Case Study on Product Costing in a Dairy Plant

A study was conducted in a dairy plant under the co-operative set-up in Erode district of Tamilnadu to estimate the cost of production of different products. The dairy plant is a feeder-balancing dairy. It collects milk from its own milk-shed area in Erode district. In addition to it, milk from other milk-producers co-operative unions and State Federations is diverted to this plant for conversion into milk and other dairy products. During the period April 99 to March 2000, 725 lakh litres of milk was received at the plant. Data on various aspects like milk inflow, raw materials consumed, expenses incurred in generation of utilities, manpower employed, products manufactured and other expenses for the financial year 1999-2000 were taken from the dairy plant. Process costing technique was applied to estimate cost of production of different products.The following criterion was adopted to allocate /apportion costs. 

Skim milk powder (SMP) was the highest contributor in revenue generation with 42.93 per cent share obtained from 477.5 tonnes of output. Butter and Ghee were other significant products accounting for 39.48 percent and 16.37 per cent of revenue respectively. Standardised milk, Dudh Peda, Flavoured milk and other products individually had less than 1 per cent share in total revenue. 

Product Mix of the Dairy Plant (1999-2000)

The cost of manufacture of different dairy products is displayed in Table

Cost of Manufacture of Various Dairy Products (1999-2000)

It could be easily seen that in all the products manufactured, the major item of cost was on account of raw materials followed by processing and packaging cost in that order. The cost of production of SMP worked out to be Rs.70.19 per Kg.The respective share of raw materials cost, processing cost and packaging cost in the total cost was 83.25 per cent, 15.36 per cent and 1.39 per cent.The average manufacturing cost of Butter was Rs.91.23 per Kg.. Manufacturing activities added cost to the extent of Rs.8.58 to the raw materials worth Rs.82.65.Packaging cost constituted one per cent of the total cost.The longer shelf-life and returns associated with Ghee manufacture has attracted many entrepreneurs, especially in Tamil Nadu to initiate dairy business with this product line .The average cost of Ghee was found to be Rs.113.05.The relative share in cost on account of raw materials processing and packaging was 87.92 per cent, 7.29 per cent and 4.79 per cent.

Standardized milk is not a major revenue-earning product of the plant. But to cater to the demand of the consumers, standardized milk is processed in the plant for sale in nearby towns. During the study period the plant processed 4,86,258 litres of standardized milk at an average cost of Rs.10.91 per litre. The cost on raw material, being 91.86 per cent of the total cost, was highest among all the products. The processing and packaging cost were 4.75 per cent and 3.39 per cent respectively.

Dudh Peda, a desiccated indigenous product is popular in the region. It commands high demand throughout the year. The plant manufactured 45700 Kg. of Dudh Peda during the period under consideration. The cost of production turned out to be Rs.47.41.Raw materials cost was Rs.30.67 (64.68%) followed by processing cost, Rs.12.60 (26.59%) and packaging cost of Rs.4.14 (8.73%)The cost of manufacture of different dairy products has been analyzed from other angle segregating total cost into fixed and variable costs. These costs are produced below

Cost of Production of Different Dairy Products (1999-2000)

 The above cost figures are indicative only and applicable to the case dairy plant.These cost figures may vary from plant to plant depending upon factors such as fixed costs on land and building, plant and machinery, equipments etc. Installed capacity and capacity utilized, input costs and productivity of the resources also have a strong bearing on the cost aspects and these factors should be taken into consideration while working out cost of manufacture of dairy products.(The case study is based on research work conducted by Mr. P.Murali in partialfulfilment for the award of Degree in Master in Science in Dairying (Dairy Economics) to the N.D. R.I. Deemed University, Karnal, Haryana).