A Description Of Tea Industry:

The industry combines both agriculture and industry.This aspect sets it apart from the
traditional concept of industry or agriculture.
Unlike tea industry,most agro-industries like sugar,jute,tobacco,confine themselves,to the
manufacturing operations,leaving the growing of the basic agricultural input to farmers.
The vertical integration in the industry however stops short as production. Most producing
companies do not think beyond sending their tea to the auction centres. This trend has been
encouraged by the Rural Employment Cess In West Bengal which penalizes private sales
beyond 30%. Thus the function of reaching the ultimate consumer is performed by the tea
trade (as distinct from the tea industry).
This lack of market orientation is largely responsible for tea being a commodity rather than a
product.
The large variety of tea produced does not lead itself easily to the formation for a futures
market. Some experts consider this to be the main reason behind the relative lack of grow of
tea as an international commodity.
Tea is the highed taxed industry in India. The average rate of taxation is nearly 70% as
compared to the standard corporate tax rate of 57%. This high tax rate is because only 40%
of the tea company,s profit attract corporate income tax,the rest is taxed as agricultural
income and the applicable tax rate is as high as 75%. Agricultural income tax ,unlike
corporate income tax is leived by the state government.

Besides,the industry suffers from various other levies such as excise duties and cess,entry
tax,sales tax,land revenue etc.Tea is the only low technology industry which was allowed by
Foreign Exchange Regulation Act,1969,(FERA) to hold upto 74% non-residential shareholding
without any export oblibations. The only stipulation (other than 26 % dilution ) was to
“Indianise” – I.e, gradually induct Indians to manage the company.
Another distinctive feature is the high level of uncertainty that the industry faces.
While the level of uncertainty with rrespect to iits agricultural operations – with its greater
dependence on the environment- is predictably high, the efficiency of its manufacturing
operations is also infgluenced by the weather. The price of made tea is volatile and difficult to
predict. Tea prices depends on many factors including international supply and demand.

Some Important Features:

It is interesting to note that yield of made tttea per hectare(YPH) is responsible to location,size
and ownership.It is interesting to note that the ownership/control of a large number of estates
has changed over the years. The independence of India led to disinvestment in India by a few
British ttea garden owing interest.
The abolition of managing agency and the enactment of FERA (Foreign Exchange Regulation
Act,1969)led to the significant regrouping of tea companies.
Around 1977,there was tea price boom ,there was considerable international interest in tea.
Gordon Fox ,a British based business magnate,through a series of intricate intercorporate
holdings, managed to gain control of around 10% of the world tea output , including as large
number of ttea estates in India.

Organisation Structure:

A tea estate consists of a garden(plantation of tea bushes) and usually a factory and other
necessary facilities.
Figure below depicts the organisation chart of a typically multi-estate tea company.
A COST ACCOUNTING SYSTEM FOR THE TEA INDUSTRY:

Scope Of Cost Accounting:

A cost accounting system may be defined as a systematic method of accumulation of costs

with respect to cost objectives.( See Horngren).
The principal cost objective of most companies is the output /product of the company. In other
words, cost data is accumulated in a manner such that the parameter,”cost per unit of
production” is meaningfully computed. This product costing approach is essential for inventory
valuation and income determination. The parameter,”cost per unit of production”,which is an
output of the system,is useful information for control. Though it must be mentioned that unit
costs alone may be misleading as they are dependant on the activity level attained which
obscure the cost behaviour pattern.

An Analysis Of Current Data:

The Tea-industry in north-east India do not have any manufacturing activity for about twq
months,usually covering January and February. As if to compensate in the three-month
period,December to February substantial expenses on account of field expenses (as well as
other agricultural operations) termed as “cold weather works”,are however incurred.
In the other months-,i.e, during the manufacturing season,there is hardly any correlation
between agricultural activity and output.
It is undeniable that agricultural activity significantly determines ooutput.However it is
extremely difficult to co-relate accurately the current year,s agricultural activity with the
current year,s crop. As the fertilizer response function ,or the exact benefit from irrigation
,pruning cycle also ,etc,is not known precisely,it is difficult to classify these costs in terms of
cost behaviour. This is especially true when considering time periods of less than a year(i.e, in
the short term). These conditions are not unexpected in agricultural operations ,where the
environment plays a key role, and where the complex interactions of causal variables is
difficult to assess.
Thus there is a measure of swubjectivity in planning of these expenses. These can be
justifiably be considered as managed(or discretionary) costs as opposed to “engineered” costs.
From a management accounting perspective,it seems reasonable to assume that such
operations benefit the entire year,s output (or even later periods) rather than the output of
the period when such expenses were incurred. Thus field expenses and other agricultural
expenses,and by the same logic,administrative expenses incurred in the non-manufacturing
period ,must be matched with the years ooutput in a rational manner.
The tea estate accounts(Table 1) suggest s that emphasis is ot on product costing.
It is to be mentioned that no separate cost accounts are maintained and one has to refer to
the monthly acconts to get an indication of the cost of production.
Unfortunately,due to cahs basis of accounting ,being in vogue,and lack of an attemmmpt to
match agricultural and administrative expenses with output,it is not possible to esmiate the
product cost from the monthly accounts accurately.
In view of the special circumstances discussed above “cost of production” should be defined as
manufacturing expenses plus a fair share of agricultural and administrative expenses for the
output produced. It should be clarified that though all accounting systems enable the
calculation of the ocst fo production for the annual production (as ,over a ,full year,the
problem of matching does not arise),unless output and expenses are properly
matched,calculation of cost of production for interim periods is not possible. Thus the Table 1
gives production costs incurred during the month rather than the cost of production.
Another deature that characterises the accounting system of many tea companies ,is the use
of cash basis of accounting . For example in Table 1 manufacturiing expenses are reported for
January & February –where there is no manufacturing. Though the amount involved in this
case is comparatively small –they do lead to distortion of results by reducing manufacturing
expenses in the manufacturing season.
Table 2 indicates that in terms of “cost incurred per kg”(based on thew monthly
accounts)there are wide differences. One can justify hypothesis that there are significant
differences in monthly cost of production as compared to the annual average cost of
production.
There is much less variation in “cumulative cost incurred” per Kg,see table 3. Like the
parameter “cost incurred per Kg” it is useful in monitoring production costs incurred rather
than the cost of production.
“Cumul;ative cost per Kg” approximates the annual average cost of production (production
cost incurred during the year+output cost incurred during the year) only near the year-end.
(See Table : 3).
NEED FOR A COST ACCOUNTING SYSTEM:
Before embarking on a detailed exposition of a suggested cost accounting system,it would be
useful to briefly enumerate the possible benefits and costs of such a system.
Inventory valuation(of made tea )is not done on a satisfactory basis. Where cost is the method
of valuation it implies “average annual cost” A proper method of product costing will ensure
that stock of made tea is valued on the basis of cost of production during the period of its
manufacture(which may be significantly different from annual average cost).
At present the interim profit and loss accounts and balance sheets based on monthly accounts
are also likely to be unsatisfactory because of the problems referred to earlier. A product
costing approach is essential for interim financial statements to be meaningful.
Used catiously,the parameter “cost per Kg”-calculated in a rational manner –would be useful
for planning and control. At present what is termed as “cost per Kg” is misleading.

The Basic Approach:

The basic costing method would be in the nature of operation costing (as opposed

to specific order costing). Operation costing is defined as “that category of basic costing
method where standardised goods or services result from a sequence of repetitive and more
or less continuous operations or processes to which costs are charged before being averaged
over the units produced during the period.(Institute Of Cost & Management Accounting).
Even though the output of the industry is not standardised ,and the production pattern is
seasonal ,the basic concepts of operation costing are still appropriate.
Controversy regarding the relative merits of absorption costing and marginal costing still
lingere(See Horngren).
As regards the tea industry the following points emerge:-
A marginal costing system would be difficult to construct as the cost behaviour pattern is
difficult to assess-particularly with respect to agricultural expenses. The popularly held rule of
thumb of 60%fixed cost and 40% variable cost has no scientific basis.However , as widely
accepted ,a marginal costing approach is vital to effective decision-making. On the other
hand ,absorption costing can lead to wrong decisions unless carefully used. And the treatment
of agricultural expenses as “indirect”(see below) is inevitable under such a system. Further
there can be no “true” method of absorption such expenses.
The main advantages of absorption costing ,besides inventory valuation ,are as follows:-
a)The difficult problem of estimating cost behaviour pattern is avoided.
b)The parameter “cost per Kg” is something which the modern day planter is familiar with
,and would avoid the initial confusion if marginal costing was introduced –even if this was
possible.
One feels that it is an absorption costing system which would be the only practical proposition.

System Details:

The view taken here is that only the following broad items of expenses can be treated as
“direct”.
1)Plucking Cost
2)Transport of green leaf.
3)Manufacturing: Withering
Rolliing/CTC
Fermenting
Drying.
4)Sorting
5)Packing
8)Other Expenses(which can be considered as “Direct”).
Such costs(which constitute manufacturing expenses –excluding excise and cess ,and a part of
transport expenses ,as per the classification of a tea company)can be unquestionably matched
with output (of made tea)-in the long term as well as in the short term.Therefore such costs
may be termed as “direct” costs.
Agricultural expenses are extremely vital and constitute a large portion of total expenses(See
Table:1).However,it would be extremely difficult to match such expenses with output made of
tea –especially in the short term. Indeed some expenses may benefit the plantation for
periods exceeding one year. Thus from practical consideration such expenses be classified as
“indirect” expenses in terms of cost accumulation.
Administrative and general expenses(which constitute the remaining revenue expenditure
account hreads other than immature cultivation) can obviously be treated as “indirect”.
It is assumed here that all costs,whether direst or indirect,are product costs and therefore
inventories. However,there may be some doubt regarding executive salaries,salaries and
benefits of general staff,repairs and maintenance of general items,such as residential
buildings,etc. Theoritically, such expenses can be justifiabialy be considered as periods
expenses(rather than product expenses). However,for the ensuing discussion,such costs are
also considered as product costs.
An essential prerequisite of a proper costing systemis that cost should be based on all revenue
expenditure items and should exclude capital expenditure. The problem of capitalisation policy
in the tea industry is an important issue.
For the purpose of our discussion ,cost of production will exclude expenditure on young
tea.This is done for two reasons:-
i)These expenses may be considered fully or partially capital.
ii) The inclusion of these expenses would tend to distort cost data-in the same sense that an
estate with more new plantations would tend to have a higher cost of production of made tea.

Finally, the question of absorption of indirect expenses. The procedure adopted here would be
to absorb those expenses on the basis of output of made tea. There are two methods by which
this can be done.
First,by using “budgeted absorption rates”. In this method,absorption rates would be
calculated as (budgeted total indirect cost)+(budgeted annual output of made tea) and applied
irrespective of whether actual output of made tea and costs are different from budget.
Secondly,by using revised absorption rates”. Here the absorption rates would be calculated
as,”actual indirect costs till date +amount expected to be incurred till date+balance output of
made tea expected till the end of the year).Both methods would employ different absorption
rates for each group of indirect costs.
The second method would enable a more realistic assessment of cost of production of made
tea. It may however be necessary to revise the indirect cost absorbed in previous periods. In
such cases,the net changes can be treated as forecasting errors.
The second method has clearly advantages,epecially since the calculation of the revised
absorption rates can be dovetailed with the management control process.
Management control at the estate level would imply monitoring direct costs on a current basis
and indirect costs and output of made tea on a “cumulative till date plus expected till end of
the year” basis.

The suggested cost accounting system may be depicted by the figure 4;

TABLE :1

EXPENSES JULY AUGTUST SEPT. OCTOBER NOVEMBER DECEMBER

FIELD EXPENSES
(MATURE TEA) 61107.57 20129.42 4895.70 1640.73 39551.17 21257.71
MANUFACTURING EXPENSES 189163.49 207479.71 305824.87 205005.71 441224.75
212871.21
NURSERIES & SEED BARRIES 8332.02 12609.05 4458.68 5678.39 15128.03 7837.47
STAFF SALARIES
57825.58 78505.94 440616.47 68682.98 76575.38 87524.41
STAFF & LABOUR WELFARE 45110.02 37067.02 45677..92 28226.14 31760.48 34596.21
MEDICAL SERVICES 15429.72 13251.51 20253..36 11405.72 13502.24 13001.87
TRANSPORT 7032.28 8489.81 13156.71 8403.38 7068.50 5979.79
OTHER EXPENSES 9587.25 111835.71 9080.51 5926.30 19038.80 30285.84
REPAIRS & MAINTENANCE 14632.53 15741.17 14031..09 16427.42 28350.24 24973.64
TOTAL EXPENSES(MATURE TEA) 408220.46 405109.52 857995.31 351396.78 672199.59
438828.15
YOUNG TEA(R & R) 9874.67 15229.29 20554.34 9747.51 8220.50 5123.14
UPKEEP OF YOUNG TEA 8089.63 21041.15 4504.50 7878.41 6284.22 6033.27
TOTAL REVENNUE EXPENSES

OUTPUT 426184.76

57651

441379.96

77803 883074.29

80410 369022.70

83903 686704.31

47853 449484.56

16034

TABLE :2

EXPENSES JULY AUGTUST SEPT. OCTOBER NOVEMBER DECEMBER

FIELD EXPENSES
(MATURE TEA) 1.06 .26 .06 .02 .83 1.33
MANUFACTURING EXPENSES 3.28 2.67 3.80 2.44 9.22 13.28
NURSERIES & SEED BARRIES .14 .16 .06 .07 .32 .49
STAFF SALARIES
1.00 1.01 5.48 .82 1.60 5.46
STAFF & LABOUR WELFARE .78 .48 .57 .34 .66 2.16
MEDICAL SERVICES .27 .17 .25 .14 .28 .81
TRANSPORT .12 .11 .16 .10 .15 .37
OTHER EXPENSES .17 .15 .11 .07 .40 1.89
REPAIRS & MAINTENANCE .25 .20 .17 .20 .59 1.56
TOTAL EXPENSES(MATURE TEA) 7.08 5.21 10.67 4.19 14.05 27.34
YOUNG TEA(R & R) .17 .20 .26 .12 .17 .32
UPKEEP OF YOUNG TEA .14 .27 .06 .09 .13 .38
TOTAL REVENNUE EXPENSES(Per Kg Of Made Tea).

7.39 5.67 10.98 4.40 14.35 27.97

Note: Monthly cost per kg is calculated as “cost incurred during the month+output of made
tea during the month”.

Table 3:
Cumulative cost Incurred Per Kg(Rs./Kg).

EXPENSES JULY AUGTUST SEPT. OCTOBER NOVEMBER DECEMBER

FIELD EXPENSES
(MATURE TEA) 1.06 .60 .40 .29 .37 .41
MANUFACTURING EXPENSES 3.28 2.93 3.25 3.03 3.88 4.29
NURSERIES & SEED BARRIES .14 .15 .12 .10 .13 .15
STAFF SALARIES
1.00 1.01 2.67 2.15 2.08 2.23
STAFF & LABOUR WELFARE .78 .61 .59 .52 .54 .61
MEDICAL SERVICES .27 .21 .23 .20 .21 .24
TRANSPORT .12 .11 .13 .12 .13 .14
OTHER EXPENSES .17 .16 .14 .12 .16 .24
REPAIRS & MAINTENANCE .25 .22 .21 .20 .26 .31
TOTAL EXPENSES(MATURE TEA) 7.08 6.00 7.74 6.75 7.75 8.62
YOUNG TEA(R & R) .17 .19 .21 .18 .18 .19
UPKEEP OF YOUNG TEA .14 .22 .16 .14 .14 .15

Note: Cumulative cost per Kg is calculated as “cumulative cost incurred till date+cumulative
output of made tea”