DEPRECIATION 152460 0.15572636
32678.4903
5 LABOUR SALARIES 8 0.033378607
3701.92307
6 HOUSEKEEPING 7 0.003781234
3908.33333
7 SECURITY 3 0.003992067
1009.61538
8 CANTEEN 5 0.001031246
8452.23076
9 QA/QC 9 0.008633315
3926.25961
10 REPAIR & MAINT. 5 0.004010377
1458.35576
11 UNIFORM 9 0.0014896

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OFFICE & ADMIN. EXP.

35825.1923
12 OFFICE SALARY 1 0.036592725
1587.31730
13 STATIONARY 8 0.001621325
1076.92307
14 TELEPHONE EXP 7 0.001099995

TOTAL COST OF 755571.193

PRODUCTION 8 0.771758835

223453.806
PROFIT/LOSS 2 0.228241165

SALES 979025 1

The researcher allocated the fixed expenses as per the time required to (manufacture)
process the product, the variable expenses are allocated as the total number of products
manufacture in the month

Name of Product Quantity Dose Required days

Benzylpenicilline 5 Mega 11, 37, 000 Vials 2 Dose 16 Days

F.P.P 4 Mega 6, 13, 200 Vials 4 Dose 17 Days

Ampilox C 1 gm 4, 98, 900 Vials 1 Dose 4 Days

Biotex 250 9, 98, 000 Vials 1 Dose 7 Days

. Allocation of fixed Expenses

Four line of Per hour exp
production Single line Per day exp (12 hours
Particulars (monthly exp) exp.(monthly) (26 days) shift)
DEPRECIATION 2265120 566280 21780 1815
5117.88461
Staff salary 532260 133065 5 426.4903846

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4668.35576
SALARY 485509 121377.25 9 389.0296474
528.846153
HOUSEKEEPING 55000 13750 8 44.07051282
558.333333
SECURITY 67000 16750 3 46.52777778
144.230769
CANTEEN 15000 3750 2 12.01923077
1207.46153
QA/QC 125576 31394 8 100.6217949
560.894230
REPAIR & MAINT. 58333 14583.25 8 46.7411859
208.336538
UNIFORM 21667 5416.75 5 17.36137821
226.759615
STATIONARY 23583 5895.75 4 18.89663462
153.846153
TELEPHONE 16000 4000 8 12.82051282

Allocation of Variable Expenses

Ampilox C
F.P.P 4 mega 1 gm Biotex 250
Benzylpenicilline (6,13,200 (4,98,900 (9,98,000
Particulars Total Exp (11,37,000 Vials) Vials) Vials) Vials)

POWER 1413087 416502.3576 224625.5459 182755.52 365584.303

GAS 448603 132224.1356 71310.32538 58018.13655 116059.532

WATER 107620 31720.61149 17107.36936 13918.5691 27842.7179

DATA ANALYSIS:

1. BENZYLPENICILLINE 5 MEGA

Total Cost of Processing = Total no. Of units * Cost per unit

= 11, 37, 000 Vials * 1.101

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Total Cost = Rs 12, 25, 114.3

Revenue by selling the vials = Total no. Of units * Selling price per unit.

= 11, 12, 600 * 1 Re

Total Revenue = 11, 12, 600 Rs.

Net Loss = Total Cost – total Revenue

= 12, 25, 114 – 11, 12, 600

Net Loss = 1, 12, 514.3 Rs.

2. F.P.P 4 Mega:

Total Cost of Processing = Total no. Of units * Cost per unit

= 6, 13, 200 Vials * 1.517

Total Cost = Rs 9, 10, 677.369

Revenue by selling the vials = Total no. Of units * Selling price per unit.

= 6, 00, 000 * 1.25

Total Revenue = Rs. 7, 50, 000

Net Loss = Total Cost – total Revenue

= 9, 10, 677 – 7, 50, 000

Net Loss = Rs. 1, 60, 677

3. AMPILOX C 1 GM :

Total Cost of Processing = Total no. Of units * Cost per unit

= 4, 98, 900 Vials * .807

Total Cost = Rs 395312

Revenue by selling the vials = Total no. Of units * Selling price per unit.

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= 4, 89, 250 * 1.1 Re.

Total Revenue = Rs. 538175

Net Profit = Total Revenue –Total Cost

= Rs. 5, 38, 175 – Rs. 3, 95, 312

Net Profit = Rs. 1, 42, 863

4. BIOTEX 250 :

Total Cost of Processing = Total no. Of units * Cost per unit

= 9, 98, 000 Vials * .771

Total Cost = Rs. 7, 55, 571

Revenue by selling the vials = Total no. Of units * Selling price per unit.

= 9, 79, 025* Re. 1

Total Revenue = Rs. 9,79,025

Net Profit = Total Revenue –Total Cost

= Rs. 9, 79, 025 – Rs. 7, 55, 571

Net Profit = Rs. 2, 23, 454

SUMMARY TABLE SHOWING PROFIT AND LOSS OF ALL

THE PRODUCTS:

Product Name Profit / Loss Amount

Benzylpenicilline 5 Mega Loss (1, 12, 514)
F.P.P 4 Mega Loss (1, 60, 677)
Ampilox C 1 gm Profit 1, 42, 863
Biotex 250 Profit 2, 23, 454

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Net Profit/ Loss = (1, 42, 863+2, 23, 454) - (1, 12, 514 + 1, 60, 677)

= 3, 66, 317 – 2, 73, 191

Net Profit = Rs. 93, 126

The analysis shows the results:

1. The company is following only the average cost. (total cost of processing/ Total
number of units manufactured)

2. Company is not taking the time factor into consideration (time required for
manufacturing the various products).

3. Company is not including the depreciation cost of machinery into cost of

processing. As total processing work is done by high speed automatic machines so
it’s necessary to include machine depreciation into cost of processing.

4. The company is not including all the fixed costs incurred in processing work.

5. Company is not allocating the overheads in proper way.

6. Company is earning profit on only two products.

a. Ampilox C 1 gm

b. Biotex 250

7. Now company is incurring losses on two products:

a. Benzylpenicilline 5 mega

b. F.P.P 4 mega

However, overall the company is profitable.

Calculation of BEP Point

Benzylpenicilline
sales units 1112600

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fixed cost 644668

variable cost (per unit) 0.52
sales price (per unit) 1
Total Sales 1112600

contribution = sales - variable costs

contribution = 4.819

contribution = 0.48

P.V Ratio (%) = contribution/sales *100

P.V Ratio (%) = 48

BEP (Units) = Fixed cost / Contribution per unit

BEP (Units) = 1343058

BEP (Sales) = BEP (Units) * Sales Price

BEP (Sales) = 1343058

Margin of safety = Actual sales - BEP sales

Margin of safety = -230458

The above analysis shows that the company is not earning profit on the current level
of output (11, 12, 600 vials) it has to be increased 2, 30, 458 vials to reach atleast the
BEP point.

Calculation of BEP Point

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F.P.P 4 MEGA
sales units 600000
fixed cost 597634
variable cost (per unit) 0.521
sales price (per unit) 1.25
Total Sales 750000

contribution = sales - variable costs

contribution = 4.459

contribution = 0.729

P.V Ratio (%) = contribution/sales * 100

P.V Ratio (%) = 58.32

BEP (Units) = Fixed cost / Contribution per unit

BEP (Units) = 819799.7

BEP (Sales) = BEP (Units) * Sales Price

BEP (Sales) = 1024750

Margin of safety = Actual sales - BEP sales

Margin of safety = -274750

The above analysis of FPP 4 mega shows that the company is not getting profit on
current output (6,00,000 vials). The company has to produce more than 8,19,800
vials to get the BEP point.

Calculation of BEP Point

Ampilox C 1 gm
sales units 489250

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fixed cost 140620

variable cost (per unit) 0.52
sales price (per unit) 1.1
Total Sales 538175

contribution = sales - variable costs

contribution = 0.58

contribution = 0.58

P.V Ratio (%) = contribution/sales * 100

P.V Ratio (%) = 52.72727

BEP (Units) = Fixed cost / Contribution per unit

BEP (Units) = 242448.3

BEP (Sales) = BEP (Units) * Sales Price

BEP (Sales) = 266693.1

Margin of safety = Actual sales - BEP sales

Margin of safety = 271481.9

.

The above analysis shows that company is earning Profit of Rs.1,42,863 by selling
4,89,250 vials, which is almost double than the BEP units (2,42,448 vials).

Calculation of BEP Point

Biotex 250
sales units 979025
fixed cost 246085

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variable cost (per unit) 0.52

sales price (per unit) 1
Total Sales 979025

contribution = sales - variable costs

contribution = 0.48

contribution = 0.48

P.V Ratio (%) = contribution/sales * 100

P.V Ratio (%) = 48

BEP (Units) = Fixed cost / Contribution per unit

BEP (Units) = 512677.1

BEP (Sales) = BEP (Units) * Sales Price

BEP (Sales) = 512677.1

Margin of safety = Actual sales - BEP sales

Margin of safety = 466347.9

The above analysis shows that company is earning profit by selling 9,79,025 vials,
which is more than its BEP (5,12,677) vials, its margine of safety is 4,66,348 Rs.

CHAPTER 5 FINDINGS AND SUGGESTIONS

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FINDINGS:
1. Company being a SSI unit, it does not have at present a Costing and
Marketing team.

2. No time factor is taken in to consideration (time require to manufacture

different products)

3. all cost items are not included by the company in their cost sheet

4. Average costing or Process costing technique is used by the company.

5. Under utilization of production capacity.

SUGGESTIONS:
Based on the above findings the researcher is come up with following suggestions:

1. It is beneficial to appoint a marketing team to get more number of

orders, so that company can utilize its maximum production capacity.

2. The method of costing can be improved by adopting Job Costing

technique, which will benefit the company.

3. It is suggested by the researcher that company should include the

depreciation cost in its costing, so that the exact cost of manufacturing can be
easily calculated.

4. The researcher suggests that depreciation and other fixed overheads

should be allocated to different products on the basis of time taken for
manufacturing.

Conclusion:
The researcher completed his project on the topic Cost Analysis of Various Products
at Injectcare Parenterals Pyt. Ltd. The study helps the researcher to get the practical
experience in industry and also the application of theoretical knowledge in the actual
practical work.

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BIBLIOGRAPHY

1) Books

Book Name Author Name Publishers Name Edition

Cost Accounting Horngren, Datar, Eastern Economy 12th

Foster Edition

Management J. Madegowda Himalaya Publishing 3rd

Accounting House

Cost & Work Dr. Mahajan, Nirali Prakashan

Accounting Kulkarni

2) Websites

 www.injectcare.com
 www.icra.in
 www.google.com
 www.pharmtech.com

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