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Project on

Cost & Management

Accounting Aspect of 3M

Submitted to: Dr. Anupam Mitra

Group 5 Members Pallavi Tulshiram Ghandat 13020841092 Prabhash Babbar 13020841093 Prashant Kumar Patro 13020841094 Prithvi Rao 13020841095 Priya N S 13020841096 Priyanka Manchanda 13020841097

Rahul Raju 13020841098

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ACKNOWLEDGEMENT

We would like to take this opportunity to thank Professor Anupam Mitra (Cost

&Management Accounting) for giving us such an interesting project to work on. This

project has made us more aware of the issues related to one of the biggest

manufacturing firm and has impregnated us with a sense of awareness not only towards

the immediate scenario but the entire trend in total. During the course of our research

we came across certain areas related to the ups and downs of the Manufacturing Secctor

and the potential implications. Our Project – “Cost & Management Accounting Aspect

of 3M” strives to imply, focus and elaborate all possible reasons and strategies followed

by 3M for maintaining its position in the industry.

Thanking You,

Group 5 Section B

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CONTENTS

Sl No Contents Page No

1 Company Analysis 4

2 Industry Analysis 9

3 Products & Services 15

4 Costing Mechanism 18

5 Pricing Mechanism 22

5 Cost & Management Techniques 27

6 Conclusion 31

6 References 32

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COMPANY ANALYSIS

Company Background

The 3M Company is one of the great examples of success through change and

Innovation, formerly it was known as the Minnesota Mining and Manufacturing

Company. The name 3M originates from it. 3M was founded in 1902 along the north

shore of Lake Superior in Minnesota by Henry Bryan, Herman Cable, John Dwan,

William McGonagle and Dr. J. Danley Budd. 3M is an American multinational

conglomerate corporation based in St. Paul Minnesota. It’s a diversified technology

company serving customers and communities with innovative products and services.

Each of their businesses is committed to making their customers lives easier and better.

3M makes everything from tape to high-tech security gear.

3M is the global innovation company that never stops inventing because they are

passionate about making progress possible. People at 3M capture the spark of new

ideas and transform them into thousands of ingenious products and practical

applications that help make people’s lives better. Culture of creative collaboration

inspires a never-ending stream of powerful technologies that combine in unique and

imaginative ways to create innovations that transform people’s experiences. With $30

billion in sales and operations in more than 65 countries, 3M employs more than 88,000

people worldwide who collaborate actively to design, manufacture and engage in the

delivery of products & services spread across 35 3M businesses. The original plan for

the company was to mine the mineral corundum which would then be sold to

manufacturers of grinding but now 3M sells more than 55,000 products worldwide in

about 200 countries and owns more than 45 technology platforms. 3M sells products

directly to users and through numerous wholesalers, retailers, distributors, and dealers

worldwide.

3M technology solutions, hold leading the position in a variety of markets like

Transportation, Hospitals, General Industry, Construction, Aerospace, Railways,

Highways, Defense, Security, Mining, Health, Oil & Gas, Telecom, Marine and Homes. Our

prominent brands include Scotch®, Post-it®, Scotchgard ™, Scotchprint®, Nexcare™,

Scotch-Brite®, Filtrete™, Command™ and Vikuiti™ which is very commonly found in

most homes, retail and office spaces.

Fact is, half the world's population today enjoys experiencing at least one of 3M's

50,000 products, either directly or indirectly, every day. So when you choose 3M, you

can rest assured that you have chosen a company that pursues international standards

of quality, reliability and consistency in every product & service detail, providing

customer value like never before.

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Values

• Act with uncompromising honesty and integrity in everything we do.

• Satisfy our customers with innovative technology and superior quality, value

and service.

• Provide our investors an attractive return through sustainable, global growth.

• Respect our social and physical environment around the world.

• Value and develop our employees' diverse talents, initiative and leadership.

• Earn the admiration of all those associated with 3M worldwide.

3M in India

3M India Limited, the Indian subsidiary of 3M Corporation was established in

1988. 3M India is the only Public company 3M has been a steadfast partner in India’s

progress for over 24 years, committed to solving problems unique to the Indian

customer. The Managing Director at 3M India is Mr. Ajay Nanavati.

3M Electro & Communications India Pvt. Ltd. is a privately owned subsidiary of

3M Corporation. Together, these two companies market over 7,000 products in India

with leading positions in health care, industrial, retail, construction, transportation,

energy, utilities, mining, general office and home. In India, the magic of 3M innovation

takes places at our R&D centers, situated at Bengaluru and Gurgaon, NCR (National

Capital Region). Our manufacturing facilities in India are at Bengaluru, Pimpri (Pune),

Ranjangaon (Pune), Ahmedabad & Pondicherry.

Company Performance

The Company registered an overall turnover growth of 17.30% at Rs. 141,036.81

Lakhs for the financial year ended March 31, 2012 compared to Rs. 120,240.89

Lakhs in the previous year.

The operating margin for the current year was at 8.96% compared to 13.82%

for the last year, down by 35.17%. Net Profit before Tax was lower by 35.09% at

Rs. 9,611.06 Lakhs compared to Rs. 14,806.47 Lakhs for the previous year.

1. Net profit after taxation was also lower by 34.45% at Rs.6,477.17 Lakhs

compared to Rs.9,880.72 Lakhs for the previous year mainly on account of:

higher input costs, adverse impact of depreciation of the rupee against all

currencies at Rs. 4,333.49 Lakhs, interest costs at Rs. 318.05 Lakhs and increase

in Corporate Management fee paid to the parent company.

Export Sales de-grew by 20.33% at Rs. 2,248.12 Lakhs for the year ended March

31, 2012 compared to Rs. 2,821.94 Lakhs in the previous year.

The Industrial and Transportation business grew by 24.56%; Health Care

business grew by 13.61%: Display and Graphics business grew by 5.67%;

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Consumer and Office business grew by 24.78% and Safety, Security and

Protection Services business grew by 15.55%.

The EPS (Basic and Diluted) of the Company for the year 2011-12 de-grew by

34.44% to Rs. 57.50 per share from Rs. 87.71 per share.

3M Businesses in India

• Consumer & Office

From simplifying life at home to keeping you organized at work; simplifying life

and work.

• Display & Graphics

From signs on the road to the images on your phone; enhancing visual

communication and interactivity.

• Electro & Communications

From connecting the world’s power grid to supporting high-tech electronic

devices; enabling tomorrow’s lifestyle today with electrical power,

communications and electronics.

• Health Care

From preventing infections to making smiles brighter; promoting health and

improving quality care.

• Industrial and Transportation

From underground to outer space, changing how industry works.

Safety, Security & Protection Services

From protecting information to protecting people at work and at play; protecting

people and facilities

3M at a Glance (Year-end 2012)

• Global sales: $30 billion.

• International (non-US) sales: $19.4 billion (65 percent of company's total).

• Operations in more than 70 countries.

• 3M products sold in nearly 200 countries.

• 88,000 employees globally.

• 2012 3Mgives cash and product donations totalled $56.6 million.

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Awards and Recognition

The Company’s Electronic City (EC) plant has won the First Prize for Lean

Manufacturing at the National level Lean Six Sigma competition organized by CII

(Confederation of Indian Industry).

The 3M India team made it to the final 24 organizations despite a tough pan

India competition.

The EC plant had entered its lean project on the Sakurai line which won the first

prize in the Lean Manufacturing category, beating companies like Caterpillar.

Customer recognition is the best way to gain credibility for the brand. 3M India

recently received two awards from one of its biggest customers, Maruti Suzuki.

These awards were handed out as a way to recognize Maruti's vendors. The

awards were namely - Overall Star performance Award 2010 -11 Certificate

award for sincere and superior performance in the field of VAVE in the year

2010-11.

3M Competitors

The major competitors of 3M are General Electric, Johnson and Johnson, and

Kimberly Clark, Reliance Industries Ltd. Sintex Industries Ltd.

Competition Analysis (India)

Name Market Cap. Sales Net Profit Total

Assets

(Rs. cr.)

Grasim 24,454.25 5,255.01 1,225.99 11,293.60

3M India 3,847.70 1,574.13 52.27 674.55

Voltas 3,775.39 5,565.43 180.07 1,694.59

Century 2,610.86 5,949.47 -34.49 6,204.40

Nava Bharat Ven 1,523.70 1,124.20 238.31 2,432.07

Bombay Dyeing 1,522.16 2,329.26 75.7 2,648.68

Sintex Ind 1,063.01 2,971.79 269.19 5,384.24

NESCO 1,056.83 143.46 81.69 366.04

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SWOT Analysis of 3M

Strengths

• Diversified businesses - industrial and transportation, healthcare, display and

graphics, consumer and office, safety, security and protection services, and

electro and communications.

• Strong research and development capability

• Diversified geographic presence

• Solid revenue & profit growth

Weaknesses

• Low inventory turnover which impacts inventories and margins

• Weaker than expected performance in key segments

• Not as nimble as smaller, more focused competitors

• Lack of synergy between business units

Opportunities

• Acquisitions in key operating areas

• Continued global expansion.

• Rising healthcare spending in the US

• Security concerns with weaker economy in the US could present opportunities

for 3M's security business

• Markets similar to areas it is currently in, such as renewable energy, water

infrastructure, architecture, and lighting.

Threats

• Rising commodity and energy prices

• Exchange rates fluctuations

• Environmental regulations

• Consumer preferences and competitive conditions.

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INDUSTRY ANALYSIS

Manufacturing industry is the collection of all industries engaged in the

production of goods either for use or for sale, where production is done by mechanical

transformation, chemical or biological processing to obtain industrial goods.

According to North American Industry Classification System, manufacturing industry is

defined as follows:

The Manufacturing sector comprises establishments engaged in the mechanical,

physical, or chemical transformation of materials, substances, or components into new

products. The assembling of component parts of manufactured products is considered

also manufacturing. Establishments in the Manufacturing sector are often described as

plants, factories, or mills and characteristically use power-driven machines and

materials-handling equipment. Apart from these, establishments that transform

materials or substances into new products by hand or in the worker's home and small

stores like bakeries, candy stores, and custom tailors, may also be included in this

sector. Establishment that process materials is also included in manufacturing.

Manufacturing plays a central part in many different sectors such as the

industrial, automotive and food industries. Other market segments that involve a degree

of manufacturing include the chemical, aerospace and defense, electronics and

pharmaceutical industries. Manufacturing is used to produce materials such as paper,

wood, plastics and packaging. Specifically, industrial manufacturing covers the mass

production of finished goods from raw materials where machinery and materials-

handling equipment are optimized for output. The main pressures for companies

operating in the global manufacturing industry involve the conception of innovative

products, competition from domestic and foreign companies, and making a profit while

satisfying the need for cost competitiveness.

Global Economic Overview

Global prospects have improved but the road to recovery in the advanced

economies will remain rough. World output growth is forecast to reach 3¼ percent in

2013 and 4 percent in 2014. In the major advanced economies, activity is expected to

gradually accelerate, following a weak start to 2013, with the United States in the lead.

In emerging market and developing economies, activity has already picked up steam.

Advanced economy policymakers have successfully defused two of the biggest threats

to the global recovery, a breakup of the euro area and a sharp fiscal contraction in the

United States caused by a plunge off the “fiscal cliff.” In the short term, risks mainly

relate to developments in the euro area, including uncertainty about the fallout from

events in Cyprus and politics in Italy as well as vulnerabilities in the periphery. In the

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medium term, the key risks relate to adjustment fatigue, insufficient institutional

reform, and prolonged stagnation in the euro area as well as high fiscal deficits and debt

in the United States and Japan. In advanced economies, the right macroeconomic

approach continues to be gradual but sustained fiscal adjustment, built on measures

that limit damage to activity and accommodative monetary policy aimed at supporting

internal demand. The euroarea needs to strengthen the Economic and Monetary Union

(EMU). In emerging market and developing economies, some tightening of policies

appears appropriate in the medium term.

Global Trends in Manufacturing Industry

World manufacturing output growth slightly improved in the third quarter of

2013, indicating that the recovery from recession is continuing to move forth. Some

positive changes in industrial growth were observed across the industrialized

economies. World manufacturing output grew by 2.4 percent in the third quarter

compared to 1.8 percent of the revised estimate for the second quarter. Industrialized

countries have maintained the upward growth trend in manufacturing, which was

initially observed in the previous quarter. Despite these positive indications, the pace of

global manufacturing output growth still remains low. Industrialized countries that

have recently gained some speed have not yet achieved higher growth, while the growth

of developing and emerging industrial economies, which account for most of global

manufacturing growth, has slowed

This is clearly reflected in PMI, an indicator of the economic health of the

manufacturing sector(JPMorgan Global Manufacturing Purchasing Manager’s Index,

Markit Eurozone Manufacturing PMI ). The PMI index is based on five major indicators:

new orders, inventory levels, production, supplier deliveries and the employment

environment. There is an increase in JPMorgan Global Manufacturing Purchasing

Managers’ Index (PMI) from 51.8 in September to 52.1 in October, its highest point

since May 2011 reflecting modest growth.

The Markit Eurozone Manufacturing PMI has shown modest expansion for four

consecutive months—a sign that Europe has begun to rebound after its deep two-year

recession. The story is similar in Canada, throughout Asia and in the emerging markets.

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The manufacturing output of the United States grew by 2.3 percent in the third

quarter, indicating sustained economic recovery.

According to the US National Association of Manufacturers, the US represents

more than a fifth of the global manufacturing industry, with China producing 15% and

Japan 12% of manufactured product.in global scenario TOYOTO leads with a revenue of

235,364 mil USD.

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Industry Challenges

Industrial-sector growth during the current financial year is expected to be

between 4 and 5 per cent. At this rate, the annual growth would be less than the

annual growth rates achieved in the recent past and far below the potential

growth rate.

The challenge in the short term would, therefore, be to shore up business

sentiment, spur investment in productive activities, and identify bottlenecks

That can be removed in a reasonably short period of time.

The government has already made some quick moves to clear bottlenecks in

some critical sectors such as coal and power and is also pushing forward project

implementation in some key infrastructure sectors.

With the easing of headline inflation, moderation in commodities prices in the

international market, and revival of manufacturing performance in recent

months in the major economies,

India’s industrial sector is expected to rebound during the next financial year.

Manufacturing Sector Scenario

The manufacturing sector continues to be a mainstay of US economic

productivity, generating $1.8 trillion in GDP in 2011 (12.2% of total U.S. GDP). U.S.

manufacturing firms lead the Nation in exports: The $1.3 trillion of manufactured goods

shipped abroad constituted 86% of all U.S. goods exported in 2011. Moreover,

manufacturing has a larger multiplier effect than any other major economic activity – $1

spent in manufacturing generates $1.35 in additional economic activity.

The manufacturing sector employed 11.8 million workers in 2011, or 9% of total

employment, and supported additional non-manufacturing jobs up and down the supply

chain as well as in financial services. In 2010, total hourly compensation, which includes

employer-provided benefits, was $38.27 for workers in manufacturing jobs and $32.84

for workers in non-manufacturing jobs, a 17 percent premium.2 In addition,

manufacturing jobs translate into additional jobs in other parts of the economy. At

current manufacturing employment levels, almost 7 million additional jobs in other

sectors of the economy estimated to dependent on manufacturing. These additional jobs

do not include new employment created in the local service sector (or “non-tradable”

sector), such as teachers, doctors, landscapers, hair stylist. On average, one new

manufacturing creates 1.6 additional jobs in local service businesses. Jobs in high-tech

manufacturing industries, which require workers with high skill levels and pay above-

average wages, generate five local service jobs.

Increasingly capable global competitors are severely challenging American

leadership in manufacturing and innovation. After ranking as the world’s largest

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manufacturer for more than a century, the United States has lost ground to China in

terms of share of global manufacturing output. It also has slipped below Germany, South

Korea, and Japan in rankings of manufacturing intensity, a critical indicator of future

job-creating innovation.

The U.S. remains the largest producer of advanced technology products, but

competition in markets for these products also has ramped up over the last decade. In

2011, the U.S. ran a $99 billion deficit in trade of advanced technology products, an

increase of almost 25 percent over the previous year’s deficit. The U.S. has lost 687,000

high-technology manufacturing jobs since 2000,5 when the nation posted a $5 billion

trade surplus in advanced technology products.6 In 2011, imports of advanced

technology products accounted for 17 percent of the total U.S. trade deficit.

U.S. manufacturing has begun to rebound from the “great recession”. Since

December 2009, manufacturers have increased their payrolls by almost 500,000

workers. In the first four months of 2012 alone, the U.S. manufacturing sector added

139,000 jobs.

Some of these jobs were the result of on-shoring—the return of positions and

operations that had been transplanted to lower-wage nations. Shifting global conditions

and promising technologies could add momentum to these nascent trends, leading to a

healthy resurgence in U.S. manufacturing output and to new employment opportunities

across the economy.

In fact, several economic and technological trends are converging to create new

opportunities for U.S. manufacturing. Increasing U.S. manufacturing productivity, rising

labor costs in developing economies, prospective market-disrupting product and

process technologies, growing production of domestic natural gas, and the desire to

protect home-grown intellectual property are shifting the comparative advantages of

global competitors. The shifts, many predict, will favor the U.S. manufacturing sectors,

especially industries that produce high-value-added goods.

Manufacturing Companies of US And 3M

In US the largest manufacturing company by revenue is GENERAL ELECTRIC

(235,364 mil USD) followed by FORD (221,551 Mil USD).3M is currently ranked 33rd

generating revenue of 29,611 million USD.

3M has a majority of its manufacturing in the U.S., including operations in 28 U.S.

states and 33,000 employees. In addition, 3M conducts over 60% of its worldwide R&D

activities in the U.S. While its U.S. presence is strong, 3M is increasingly a global

company. Specifically, in 2012, approximately two-thirds of 3M’s sales were outside the

United States. Accordingly, being able to compete successfully in the global marketplace

is critical to 3M.

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Diagram: Competition Analysis (Global)

India’s Manufacturing Sector & 3M in India

India’s manufacturing segment is a crucial cog in the wheel of economic progress; the

sector’s contribution to the gross domestic product (GDP) being 16 per cent. With the

passage of time post 1990-economic liberalisation era, India has well realised the

importance of manufacturing for the overall industrial development. In this wake, the

Government has also been very pro-active, especially during the last decade.

The recent initiative counts back to the Manufacturing Policy that was announced in

2010. It was followed by the introduction of a systematic Manufacturing Plan for the

country, designed with extensive involvement of industry. Now India Inc. and the

Government are focusing their energies on implementation of this Plan.

Growth Trend

The HSBC India Manufacturing Purchasing Managers' Index (PMI) - a measure of

factory production - stood at 48.5 in August 2013. 3M India Limited, the Indian

subsidiary of 3M Corporation was established in 1988. 3M has been a steadfast partner

in India’s progress for over 24 years, committed to solving problems unique to the

Indian customer. The Managing Director at 3M India is Mr. Ajay Nanavati.

3M Electro & Communications India Pvt. Ltd. is a privately owned subsidiary of

3M Corporation. Together, these two companies market over 7,000 products in India

with leading positions in health care, industrial, retail, construction, transportation,

energy, utilities, mining, general office and home. In India, the magic of 3M innovation

takes places at our R&D centers, situated at Bengaluru and Gurgaon, NCR (National

Capital Region). Our manufacturing facilities in India are at Bengaluru, Pimpri (Pune),

Ranjangaon (Pune), Ahmedabad & Pondicherry.

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PRODUCTS & SERVICES

Making life easy where 3M solution excel, today everyone experiences 3M innovation

right from mobile phone to vehicle. Innovative strategies employed by 3M lead to

various product and service development which are as follows:

1. Displays & Graphics

3M is one of the world leaders in films that brighten the displays on electronic

products, such as flat-panel computer monitors, cellular phones, PDAs, and LCD

televisions.

Architectural Markets

Commercial Graphics

Computer Privacy Filters

Digital Signage & Narrowcasting Solutions

Mobile Interactive Solutions

3M Touch Systems

Traffic Safety Systems

2. Manufacturing & Industry

Our innovative products and services help

manufacturers improve their businesses. With a global

network, we meet needs of both multinational and local

customers.

Abrasives

3M Adhesives & Tapes

3M™ VHB™ Tapes

3M™ Purification

Dyneon™ Fluoropolymers

Energy Markets

3. Electronics, Electrical & Communications

3M is a leading supplier of innovative solutions to the

electrical, electronics, and telecommunications

industries.

Electronics Design & Manufacturing

Electrical Markets

Telecommunication Solutions

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4. Office

We continue to rejuvenate products for the office. An example of this is the Post-

it brand which includes notes, flags, easel pads. Today more than 1,000 Post-it®

products are sold in more than 100 countries.

Scotch® Products

5. Health Care

3M Health Care is committed to providing the health care community with

innovative solutions, based on 3M's diversified technologies, that help improve

the quality of life.

Dental (3M ESPE)

Food Safety

Infection Prevention Solutions

Orthodontics (3M Unitek)

Skin and Wound Care

Stethoscopes (Littmann®)

6. Safety, Security, and Protection

We produce products that increase the safety, security, and productivity of

workers, facilities, and systems around the world.

Building & Commercial Services

Corrosion Protection Products

Food Safety

Mining Market Center

Personal Safety

Security Systems

Track & Trace Solutions

Traffic Safety Systems

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7. Home & Leisure

Some of the world’s best-known consumer brands, Scotch®, Post-it®, Scotch-

Brite®, and Scotchgard™, are household names. 3M people

find ways to make life better and easier.

Scotch-Brite®

Nexcare™

8. Transportation Industry

We provide high-quality abrasives, tapes, films, adhesives, and specialty

materials for the manufacture, repair, and maintenance of autos, aircraft, boats,

and other vehicles.

3M Automotive OEM

3M Automotive Aftermarket

3M Car Care

Traffic Safety Systems

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COSTING MECHANISM

Process Costing

Process costing is a form of operations costing which is used where standardized

homogeneous goods are produced. This costing method is widely used in the cement

industry. Process costing is also used in the assembly type of industries also. It is

assumed in process costing that the average cost presents the cost per unit. Cost of

production during a particular period is divided by the number of units produced

during that period to arrive at the cost per unit.

Items on the Debit side of Process A/c.

Each process account is debited with –

Cost of materials used in that process.

Cost of labour incurred in that process.

Direct expenses incurred in that process.

Overheads charged to that process on some pre determined.

Cost of ratification of normal defectives.

Cost of abnormal gain (if any arises in that process)

Items on the Credit side:

Each process account is credited with

Scrap value of Normal Loss (if any) occurs in that process.

Cost of Abnormal Loss (if any occurs in that process)

Guidelines Used In Preparing Cost Sheet

• Materials

Proper records shall be maintained showing separately all receipts, issues and

balances both in quantities and cost of each item of direct materials required and

actually used in the production, processing or manufacture of products referred

to in rule 2, in any form or any type. These records for direct materials shall

contain such details as to enable the company to determine the quantity and cost

of receipt (including all direct charges upto the works in respect of all major

direct materials), separately for imported and indigenous supplies. Proper

records shall be maintained indicating the quantity and cost of by-product

recovered in the different processes having significant value say five per cent or

above of the cost of input of materials. Proper records shall be maintained to

show the receipts, issues and balances, both in quantities and cost of each item of

any process material or chemicals, consumable stores, small tools and machinery

spares. The cost shall include all direct charges upto works. The cost of

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consumption of consumable stores, small tools, and machinery spares shall be

charged to the relevant cost centres on the basis of actual issues.

• Salaries and wages

Proper records shall be maintained to show the attendance and earnings of all

employees of the cost centres/ departments and the work on which they are

employed. The records shall also indicate the following separately for each cost

centre/ department:

• Piece rate wages earned (wherever applicable);

• Incentive wages earned, either individually or collectively as production

bonus or

• under any other scheme based on output;

• Overtime wages earned;

• Earnings of casual labour;

Idle time shall be separately recorded under classified headings indicating the

reasons therefor. The method followed for accounting of idle time payments in

determining the cost of product shall be disclosed in the cost records. Any wages

and salaries allocable , to capital works such as additions to plant and machinery,

buildings or other fixed assets shall be accounted for under the relevant capital

heads.

• Service department expense

Detailed records shall be maintained to indicate expenses incurred in respect of

each service department or cost centre like laboratory, welfare, transport etc.

These expenses shall be apportioned to other services and production

departments on equitable basis and applied consistently.

• Utilities

• Water

• Steam

• Power

• Others

•

• Maintenance

Proper records showing the expenditure incurred by the workshop under

different heads and on repairs and maintenance by the various cost centres/

departments shall be maintained. The records shall also indicate the basis of

charging the workshop/ tool room expenses to different cost centres/

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departments and units. Where maintenance work is done by direct workers of

any production cost centre, the wages and salaries of such workers shall be

treated as direct expenses of the respective cost centre

• Depreciation

The basis on which depreciation is calculated and allocated/ apportioned to the

various cost centres/ departments and absorbed on the products shall be clearly

indicated in the cost records. The cumulative depreciation charged in the cost

records, against any individual item of asset shall not, however, exceed the

original cost of the respective asset.

• Other overheads

Proper records shall be maintained showing the various items of expenses

comprising the other overheads. These expenses shall be analysed, classified and

grouped according to functions, viz. works, administration, selling and

distribution. Basis of apportionment or absorption of overheads to the cost

centres and products shall be indicated in the cost records.

• R&D Expenses

Expenses incurred by the Research and Development department for furnishing

technical knowhow to outsiders shall be recorded separately and excluded from

the cost of product(s).

• Interest

The basis of apportionment of interest shall be spelt out clearly in the cost

statements.

• Packing

Proper records shall be maintained showing the quantity and cost of various

packing materials and other expenses incurred for packing the finished products

for the marketing of the product. Where such expenses are incurred in common

for other products also, the basis of apportioning the expenses between the

relevant products shall be clearly indicated in the cost records and applied

consistently. Detailed records of the expenses incurred on export packing, if any,

shall also be kept separately and exhibited in the relevant cost statements for

exports.

• Work in progress and finished goods stock

The appropriate share of conversion cost upto the stage of completion shall be

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taken into account while computing the cost of work in progress. The method

adopted for determining the cost of work in progress and finished goods shall be

followed consistently.

• Cost statements

The product emerging from a process which forms raw material for a subsequent

process shall be valued at the cost of production upto the previous stage. If the

company is operating more than one factory, separate cost statements as

specified above shall be maintained in respect of each factory.

• Production records

The cost of all finished and packed production shall be kept in detail for each

type of product or in the form of control accounts provided the value of the

balances according to such control accounts are reconciled periodically at least

once in a year with the value of the Quantities shown in the quantitative account

maintained for each type of products.

• Reconciliation of cost and financial accounts

Cost records shall be reconciled with the financial books of account for the

financial year so as to ensure accuracy. Variations, if any, shall be clearly

indicated and explained. The reconciliation shall be done in such a manner that

profit of the product under reference can be correctly arrived at and reconciled

with the overall profit of the company.

• Adjustment of cost variances

Where the company maintains cost records on any basis other than actual such

as standard costing, the records shall indicate the procedure followed by the

company in working out the cost of product under such system.

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PRICING MECHANISM

Factors That Will Influence Your Product Pricing Mechanism

1. The level Of Competition

Most entrepreneurs fancy the concept of selling their products with a very high

margin. This idea can only be realistic when you have a monopolistic hold on the

market. But if not, you can’t sell with your desired profit margin without getting a sting

from competition.

When trying to adopt a product pricing strategy or determine the right price for

your product, the issue of competition is a factor that must be trashed out effectively.

The more intense the competition in your industry is, the more flexible your product

pricing strategy and policy will have to be.

2. Perceived value of your product

This is another factor you must take into consideration before setting a price for

your product. Your first step is to ask this question “what is the perceived value of my

product in the heart of the customer? You must strive to find a good and definite answer

to this question before fixing a price for your product.

The reason perceived value is a critical factor to consider in a product pricing

strategy is because customers

often associate low price with

low quality. Meaning, if your

product is priced too low, the

customers tend to feel the

materials used in producing the

goods is inferior and so

therefore, the product is of low

quality. So before fixing a price

for your product, make sure you

strike a balance between the

price of your product and its

perceived value.

3. Product development cost

This is definitely a factor you cannot turn a blind eye to. With respect to normal

business and market economics, you should never price your product below its actual

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cost price. Your actual product cost price is determined by the total cost of production

including tax, divided by the total number of products produced.

But in this case, I am not talking about production cost. I am talking about

product development cost; a cost incurred from research and experimentation, a cost

that’s usually incurred when bringing an innovative product to the market. If you are a

business owner, you should know that newly introduced products usually command a

high price. This high introductory price is based on two reasons:

a. The first reason for the high product price is due to lack of competition.

Since the product is the first of its kind in the market place, there will be less or no

competition thereby giving room for the company to fix price.

b. The second reason is this; a high price will enable the manufacturer

recover the heavy investments channelled into the research and development of the

product.

However, I have seen some company successfully use the product pricing

strategy of losing on the front end by pricing below cost price only to recoup you losses

and pick up some profits from the back end. So whatever product pricing strategy you

choose; just make sure it positively adds to your bottom line.

4. Economic trend

This is another unavoidable factor that can influence the pricing of your product.

I don’t even need to stress much on this. As an entrepreneur, you should know that

economic factors such as taxation rate, labor cost, inflation rate, and currency exchange

rate, government’s fiscal and monetary policy will definitely influence your adopted

product pricing strategy either positively or negatively.

5. Level of market demand

This is the fifth factor that can greatly affect your product pricing strategy. Just

like economic factor, I feel this point is self explanatory. In business economics, if

demand exceeds supply, there tends to be a mad rush for the few available products,

thus inflating the price of the product and vice versa. Some companies even go as far as

creating artificial scarcity in order to gain a stronger hold on the industrial price level.

6. Demographics

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The demographics of the targeted customers will indisputably influence the pricing

of your product. Demographic factors to consider before taking a stand on your product

price include:

The age bracket of the customers you are targeting

Your business location and customer’s location

Educational status of your targeted market

7. Class of targeted customers

The class of customers you are targeting will greatly influence the pricing of your

product. In the society, there are three classes of people. The rich, the middle class and

the poor or more preferably “low income earners,” who are always the majority in

terms of population. A product targeted at the rich will surely command a higher price

than those targeted at the middle class. If products targeted at the rich commands a low

price, it will be tagged valueless by the rich. So when devising your product pricing

strategy; consider the societal class of your targeted customers first. It’s very important.

For instance, there are cars for the rich and cars for the middle class; both can’t be can’t

be sold in the market place with the same product pricing strategy.

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PRICING EXAMPLES

1. 3M Electrical Market Divisions

3M produces over 70,000 existing products many of which are designed specifically

for the electrical, electronics and telecommunications industries. It invests in over

$1 Billion a year on R & D and employ over 7,000 research engineers dedicated to

meeting customer’s needs. By working closely with its customers 3M is able to apply

its vast experience in cutting edge technologies where it counts the most: optimizing

their product or system capabilities. In 3M, the employees on the receiving end of

the unrivalled support of a global company, with a strong local presence. Moreover,

all its products are independently tested to the major industry standards. They have

all their products marketed under four major categories: Heat Shrink, Tapex, Pushon

and Scotchcast 450. The product is priced according the lot size, category, after sales

services and logistics charges. Pricing of a few products in India can be shown as

below:

(Source: http://www.indiancables.net)

2. 3M Optical Systems

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At 3M Optical Systems, 3M lead the world in creating boundary-pushing display films that optimize light and advance the performance of LCD displays. Light-optimization technology from 3M Optical Systems can help make LCD displays brighter, thinner and more efficient than ever before. It's a difference customers experience and believe – and it's designed especially for customers favorite every day devices. The pricing for different products is as follows:

(Source: http://solutions.3mindia.co.in)

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COST & MANAGEMENT TECHNIQUES

Major Cost Components of 3M

The major cost components for 3M India may be listed as follows:

Assets Taken On Lease:

The Company has taken office premises, warehouse, residential premises,

vehicles and office equipment under operating lease agreements that are

renewable on a periodic basis at the option of both the lessor and lessee. The

initial tenure of the lease is generally for eleven months to ninety six months.

Presently, the Company's operating results were managed on the basis of its

existing segment structures viz., Industrial and Transportation, Health Care,

Display and Graphics, Consumer and Office and Safety, Security and Protection

Services.

Inventories:

Inventories are valued at the lower of cost and estimated net realizable value,

after providing for cost of obsolescence and other anticipated losses, wherever

considered necessary. The costs of raw materials and traded goods are

ascertained on FIFO basis, whereas manufactured work-in-progress and finished

goods are ascertained on weighted average method.

Finished goods and work-in-progress include costs of conversion and other

costs incurred in bringing the inventories to their present location and condition.

Net realizable value is the estimated selling price in the ordinary course of

business, less the estimated costs of completion and the estimated costs

necessary to make the sale.

Major costs for the year 2013 are as follows (Source: 3M Annual Report 2012-13)

46%

27%

12%

9% 6%

Raw Materials Consumption for 2013

Others

Self Adhesive Lables

Abrasives

Tapes

Epoxy Resins

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Prime Locations in India:

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The Supply Chain of 3M India follows a complex network starting from

mining to distributions among the clients. The following departments head all

daily business operations at 3M India.

Corporate Office: UB City, Bangalore

R & D Office: Electronics City, Bangalore

Udyog Vihar, Gurgaon

Manufacturing Cites: Electronics City, Bangalore

Shirur, Pune

Sanad, Ahmedabad

Pimpri, Pune

Mettupalayam, Pondicherry

Distribution Centres: Udyog Vihar, Gurgaon

Bandra, Mumbai

Anna Salai, Chennai

Upper Wood Street, Kolkata

Senapati Bapat Road, Pune

Major production include raw materials such as abrasives, rubber, adhesives,

epoxy, chemicals etc are obtained from various locations in India which are then

manufactured to required products. The R & D office keeps on innovating new products

based on needs, demand and trends in the market.

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41%

30%

13%

10%

4%

1% 1% 0% 0%

Sales Contribution (2013)

Self Adhesive Lables

Others

Abrasives

Surgical & Dental Products

Epoxy Component

Other Operating Revenue

Paint Polishes

Duty Drawback

Scrap

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CONCLUSION

3M, as a diversified global technology company their businesses draw on the

creative thinking of their employees to churn out game-changing technologies, initiate

sound practices and invent sophisticated manufacturing processes that ultimately help

our customers be successful in their own businesses. This 3M culture fosters a spirit of

entrepreneurship and perseverance that outside organizations have come to recognize.

3M captures the spark of new ideas and transforms them into thousands of ingenious

products. The culture of creative collaboration inspires a never-ending stream of

powerful technologies that make life better & It's the innovation company that never

stops inventing.

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REFERENCES

Annual Report of 3M India 2012-13

www.solutions.3mindia.co.in/wps/portal/3M/

www.moneycontrol.com

www.economictimes.indiatimes.com

Trends in Manufacturing Sector across Globe, 2012, Wall Street Journal

www.investopedia.com