Case Study: Cost Audit Solutions for GreenBuild Cement Manufacturing Unit

Background: GreenBuild Cement Manufacturing Ltd. (GCML) is a medium-sized cement company based in Raipur, Chhattisgarh, producing around 1 million metric tons of cement annually. Established in 2005, GCML initially enjoyed strong growth driven by high demand in the construction sector. However, by 2020, the company began facing several financial and operational challenges that threatened its profitability and market share.

To identify the root causes of these problems and restore profitability, the management decided to hire a renowned cost accounting firm, Dutta & Associates.

Problems Faced by GCML:

1. Rising Production Costs: Over the years, the cost of raw materials (limestone, coal, and gypsum) and energy had increased significantly. GCML’s production costs per metric ton of cement had risen from ₹3,000 to ₹3,800 over the last five years, affecting their competitiveness.
2. Inventory Management Issues: GCML had a high level of raw material and finished goods inventory. The company’s inventory turnover ratio had declined, leading to blocked capital and increased carrying costs.
3. Inefficient Energy Usage: Energy costs, particularly electricity and coal consumption, were one of the major contributors to overall production costs. However, no energy audit had been conducted for years, leading to inefficiencies in power consumption.
4. Overhead Allocation Issues: GCML’s method of overhead allocation was outdated, leading to poor cost control. Many overhead costs were assigned arbitrarily, making it difficult to identify specific cost-saving opportunities.
5. Unprofitable Product Mix: GCML produced three varieties of cement: Ordinary Portland Cement (OPC), Portland Pozzolana Cement (PPC), and Portland Slag Cement (PSC). However, it was found that OPC, while high in demand, was less profitable due to its higher production costs compared to PPC and PSC. The product mix needed strategic review.

Cost Audit by Dutta & Associates:

Dutta & Associates  and his team conducted a thorough cost audit of GCML, identifying inefficiencies and areas for improvement across all functions of the company.

1. Detailed Cost Analysis: The team performed a detailed cost sheet analysis, revealing that GCML’s cost structure was skewed. The cost per metric ton of cement (₹3,800) was higher than the industry average of ₹3,500. The analysis pinpointed high fuel and electricity consumption, excessive labor costs, and inefficient use of raw materials as major contributors.
2. Energy Audit and Optimization: The firm conducted an energy audit in collaboration with technical experts. It was found that old equipment was consuming more power, and there was a lack of energy-saving practices in place. Dutta & Associates recommended upgrading machinery, adopting renewable energy sources (solar), and implementing energy-efficient measures.

   Result: Energy costs per metric ton of cement were reduced by 15%, from ₹900 to ₹765, within six months of implementation.

3. Improved Inventory Management: Through a review of the inventory management system, the team introduced the Economic Order Quantity (EOQ) model and Just-in-Time (JIT) practices to optimize raw material purchases and reduce storage costs. They also set up a system to regularly review and eliminate obsolete stock.

   Result: Inventory holding costs were reduced by 20%, freeing up ₹50 million in working capital.

4. Rationalized Overhead Allocation: Dutta & Associates  restructured the overhead allocation process by introducing Activity-Based Costing (ABC). Each department’s costs were allocated based on actual activities, which provided better insights into cost drivers and allowed GCML to reduce unnecessary overheads.

   Result: Overhead costs reduced by 10%, translating to annual savings of ₹30 million.

5. Optimized Product Mix: The audit revealed that PPC and PSC were more profitable products, with production costs per ton of PPC at ₹3,200 and PSC at ₹3,300, while OPC cost ₹3,800. Despite OPC’s higher demand, Dutta & Associates recommended shifting focus to the more profitable PPC and PSC while maintaining OPC production at an optimal level.

   Result: By increasing PPC and PSC production by 15%, GCML achieved higher profit margins and maintained market share.

Outcomes of the Cost Audit:

Thanks to the comprehensive cost audit and strategic recommendations provided by Dutta & Associates, GCML experienced significant improvements within a year:

• Cost Reduction: Total production costs were reduced by 12%, from ₹3,800 per metric ton to ₹3,344.
• Profitability Boost: GCML’s profit margins increased by 5%, leading to a ₹200 million increase in net profit.
• Operational Efficiency: The energy consumption reduction and streamlined inventory management led to a 10% improvement in overall operational efficiency.
• Sustainable Practices: The shift to energy-efficient machinery and renewable energy sources helped GCML reduce its carbon footprint, aligning with industry sustainability goals.

Conclusion:

The case of GreenBuild Cement Manufacturing Ltd. illustrates how a well-executed cost audit can help an organization regain its competitive edge by identifying inefficiencies, optimizing processes, and focusing on sustainable cost-saving measures.  Dutta & Associates, played a pivotal role in transforming GCML from a struggling company to a profitable and efficient industry leader.

This success story not only highlights the importance of cost audits but also reinforces the brand value of Dutta & Associates as a trusted partner in providing cost management solutions to manufacturing units across India. The expertise and strategic vision of Dutta & Associates continue to set the firm apart in the competitive world of cost accounting consultancy.

Note : All names and figures are hypothetical but case study is based on actual analysis