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INTRODUCTION TO OPERATING COST

The information concerning the business enterprise is very


helpful to the management to control it in an efficiently way.

As the other branches like financial accountancy and


management accountancy, the cost accountancy also serves the
important information to the management regarding the operating
efficiency of the business. It becomes very easy for management to
lay down management policies, to guide management decisions or
evaluate operating management performance with the information
provided by cost accounting.

The term operation in business terminology refers to an


activity of the business. It is very important to study the operations
of the business in detail because depends on the operations, which
it performs. The management should always concentrate on the
efficiency of the operation and also the costs associated to the
operations. It is very important to control the costs associated to
the operations for the enterprises like manufacturing companies,
companies engaged in the process of extraction of materials from
earth like, coal mines etc.

Generally, the above mentioned business enterprises


depend on the operation that it has to be performed in to produce in
to produce the final output. The costs associated with such
operations are generally higher. These costs are called as
“operating costs”.

The costs, which are incurred to perform the operation of


the enterprise, are called as operating costs.

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These costs are to be accounted for in order to arrive at
the total costs of operation or process, which helps in determining
the price of the final product.

“Cost accounting is the classifying, recording and


appropriate allocation of expenditure for the determination of the
costs of products or services, and to the presentation of suitably;
arranged data for the purposes of control and guidance of
management.”

It includes the ascertainment of the costs of every process,


operation, services or contrast as may be appropriate. It deals with
the cost of production, selling and distribution. It thus, the
provision of such analysis and classification of expenditure as will
enable the total cost of any particular unit of production to be
ascertained with reasonable degree of accuracy and at the same
time to disclose exactly how such total cost is constituted (i.e. the
value of material used, the amount of labour and other expenses
incurred) so as to control and reduce the cost.

THE FEATURES OF COST ACCOUNTING:

1. It is a process of accounting for costs.

2. It records income and expenditure relating to goods and


services.

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3. It provides statistical data on the basis of which future
estimates are prepared
4. and quotations are submitted.

5. It is concerned with cost ascertainment, cost control and cost


reduction.

6. Finally it involves the preparation of right information to the


right person at the right time so that it may be helpful to
management for planning, evaluation of performance, control
and decision-making.

ADVANTAGES OF COST ACCOUNTANCY

1. It enables a concern to measure the efficiency and than to


maintain and improve it. This can be done with the help of
comparison of data made available of the previous periods
and current period.

2. It provides information upon which estimates and tenders are


based.

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3. It guides for future production polices. It explains the cost
incurred and there by provides data on the basis of which
production can be appropriately planned.

4. The extract cause of decrease or increase in profit/loss can be


detected. A concern may suffer not because of the cost of
production is high or prices are low but also because the
output is much below the capacity of the concern.

5. Efficiency of public enterprises. Costing has a more


important role to play in public enterprises than in private
enterprises. The primary objective of the public enterprises is
not to raise profits but it is to serve the society by providing
quality good at cheaper rates.

The efficiency of a public sector can be judged by comparing its


cost of production of its counterparts.

STATEMENT OF THE PROBLEM:

The main focus is on the operating costs of a coal mine in the


Singareni collieries company limited.

OBJECTIVES OF THE STUDY:


The study of “operating costs of a coal mine” proposes
the following:

• To identify the operations of the coal mines.

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• To identify the different technologies used to extract the
coal from earth.
• To find the associated with the process under various
technologies.

SCOPE OF STUDY:

The area of the study was restricted to the Singareni


collieries company limited and its operations.

METHODOLOGY OF THE STUDY:

Data collection methods


The study is based on both secondary and examines the
total costs vs. operating costs. The results are drawn mainly from
the primary and secondary data collected.

Secondary data has been collected from the various sources


such as
 Publications of the company.
 Business magazines.
 Journal, text books.
 Websites.
 Annual reports.

In order to gain information on current process and operations the


area chosen for study is the BHOOPALPALLY IN WARANGAL
DISTRICT.

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TOOLS & TECHNIQUES OF DATA COLLECTION:

1. This phase of the project deals with the various techniques


adopted in gathering information.
2. The information and data was collected during my visit to the
coal mine and GM office of Bhupalpally area.
3. The study required observation method, which has both of
direct and indirect in NATURE.
4. A questionnaire was adopted was designed to collect the
relevant information. Questionnaire consists of both open
ended and close-ended questions.
5. The direct approach was adopted to gather as much
information as possible, by interacting with persons working
in organization such as operational engineers of the mine,
additional General Manager (finance), deputy General
Manager(finance), accounts officers and other executives and
so on.
6. The direct approach was also adopted to gather was also
adopted to gather the relevant
7. Information for the study.

Limitations of the study:


1. Coverage area was only limited to one coal mine in the
company.
2. The financial data of the mines is limited to one year.
3. The study is based on secondary data.
4. There may be approximation.

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COMPANY PROFILE

INTRODUCTION OF COAL MINING IN INDIA:

Man had blessed with abundance of natural resources,


including mineral wealth. That play vital role in the
development of a country and promote the economic growth
when explored and made best use of them.

Coal, which is one if the important minerals, is


known to man since ages and this natural wealth has put to
diverse use in the modern world. Coal regarded as the fuel
for growth, the coal is an important input for power
generation and many other industries like iron and steel,
railway, shipping and construction industries etc, a vital
infrastructure for economic development. Despite the
development of alternative fuel sources like electricity, petrol

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and solar energy, coal continues to be major fuel material in
many industries. Thus coal industry plays an important role
in the industrial development of any country, like India.

The world coal consumption is projected to go up from 4.7


billion tines in 1999 to 6.4 billion tones by 2020, primarily in
china and India, which are expected tom account for 75% of
the increased consumption.

In India coal mining was started in 1774 and is still


significantly under the Government control and ownership
with coal India Limited (CIL), along with Government with
its following subsidiaries are become number one coal
producer in India.

1. Eastern coal fields India limited (ECFIL) – Sanctrica, west

Bengal.

2. Bharath cooking coal limited (BCCL) – Dhanbad, Bihar

3. Central coal fields limited (CCL) – Ranchi, Bihar.

4. Northern coal fields limited (NCFL) Singrauli, Madhya

Pradesh

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5. Western coal fields limited (WCFI) – Nagpur, Maharashtra.

6. Mahanadi coal fields limited (MCL) – Sambalpur, Orissa

7. Central mining planning & Design institute Limited

(CMPDIL) - Ranchi, Bihar

8. Singareni Collieries Company Limited (SCCL) –

Kothagudem, Andhra Pradesh.

SINGARENI COLLIERIES COMPANY LIMITED:

ORIGIN:

A remarkable little adventure gave birth to this giant


corporate entity that us today the Singareni Collieries Company
Limited.

Way back on a dark night in 1870 a group of Pilgrims


who on their way to have a Darshan of Lord Rama at
Bhadrachalam Temple (near Singareni Village) has lit a fire to
prepare their meal. One of the supporting stones on their

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makeshift stove caught fire. The incident was immediately
reported to the local Government.

This led to an extensive survey by Dr. William King, an


eminent Geologist, which confirmed the revolutionary
discovery of mammoth deposits of coal in the Godavari Valley.

The rest, as they say, is HISTORY :

The year 1886 witnessed the formation of the


Hyderabad Deccan Company Private Limited and It
acquires the mining rights for exploiting the coal reserves.
The first commercial operation commenced at Yellandu
(Khammam District) in Andhra Pradesh in 1889. In 1921 the
company was re-christened the “Singareni Collieries Company
Limited” and its script listed on the London Stock Exchange.

The mining rights for exploiting the coal reserves were


acquired by the Hyderabad Deccan Company, which was
incorporated at London Exchange. Hence the first extracting of
coal was started at Yellandu in 1886 by Hyderabad Deccan
Company.

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The company become Government Company after
Nizam purchased its shares from London Stock Exchange in
1945.With this SCCL became the first-ever government
management Coal Company in India. Later in the year 1949,
SCCL came under the control of Government of India and
Andhra Pradesh as a joint venture with equity ratio of 49% and
51% respectively.

The Bhupalpally Area was started the ensuing the coal


since the year 1997. Till it has working as five underground
mines and one opencast sector – I project. The life of the coal
mines nearly 75 years. So, the village of the Bhupalpally had
changed as Mandal and it has developing Area.
The SCCL is engaged in coal mining in four districts of
Andhra Pradesh namely, Khammam, Karimnagar, Adilabad and
Warangal. In overall India it spreads to 6% geographical area
producing 10% of total coal.

The Operation Areas of SCCL are as follows:

KHAMMAM DISTRICT Kothagudem, Yellandu and

Manuguru.

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ADILABAD DISTRICT Bellampalli, Mandamarri and

Srirampur

KARIMNAGAR DISTRICT Ramagundem I, II, III

WARANGAL DISTRICT Bhupalpally.

The Coal reserves stretch over 350 squares Kms.


of Pranahitha Godavari valley of above Districts of Andhra
Pradesh with provide geological reserves of 9384, million tones
of coal.

SCCL now operates Thirty Six (36) under Ground


Mines and fourteen (14) open cast Mines in these four (4)
Districts.

MILE STONES OF TECHNOLOGY INTRODUCTION :

1948 Introduction of machine mining (Shuttle car)

1951 Electric Coal Drills.

1953 Electric cap Lamps.

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1954 Flame proof Mining Machinery.

1975 Open Cast mining.

1979 Side Dump Loaders (SDL s)

1981 Load hauls Dumpers.

1983 Mechanized Long wall.

1986 Introduction of computers and walking Dragline in

Opencast Mines.

1989 French Blasting Gallery Technology.

1994 In pit crushing & conveying Technology.

Vision , Mission and Principles Guiding Sustainable

Development:

Vision :

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a. Vision shall bring into view untapped potentials and

unutilized opportunities that await exploitation as well as

problems and challenges that may impede progress. The

vision must identify catalytic forces that can be harnessed.

b. It must express aspirations, determination and commitment

for self realization.

c. Though planning and prediction over long time horizon is

difficult, desired end results must be dreamt and strategies to

accomplish them shall be drawn. Vision needs a subtle blend

of humility and courage to dare.

d. Vision is realizable only when it neither has lofty optimism

nor extreme pessimism.

The Vision of Singareni is,

“Singareni Collieries to produce coal qualitatively and cost

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effectively in a socially and environmentally sustainable

manner, valued by customers, employees, and the community”.

To achieve this vision,

a. It aims to achieve a best safety performance.

b. Adopt best environmental practices strive to bring

back the nature to the best possible original extent.

c. Attain a sustainable competitive advantage in the

marketplace.

d. Align production to meet market demand.

e. And, continuously improve operational

performance.

SCCL – MISSION :

 To retain role of a premier coal producing company and

excel in a competitive business environments.

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 To strive for self – reliance by optimum utilization of

existing resources and earn adequate returns on capital

employed.

 To exploit the available mining blocks with maximum

conservation and utmost safety by adopting suitable

technologies and practices and constantly upgrading them

against international bench marks.

 To supply reliable and qualitative coal in adequate quantities

and strive to satisfy customers needs by constantly sharing

their experience and customizing our product.

 To emerge as a modal employer and maintain harmonious

industrial relations with the legal and social frame work of

the state.

To emerge as a responsible company through good

corporate governance, by laying emphasis on protection of

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environment & ecology and with due regard for corporate social

obligations.

Gloom to Glory :

The SCCL was receiving budgetary support from both

Government of India and government of Andhra Pradesh till some

time age, but they later abandoned. Also the pricing of coal was

decided by government of India keeping its impact on other major

sectors like, power, Railways, cement etc. The prices were not

revised regularly; also hike in input cost due to periodical revisions

of national coal wage agreements (NCWA), stores and interest

were also not fully compensated by Government. The frequent

strikes by the workers, law and order problems, low productivity,

apart from un remunerative coal price vis-à-vis cost of production

during the period 1989-90 to 1991-92 affected the financial health

of the company and refer referred to BIFR in 1992, but due to

liberal financial package extended by the Govt. of in India

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consultation with Govt. of AP, and sustained efforts made by the

management of SCCL and Trade Unions, a modest financial

turnaround was achieved. The company earned profit of

Rs.17.76Crore and 26.64Crore in 1993-94 and 1994-95

respectively. My March 1994, SCCL came out of the BIFR

purview. Following remedial measures/reforms were taken by the

company for Success:

i. Unifying Trade Unions through Path Breaking

Elections.

ii. High Pitch Communication Drive harnessing

media, launching literacy programs.

iii. Focused multi-faceted worker’s welfare program.

Iv. Establishing outsourcing of non-core and ancillary

activities.

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v Innovative programs Launched (Dial-your-GM, Field

Visits, Interactions and Follow-ups).

vi. Fuel Supply Agreements – Technology infusion for

Quality Testing, Workforce visits to client sites.

vii. Focus on Safety, Environment Protection and Labour

Welfare.

The process of turning around a Sick Company, which

commenced in 1997-98, reached its logical conclusion when

SCCL totally wiped out its accumulated losses and entered

the financial year 2003-04 with a net profit of RS.80.45core

after issuing a dividend of RS.86.70Crore.

DETAILS OF LOCATION OF VARIOUS UNITS:

SCCL operates 51 mines including 14 open cast mines in 10

operating areas in the state of Andhra Pradesh.

Area UG Mines, OC mines, Total & District.

a) Area / Region – wise production :

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No. of Mines
April,2010 Distri
Areas U Tot
OC ct
G al
Khamma
Kothagudem 2 2 4
m
Khamma
Yellandu 1 2 3
m
Khamma
Manuguru 1 1 2
m
KGM
4 5 9
REGION
Bellampalli 1 3 4 Adilabad
Mandamarri 7 - 7 Adilabad
Srirampur 8 2 10 Adilabad
BPA.
16 5 21
REGION
Ramagunda Karimnag
5 1 6
m-I ar
Ramagunda Karimnag
4 1 5
m-II ar
Ramagunda Karimnag
2 2 4
m-III ar
Bhupalpally 5 1 6 Warangal
RGM. 16 5 20

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REGION
Total SCCL 36 15 51

TABLE – 2.1
THE SINGARENI COLLERIES COMPANY
LIMITED
PRODUCTION PROFILE
(Lakh Tonnes)
Ap
200 200 200 200 200 ril
Year
5-06 6-07 7-08 8-09 9-10 201
0
Product 361. 377. 406. 445. 504. 35.0
ion 38 07 04 46 25 2
UG 127. 118. 126. 120. 119.
9.37
Mines 11 76 45 87 69
234. 258. 279. 324. 384. 25.6
OC
27 31 59 59 56 5

TABLE – 2.2
THE SINGARENI COLLERIES COMPANY
LIMITED

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MANPOWER PROFILE (Lakh
Tonnes)

Year 20 20 20 20 20 20 Apr2
04- 05- 06- 07- 08- 09- 010
05 06 07 08 09 10
Manp 91, 86, 82, 75, 70, 69, 68,84
ower 97 02 22 52 58 04 4
0 5 4 7 6 3

TABLE – 2.3
THE SINGARENI COLLERIES COMPANY
LIMITED
PRODUCTION PROFILE
(Lakh Tonnes)
2004- 2005- 2006- 2007- 2008- 2009-
Year
05 06 07 08 09 10
Over all
productivity 1.62 1.74 1.91 2.10 2.42 2.73
UG-OC
UG mines 0.85 0.89 0.90 1.02 1.05 1.08

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The term operation here in general refers to any
activity, which is engaged in converting the raw materials into
finished goods or the process of producing or extracting the final
product.

This project is concerned with the operation of


extracting the coal from the underground and the costs associated
with that operation.

The company produce s the coal from 2 type mines namely open
cast and under ground mines. More specifically this project focuses
on the costs of operations in under ground mines.

In under ground mines the company follows various


technologies to produce the coal are as follows.

 Hand section
 Long walls
 BG panels
 Road headers
 Continuous miner
 Side discharge loaders
 Load haul dumpers

In hand section the coal is extracted entirely with Manpower.


In machine mining the coal is produced with the help of machines.
In machine mining the production process depends largely on
machines but it requires some skilled manpower also. The study
focuses on the machines called side discharge loaders.

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For the purpose of the detailed study of the production
process of coal in singareni collieries the coal mine Bhupalpally
area was observed.

In the mine, the coal is produced with the help of machines


called SDL s (Side Discharge Loaders) besides the hand section.

Extraction of coal in hand section entirely depends on the


man power. The process of extraction of coal from an underground
mine which is using the technology of hand section is as follows.

Blasting the faces with the help of explosives. The face is the place
where the coal is located; the coal will be separated from the earth
using these explosives.

The process of blasting makes it easy to remove the coal


from the earth. This process is known as coal cutting. The men ho
do this process are known as coal cutters. After cutting into pieces
the coal will be filled into tub trains. The men who perform this
process are known as coal fillers. The tub trains bring the coal
from under ground to the surface using track.

From the surface the coal is transported to the coal screening


plant (CSP) for cleaning and other process the coal can be
transported to the customers of Singareni.

Another technology of extracting of coal is using SDL s, the


main objective of introducing SDL s is to improve safety, avoid the
human drudgery of carrying baskets at work space and also better

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conservation of coal. In the mains where the technology of SDL s
is using the coal can be extracted as follows.

Blasting of coal with the help of explosives to separate it


from the earth. The machines instead of men can fill the coal.
These machines are called as Side Discharge Loaders (SDL s) after
the blasting of the coal SDL s move towards the face, takes the
coal into its bucket and comes back (in the same direction without
turning back) and discharge the coal onto a belt. The belt takes the
coal and dumps into the tubs of the trains and these tubs will bring
the coal to the surface.

The capacity of the bucket of the machine is one tonne. The


time taken by the machines to move from the coverage belt to the
face where the coal is blasted, to lift coal into the bucket and to
discharge the coal onto the coverage belt is called lead time. The
lead time takes the major part in computing the cost of the
production. Shorter the lead time larger the production and vice e
versa.

The process will generally include the following costs.

1. Wages (Filling and Time rated )


2. Wages of other executives.
3. Explosives.
4. Other stores.
5. Power.
6. Coal transportation.
7. Stand stowing
8. Mine over heads.
9. Work shop over heads.
10. CSP over heads

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11. Depreciation of mines.
12. Depreciation of common assets.
13. Interest.
14. Area over heads.

The system being followed band the steps involved in


preparation of cost sheet under the present costing system involved
in preparation of cost sheet under the present costing system are
explained as follows.

i. A perform cost sheet followed in presentation of


cost sheets for hand section and other
technologies is furnished. The expenditure is
presented through the cost sheet under various
elements of cost.
ii. Cost ascertainment is done through cost centers
allotted to the various activities in under ground
and surface operations at the mine and overhead
costs for the expenditure on service and
administrative department.

Elements of costs:
Elements of Costs

Material Labour

Other Express

Direct Indirect Direct Indirect

Direct Indirect

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Production or Administration Off Selling Off

Distribution Off

Works Off

By grouping the above element the following division of cost is


obtained.

i. Prime cost = Direct material + Direct labour +


Direct expenses.
ii. Works or factory cost = Prime costs + Work or
factory overheads.
iii. Cost of production = Works cost + Administration
overheads.
iv. Total cost or cost of sales = Cost of production +
Selling and distribution overheads.

The difference between cost of sales and selling price


represents the profit or loss.

Direct Materials:
Direct materials and those materials which can be
identified in the production and can be conveniently measured and
directly charges to the product. Thus, these materials directly enter
the production and form a part of the finished product. For
example timber in furniture making clothe in dress making and
bricks in building a house.

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The following are normally classified as direct materials
i. All raw materials like jute in the manufacturing of
gunny bags, pig iron in foundry and fruits in
canning industry.
ii. Material specifically purchased for a specific job,
process or order like glue for a book building,
starch powder for dressing yarn etc...
iii. Parts or components purchased or produced like
batteries for transistor radios and tries for cycles.
iv. Primary packing materials like cartoons,
wrappings, cardboard, boxes, etc... Used to
protect finished product from climate conditions
or far easy handling inside the factory.

Indirect materials are those materials which cannot be


classified as direct materials. For examples, consumables like
cotton waste, lubricants, brooms, rags, cleaning materials,
materials for repairs and maintenance of fixed assets, high speed
diesel used in power generators etc.

Direct Labour:
Direct labour is all labour expended in altering,
construction, composition, confirmation or condition of the
product. In simple words it is that labour which can be
conveniently identified or attributed wholly to a particular job,
product of extended in converting raw materials into finished
goods.

Indirect wages are the wages paid to supervisors,


inspectors etc... Through not direct labour.

Direct Expenses:

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All expenses, which can be identified to a particular cost
center and hence directly charged to the center, are known as direct
expenses. In other words all expenses (other than direct materials
and direct labour) incurred specifically for a particular, job,
department etc., are called direct expenses. These are directly
charged to the product, job, department etc.
Examples of such expenses are royalty, excise duty, hire
charges of a specific plant and equipment.

Overheads:

Overheads may be defined as the aggregate of the costs of


indirect materials, indirect labour such other expenses including
services as cannot conveniently be charged direct to specific cost
units. Thus, overheads are all expenses other that direct expenses.

Overheads are sub-divided as

a. Manufacturing expenses.
b. Administration overheads.
c. Selling overheads.
d. Distribution overheads.
e. Research and development overheads.

Expenses included from costs:


The total of a product should include only those items
of expenses which are a charge against profit. Items of expenses
which are relating to capital assets which are relating to capital
assets, capital losses, payments by way of distribution of profits
matters of pure finance should not from a part of the costs.

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MINING:
Mining is an economic activity. It does not belong to a
service sector where expenditure is permitted without matching
financial returns. Coal mining activity, therefore, is undertaken not
only to meet the coal demand but also to enhance financial
resources of the coal producer for further advancement and growth.
Even when coal prices are controlled or regulated by the Govt., a
coal producing organization is either given an average price for
coal that is expected to yield a reasonable return on overall
investments by the producer or is given a subsidy as
comprehensive for activities required to be done but are not
economical. The coal mining industry in India is largely in public
sector and guidelines of the Govt., presently (1998), are that, while
approving any coal mining new, reorganization or expansion
project, the project should indicate a return (to be precise- internal
rate of return- IRR) on investment of minimum 17% at 85% level
of projected output. It is, therefore, clear that even the public sector
coal mining activity is expected to be an economic activity. The
private sector, obviously, will like to have similar or more return
on investment. Any mining activity, therefore, has to be viable.
Not only just viable but also that which will give minimum
acceptable return on investment, of course, following law of the
land. Thus all economic activities, including mining are permitted
activities that incur least cost and are viable.

IMPORTANT OF TRENDS:

1. It has been started that, opencast costs are rising at a


rate slower than costs for under ground. Consequently, many
properties, economical today for underground mining, will become
opencast able in near future as has happened in the past. A portion
of kargali underground mine was converted to opencast in
1950’s.similarly, a portion of kurasia underground was converted

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to opencast in 1960’s. Today, many erstwhile underground mining
properties. In full or part, are being worked and are being
converted to be worked by opencast. This trend music must be
given due consideration while deciding whether a property should
be worked by opencast or by underground mining to be cheaper by
10-15% or so compared to opencast mining, the property should
not be worked by underground. After all, an underground mine
may have a life of 15 to 20 years and more with in which time
opencast mining become more viable in many cases, by the time
depth is worked by opencast, deeper depth may also become viable
for opencast.
2. Similarly, transport costs by rope haulage are rising
sharply than transport costs by belt conveyor. This is due to the
fact that, a rope haulage system is manpower oriented and wage
cost is increasing substantially each year. Therefore, if there is only
a sight difference between estimated mining costs for rope haulage
and belt system should be preferred if the installation is to last for a
few years. Further, belt conveyors can deal with increased output
in future more affectivity.

3. Shaft versus incline is another case which can be cited.


Supremacy of shaft to meet ventilation requirements is undisputed.
As far as coal raising is concerned, an incline equipped with the
belt conveyor for coal raising with a rail track for supply is
superior to a shaft for similar duties expect perhaps for depths
more than 250m at present. In olden days, say three decades ago,
initial depths exceeding 70m were planned with shafts only as
mine openings. Today, coal raising from such depths is planned
through inclines with belt conveyor. Recent mines have been
planned with inclines for coal raising from depth exceeding 200m.

4. Marginally better estimated viability for imported


technology, not sufficiently field proven, should not be considered
for adoption. Only when substantial advantages of such a
technology calls for a trail only in geo-mining conditions suitable

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for such a technology have not yield desired results on sustained
basis and such equipments have ultimately become a Burdon on
the industry.

Trends and experience, therefore, have to be given due


importance before taking final decisions on current estimates.
Trends and experiences are facts well established while estimates
are projections only, through well intended, which may or may not
come true further, estimates are always coloured by subjective
thinking of the estimator which can be made more objective by
considering past and current trends and experience in similar
circumstances. It only means that, realistic and sustainable
improvements should improvements should be planned and
executed.

SCOPE:

The scope of operation costing is very wide and includes the


following.
 Where there is only one process or operation (unit
costing)
 When they concern rendering some services rather than
manufacturing the goods called service costing
(operating cost)
 When in one process there are different operations
which are to be performed to convert the raw material
into finished product (operating costing)
 When the raw material in order to be converts or into
finished products has to per certain stages or process
called process costing.

1. ONE OPERATING (UNIT) COSTING:

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This is a method of costing by units of production and it
adopted where production is uniform and a continuous affair, units
of output are identical and the cost units are physical and natural.
The cost per unit is determined by dividing the total cost during a
given period by the number of units produced during that period.
This method of costing is generally adopted where an undertaking
is engaged in producing only one type of product or two or more
products of the same kind but of varying grades of quality. The
industries where this method of costing is used are collieries,
sugar, mills, cement works, brick works, paper mills etc. In all
these cases, work is a natural unit of cost.

2. OPERATING (SERVICE) COST:

Service costing is that form of operation costing which


applies where standardized services are provided either by an
undertaking or by a service cost center with in an undertaking. The
method may be used where service is not completely standardized,
but where it is continent to regard it is such, and to calculate
average cost per period in relation to the standardized unit of
measurement. Thus it is the cost of producing and maintaining a
service. It is a method of costing applied to undertaking which
provides service rather than production of commodities. The ices
to be costed could either be:

1. Transport service:
Tramways, Railways, Bus, Transport.

2. Supply service:
Gas supply, Electricity supply, Water supply.

3. Welfare service:
Hospitals, canteen, Libraries.

33
4. Municipal service:
Street lighting, Road maintenance etc.

INPUT AND OUTPUT COSTS:

Input costs are constantly changing, actually constantly


rising. Further, due to recent change in favour of global market
economy, the price of coal has to be competitive with imported
coal of better quality. The market forces will, thus, restrict selling
price of coal requiring mining to be more and more effective. A
visible mine of today, therefore, may not be viable tomorrow due
to rising input costs and limitations on raising coal price. The
situation will require fresh look on the exiting system of mining to
evolve a system that will keep the production costs contained.
Planning, therefore, is a continuous process. Even profit earning
mines should be given a fresh look every now and than for
improving economics and reducing costs. Or else, they will also
become uneconomic in near future.

In any activity, only a few key items constitute major share


of costs. In opencasts. In opencast, the activities of drilling,
blasting and transport are the key activities where attention should
first be diverted. In medium mechanized underground mines, the
important activities may be supports, coal availability for
SDL/LHD and coal clearance. Costs of these key items have to be
keenly and constantly watched and improved upon.

For any worthwhile assessment, it is very essential that item


wise and activity wise cost data are correctly recorded, stored and
analyzed. Further, they should be made available to the concerned
executives at regular intervals and well in time before they become
too old to be effective. If they data are not correctly recorded and

34
timely furnished, improvements for cannot be properly planned
and executed.

From the above, we can conclude that, while calculating


economics and preparing estimates, we have to consider:

1. Nature of deposit
2. Quantum of projected production and degree of
mechanization. Effect of reduced or increased production
than projected.
3. Requirement and availability of recourses and their phasing:
i. Financial (including loan)
ii. Equipment (including hire), particularly from
indigenous sources.
iii. Manpower (including contact).
4. Proximately of coal consumer and willingness to pay higher
price, if required.
5. Capabilities of management.
6. Law of land.
7. Intrastate required and infrastructure available.
8. Past trends and future projects.
9. Social atmosphere and expectations of the people likely to be
disturbed.
10. Possibilities of early return on capital and rate of return
on capital to be invested.
11. Period for which a facility is to be created and the time
it takes to be created.

It will, thus, be seen that, economics of a mine is not a


mere theoretical exercise. It is sum total of possibilities and
restrictions.

35
7. Specimen of sheet or statement of cost:

Partic
ulars total cost (Rs) cost per unit (Rs)

36
DIRECT XXX XX
MATERIALS XXX XX
DIRECT LABOUR XXX XX
DIRECT OR
CHANGEABLE
EXP
XXX XX

PRIME COST
ADD:
WORK
OVERHEADS

WORKS COST XXX XX


ADD:

ADMINISTRATION XXX XX
OVERHEADS

COST OF
PRODUCTION XXXXXXX
ADD: XX

SELLING AND
DISTRIBUTION
OVERHEADS

TOTAL COST OF
COST OF SALES

37
DEPLOYMENT OF SDLS IN UNDER GROUND MINES
YEAR SIMPLEX EMICO TOTAL
YEAR
2005-06 2 0 2
2006-07 6 1 7
2007-08 7 1 8
TOTAL 15 2 17

Production capacity of SDL as per feasibility reports.

The production capacity of SDL of 1.0 cu.m. Bucket


capacity is estimated at 100% performance level is 159 tones per
day.

Actual production from SDL s:

Year wise deployment of SDL s and production is as


follows:

YEAR SDL s PRODUCTION


(T)
2006-07 2 44,290
2007-08 7 1,48,388
Total 9 3,98,455

The average production in KTK 1 per SDL per day for the year
2007-08 is as follows.

38
MINE NO.OF PRODUCTIO PRODUCTION
SDL s N (T) (T) PER
DAY
KTK 1 3 98,120 119

Availability and utilization of SDL s:

Availability of SDL s is found to be 85.6%.

% of availability No. of SDL s


More than 90 18
80 to 90 50
Less than 90 26

Percentage utilization of machine available hours (MAH) is


furnished below and the overall utilization of SDL is found to be
39% of MAH i.e. 8 hours per day.

Utilization (%MAH) No. of SDL s


More than 60 3
50 to 60 0
40 to 50 18
30 to 40 27
20 to 30 34
Less than 20 12

39
Detailed analysis of the idle hours:

SDL s is idle for 52% of available time. The reasons for


idleness are analyzed and furnished below:

1. Idle due to shift change 15%


2. Idle due to roof supporting 19%
3. Idle due to machine shifting 3%
4. Idle due to out by problem 15%

Total 52%

Man power:

Man power provided for SDL s in feasibility is as follows.


No of SDL s 2 3 4
Man shifts 129 159 186
Men in roll 156 185 217

The actual man shift booked are varying from 25 to 135 per
SDL as there is no uniform practice of booking in different mines.
The average is 58 man shifts per day per SDL

Description 2005-06 2006-07 2007-08


No of H/S 33 31 31
drills
No of SDL s 2 3 6
Production (t) 11,41903 10,91,767 11,24,566
Men in roll 7,897 8,033 7,542

Cost of production from SDL s and Hand Section at company


level:

40
The details of cost of production, ASR and profitability of
Hand Section and SDL s at company level during the 2006-07 to
2007-08.

(a) Total cost of production:

Year No of SDL s Hand Section SDL s RS in


Rs. In Lakhs Lakhs
2006-07 2 22702.60 701.61
2007-08 7 26804.69 1273.70

(b) Cost of production:

Year Hand Section SDL s(RS)


2005-06 1648.59 1132.13
2006-07 2173.59 1584.12
2007-08 2745.99 1588.77

(c) Average sales realization per tonne:

Year Hand Section (Rs In SDL section (Rs in


Lakhs) Lakhs)
2005-06 1,030.93 1,037.82
2006-07 1,078.00 1,043.45
2007-08 1,129.23 1,068.85

41
(d) Profit/loss:

Year Hand Section (Rs in SDL section (Rs in


Lakhs) Lakhs)
2005-06 (-)7205.461 7.17
2006-07 (-)10728.24 (-)185.4115
2007-08 (-)11096.36 26.7169

The production and costs at RK-1 mine, Bhupalpally area for


the year 2007-08.

Mine Production Cost per Production Cost per


in tones tonne in tones tonne SDL
Hand Hand SDl s s RS.
Section Section
RK- 1 9,76,141 2,745.99 80,169 1,58,877

The total activities at the mine are divided into 39 parts and
each activity is given from 01 to 39 to ascertain the expenditure.
The activity wise costs centers are shown below. The expenditure
booked to the below cost centers is treated as direct cost incurred at
the time.

Similarly to ascertain the expenditure on various surface


cost codes from 40 to 102 are allocated which are used to book the

42
expenditure on the activities on the service and administrative
department etc. the expenditure incurred at workshop. CSP and
G.M. office etc are the examples of the indirect cost booked
through below cost centers.

The indirect cost is grouped into 2 parts for the presentation


in the mine cost sheet. They are overheads and area overheads. The
mine overhead, while represents the incidental, costs to the direct
wages like LTC/ LLTC, leave enhancement, women compensation
free issue of gas etc. paid to the employees have been taken as
direct expenditure and the actuarial provision of been taken as
direct expenditure and the actual provision of Gratuity allocated to
the mine is treated as mine overheads and apportioned on the basis
of production as per the procedure.

Thus, the total cost of production is ascertained by way of


allocation of direct expenditure and apportionment of overhead
costs books through various cost centers. The expenditure thus
ascertained is divided with the production to arrive at the cost of
production per tonne. The profit/ loss is the difference the average
sales realization plus surface transport charges and total cost of
production.

COST CODE COST DIRECTION


UNDER GROUND
01 COAL CUTTING
02 COAL BLASTING
03 COAL FILLING
04 COAL HAULAGE AND TRAMMING
05 PLATE LAYING AND BLASTING
07 PUMPING
08 SUPERVISORYAND SURVEY

43
08 VENTILATION AND SANITSTION
10 PROVING FAULT
11 DAILY MAZDOORS
12 MAINTANCE AND REPAIR

13 TIMERING AND ROOF SUPPORT


14 ROOF SUPPORT -STEEL
15 ROOF SUPPORT-GRIDERS
20 MACHINEMINING-CUTTING
21 MACHINE MINING-FILLING
22 MNE MINING- CONVEYING ROAD HAUL
DUMPERS
25 AM- 50
26 LONG WALL EXPENDITURE
28 PROSPECTING
29 SAFTY
30 HAULAGE(SURFACE)
31 COAL TRANSPORT BY CONTRACTERS
32 COAL TRANSPORT BY COMPANY
LOORIES
33 PLATE LAINING AND BLASTING
34 MAINTANCE AND REPAIRS (SURFACE)
35 TUB REPAIRING
36 MINE ADMINISTRSTION- PIT OFFICE
37 SAND GATHERING STATION AREIAL
ROPE WAY AND UNDER GROUND
SHOWING
38 TRANSPORT CAR & JEEEPS (MINES)
39 OTHERS
83 CANTEEN

44
STATEMENT SHOWING THE OPERATION
COSTS

OF BHOOPALPALLY AREA FOR 2008-09

45
Total Output:
10.75360

PARTICULARS RS. IN RS./ RS. IN RS./MTN % of


LAKHS MTS LAKHS OC to
TC
Total cost of 2580.93 240.01 100%
production
Less:
Interest 4.66 0.43 0.18%
2576.27 239.57 99.82%
Less:
overheads
Are overheads 276.25 25.68 10.70%
2300.02 213.88 89.12%
Less:
Indirect cost for
Work shop 10.02 0.93
CSP 1.21 0.11 11.23 1.04 0.44%
2288.79 212.83 88.68%
Less:
Coal transport
cost:
Coal transport 31.73 2.95 1.23%
contract
TOTAL 2257.06 209.88 87.45%
OPERATING
COST
Total % of Operating costs in total production cost is
Total operating cost/ Total cost of production. i.e.,
(2257.06/2580.93)*100=87.45%

46
STATEMENT SHOWING THE OPERATION
COSTS
OF BHOOPALPALLY AREA FOR 2007-08

47
Total Output:
10.88767

PARTICULARS RS. IN RS./ RS. IN RS./MTN % of


LAKHS MTS LAKHS OC to
TC
Total cost of 2658.16 251.64 100%
production
Less:
Interest 1.22 0.115 0.05%
2659.94 251.525 99.95%
Less:
overheads
Are overheads 541.50 51.26 20.37%
2115.44 200.265 79.58%
Less:
Indirect cost for
Work shop 26.98 2.6
CSP 9.96 0.9 36.94 3.94 1.39%
2078.5 196.775 78.19%
Less:
Coal transport
cost:
Coal transport 94.05 8.90 3.54%
contract
TOTAL 1984.45 187.875 74.65%
OPERATING
COST
Total % of Operating costs in total production cost is
Total operating cost? Total cost of production. i.e.,

(1984.45/2658.16)*100=74.
65%

48
STATEMENT SHOWING THE OPERATION
COSTS

OF BHOOPALPALLY AREA FOR 2006-07

49
Total Output:
10.88767

PARTICULARS RS. IN RS./ RS. IN RS./MTN % of


LAKHS MTS LAKHS OC to
TC
Total cost of 2149.61 197.4 100%
production
Less:
Interest 1.86 0.17 0.09%
2147.75 197.23 99.91%
Less:
overheads
Are overheads 478.19 43.92 22.24%
1669.5 153.3 77.66%
Less:
Indirect cost for
Work shop 27.63 2.5
CSP 10.33 0.94 37.96 3.48 1.76%
1631.6 148.83 75.90%
Less:
Coal transport
cost:
Coal transport 96.72 8.88 4.59%
contract
TOTAL 1534.88 140.95 71.40%
OPERATING
COST

Total % of Operating costs in total production cost is


Total operating cost? Total cost of production. i.e.,

50
(1534.88/2149.61)*100=71.
40%

STATEMENT SHOWING THE OPERATION


COSTS
OF BHOOPALPALLY AREA FOR 2005-06

51
Total Output:
10.88767

PARTICULARS RS. IN RS./ RS. IN RS./MTN % of


LAKHS MTS LAKHS OC to
TC
Total cost of 1638.10 143.45 100%
production
Less:
Interest 1.25 0.10 0.08%
1636.85 143.35 99.92%
Less:
overheads
Are overheads 273.82 23.97 16.72%
1363.03 119.38 83.2%
Less:
Indirect cost for
Work shop 25.45 2.23
CSP 7.72 0.68 33.17 2.90 2.02%
1329.86 116.48 81.48%
Less:
Coal transport
cost:
Coal transport 86.51 7.58 5.28%
contract
TOTAL 1243.35 108.9 75.90%
OPERATING
COST

Total % of Operating costs in total production cost is


Total operating cost? Total cost of production. i.e.,

52
(1243.35/1638.10)*100=75.
90%

STATEMENT SHOWING THE OPERATION


COSTS
OF BHOOPALPALLY AREA FOR 2004-05

53
Total Output:
9.79111

PARTICULARS RS. IN RS./ RS. IN RS./MTN % of


LAKHS MTS LAKHS OC to
TC
Total cost of 1655.13 169.04 100%
production
Less:
Interest 4.51 0.46 0.27%
1650.62 168.58 99.73%
Less:
overheads
Are overheads 418.11 42.70 25.26%
1232.51 125.88 74.47%
Less:
Indirect cost for
Work shop 21.13 2.16
CSP 5.79 0.59 26.92 2.75 1.63%
1205.59 123.13 72.84%
Less:
Coal transport
cost:
Coal transport 68.58 7.00 4.14%
contract
TOTAL 1137.01 116.13 68.70%
OPERATING
COST

Total % of Operating costs in total production cost is


Total operating cost? Total cost of production. i.e.,

54
(1137.01/1655.13)*100=68.
70%

CONCLUSIONS

One of the objectives of introducing SDL s is to save


manpower and thereby reducing the cost of production. A study of
technology wise cost sheet shows that SDL s technology. In the
present 2007-08 the SIMPLEX provides 6, EMICO-1 in 2006-07
SIMPLEX-2 and EMICO– nill. The production capacity of SDL s
of 1.0.cu.m. and the actual production from SDL s for year 2007-
08 is 205777 which was increased compared to 2006-07. The
average production per day for the year 2007-08 is 119 tonnes.

The availability and utilization of SDL s is found to be


85.6% and Man Power is 39% where the Idle Hours are 52% the
average Man Shifts per day of SDL is 58.cost of production from
SDL s and Hand Section at company level for the year 2007-08 is
no. SDL s is 7 and Hand Section production is 26804.69 lakhs and
1273.70 lakhs. The profit/loss of Hand Section is (-) 11096.36 and
SDL is 26.7169.

55
The total operating cost is 2257.06 with the total output of
10.75360 by which the operating cost to total cost % is 87.45 in the
year 2008-09. The total operating cost is 1984.45 with the total
output of 10.56310 by which operating cost to total cost % is 74.65
in the 2007-08. In 2006-07 the total output production is
10.388767 and the total cost % is 71.40%. In 2005-06 the total
output production is 11.41903 and the total cost % is 75.90%. In
the year of 2004-05 the % is 68.70% with the total output
production of 9079111.

SUGGESTIONS

The operating cost in the underground mines can be reduced


by…

 Controlling the ratio of absenteeism of employees.


 Decreasing the company losses by the effective
utilization of resources.

56
 Reduce the cost of area.
 Reduce the area overheads.
 Increase the production which can be done by the
increase the mechanization in the total production
process.
 Reduce the indirect cost of workshop and CSP.
 Reduce the cost of transport contract.

57
h

58

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