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MANAGERIAL

ACCOUNTING
PRACTICES AT ITC
SUNFEAST

Submitted by:

Abhas Srivastava (13002)


Asmita Karanje (13012)
Deepika Dholkheria (13014)
Nikita Doshi (13024)
Rupali Varshney (13040)
Sharath Chandra (13045)
EXECUTIVE SUMMARY

ITC is among India’s most respected and reputed companies. ITC’s diversification strategy has helped it
grow. ITC is also moving into emerging markets. ITC’s main line of business has shifted from tobacco to
various other businesses.

We have restricted our analysis to Sun feast itself. ITC is investing in mass media ad campaigns and non-
traditional media in Q3 FY 2011.ITC has been able to create a brand Sun feast with annual revenues of
Rs 7 billion” (Rs 700 crore). This is 40% of the size of the country’s leading biscuit brand Britannia. Parle,
Britannia, and Priya Gold are the main competitors of Sun feast. Sun feast looks at a two-pronged
strategy with their strategy being high margins in cream variants and volumes from the Marie and
Glucose segments.

The major strategy of ITC was to exploit the gap in innovation in the business industry. There had been
no major innovations in the biscuit industry over a long period and people were waiting for these to take
place. ITC follows various business level and corporate level strategies. Corporate strategies focus on
internal validity, market standing and profitability. Business level strategic analysis includes resources,
capabilities and core competencies.

ITC works hard towards enhancing its competitiveness. In a very short span of time ITC has garnered
significant market standing. Maintaining consistent quality at lower prices while keeping overall
investments down is a formidable challenge. The continuing focus of ITC on cost management (both
operational and financial), productivity enhancement, quality up gradation and value addition to its
products and services, has resulted in improved performance on the business front in previous two
financial years and first half of the current fiscal. ITC realized that they have to offer products at a price
which is equal to or lesser than what is being offered.

The strategy followed by ITC here was the differentiation strategy. They differentiated their biscuits
from the other types of biscuits available in the market. Their aim was to achieve competitive advantage
by offering better biscuits at the same price.The company has devised an excellent supply chain
management system which also translates into reduced costs and competitive prices

From the annual report of the company we came to know that the company does have a Financial and
Management Information Systems in place. The sun-feast division had hoped to break-even by the end
of 2007 after kicking off its manufacturing operations in 2003 after Smelling the potential in the
country's biscuit industry but it could break-even only recently in Mar 2010.

Foods cannot afford large overheads on a small base. The issue is one of attaining scale as quickly as
possible to distribute the overheads on a large base.The Strategy followed by ITC in keeping their
overheads down.ITC believes that control is a necessary concomitant of its second core principle of
governance that the freedom of management should be exercised within a framework of appropriate
checks and balances. Target Costing Practices is followed at ITC – Sunfeast.ITC has grown a lot over

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these 6-7 years. It continues to build consumer franchise. The company will surely grow further over the
next few years.

To remain competitive in the biscuit and food segment in general ITC needs to develop a full pronged
strategy towards customer retention, foray into uncontested space, reducing frivolous costs such as
heavy spends on advertisements and also lobbying with the Indian biscuits Industry association to
increase the biscuit prices all throughout the industry without putting any player to a disadvantage. It
can also increase its distribution reach using the e-sagar e-choupal channels.

We have also included a case analysis at the end to better understand the Costing of Biscuit industry.

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ABOUT ITC

ITC is one of India's foremost private sector companies with a market capitalisation of nearly US $ 19
billion and a turnover of over US $ 5 billion. ITC is rated among the World's Best Big Companies, Asia's
'Fab 50' and the World's Most Reputable Companies by Forbes magazine, among India's Most Respected
Companies by Business World and among India's Most Valuable Companies by Business Today. ITC ranks
among India's `10 Most Valuable (Company) Brands', in a study conducted by Brand Finance and
published by the Economic Times. ITC also ranks among Asia's 50 best performing companies compiled
by Business Week.

ITC's diversified status originates from its corporate strategy aimed at creating multiple drivers of
growth anchored on its time-tested core competencies: unmatched distribution reach, superior brand-
building capabilities, effective supply chain management and acknowledged service skills in hoteliering.
Over time, the strategic forays into new businesses are expected to garner a significant share of these
emerging high-growth markets in India.

ITC's Agri-Business is one of India's largest exporters of agricultural products. ITC is one of the country's
biggest foreign exchange earners (US $ 3.2 billion in the last decade). The Company's 'e-Choupal'
initiative is enabling Indian agriculture significantly enhance its competitiveness by empowering Indian
farmers through the power of the Internet. This transformational strategy, which has already become
the subject matter of a case study at Harvard Business School, is expected to progressively create for ITC
a huge rural distribution infrastructure, significantly enhancing the Company's marketing reach.

ITC's production facilities and hotels have won numerous national and international awards for quality,
productivity, safety and environment management systems. ITC was the first company in India to be
rated for Corporate Governance by ICRA, an associate of Moody's Investors Service, which accorded it
the second highest rating, signifying "a high level of assurance on the quality of corporate governance."

ITC employs over 26,000 people at more than 60 locations across India. Ranked among India's most
valuable companies by the 'Business Today' magazine, ITC continuously endeavors to enhance its wealth
generating capabilities in a globalizing environment to consistently reward all its shareholders, fulfill the
aspirations of its stakeholders and meet societal expectations.

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SWOT Analysis of ITC

Strengths
ITC leveraged it traditional businesses to develop new brands for new segments. For example, ITC used
its experience of transporting and distributing tobacco products to remote and distant parts of India to
the advantage of its FMCG products. ITC master chefs from its hotel chain are often asked to develop
new food concepts for its FMCG business.

ITC is a diversified company trading in a number of business sectors including cigarettes, hotels, paper,
agriculture, packaged foods and confectionary, branded apparel, personal care, greetings cards,
Information Technology, safety matches, incense sticks and stationery.

Weaknesses
The company’s original business was traded in tobacco. ITC stands for Imperial Tobacco Company of
India Limited. It is interesting that a business that is now so involved in branding continues to use its
original name, despite the negative connection of tobacco with poor health and premature death.

To fund its cash guzzling FMCG start-up, the company is still dependent upon its tobacco revenues.
Cigarettes account for 47 per cent of the company’s turnover, and that in itself is responsible for 80% of
its profits. So there is an argument that ITC’s move into FMCG (Fast Moving Consumer Goods) is being
subsidised by its tobacco operations. Its Gold Flake tobacco brand is the largest FMCG brand in India.
This single brand alone holds 70% of the tobacco market.

Opportunities
Core brands such as Aashirvaad, Mint-o, Bingo!, Sun Feast (and others) can be developed using
strategies of market development, product development and marketing penetration. ITC is moving into
new and emerging sectors including Information Technology, supporting newer business solutions. E-
Choupal is a community of practice that links rural Indian farmers using the Internet. This is an original
and well thought of initiative that could be used in other sectors in many other parts of the world. It is
also an ambitious project that has a goal of reaching 10 million farmers in 100,000 villages.

ITC leverages e-Choupal in a novel way. The company researched the tastes of consumers in the North,
West and East of India of Atta (a popular type of wheat flour), then used the network to source and
create the raw materials from farmers and then blend them for consumers under purposeful brand
names such as Aashirvaad Select in the Northern market, Aashirvaad MP Chakki in the Western market
and Aashirvaad in the Eastern market. This concept is tremendously difficult for competitors to emulate.

Per capita consumption of personal care products in India is the lowest in the world offering an
opportunity for ITC’s soaps, shampoos and fragrances under their Wills brand.

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Threats
The obvious threat is from competition, both domestic and international. The laws of economics dictate
that if competitors see that there is a solid profit to be made in an emerging consumer society that
ultimately new products and services will be made available. Western companies will see India as an
exciting opportunity for themselves to find new market segments for their own offerings.

ITC’s opportunities are likely to be opportunities for other companies as well. Therefore the dynamic of
competition will alter in the medium-term. Then ITC will need to decide whether being a diversified
conglomerate is the most competitive strategic formation for a secure future.

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1. What is the company’s main line of business - product / service and
which sector?

ITC was incorporated on August 24, 1910 under the name Imperial Tobacco Company of India Limited.
As the Company's ownership progressively Indianised, the name of the Company was changed from
Imperial Tobacco Company of India Limited to India Tobacco Company Limited in 1970 and then to I.T.C.
Limited in 1974.As such the company’s main line of business has shifted from tobacco to various other
businesses.

ITC has divided its business into the following five divisions:
FAST MOVING CONSUMER GOODS (FMCG)
Cigarettes, Packaged foods & Confectionary, Lifestyle Retailing, Personal Care, Education & Stationary,
Safety Matches & Incense Stick

HOTEL
ITC Welcomgroup Hotels

PAPERBOARDS AND PACKAGING


Cyber XLPac, Cyber Cypak, Cyber Propac, Safire Graphik, Art Maestro, Carte Persona, Indobev, Indobarr,
Ecoviron, Fusion (Paperboards)

AGRI-BUSINESS
Soyameal, Rice (Basmati & Non Basmati), Wheat, Pulses, Sesame Seeds, HPS Groundnuts, Castor oil,
Shrimps and Prawns, Fruit Purees/Concentrates, IQF/Frozen Fruits, Organic Fruit Products, Fresh Fruits,
Coffee, Black Pepper, Chilly, Turmeric, Ginger, Celery and other Seed Spices. (Agri Commodities),
Choupal Saagar, Choupal Fresh, Choupal Pradarshan Khet (e- Choupal), Leaf tobacco, Spices

INFORMATION TECHNOLOGY

ITC Infotech

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For this project we have restricted ourselves to Sunfeast brand of biscuits and all answers are
pertaining to this segment.

Sunfeast

'Sun feast ' brands of biscuit owned by ITC group which is amongst major corporates in Indian
industry with products ranging from stationery items , paper , hotels , food products and its main
stay tobacco . ITC is new entrant to biscuit segment which has been dominated by Parle and
Britannia. ITC deep pockets and distribution channels have helped it to make dents in already
entrenched market. It claims to have 9-11% market share of organised or branded Indian biscuit market.
With competition hotting up with slew of new products and expansion by its competitors and with
arrival of new players like Mcvities , Unibic ,GSKB,Pepsi ,It plans to counter these developments
through various expansion plans for its biscuit division .

ITC Foods is investing in research and development projects to launch new variants in Q3 FY 2011.
Company’s growth strategy is to create new products to fight competition. They are extending their
distribution network both in rural and urban India. Their core strategy is to offer quality products at
optimum prices.

The company has extended its manufacturing capacity by setting up three new biscuit plants in UP and
West Bengal. They are sharpening their focus on their supply chain management strategy to enhance
product freshness, market servicing and margins. ITC has 14 manufacturing facilities.

To promote its flagship brand Sunfeast, ITC is investing in mass media ad campaigns and non-traditional
media in Q3 FY 2011.ITC has been able to create a brand with annual revenues of Rs 7 billion” (Rs 700
crore). “This is 40% of the size of the country’s leading biscuit brand Britannia, and is one of the biggest
brand creations that have happened over the last five years within the consumer staples sector.

ITC also has plans for setting up a biscuit manufacturing plant at a cost of Rs 70 crore. ITC visualises a
50% growth in the size of the brand over the next two years. ITC has built up a network of 6,000 e-
choupals, or internet booths manned by villagers that offer farmers advice on market and weather
trends among other things. This chain, covering 36,000 villages across nine states, helps ITC help buy the
best produce and also sell third party products to rural India. Such transactions added up to over Rs 100
crore last year.

Sunfeast biscuits grew by 32% in the September quarter driven by products mix improvement with
growth in the sales of value-added variants of cookies and creams. Tendular will continue to be the
brand ambassador of Sunfeast. Like ITC, Parle Foods is also investing in new product developments to
woo new consumers.

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Questions
2. Who are the main competitors?

The Major Players in the Biscuit Industry :

Parle

ITC Sunfeast

Britannia

PriyaGold

The latest statistics of 2010 point out that the total production of biscuits in India is estimated to be
around 30 lakh MT, the organized sector accounts for 65% and the unorganized sector accounts for 35%
of the total industry volume. The organized sector is valued at above Rs 8000 crores.

The biscuit industry is estimated to grow over 15-17% in the next few years and the per capita
consumption of biscuits in India is 2.0 kg. India is ranked 3rd after US and China amongst the global
biscuits producers.

The export of biscuits is approximately 17% of the annual production and the imports are not significant
amount as compared to the total consumption. The penetration of biscuits in urban and rural market is
85% and 55% respectively. The Biscuit industry employs almost 3.5 lakh people directly and 30 lakh
people indirectly.

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The organized biscuit manufacturing industries annual production
Year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Annual Production(Lakh MT) 11.00 12.54 14.29 16.14 17.14 19.5

Brands:-
Major brands The Indian biscuit industry is dominated by major brands like Parle, Britannia, and
Sunfeast. Also the category has strong regional brands such as Priya Gold-North, Cremica-North & West,
Dukes-South and Anmol-East & North.

Market Share Breakdown

Consumption Pattern across Various Regions:


The biscuit consumption is evenly divided across the regions.

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Future Competitions:
GlaxoSmithKline Consumer Healthcare has come up with Junior Horlicks Biscuits-toddler biscuit
category. PepsiCo India launched biscuit brand Aliva, it will be produced by food division Frito Lay India.
United Biscuits (UK), world’s third largest biscuit company, is set to enter India market.

Pricing models:
The biscuits industry has two clear models. Parle products play the low price game at all varieties of
biscuits from glucose to cream. Essentially, Parle plays a high volume, low margin game. But Britannia
and Sunfeast look at a two-pronged strategy with their strategy being high margins in cream variants
and volumes from the Marie and Glucose segments.
For instance, cream biscuits from both Britannia and Sunfeast cost Rs 10 for 100 grams. Parle, however,
only charges Rs 5 for its cream variants. Except for Hide & Seek, all of Parle’s products lie in the price
range between Rs 4 and Rs 6 for 100 gram packs.
To be fair, in Glucose and Marie, the companies have little choice. As there is little differentiation,
consumers are extremely price sensitive. But these segments are important. Marie and the popular
glucose varieties make up for nearly 55 per cent of the Rs 4,000 crore biscuits segment — a significant
Rs 2,200 crore.
A former CEO of one of the major players reportedly commented “the biscuit consumer is willing to pay
more only when he sees a clearly differentiated product. Hence companies have little choice in terms of
pricing.” No wonder all the Glucose and Marie variants straddle price points of Rs 4-6 (for 100 grams).
Although Parle and Britannia still hold the lion’s share of the market ITC seems to be catching up. AC
Nielsen has indicated that the market share of ITC has seen a steady increase over the past few years.

The turnaround:
The major strategy of ITC was to exploit the gap in innovation in the business industry. There had been
no major innovations in the biscuit industry over a long period and people were waiting for these to take
place. The want of customers for something new, something fresh was satiated by Sunfeast brand. And
though there was a flurry of innovations at a later stage ITC had gained a strong foothold in the biscuit
industry by then.
Distribution network are of primary importance in FMCG industry and for this purpose the company
used its existing network of convenience stores: the company’s name for the hole-in-the-wall pan-beedi
shops for Sunfeast. Not content with the existing resources, the company also looked at grocery stores
and other retail formats.
The company says the brand is now available in nearly 1.8 million outlets. Britannia claims it has a
superior distribution clout with its presence in nearly 3.3 million outlets. Parle, the seasoned player
itself, says it is available in 1.5 million outlets.
Sunfeast’s next step was to step up its branding and promotion. The company claims that it has been
spending 35-40 per cent of its turnover from the biscuits segment on advertising and promotions,
whereas until last year, Priya Gold spent nearly 10 per cent of its turnover on marketing. Even market
leader Britannia spends about 10 per cent of sales on marketing. Thus analysts believe that ITC’s deep
pockets have helped Sunfeast in many ways.

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3. What is the cost management strategy of the company?

The continuing focus of ITC on cost management (both operational and financial), productivity
enhancement, quality upgradation and value addition to its products and services, has resulted in
improved performance on the business front in previous two financial years and first half of the current
fiscal.

ITC’s operational efficiency can be gauged from its rising profitability margins, both operating profit
margin (OPM) and the net profit margin (NPM), for the third consecutive year in a row. This is despite
the fact that the company is making a significant contribution to the national exchequer in the form of
excise duty and income tax.

The company is pursuing a debt reduction plan, which has resulted in a substantial saving on account of
interest cost.

ITC reported a 25.81% year-on-year (y-o-y) growth in net profit for the second-quarter (Q2) ended
September 30, 2009, to Rs 1,009.91 crore (Rs 802.72 crore). Net sales during the period, however,
reported a 14.06 % Y-o-Y growth at Rs 4,292.59 crore (Rs 3,763.29 crore).
Pre-tax profit at Rs 1,492.03 crore during the July-September period was higher by 25.47%. Earnings per
share for the quarter stood at Rs 2.67. In a statement issued after the board meeting, ITC stated the
resilience of the company's business portfolio was underscored by the growth in pre-tax and post-tax
profits despite tough economic conditions. With the exception of the hotels segment which is still
reeling under the impact of the global economic slowdown, net revenue from the company's cigarettes,
FMCG, other, agri and paper & packaging businesses grew by 21%, 14%, 19% and 13%,
respectively. Profitability improved on the back of better product mix, smarter sourcing of inputs and a
series of targeted cost management actions.

Though the company's cigarette business was adversely hit because of severe taxation, investments in
technology, product, innovation coupled with consumer focus have enabled the business to deliver
superior value through its brand portfolio of well crafted blends, contemporary packaging styles and use
of state-of-the-art manufacturing technology. Investments are also being made to enhance quality,
productivity and variety. Similarly, focused initiatives are being taken to strengthen the trade and
distribution channels.

ITC's paperboards, speciality papers & packaging business maintained its growth trajectory with net
segment revenues increasing by 13% driven by better product mix, lower input costs and significant
value capture in pulp mill operations.

"In the packaging & printing business, commissioning of investments in flexible and carton lines
augmented the company's capability to deliver value added packaging to customers in the consumer
electronics and FMCG industries. The business continues to provide state-of-the-art strategic sourcing
support to the cigarette business.

Revenue from the company's agri-business was impacted because of lack of market opportunities.
Whilst these circumstances affected the volume throughput of soya, coffee and spices, the business
registered impressive growth due to the performance of the leaf tobacco portfolio.

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The company's hotels business demonstrated resilience despite economic slowdown, squeeze on
corporate travel, de-growth in occupancies and average room rates triggered a slide in occupancies and
average room rates for the hotel sector in India. ITC continued to pursue an aggressive investment led
growth strategy in line with the longer term potential of the sector and the need for greater room
capacities commensurate with India's economic growth

4.Which strategy do the companies follow? - Cost Leadership, differentiation or


Focus?

The company largely follows a cost leadership strategy as it can be seen from the following analysis.

Cost control strategy in the food division


When ITC started its food division, its main challenge was to compete with the players who were already
there. To overcome this challenge, ITC realized that they have to offer products at a price which is equal
to or lesser than what is being offered. So, they planned to capitalize by leveraging the strength of its
other businesses like tobacco’s distribution network and e-Choupal.

ITC’s printing and packaging business provided high quality, cost effective and innovative packaging.
ITC’s strong e-Choupal network covering 34,000 villages gives it unparalleled procurement and
distribution muscle. Wheat is the primary input in the atta and biscuits segments, which contribute the
bulk of ITC’s revenues. It is also the commodity in which we have the strongest presence.

Differentiation Strategy for Sunfeast biscuits


Before entering the biscuit business, ITC did a lot of market research and concluded that there were lots
of strategic gaps where ITC could benefit. New recipe and innovation was the key here. ITC took a
calculated risk by launching Sunfeast with six ranges. However, ITC was still producing category
favourites like Glucose, Marie and Bourbon cream. The strategy followed by ITC here was the
differentiation strategy. They differentiated their biscuits from the other types of biscuits available in
the market. Their aim was to achieve competitive advantage by offering better biscuits at the same
price. The company follows the going rate pricing that is the price of the product depends upon the
competitors’ price. The firm chooses pricing more or less same as that of the market leader. ITC’s e
chaupal which is kind of centre of excellence also augurs well for the sunfeast brand. Biscuits industry
had not witnessed any major product innovation in years, so ITC launched innovations such as orange-
flavoured Marie, Marie light and butterscotch-flavoured cream biscuits

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5. How do the companies manage cost and use the information for decision
making and control?
The company has devised an excellent supply chain management system which also translates into
reduced costs and competitive prices. The company’s e-choupal initiative which has established internet
kiosks, 1 sanchalak and warehousing hubs; has not only helped the farmers to gain the right information
but also helped the company to directly procure raw materials for its food segment including sunfeast.
This ensures significant cost reduction. Also the company has an extensive network of convenience
stores especially the hole-in-the-wall pan beedi shops which ensures a wide distribution coverage
resulting in higher sales targeted towards cost conscious consumers and huge recovery of costs. Mass
distribution helps in reaping economies of scale.

6. What decisions are being taken using management accounting information?


From the annual report of the company we came to know that the company does have a Financial and
Management Information Systemsin place . The objectives of the FMIS is

To practise an Integrated Accounting System which unifies both Financial Books and Costing Records.
The books of account and other records have been designed to facilitate compliance with the relevant
provisions of the Companies Act on one hand, and meet the internal requirements of information and
systems for Planning, Review and Internal Control on the other.

To ensure that the Cost Accounts are designed to adopt Costing Systems appropriate to the business
carried out by the Division with each Division incorporating into its Costing System, the basic tenets and
principles of Standard Costing, Budgetary Control and Marginal Costing as appropriate.

MIS especially ERP modules for accounting and costing system has helped the company in leveraging on
its Supply chain management which is one of its biggest strengths. It facilitates quick turnaround of
decisions, greater integration with marketing and sales departments and reduction in costs.

7. Doing a CVP & Break-Even Analysis of the Companies for the past 5 years,
See the trends in fixed and variable costs and compare the same with the
industry trend
The sun-feast division had hoped to break-even by the end of 2007 after kicking off its manufacturing
operations in 2003 after Smelling the potential in the country's biscuit industry,
The reason for such a long time to break-even is heavy spend on advertisement, packaging designs and
display. This is clearly in the hope that in time to come, on the strength of a combination of good
advertising, marketing and product line up, we can establish a significant market share and volume.

While ITC’s foods portfolio, ex–Bingo, has already achieved break-even in the year ending 2010-11.In
FMCG-other divisions can achieve break-even in FY13e owing to losses in Personal Care. Bingo is
expected to break-even in another 6-8 quarters.

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8. What are the main overheads and the current method of allocating the
same?
We got the following information relating to overheads

Main overheads Include “reasonable portions” of:

• General and administrative expenses, such as personnel or accounting staff,

• The cost of light, heat and long distance telephone charges,

• The cost of maintenance and upkeep of premises, facilities or equipment provided for research,
including a reasonable portion of the municipal taxes and cost of insurance for the building.

Foods cannot afford large overheads on a small base. The issue is one of attaining scale as quickly as
possible to distribute the overheads on a large base.The Strategy followed by ITC in keeping their
overheads down.

They do not have a large asset base - like factories. At the moment in the branded food business there is
a lot of idle capacity. They used this to build the initial size of the business. On the management side
they have tried to keep the overheads down. Also they have tried to market in such a way as to
economise on marketing spends by adopting umbrella brands like Aashirvaad, under which come the
staples, multipurpose cooking paste, ready to eat meals. They might expand this range to include spices,
rice, pulses in the future. The Kitchens of India brand has the mandate to put within consumers' reach
the best of packaged Indian cuisine.

9.Whether the companies have been using new strategic cost management
techniques such as value chain analysis, target costing, and cost of quality, life
cycle costing, balanced score card etc. and its impact on the managerial
decision making and performance?

Target Costing as followed in ITC

Target Costing is primarily a technique to strategically manage a company’s future profits. It makes cost
an input to the product development process, not an outcome of it.

Target Costing is a highly disciplined process having three main elements:

1. Market Driven Costing

2. Product Level Target Costing

3. Component Level Target Costing

ITC follows market driven costing as there is heavy competition in the market and it needs to be in the
competitive pricing range so as to be able to deliver value. It focuses on customer requirement and uses

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the concept of allowable cost to transmit the competitive pressure of the marketplace to the company’s
product designers and suppliers. Infact if we notice then the prices for the Sunfeast has been quite less
than that of its competitors such as Britannia and Parle. They have achieved this by making use of target
costing and 6 fold approach as follows:-

1. Balance target cost with requirements. Before the target cost is finalized, it must be considered in
conjunction with product requirements. This requires a careful understanding of the voice of the
customer, use of conjoint analysis to understand the value that customers place on particular product
capabilities, and use of techniques such as quality function deployment to help make these trade-off's
among various product requirements including target cost.

2. Establish a target costing process and a team-based organization. A well-defined process is required
that integrates activities and tasks to support to support target costing. Further, a team-based
organization is required that integrates essential disciplines such as marketing, engineering,
manufacturing, purchasing, and finance.

3. Establish product cost models to support decision-making. Product cost models and cost tables
provide the tools to evaluate the implications of concept and design alternatives. In the early stages of
development, these models are based on parametric estimating or analogy techniques.

4. Use tools to reduce costs. Use of tools and methodologies related to design for manufacturability
and assembly, design for inspection and test, modularity and part standardization, and value analysis or
function analysis. These methodologies will consist of guidelines, databases, training, procedures, and
supporting analytic tools.

5. Reduce indirect cost application. Since a significant portion of a product's costs (typically 30-50%)
are indirect, these costs must also be addressed. The enterprise must examine these costs, re-engineer
indirect business processes, and minimize non-value-added costs.

6. Measure results and maintain management focus. Current estimated costs need to be tracked
against target cost throughout development and the rate of closure monitored. Management needs to
focus attention of target cost achievement during design reviews and phase-gate reviews to
communicate the importance of target costing to the organization

10. Which of the tools are being used by the companies for control purposes?
ITC believes that control is a necessary concomitant of its second core principle of governance that the
freedom of management should be exercised within a framework of appropriate checks and balances.
Control should prevent misuse of power, facilitate timely management response to change, and ensure
that business risks are pre-emptively and effectively managed.

Following are the various tools used by the company for control purposes

1. Accurate costing

-Standard and current cost comparisons

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-All costs are quantity sensitive (setup time, etc.).

-Costs are adjusted for labor efficiency, process losses and material utilization

2. Inventory costing

-Work towards reduction of inventory especially the raw material and work-in-process inventory. One of
the strategies is to enter the workstation at which an item is and costs are automatically rolled up to the
last operation.

3. Scrap reporting
Scrap costs are charged to the operation and department where they occurred

4. Automatic data reporting

Invoices and Purchase Order receipts automatically update General Ledger

11. What are the current relevance / usage of the traditional control tools such
as standard costing / budgetary control etc?

Relevance of standard costing and budgetary control

Standard costing one of the advance techniques of cost accounting. With this manager calculates the
standard cost and compares it with actual cost and after calculating variance, improvement is done in
area of production. So Standard costing is so important for every type of business organization. We can
explain its importance under following points.

Increase the efficiency

Account manager fixes the standard cost of direct material, labour and overheads and pre-determined
standard cost increases the efficiency of production, every worker produce goods according to standard
cost. After this actual cost is also compare with standard cost. With this comparison, manager will
succeed to increase the efficiency of worker for reducing cost.

Effective utilization of resources

Standard costing is also helpful for effective utilization of resources

Use in Budgetary Control

Standard costing can also use in budgetary control. We know that budgetary control is the part of
management and in controlling, it can be used. In budgetary control, not only standard cost is calculated
but after comparing relative actions of improvement are taken. With standard costing, effective control
of cost can be possible.

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Proper decisions

Standard costing is also helpful for taking proper decisions for deciding cost. There is large number of
expenses and there are many alternatives of these expenses. When standard cost is decided at that
time, best alternative from different expenses is chosen and it will reduce extra cost burden
Budgetary control is a strong tool of business is to maximise profits. Budget is also used for the
management to plan and control business operations and it is widely used as a standard device of
planning and control. In case of the manufacturing organizations, the estimation about the future is very
important for the production activities as huge amount of costs are invested in the same activity. It
helps senior managers ensure that spending limits are adequate. This control is important because
spending excesses have an unfavorable impact on corporate profits. A budgetary control helps
corporate leaders monitor revenue and expense levels in operating activities. A budgetary control also
ensures that corporate cash outflows (payments) and inflows (receipts) remain at adequate levels.

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12. How does the company manage cost reduction? See if the company is
willing to share about its implemented cost saving / reduction proposals.
Following are the key area where the company has implemented following cost reduction methods
with significant results. 1. Raw material procurement: 2. Logistics-Inbound and Outbound: 3.
Warehouse and Stores: 4. Manufacturing Process (Production): 5.Energy, fuel

BULK BUYING: A. The company has units spread across the geography can negotiate better price when
the volumes are high, instead of buying for individual units its recommended to have central buying
policy.

LOCAL VENDORS: Vendors should be located in close vicinity of the manufacturing area that helps lower
freight charges and keeping low inventory.

BUYING FROM TAX EXEMPTED AREA: In Several countries the federal Government have certain tax-
exempted area where they allow manufacturers to set up their plants. In common parlance its called
Tax holidays. ITC has used such strategies to gain a competitive advantage

REMOVING INTERMEDIARIES: Wherever possible buy from the farmers directly not from any agent,
distributors or commission agents.

RECYLING AND REUSE OF PACKING ITEM: All items comes into some form of secondary packaging out of
which some of the items can be reused or recycled.

INSPECTION: By eliminating inspection at factory and asking vendors to provide materials as per
standards and completing inspections at their end they can eliminate delays and manpower used in
these kind of activities.

Look at the entire process, operations and the value chain and see whether you can contribute
something and help the companies with some good suggestions regarding reconfiguring value chain,
cutting on some non value added activities etc, which may result in cost advantage / more value
creation for the company.

Before we move onto the value chain strategy of ITC we need to understand as to how the business
segment of biscuits had started.

Before entering the segment, ITC dug into market research. Research revealed that the category had
gaps which ITC could settle into. Findings revealed that consumers wished to taste new and innovative
products. That was precisely what the competition had not done in a big way.

The biscuits industry had witnessed little innovation; Glucose was Glucose and Marie was still Marie.
The company decided that this could be its biggest point of attack.

In August 2003, a month after its launch, the company undertook a major sampling exercise to promote
the product. For two years then, the brand did all the usual rounds -- riding behind buses, blocking
television spots, booking that corner space in your favourite newspaper and so on.

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“The launch of “Sunfeast” marks ITC Foods entry into the branded biscuit market with a range of
offerings in both basic and value added segments.”

'Sunfeast', with the Brand Essence “Spread the Smile,” connotes happiness, contentment, satisfaction
and pleasure which one would derive from the biscuits. The brand positioning and imagery is reinforced
by the Sun mascot conveying the emotional and gratifying aspects of the product.
The latest offering from ITC Foods is in tune with the company’s strategic direction to develop new
product lines by synergizing its proven competencies. They believe that their understanding of the
Indian consumer is reflected in the increasing confidence in the 'ITC' brand and more importantly the
trust that Indian consumers are reposing in all their products.

Corporate level strategies

Sustain multiple drivers of growth, matching internal capabilities with emerging market opportunities.
Pursue World class competitiveness in all businesses and across the entire value chain

Best-in-class in terms of:

• Internal Vitality

• Market Standing

• Profitability

Strategy of Organisation and Governance processes geared to manage multiple businesses. Blend core
competencies and leverage ITC umbrella strengths to create new avenues of growth.

Business level strategic analysis


Resources

The physical resources such as the raw material are available in abundance in India. Indian being an
agrarian economy the procurement of edible oil, wheat, flour, butter, cocoa, etc is comparatively easier
and cheaper.

Capabilities

The state of art factories of ITC-Sunfeast are one of the capabilities of the company. The technological
advantages of the company combined with the labor have allowed the company to develop their
resources well into their capabilities.

Core Competencies

ITC knows how to capitalize on its core competencies, which include unmatched distribution, reach,
superior brand-building capabilities, effective supply chain management and acknowledged service
skills. This has also helped them to enter into the Biscuits Division (Sunfeast).

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Marketing strategies of ITC

Innovation in the product line -- biscuits with butterscotch cream with actual granules in the cream,
strawberry cream with flavour-enhancers and orange-flavoured marie.

• Gained an edge from the well established distribution network of its tobacco business.
• Signed up big film stars like Shah Rukh Khan and southern star Surya as brand ambassadors for
Sunfeast.
• Branded the WTA tennis tournament with promos starring tennis stars, Mahesh Bhupati and Sania
Mirza needs further embellishments.

Value chain model of ITC

ITC believes that its aspiration to create enduring value for the nation provides the motive force to
sustain growing shareholder value. ITC practices this philosophy by not only driving each of its
businesses towards international competitiveness but by also consciously contributing to enhancing the
competitiveness of the larger value chain of which it is a part. The Company's 'e-Choupal' initiative is
enabling Indian agriculture significantly enhance its competitiveness by empowering Indian farmers
through the power of the Internet. This transformational strategy, which has already become the
subject matter of a case study at Harvard Business School, is expected to progressively create for ITC a
huge rural distribution infrastructure, significantly enhancing the Company's marketing reach.

Recent analysis of its biscuit segment

The innovative products under this brand have garnered significant market standing in a short span of
time and are being increasingly accepted by consumers as a credible new option to the established
players in the industry.

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During the year, outsourced and distributed manufacturing capacities were geared up to support the
increase in scale of operations.

The business is in the process of establishing its own production facilities across the country, including in
tax-exempt zones, with a view to servicing proximal markets in an efficient and cost-effective manner.
The biscuits segment of ITC Foods Division, spearheaded by the Sunfeast range, is now witnessing a
situation of demand outstripping supply. They have chosen the Partnership route instead of the
outsourcing route to augment the supply.

The supply position for biscuits right now was not comfortable and that efforts were on to add to
capacities. Maintaining consistent quality at lower prices while keeping overall investments down is a
formidable challenge. This is particularly so for confectioneries, where it was absolutely essential to
maintain attractive price levels.

13. Some useful suggestions


The company has got rid of all the branding exercises that it had undertaken initially and follows a focus
strategy.

The company can work on its packaging costs as it can leverage on its paper manufacturing and
packaging business.

The company can also seek to undertake various strategies such as Forwards/Futures trading on agri
commodities to tame inflation.

Demand outstripping supply means that the company has huge unfulfilled demand which its existing
production capacities are unable to fulfil. So it must invest in expanding its capacities.

14. Any other useful observations / comments related to the company or to


the industry / economy, which may further enrich your research work.

The company has not yet introduced the IFRS accounting standard in its organization but it may be on
their cards with increasing global initiatives.
With the rising inflation in the food industry the raw material prices have gone up drastically especially
the flour, sugar, butter, milk resulting in a catch-22 situation wherein the company is in a fix as it doesn’t
know whether it should pass on this cost to the consumers or bear the brunt of inflation hurting its
investor expectations.

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15. Summarize the key learning from those two companies and try to compare
and contrast and give your own analysis and recommendations.

About costing and accounting since there was not enough data there is not enough learning except that
it undertakes market driven target costing, about its overhead cost allocation , to remain competitive in
the biscuit and food segment in general ITC needs to develop a full pronged strategy towards customer
retention, foray into uncontested space, reducing frivolous costs such as heavy spends on
advertisements and also lobbying with the Indian biscuits Industry association to increase the biscuit
prices all throughout the industry without putting any player to a disadvantage. It can also increase its
distribution reach using the e-sagar e-choupal channels.

16. Conclusion

ITC’s entry into the Food sector created a great impact on the company’s progress. They took a great
risk but were successful because of the following strategies:

ITC has been innovating, creating new type of brands which are of good quality due to which they have
customer loyalty. Their biscuits had been innovated and tasted different from other biscuits increasing
the desire for newer taste.

Their innovative products are a key differentiator. They also have a number of innovative products in
the pipeline leveraging the capabilities of the ITC R&D Centre

ITC has done a great job in marketing, advertising, innovating, providing good quality products. It also
ramped up distributed and outsourced Supply Chain

Selling less for more is not enough now. With commodity inflation a continuous threat to growth, foods
companies like ITC are frantically reworking supplier networks, hedging risks through futures trading,
and taking a closer look at product attributes to save every precious rupee.

But these strategies may not sufficiently protect dwindling profit margins and shaky sales in an intensely
competitive market. Commodity companies say they will continue to pass on all price increases in the
coming months. Food commodity prices touched a two-year high in January.

ITC – Sun feast is relooking at various cost-saving strategies. It has done it in the past as well, but there’s
a sense of urgency now.

ITC has grown a lot over these 6-7 years. It continues to build consumer franchise. The company will
surely grow further over the next few years.

It has fulfilled all needs and requirements of the people. If the company maintains its standards or
increases it in the near future it surely will attain the number one position in the market.

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Case on Costing in the biscuit industry

This case helps us in understanding the various costs in biscuit industry.

XYZ Biscuit Inc has a very select but highly respected product portfolio. They produce 3 different kinds of
fine biscuits. -supreme crisp: A light wafer cookie with dark chocolate crème filling -tropical chocolate : A
heart-shaped cookie enrobed in smooth Belgian chocolate, with a touch of orange flavor. - Sublime roll :
A thin crepe rolled into an elegant flute, drizzled with a hint of dark chocolate. All biscuits have the same
main ingredients (chocolate, butter, sugar and flower) complement with biscuit specific ingredients. XYZ
BiscuitInc. Only works with top quality suppliers who charge Rs 160 per kg of chocolate, Rs 150 per kg of
butter, Rs 35 per kg of sugar and Rs 25 per kg of flour. All other ingredients are purchased at an average
price of Rs 50 per kg . To produce 1 kg of supreme crisps, XYZ BiscuitInc. needs to purchase 200g of
chocolate, 150g of butter, 250g of sugar, 250g of flower and 150g of other ingredients such as vanilla
powder, eggs, XYZ BiscuitInc. also employs 4 full time production workers in its production hall, working
in 2 shifts. A production worker works 1750 hours every year at practical capacity and at a cost of Rs 150
per day. In case of temporary technical unemployment, the production workers receive an
unemployment benefit from the government and XYZ Biscuit Inc. does not have pay any supplementary
compensations. To produce 1 kg of supreme crisps 0.09 labor hours are required. In addition, the
company has 1 person (FTE) in charge of maintenance. He also works an average of 1750 hours a year.
XYZ Biscuit Inc. has also invested in 3 new production processes of Supreme crisps which take 0.16
machine hours per kg. Annual depreciation of the machines is Rs 2 lakhs. The cost of power and other
supplies to run the machines is Rs 40 per machine hour for the Supreme crisp production line. As such,
the cost of power and supplies is considered to be a direct cost. Also there were Rs 1,00,000 general
administration costs linked to the production, and that XYZ Biscuit Inc pays a total amount of 3,50,000
rent for the administration building and the production hall. Management receives Rs 25, 00,000 for
running the business. Allocation of costs knowing these costs, we had to make a decision about how to
allocate the overhead costs. The allocation needed to be both logical and uncomplicated. After a long
discussion with the manager, they decided it would be best to allocate the maintenance and
depreciation costs based on the machine hours. All other indirect costs linked with production would be
allocated based on direct labor hours.

After a thorough analysis of the case the cost of manufacturing a biscuit comes to around Rs 5 per 100
grms of packet including the manufacturing costs, overheads, advertisement costs, etc. And when it
comes to market it is priced at around Rs 10 per packet which means there is various margins – the
manufacturer’s profit margin, retailer’s margin and any discount offered to the consumer.

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