ADM_Project Report

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Cost Analysis of Apollo Tyres


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TABLE OF CONTENTS

ACKNOWLEDGEMENT .............................. ......................... ............................... ............................. ........... 3

EXECUTIVE SUMMARY ............................................................................................................................. 4

INTRODUCTION ....................................................................................................................................... 5

APOLLO TYRES LTD:.............................................................................................................................. 5

COST SHEET ............................................................................................................................................. 5

CLASSIFICATION OF COSTS ....................................................................................................................... 5

Prime cost:........................................................................................................................................... 5

Factory/Works Cost: ............................................................................................................................ 6

Cost of Production (COGM): .......................... ................................ ...................... ................................ . 6

Cost Of Goods Sold (COGS): ................................................................................................................. 7

ASSUMPTIONS AND CRITERIA FOR ALLOCATION OF COST ................................................... ................. 8

ANALYSIS OF COST SHEET: 2008............................................................................................................... 9

Break-up of Raw Material consumed: ................................................................................................ 10

ANALYSIS OF COST SHEET: 2009............................................................................................................. 11


ANALYSIS OF COST SHEET: 2010............................................................................................................. 13


COST ANALYSIS: ..................................................................................................................................... 15

Prime Cost Analysis: ........................................................................................................................... 15

Work Cost Analysis: ........................................................................................................................... 17

Cost of production: ............................................................................................................................ 17

Cost of Goods Sold: ............................................................................................................................ 18

Fixed costs: ........................................................................................................................................ 18

Variable Costs: ................................................................................................................................... 20

Analysis of the Sales, Variable costs, Fixed costs, Contribution, P/V Ratio and Break-even point: ....... 22


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ACKNOWLEDGEMENT

This report has been very important to us as it has given us an opportunity to learn

how to go about analysing the cost structures and various financial sheets of acompany. It has also given us a opportunity to learn a few nitty gritties about the

India tyre industry and how Apollo being a Local player is making its presence felt

globally. It has also helped us in think about all the scenarios which could affect our

study, which we will be able to carry forward in our lives. For all this we would like

to thank Prof. Subha Kant Padhi , our course instructor, who apart from going

about the course in a wonderful manner has also been was very forthcoming with

any guidance or clarification that we required and also giving us hints from time to

time.

We would also like to thank our friends, family and compatriots here at XIMB for

giving their valuable support and ideas on how to go about the analysis.


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EXECUTIVE SUMMARY

This review and study focuses on the various cost components over the last 3

financial years starting from 2007-08 till the last financial year 2009-10.

The global economic downturn during 2008 had impacted businesses worldwide.

The Apollo Tyres Ltd. was a no different case where operations and profitability

also have been affected.

The high price of raw material in the fiscal year was a precursor to the slowdown

that was seeded by the sub-prime crisis in the USA. The prices of natural rubber

shot through the roof taking its toll on the profit margin. The steep fall in demand

coupled with the steep price of raw materials, eroded what could has been a very

profitable two years. Despite the fall in raw material prices over the years, the

average procurement cost remained high but the company was still able to register

a profit due to judicious planning and sales.

The major concern was the spiralling prices of natural rubber to current all time

highs, which have sharply impacted the Indian operations, the company has been

quick to react to the changing environment as it has been able to liquidate the

inventories, as a result of which it is uniquely poised to take advantage of the softer

raw material prices in the coming year. Though the natural rubber prices were high

locally they couldnt even import the resource due to the new duty policy of the

Indian government and hence led to the increase in price to the customers. This had

led to them believing that there are more opportunities abroad than in India and

that also proved right by the successful takeover of Dunlop in South Africa andrevamping it to obtain profits. Overall the company has increased its operational

efficiencies and fine tuned its manufacturing processes. The awarding of the Gold

Certificate to Apollo at the India Manufacturing Excellence Awards is a reflection of

companys endeavours.


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INTRODUCTION

APOLLO TYRES LTD:

Apollo tyres Ltd. the 15th largest tyre manufacturer, with annual revenues of Rs. 81

million (US$ 1.8 million) as of December 2010 was commissioned by Peramba,Kerala in 1976 when it got itself registered, and from there on it has gone on to

become one of the largest industrial houses in India. After the acquisition of Dunlop

Tyres International of South Africa in 2006 it now has four manufacturing units in

India at Cochin in Kerala, Limda in Gujarat, Perambra in Kerala, Chennai in Tamil

Nadu, two in South Africa at Durban and at Harare, one in Bulawayo, Zimbabwe

and one in Europe at Enschede in Netherlands. In India it houses 4000 dealership

and 2500 exclusive outlets and in South Africa it has 900 dealership outlets of

which 190 are Dunlop Accredited dealers.

Apollo tyres garner 58% of its revenue from India, 28% from Europe and 13% from

Africa and plan to become the 10th biggest player in the tyre industry with annual

revenues of $5 million.

COST SHEET

Cost Sheet is a statement, which shows various components of total cost of a

product. It classifies and analyses the components of cost of a product. Previous

periods data is given in the cost sheet for comparative study. It is a statement

which shows per unit cost. The details of total cost presented in the form of a

statement are termed as Cost sheet.

CLASSIFICATIONOF COSTS

Prime cost:

It is defined as the cost of material and labour to make a product.

It consists of only the direct costs and not the overheads. 3 main components of

Prime costs are:-

1. Direct Materials2. Direct Labour3. Direct Expenses

Direct Materials: Cost of those materials which enter into and form part of the

product. Direct materials include:

y All materials used for a particular process


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y All components used in productiony All primary packing materials

Direct Labour: Cost of wages paid to operatives who help in the construction,

composition and conformation of the product manufactured by the concern.

Direct Expenses: Cost directly identified with a job, process or operation but are

neither direct material cost nor direct labour cost.These expenses are not

incurred while the job is in process of execution.

Factory/Works Cost:

It is defined as the sum of prime cost and absorbed production overheads.

Absorbed Production Overhead: Refers to the production overhead which, bymeans of absorption rates, is included in costs of specific products or saleable

services in a given period of time. There are various components of production

overhead such as:

y Repair & Maintenance Costy Power & Fuel costy Rentsy Taxesy Depreciation of building, plants, machineries etc.

Net Factory/Works Cost is obtained by adding opening work-in-progress (WIP)and subtracting closing work-in-progress (WIP) to Gross Factory/Work Costs.

Cost ofProduction (COGM):

It is defined as total costs during an Accounting Period of all goods produced, which

includes costs of material, labour, and overhead, whether fixed or variable.

Mathematically, it is the sum of Factory/Works Cost and administration overheads.

Administration Overhead: It refers to the cost of management, and of secretarial,

accounting and administrative services, which cannot be directly related to

production, marketing, and research or development functions of the enterprise.

In short, administration expenses are in the nature of indirect expenses and

include the following:

y Salaries of office staff, accountants, directors, etc.y Maintenance of factory estate.


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y Rents, rates and depreciation of office buildings.y Postage, stationary, telephone, etc.y Office supplies and expenses.y General administration expenses.

Cost of production available for sale can be obtained by adding opening finishedgoods and subtracting closing finished goods to cost of production (COGM).

Cost Of Goods Sold (COGS):

The direct costs attributable to the production of the goods sold by a company. This

amount includes the cost of the materials used in creating the good along with the

direct labour costs used to produce the good. It excludes indirect expenses such as

distribution costs and sales force costs. COGS appear on the income statement and

can be deducted from revenue to calculate a company's gross margin.

Mathematically, cost of goods sold (COGS) is the sum of cost of production (COGM)and marketing cost or selling and distribution overhead.

Selling & Distribution Overhead: The cost incurred in researching the potential

markets and promoting products in suitably attractive forms and at an

acceptable prices. These are further analyzed into:

1. Selling Cost2. Publicity Cost3. Distribution Cost

Selling Cost: It refers to the cost incurred in securing orders, usually including

salesmans salaries, commissions and travelling expenses. Other examples are:

rent of sales rooms and offices, training of salesman and sales staff, cost of

preparing tenders for special sales, cost of after-sales services etc.

Publicity Cost: It represents:

y Cost incurred in advertising and promotion as aids to eventual sales ofgoods and services.

yCost incurred in advertising and promotion of an entity as distinct fromits products or services (public relation).

Distribution Cost: It is the cost incurred in warehousing saleable products and in

delivering products to customers. It includes rent, rates and depreciation of

warehouses, cost of insurance, freight, export duty, parking, shipping,

maintenance of transport vans, etc.


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ASSUMPTIONS AND CRITERIAFORALLOCATIONOF COST

y The cost sheet and comparative study has been done for one product (storagemedia) produced by the company from the financial statements.

y Sales volume is not given in financial statements and we have used mechanismof inventory adjustment using FIFO to find the number of units sold.

Formula for calculating number of units sold

Units Sold = Opening Inventory Units (Last Year Price) + Number of Units

Produced Closing Inventory Units (Current Year Price)

y Packing material includes protective film (as per Annual reports) used forstorage material and thus relates to primary packaging expenses and thus it has

been considered in Direct Expenses.

y Royalty is paid for production rights and thus it is considered in direct expense.y Depreciation cost has been apportioned as per cost elements from Schedules

available in Annual Report of the company.

y Cost of software, technical know-how and copyrights are indirect costs toproduction and have been therefore included in Administration Overheads.

y Marketing and Distribution rights cost has been included in Selling andDistribution Overheads.

y General staff expenses like directors fees and remuneration to auditors havebeen included in Administration Overhead as they represent indirect

supervision and management cost.

y Details for miscellaneous expenses are not available in annual reports and samehas been considered in factory cost by us.


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ANALYSIS OF COST SHEET: 2008

Cost-sheet-2008 Rs (in million) %of total cost

Direct Material

Raw materials Consumed 23930.19

Less: Scrap Recoveries 80.59

23849.6

Change in inventory level -513.24

Purchase of finished goods 1035.08

24,371.44 75.6%

Direct Labour

Salaries, wages and bonus 1855.75

Contribution to provident and other funds 115.38

Welfare expenses 299.42

2,270.55 7.04%

Direct Expense

Direct expense

Prime Cost 26,641.99 82.65%

Production/Factory Overheads

Stores and machinery spares consumed (including loose tools) 270.81 0.84%

Power and fuel 1348.15 4.18%

Insurance 65.58 0.20%

Repairs and maintenance

(a) Buildings 21.03 0.07%

(b)Plant and machinery 66.26 0.21%

(c)Others 122.56 0.38%

Rent 93.8 0.29%

Lease Rent 200 0.62%

Conversion Charges 448.91 1.39%

Research and Development 107.42 0.33%

2744.52 8.51%


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`

Among all cost units in comparison to total cost, Raw Materials cost is highest and is

around 75.6% of total cost which is an expected phenomenon in a manufacturing company.

The cost of direct labour is around 7.04% which is again within standards of manufacturing

companies. The prime cost is around 82.65% of the total cost. The factory overheads are

totalling up to 8.51% while the Cost of Production is around 94.6% of the total cost. Hence

the Selling and distribution overheads form 5.4% of the total cost, which is justified as tyre

manufacturers need not spend too much on advertising and promotions and distribution on

account of their direct tie-ups with automotive manufacturer companies.

Break-up ofRaw Material consumed:

This kind of a distribution is in line with manufacturing industry like tyres where the

major costs are incurred in manufacturing, a small part of the costs is in Sales and

Distribution and Administrative & Factory overheads for only a small part of the total

costs.

Administration/office overheads

Legal and professional charges 101.15 0.31%

Travelling expenses 394.04 1.22%

Miscellaneous 407.16 1.26%

Director sitting fee 0.92 0.00%

Rates and Taxes 74.88 0.23%

Postage and telephone 63.86 0.20%Bank Charges 48.61 0.15%

1090.62 3.4%

Cost of Production 30,477.13

Sales & Distribution Overheads

Advertisement/Promotion 859.48 2.67%

Freight 851.15 2.64%

Commision 43.57 0.14%

Provision for doubtful advances 2.25 0.01%

1756.45 5.4%

Cost of Goods Sold 32,233.58

ParticularsTonnes Rs(in million)

%of total raw

material cost

Fabric 24929.93 4193.56 15.0%

Rubber 139664.3 13490.96 48.1%

Chemicals 21460.37 1953.54 7.0%

Carbon Black 69256.16 2817.91 10.0%

Others 1474.22 5.3%

Total 23930.19


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Cost-sheet-2009 Rs (in million) %of total cost

Direct MaterialRaw materials Consumed 28,042.63

Less: Scrap Recoveries 95.99

27946.64

Change in inventory level 374.09


29,482.77 78.5%

Direct Labour

Salaries, wages and bonus 1654.32

Contribution to provident and other funds 129.31Welfare expenses 291.83

2,075.46 5.52%

Direct Expense

Direct expense

Prime Cost 31,558.23 84.01%




Insurance 60.26 0.16%




(c)Others 126.89 0.34%

Rent 103.01 0.27%




3126.74 8.32%


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From the analysis of cost sheet we see cost of direct material which includes raw material

as well as cost of finished goods constitute about 78.5 % of total cost. This is also attributed

to continued increase in the cost of natural rubber which touched a peak of Rs 142 /kg in

August 2008. Also Crude oil touched a high of US $ 145 per barrel in July 2008. As evident

from break-up of raw materials quantity of Rubber and Fabric used has reduced from 2008

to 2009 but despite that the costs have increased.

Break-up ofRaw Material consumed:

The cost of direct labour is around 5.52% which is again within standards of

manufacturing companies. The prime cost is around 84.01% of the total cost. The factory

overheads are 8.32% while the Cost of Production is around 95% of the total cost. Hence theSelling and distribution overheads form 5.0% of the total cost, which is justified as tyre

manufacturers need not spend too much on advertising, promotions & distribution on

account of their direct tie-ups with automotive manufacturer companies. This kind of a

distribution is in line with manufacturing industry like tyres where the major costs are

incurred in manufacturing and a small part of the costs is in Sales and Distribution.

Administration/office overheads

Legal and professional charges 140.1 0.37%

Travelling expenses 434.04 1.16%

Miscellaneous 223.06 0.59%

Director sitting fee 0.98 0.00%

Rates and Taxes 74.11 0.20%

Postage and telephone 64.63 0.17%

Bank Charges 61.14 0.16%998.06 2.7%

Cost of Production 35,683.03

Sales & Distribution Overheads

Advertisement/Promotion 913.69 2.43%

Freight 879.37 2.34%

Commision 50.04 0.13%

Provision for doubtful advances 38.87 0.10%

1881.97 5.0%

Cost of Goods Sold 37,565.00

ParticularsTonnes Rs(in million) %of total raw

material cost

Fabric 23131.64 4450.73 15.9%

Rubber 131090.1 16225.1 57.9%

Chemicals 20795.05 2041.15 7.3%

Carbon Black 64344.1 3447.97 12.3%

Others 1877.68 6.7%

Total 28042.63


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1

%

Direct Material

Raw materials Consumed 30,579.03Less: Scrap Recoveries 129.36

30449.67

Change in inventory level -261.74


31,704.76 74.8%

Direct Labour

Salaries, wages and bonus 2,374.33

Contribution to provident and other funds 144.35

Welfare expenses 376.07

2,894.75 6.83%

Direct Expense

irect expense

Prime Cost 34,599.51 81.58%




nsurance 53.22 0.13%




(c)Others 183.17 0.43%

Rent 134.78 0.32%




3640.16 8.58%


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This kind of a distribution is in line with manufacturing industry like tyres where the

major costs are incurred in manufacturing, a small part of the costs is in Sales and

Distribution and Administrative & Factory overheads for only a small part of the total

costs.

COST ANALYSIS:

PrimeCost Analysis:

As can be observed from the data the prime cost initially increased by 18.4% from 2008 to

2009 and then increased by 9.63% from 2009 to 2010. A closer look at the data reveals the

following:

The primary reason for the increase is due to increase in the purchase of rawmaterials. This could be probably be due to the fact that the company was moving out of

recession because of which Sales was increasing and thus to meet the demand more raw

materials needed to be procured.

In the year 2009 the inventory is actually reduced, this could be because thecompany was conservative in their growth estimate. Their sales expectations were not very

high but with the economy recovering the company used a part of its inventory to meet its

demand.

In the year 2009, there is a decrease in the cost of labour by 12.2 % whereas itincreased by 43.5%. This data again corroborated with the global recession. Due to

recession there were certain cost control measures like employee layoff. Due to this there is

a reduction in the cost of wages of employees. However in 2010, the growth is due to hiring

of employees to meet the new demand as the economy was reaching pre-crisis growth levels.

Prime cost consists of Direct Material and Direct Labour. The former contains componentsof cost such as the purchase of raw materials and finished goods. Also it captures the

change in inventory over the financial period. The latter consists of salaries, wages and

bonuses of employees/workers apart from the benefits that they are entitled to such as PF

and welfare expenses.


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The change in the cost components of Direct Material over a period of three years is as

shown below:

We can observe a rising trend in the raw materials component, while there is a marked

reduction in the inventory levels in 2010 which can be attributed to an increase in demand,

requiring quantity to be taken out of inventory in hand.

Similarly, the change in cost components of Direct Labour over the last three years is as

below:

There has been a significant increase in the salaries, wages and bonuses component in 2010

as compared to the previous year.

-5,000.00

0.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

35,000.00

Rawmaterials

Change ininventory

level

Purchase offinished

goods

2009-2010

2008-2009

2007-2008

Change!

n"# $

%

#

f &!

'ect ( aterials

#

)erthelastthreeChangeincostof & irect ( aterialsoverthelastthree

0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

2009-2010

2008-2009

2007-2008

Changeincostof & irect 0 abour componentsoverthelast


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WorkCost Analysis:

As can be observed from the data the work cost decreased by 13.92% from 2008 to 2009,

whereas it increased by 16.42% in the year 2010.

The increase in the year 2010 is largely due to the increase in the cost of 26.5% inthe stores and machinery spares used. This is again due to the increase in the production to

match the increase in the demand.

The power and fuel costs have also shown an increase of 9.5% in the year 2010which was offset by a decrease in the cost of insurance by about 11.6%

The cost of rent has also been increased by a huge percentage of 30.84% and theother cost of repair and maintenance has also increased by an amount of 44%.

Cost of production:

As can be observed from the data the cost of production increased by 17.1% in the year

2009, whereas it increased by 11.2% in the year 2010. A closer look at the data reveals the

followings:

Apart from the reasons mentioned above, the cost of production is impacted becauseof the following reasons. In the year 2010 the increase is due to the increase in the

miscellaneous expenses by a tremendous amount of 321.6%.

There is also an increase in the legal and professional charges by 87.07% in the year2010. This along with the increase in the miscellaneous expenses is one the prime reasons

from the increase in the administration overhead costs.

Thus the raw materials procurement, along with salaries and other cost used toproduce goods have shown an increase in the year 2010. The main reason is that the

economy was moving out of the recession and increase in growth boosted sales thereby

increasing production.

The conversion charges have also shown a tremendous increase of 31.96% in theyear 2010 due to which there is an increase in the cost of production.


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The changing trend in production cost can be seen from the below diagram.

Cost of Goods Sold:

The advertisement cost has increased tremendously by about 68.71%, which isprimarily due to an aggressive advertisement and promotion campaign used by the

company in the recent year.

The increase in freight charges is primarily due to increase in the quantity of salesin the year 2010.

There has been a huge decrease of 79% in the provision for doubtful advances in theyear of 2010, this again shows that the company was getting increase confidence in the

economy.

Fixed costs:

The Fixed Costs for Apollo Tyres consists of various components which is not surprising for

a well established company. From the chart it is evident that the major contribution to

Fixed Costs is from Advertising and promotion efforts taken over the year. This is

complemented with an increase in sales for the year which indicates that the promotional

2009-2010

2008-2009

2007-2008

-5,000.00

0.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

35,000.00

Raw materialsChange in inventory levelSalaries, wages and bonus

2009-2010

2008-2009

2007-2008

Changeincost ofproductionoverthelast 31

ears


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VariableCosts:

Variable Costs have a significant bearing on the total cost of production for the company.

The various components of variable costs for Apollo Tyres can be viewed in the figure above

along with their respective percentage shares in the total variable cost. It is evident that

major cost component is Direct Materials which can be attributed to the cost of raw

materials. There is also a marked decline in the inventory of goods thus indicating an

increase in demand levels which were met by inventory on hand. There were also some

purchases of finished goods.

The second biggest contributor to variable costs is the Direct Labour component which

includes salaries, wages and bonuses of workers, apart from the benefits provided to them

such as PF and welfare expenses.

0

500

1000

1500

2000

2009-2010

2008-2009

2007-2008

Comparison of 2 ixedCostcomponentsoverthelastthree


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A comparison of the different cost levels of variable cost components in the last three years

is as shown below. From this we can infer that there has been a steady rise in the cost of

Direct Materials over the last three years.

Direct Materials

Direct Labour

Stores and machinery

spares consumed

(including loose tools)Power and fuel

Research and

Development

Travelling expenses

Freight

3

ommision

Componentsof VariableCosts for 2010

0

10000

20000

30000

40000

2009-2010

2008-2009

2007-2008

Changesin VariableCostcomponentsoverthelast


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Analysis of the Sales, Variable costs, Fixed costs, Contribution, P/VRatio

and Break-even point:

The total sales value has been increasing over the years. It showed a growth of7.12% in 2009 whereas a growth of 19.25% in 2010. Thus the company sales have been a

positive growth; however the growth percentage more than doubled in 2010 primarily dueto the increase in the demand in the world economy.

The total variable costs too have increased over the years. It increased by 17.71% in2009 as compared to 10.2% increase in the year 2010. This is largely due to the increase in

the cost of raw materials like fabric rubber, chemicals and carbon black along with the

increase in the cost of labour. It should be noted that the increase in the cost of materials in

2009 was higher compared to the increase in 2010 due to which the percentage growth in

2010 is lower when compared to that in 2009.

The fixed cost did not show much deviation in 2009; however in 2010 there was ahuge increase in the fixed cost by about 42.42%. This is primarily because of increase in the

production which increased factory costs. To expand production new factories and machineswere used which increased factory rent costs as well as machine repair and maintenance

costs.

The contribution decreased in the year 2009 by 16.34%. An important issue to notehere is that although sales increased by 7.12% in 2009, contribution actually decreased.

This is primarily due to the increase in the variable costs. The variable cost increased by a

greater percentage as compared to sales due to which the contribution actually decreased in

2009. In 2010 the contribution increased by huge amount of 47.38%. The reason for this

was an increase in the sales value by 19%. The variable cost however increased by only

about 10%. It was primarily thus due to this reason that the contribution increased

tremendously in 2010. The reason could also be given to the growth in the economy post therecession. The demand of the products increased which boosted sales, and also provided

economies of scale in production.

The P/V ratio also showed a reduction in the year 2009. It stood at a value of 24% ascompared to 31% in 2008. This is largely due to decrease in the contribution and increase in

sales during the period. Decrease in contribution and increase in sales both led to a

reduction in the contribution. However in the year 2010 the contribution again increased to

a value of 30% of sales.

The Break-even point has shown a constant increase over the years. In 2008 thevalue was at 10195.56 million rupees, whereas in 2009 it was 12835.56 million rupees and

14791.22 million rupees in 2010. The break-even point increased in 2009 due to a reductionin the P/V ratio. However it increased in the year 2010 due to an increase in the fixed cost

as compared to 2009. Thus the break-even point has shown an upward trend in the last

three years.

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