Module 13. Estimation of cost and energy in product manufacture in food processing plant, sources for setting up of milk plants
Lesson 29
ESTIMATION OF COST OF MILK PRODUCTS MANUFACTURING
29.1 Introduction
Due to the increasing disposable income of 250 million of middle class families, expanding population and growing urbanization, the demand for milk is expected to increase to 160-170 million tons by 2020. The increase in demand and production of milk, which has grown nearly at a rate of 4% per annum, has attracted the multinationals to set up the milk plant in India. But the installed capacity of the milk plants is still remaining underutilized thereby resulting in high unit cost of processing. Volume of milk handling and the energy conservation in milk plants are the two important aspects, which affect the cost of milk processing and products manufacturing. Therefore, the large handling ability of milk plants will cut down per unit cost of processing.
The continuous estimates for economics of manufacturing dairy products are essential and useful for the management to take right decisions for product manufacturing, policy and planning purpose. In the present lesson the estimation of cost of milk products manufacturing is explained and illustrated with an empirical study conduced by the author and co-workers. The case study refers to ISO-9001:2000 and HACCP (Hazard Analysis and Critical Control Points) IS 15000 certified milk Plant having installed capacity of 70,000 litres per day provided a suitable background and therefore, was selected for the present investigation in the year 2001.
29.2 The Data
The required data for the financial year 2003-04 were collected from the records maintained by different sections of the milk plant for working out the cost of milk products manufacturing. The actual observation method was used to obtain information on consumption of water in different sections of the plant, steam condensation recovery during products manufacturing, sachet leakage during the operation of pre-pac machine, temperature on various stages of production. The time and motion study was conducted to record the time and different activities performed by a single person, labour used and time taken in different manufacturing processes, running time of the equipments and machines etc. The personal discussion and interview method was used to get information on electricity consumption in different sections of the plant, offices and consumption in streetlights. Discussions were held with the machine operators and incharge’s of different sections. The detailed data from the records were collected on the various aspects like daily raw milk received with Fat and SNF by the plant during the reference period, price paid for milk, raw material used by different sections of the plant for manufacturing different products, output of different products, salary and other benefits of the staff and contact labourers, fuel used in boilers, generators and other sections, spare parts, sundry items, electricity bills, telephone bills Interest paid on loans other recurring expenditures of the plant, chemicals used for testing of sample in the quality control section, running hours of different machines, capacity of the motors, current and voltage drawn by the motors fitted with different equipments from the log book maintained by different section or units.
29.3 Methodology
The milk plant under study was classified into two departments, namely, main department and Auxiliary department. The former was directly related to the manufacturing of milk products, whereas the later provided the services like steam generation, refrigeration, water supply, maintenance, quality control, effluent treatment plant etc. items under direct expenses like raw materials, packaging material, fuel and spare parts, etc. were allocated to the products as per their actual use. The milk Fat and milk SNF losses were worked out and the equipment amounts of losses were added in the cost of raw materials. Depreciation of the building/ machinery and equipments was worked by the straight-line method. The actual amount of interest paid by the plant during the study period was taken into account.
29.3.1 Cost components
For computing the cost items, the whole expenditure was classified into fixed and variable costs as below.
Total Cost = Total Fixed Cost + Total Variable Cost
29.3.2 Estimation procedure
The procedure employed for estimating expenditure on different cost components in the processing and manufacturing of milk products, the items of expenditure and their apportionment was done as discussed below.
29.3.3 Raw material cost
The raw material cost includes all the expenditure on milk and other material inputs, like sugar, salt, citric acid, flavors etc. used for manufacturing particular product. Milk losses are also included in the raw material. The cost of raw milk used in manufacturing different products was calculated on the basis of fat price paid by the plant during the financial year 2003-2004. The plant received mixed milk (cow and buffalo milk) and the data on price paid by the plant on the basis of fat contents were collected from the records of the plant. The fluctuations in price of raw milk were observed during the period of study. So weighted average of the price of raw milk was taken into account. The cost of raw milk was computed for different products on the basis of FAT and SNF contents in different products.
29.3.4 Water charges
The cost of extracting ground water per kilolitres was worked out. The cost of preparing soft water was also separately calculated and added in the cost of raw water for arriving at the cost of soft water. The soft water is mainly used for mixing in the products, steam generation and refrigeration section. The raw water is used for cleaning and washing crates etc. The water consumption was worked out for the boiler section as per the capacity of the boiler to evaporate water per hour. The water used in the refrigeration section was estimated in consultation with the operator and in charge of the refrigeration section. The water consumption in different sections of the production block for cleaning in the plant, cleaning of trays and other specific purpose was estimated by taking the actual observations from the water flow from the hose pipes, time of water flow and quantity of water.
29.3.5 Steam charges
To arrive at the cost of total steam/ steam used in different products, first of all the cost of production of one kg. of steam produced was calculated and then it was multiplied with the quantity of steam used in different operations and for manufacturing different products. The quantity of steam used in different products and for boiling the water was worked out by using the formula given in the analytical framework.
29.3.6 Electricity charges
The electricity energy can be estimated accurately if the separate energy meters are installed in each section of the plant. Since, the energy meters in different sections of the plant were not installed, therefore, in order to measure the power and electricity consumption, watt hour method was used to estimate the electrical energy consumed by street lights, tube light, ceiling fans, exhaust fans, wall fans, lamps, computers, air conditioners, impellers of the cold stores and other electric points around the buildings of the plant. The power consumption for running the machines for performing different operations in the production and auxiliary units was calculated on the basis of the actual current drawn, line voltage and power factor method by using the formulas presented in the analytical frame work.
29.3.7 Refrigeration charges
The role of the refrigeration section is to provide chilling water and maintain the required temperature in the cold stores of the plant. The cost of one kilocalorie of refrigeration was worked out and it was multiplied with the kilo calories required in extracting the heat from a particular product.
29.3.8 Quality control expenditure
The expenditure incurred in the quality control section of the plant was classified into fixed and variable costs. Expenditure on fixed costs such as depreciation on building and equipments was apportioned among different products on the basis of the value of the products. The expenditure on variable costs like chemicals was apportioned in different products on the basis of the material used in the sample tested for different products.
29.3.9 Labour charges
In a milk plant, single person is engaged in performing more than one activity particularly in production section of the plant. For example production manager looks after ghee production as well as the pouch filling operation with the assistance of other staff. So the man hours used for performing different activities were worked out by taking the actual observations by conducting the time study. Finally, man hours employed for manufacturing a particular product were multiplied with the per hour salary/wages of the concerned person. In case of contract labour, the wages were directly allocated to that job/ product for which the labour was hired.
29.3.10 Depreciation on building and machinery
Depreciation is a loss in the value of an asset due to its wear and tear. Depreciation on the building/ equipment was worked out by straight-line method. The life of the building depends upon the quality of construction, care and maintenance of the building. The depreciation rate of 2.5 percent was charged on the building as per the discussion with engineers of the plant ensuring that expected life of building is 40 years. In case of working out the depreciation on machinery/ equipments like moving machines, compressors, motors, still equipments, double jacketed equipments (silo tanks) and boilers, the useful life of different types of equipments and machinery was determined 15 to 25 years in consultation with the engineers of the plant.
29.3.11 Interest on investment
The interest on fixed capital was taken into account as such the actual amount paid toward interest by the plant during the financial year.
29.3.12 Store maintenance
The expenditure Incurred on repair and maintenance of equipment, machinery and building was allocated as per the records maintained in the store and included in the separate store maintenance head.
29.3.13 Watch and ward expenses
Watch and wards are the expense of the plant for its security, which was given on annual contract. The total expenditure of the security contract was apportioned among different products on the basis of their value.
29.3.14 Street light expenses
Miscellaneous expense Include the small expense on dusters, soap cakes, detergents, cleaning and sanitation material, glasses, towels used in different sections.
29.4 Cost of Milk Product Manufacturing
Component-wise cost of milk products manufactured has been presented in Tables 29.1 and 29.2.
29.4.1 Cost of full cream milk
The total cost of toned milk was estimated to be Rs 15.97/ litre (29.1). Among the various cost components, raw material cost was highest ( 901.17%) followed by packaging materials (2.00%), administration and supervision (1.75%), refrigeration (1.19%), labour (1.19 %) and less than one per cent was observed for rest of the components.
29.4.2 Cost of sweet flavoured milk (SFM)
The total cost of manufacturing Sweet Flavoured Milk (SFM) was worked out to be Rs 5.64/ 200 ml. bottle of which packaging cost was the highest (46.10%) followed by the raw materials (44.33%), labour (4.44%), electricity (2.30%) interest and depreciation (1.06%) and less than one per cent share was observed for rest of the components (Table. 29.1).
29.4.3 Cost of paneer
The cost of manufacturing Paneer was estimated to be 73.71/kg and Rs 14.76/200 gm. After the raw material cost (94.37%), the highest cost was followed by administration and supervision (1.38%), labour cost (1.29%) interest and depreciation (1.29%) and less than one per cent share was observed for rest of the components (Table. 29. 1).
29.4.4 Cost of ghee
The Total Cost of Ghee manufacturing (one litre poly pack) was estimated to be Rs 124.27/ 905g. Among the various cost components, the highest was observed for raw material (87.66%), followed by the administration and supervision (3.30%), electricity (1.54%), packaging materials (1.30%), labour (1.30%), quality control (1.22%) and less than one per cent was observed for the rest of the components ( Table29.1).
29.4.5 Cost of lassi
As evident from Table 29.2, the total cost of manufacturing sweet Lassi was estimated to be Rs 4.14/ 200ml cup and for salty Lassi Rs 3.12/ 250ml pouch.
29.4.6 Cost of dahi
The total cost of manufacturing Dahi shown in Table 29.2 was computed as Rs 3.91/ 200ml cup and Rs 7.60 for 400 ml cup.
Table 29.1 Component-wise Cost of Toned Milk, Sweet Flavoured Milk, Paneer and Ghee (2003-2004)
|
Cost Components |
Full Cream Milk |
Sweet Flavored Milk |
Paneer |
Ghee |
|||||
|
Unit Cost Rs./lit. |
Cost, % |
Unit Cost Rs./200 ml. bottle |
Cost, % |
Unit Cost Rs./kg |
Cost, % |
Unit Cost (Rs./200g) |
Unit Cost (Rs./905g) (Poly Pack) |
Cost, % |
|
|
Raw material |
14.56 |
91.17 |
2.50 |
44.33 |
69.56 |
94.37 |
13.91 |
108.93 |
87.66 |
|
Labour |
0.19 |
1.19 |
0.25 |
4.44 |
0.95 |
1.29 |
0.19 |
1.61 |
1.30 |
|
Electricity |
0.08 |
0.50 |
0.13 |
2.30 |
0.23 |
0.31 |
0.05 |
1.91 |
1.54 |
|
Water |
0.02 |
0.13 |
0.01 |
0.18 |
0.12 |
0.16 |
0.02 |
0.46 |
0.37 |
|
Steam |
0.10 |
0.63 |
0.05 |
0.88 |
0.12 |
0.16 |
0.03 |
0.65 |
0.52 |
|
Refrigeration |
0.19 |
1.19 |
- |
- |
0.24 |
0.33 |
0.05 |
0.65 |
0.52 |
|
Quality control |
0.09 |
0.56 |
0.01 |
0.18 |
0.19 |
0.26 |
0.04 |
1.52 |
1.22 |
|
Miscellaneous |
0.06 |
0.38 |
0.01 |
0.18 |
0.08 |
0.11 |
0.02 |
0.95 |
0.77 |
|
Packaging material |
0.34 |
2.00 |
2.60 |
46.10 |
0.25 |
0.34 |
0.05 |
1.62 |
1.30 |
|
Administration & supervision |
0.26 |
1.75 |
0.02 |
0.35 |
1.02 |
1.38 |
0.21 |
4.10 |
3.30 |
|
Interest, depreciation on building & machinery |
0.08 |
0.50 |
0.06 |
1.06 |
0.95 |
1.29 |
0.19 |
1.87 |
1.50 |
|
Total |
15.97 |
100 |
5.64 |
100 |
73.71 |
100 |
14.76 |
124.27 |
100 |
Table 29.2 Component-wise Cost of Lassi and Dahi (2003-2004)
|
Cost Components
(1) |
Cost of Sweet Lassi Rs./ 200ml.(Cup) (2) |
Cost of Salty Lassi Rs./250ml pouch (3) |
Cost of Dahi Rs./200ml cup (4) |
Cost of Dahi Rs./400ml cup (5) |
|
Raw Materials |
2.13 |
0.02 |
2.38 |
4.76 |
|
Labour |
0.24 |
0.30 |
0.23 |
0.46 |
|
Electricity |
0.03 |
0.03 |
0.01 |
0.02 |
|
Water |
0.01 |
0.01 |
0.01 |
0.01 |
|
Stream |
0.01 |
0.01 |
0.02 |
0.03 |
|
Refrigeration |
0.03 |
0.03 |
0.03 |
0.06 |
|
Quality control |
0.01 |
0.01 |
0.01 |
0.02 |
|
Miscellaneous |
0.02 |
0.02 |
0.02 |
0.02 |
|
Packaging materials |
1.53 |
0.63 |
1.05 |
1.92 |
|
Administration & Supervision |
0.04 |
0.02 |
0.03 |
0.06 |
|
Interest, depreciation on building & machinery |
0.09 |
0.05 |
0.12 |
0.24 |
|
Total |
4.14 |
3.12 |
3.91 |
7.60 |
29.5 Profitability in Milk Products
For working out the profit margins of different milk products, the unit cost of manufacturing different products was deducted from the net price received by the plant after paying all the marketing expenses incurred to pay the commission of agents, transportation expenses and taxes on different products. As evident from Table 29.3, among different varieties of liquid milk, Sweet flavoured milk turned out to be the highest profitable product (25.89%) followed by Skimmed milk (21.58%), Toned milk (20.41%), Standardized milk (18.99%), Double toned milk (16.90%) and full cream milk (7.08%) the lowest profitable product. In case of different milk products, the highest returns were observed for salty Lassi (37.82%) followed by sweet Lassi (28.01%), Dahi (18.42%), Ghee (11.30%) and lowest for Paneer (1.15%).
Table 29.3 Profitability in Milk Products (2003-2004)
|
Product
(1) |
Price received by the plant (2) |
Unit cost of manufacturing (3) |
Profit margin (2-3) (4) |
Profit, % (4÷3) (5) |
|
Full cream milk (lit.) |
17.10 |
15.97 |
1.13 |
7.08 |
|
Standardized milk (lit.) |
16.10 |
13.53 |
2.57 |
18.99 |
|
Toned milk (lit.) |
14.10 |
11.71 |
2.39 |
20.41 |
|
Double toned milk (lit.) |
12.10 |
10.35 |
1.75 |
16.90 |
|
Skimmed milk (lit.) |
11.10 |
9.13 |
1.97 |
21.58 |
|
Sweet falvour milk (200 ml bottle) |
7.10 |
5.64 |
1.46 |
25.89 |
|
Paneer (kg) |
74.56 |
73.71 |
0.85 |
1.15 |
|
Ghee (950 g) |
138.31 |
124.27 |
14.04 |
11.30 |
|
Dahi (400 ml.) |
9.00 |
7.60 |
1.40 |
18.42 |
|
Lassi sweet(200 ml) |
5.30 |
4.14 |
1.16 |
28.01 |
|
Lassi salty(200 ml) |
4.30 |
3.12 |
1.18 |
37.82 |
Conclusions
The share of packaging cost for Sweet Flavored Milk was observed higher (46%) followed by Sweet Lassi (36.95%) and Dahi, 400ml cup (25.26%). The packaging cost of these three products seems to be higher. The management of the plant must look into and search for alternative packaging materials. Among different products paneer manufacturing was found lowest profitable proposition. There is a need to explore the possibility to increase the profits in Paneer manufacturing by increasing the price of the product or to adopt some suitable steps by using the residual whey for manufacturing byproducts to bring down the cost.
Selected references
Chauhan A.K, Kalra K. K., Singh Raj Vir and Raina B.B. 2005. Profitability in milk products manufacturing in a dairy plant, Indian Dairyman, 57(11):25-31.
Singh, Raj Vir and Karla K.K. 1979. Costing of dairy products. Report of the Division of Dairy Economics, Statistics and Management, NDRI, Karnal (Haryana).