COST PLANNING.

A project is financed by the long-term funds. Cost of project comprises of all the expenditure of a project. The following are included in cost planning:

1. Land and site development:

the cost of a location differs considerably, the cost in rural areas are relatively low than that in urban areas. The following are included in land and site development cost:

  1. cost of levelling and development
  2. cost of tube wells
  3. basic cost of land including conveyance and other allied charges
  4. cost of laying approach roads and internal roads
  5. cost of compound walls and gates
  6. Premium payable on lea

2.Buildings and civil works:

the cost of building and civil works to an extent does depend upon location and might vary accordingly, but mainly it depends upon the structure of the manufacturing process. Once the manufacturing process is decided and finalised, the building cost is estimated keeping in mind the rate of different structures and the base (plinth) of the area. It covers the following:

  1. Construction of main plant and equipments
  2. Go downs, warehouses, and open yard facilities.
  3. Staff quarters
  4. Garages
  5. Auxiliary services like laboratory, water and steam supply, workshops, etc.
  6. Swerves, drainage, etc
  7. Tanks, wells, basins, cisterns, hoopers, bins, etc necessary for the plant
  8. Non-factory buildings like canteen, time office, exile house etc.
  9. Other works relating to civil engineering.

3.Technical know-how and engineering fees

specialization is needed in various technical matters, therefore, technical consultants are approached for matters like, choice of technology, selection of plant and machinery, project report, etc. Only the Cost of technical know-how and engineering for setting-up is included in the project cost; the annual royalty that depends upon the sales value is included in operating expenses.

4.Plant and machinery

It includes the following:

  1. Cost of stores and spares
  2. Cost of indigenous machinery, i.e. free on rail (FOR); sales tax; octroi; transport charges and railway freight; other taxes.
  3. Foundation and installation charges
  4. Cost of imported machinery, i.e. import duty; free on board (FOB); shipping, freight, insurance; loading, unloading, transportation charges.

5.Miscellaneous fixed assets

assets that are indirectly related to the manufacturing process are included under miscellaneous fixed assets. E.g. Furniture, pipelines, boilers, tools, vehicles, laratory and workshop equipments, fire fighting equipment, etc; they also include, patent, copyrights, trademarks, licences, etc.

6.Pre-operative expenses

the expenses incurred before starting commercial production are called pre-operative expenses. Pre-operative expenses are directly related to the production schedule, more delay will lead to more expenses. Pre-operative expenses includes: rent, rate, taxes; start-up expenses; insurance charges; mortgage expenses; miscellaneous expenses; etc. Pre-operative expenses of setting up plant and machinery can be capitalized later.

7.Preliminary and capital issue expenses

expenses relating to raising capital from public are called capital issue expense. It includes: brokerage, fees to manager, printing expenses, listing fees, and stamp duty. Preliminary expenses includes expenses relating to market survey, drafting MOA and AOA, preparing the feasibility report

8.Expenses on foreign technicians and training of Indian technicians abroad:

expenses incurred for travel, lodging, boarding etc, along with salary of foreign technicians engaged for setting up a project and supervision are included here. Similarly, expenses for abroad training of an Indian technician must be included.

9.Initial cash losses

initially every project incurs loss; these losses are not disclosed before the investors and the public to make the project look attractive. Therefore a provision is made for the cash loss.

10.Margin money for working capital

the principal support for working capital is provided by commercial banks and trade creditors. However, a certain part of the working capital requirement has to come from long-term sources of finance. Referred to as the ‘margin money for working capital’, this is an important element of the project cost. The margin money for working capital is sometimes utilized for meeting over-runs in capital cost. This leads to a working capital problem when the project is commissioned. To mitigate this problem, financial institutions stipulate that a portion of the loan amount, equal to the margin money of working capital, be blocked initially so that it can be released when the project is complete.

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