Product-Wise Costing System for Food Processing Industry: Practical Case Study

Summary: Developing a reliable product-wise costing system in the food processing industry requires more than extracting expenses from the accounting ledger. This practical case study explains a factory-based approach beginning with process mapping and yield measurement, followed by identification of cost centres, machine and utility usage, expense grouping, allocation of common costs and preparation of product-wise cost sheets. Using illustrative air-dried, freeze-dried and IQF mango production, it demonstrates how differences in saleable yield, processing requirements, energy consumption, packaging, quality control and storage can significantly affect cost per kilogram. The methodology emphasizes direct tracing of costs wherever possible and the use of reasonable, documented allocation bases for shared costs. It also shows how product costs can be reconciled with overall expenses and converted into a monthly management dashboard covering yield, cost per kilogram, electricity consumption, downtime, rejects and other operational indicators. The central lesson is that an effective costing system should connect factory-floor activity with accounting records so that management can understand not merely what each product costs, but why those costs arise and where operational improvements may be possible.

Costing System Development In The Food Processing Industry | From Factory Visit to Product-Wise Costing: A Practical Case Study

1. The assignment: A problem raised by management

“We process fruits and vegetables using different methods, but we cannot clearly tell what it costs to make each product. We know our total monthly expenses, but we do not know why one product costs more than another.”

This was the concern raised by Fresh Harvest Foods Pvt. Ltd., a fictional food-processing company planning to expand its business. The company produced air-dried, freeze-dried and individually quick-frozen (IQF) products. Its accounts team could report total expenditure, but management needed product-wise costs to support pricing and production decisions.

We were asked to develop a practical costing system. I visited the factory with a small team—a costing professional, an engineer and an audit assistant. Instead of starting with the accounts ledger, we began on the factory floor with one question: Can we trace the cost from raw material receipt to saleable finished goods?

2. First, understand how the factory works

We found that the plant had three different production routes. Fruits and vegetables were received, checked, washed, sorted and prepared. They were then sent to the relevant line—air drying, freeze drying or IQF. After processing, the products were checked, packed and stored before dispatch.

The exact process depends on the product. For example, blanching may be required for some IQF vegetables, but not for every product.

We also learned that the same quantity of raw material can produce very different quantities of finished goods. Drying removes moisture and reduces weight. IQF products generally retain more of their original weight, though trimming and rejection still occur. That is why cost per kilogram must be calculated using saleable finished goods—not simply the raw material received.

3. Step 1 — Map the process and measure the yield

We met the production manager and supervisors and mapped each product’s journey through the factory. At every stage, we recorded the quantity entering, the quantity coming out, the loss and the resources used.

For a simple illustration, suppose 1,000 kg of fresh mango is received. After peeling, seed removal and trimming, 900 kg remains for processing. After air drying, 120 kg of dried product is obtained: 115 kg is saleable and 5 kg is rejected or sent for rework.

The 100 kg removed during preparation is different from the weight lost during drying, which is largely moisture. We therefore separated normal process loss, unusual loss and rework. A high weight reduction during drying is not automatically a defect; the reason for the loss matters.

This batch example is separate from the monthly figures used later in the article.

4. Step 2 — Identify the cost centres

A cost centre is a part of the factory where costs are collected and monitored. The company’s accounts showed broad expense headings such as electricity, salaries and repairs, but did not show which line used those resources. We created a cost-centre list based on the factory’s actual operations.

We created a separate cost centre when an operation had its own equipment, used resources differently or needed separate cost reporting. The system should be detailed enough to help management, but not so complicated that staff cannot maintain it.

5. Step 3 — List machines and measure resource use

Next, we visited the production lines, electrical panels and refrigeration area. We requested the machine list, rated power, operating hours, maintenance records and available electricity meter readings.

Rated power is not the same as actual electricity use. Where a separate meter was not available, we used a clearly labelled estimate and planned to validate it.

Estimated electricity (kWh) = Rated power (kW) × Operating hours × Assumed load factor.

For example, a 100 kW air dryer operating for 8 hours at an assumed 70% load would use an estimated 560 kWh (100 × 8 × 70%). If saleable output were 140 kg, estimated electricity use would be 4 kWh per kg (560 ÷ 140). This is an estimate, not a meter reading.

We tracked four resource groups: materials (input, yield and rejects), labour (hours), machines (operating time and downtime), and utilities (electricity, water, fuel and refrigeration where relevant).

6. Step 4 — Collect expenses and group them

After understanding the process, we met the accounts team. We requested the trial balance, expense details, payroll, electricity and fuel bills, repair records, depreciation schedules, packaging purchases and other relevant documents.

For this simplified example, assume the factory processes 20,000 kg of fresh mango at ₹40 per kg. The following monthly costs are imaginary:

We assigned costs directly where possible. Shared costs—such as common refrigeration, maintenance and quality control—were kept separate until we selected a fair way to distribute them.

7. Step 5 — Share common costs on a sensible basis

Some costs can be linked directly to a product or production line. Others support several lines. We selected a basis that reflects what drives each cost, rather than spreading every expense in the same way.

The basis should be recorded and reviewed. If a cost can be directly traced, assigning it directly is usually clearer than sharing it through a broad pool.

8. Step 6 — Prepare product-wise cost sheets

We combined material, processing, packaging, quality-control and storage costs for each product. The figures below are illustrative. The monthly cost allocations are assumed for this example; a real factory would need supporting records and a suitable allocation method.

Cost per kg is calculated by dividing total product cost by saleable output. For air-dried mango: ₹5,75,000 ÷ 1,000 kg = ₹575 per kg.

The three product costs total ₹19,87,000, matching the simplified monthly expense total. In an actual system, any unallocated amount or cost kept outside product cost should be shown and explained.

The cost difference does not, by itself, mean that one process is inefficient. The products have different yields, processing needs and market characteristics. Cost should be reviewed alongside selling price, contribution, demand and available capacity.

9. Step 7 — Use the numbers to ask better questions

The cost sheet is a starting point for management review. We suggested asking:

• Why does freeze-dried product cost more per kg? Check processing time, energy use, batch size, yield and packaging.
• Is the air-drying line using its available time well? Track operating hours, changeovers, downtime and output.
• Is IQF yield steady from batch to batch? Compare input, trimming, rejects and saleable output.
• Are shared costs being distributed fairly? Review the basis used for refrigeration, maintenance and quality control.
• What does the cost mean for pricing and product mix? Compare cost with selling price, contribution, demand and capacity.

10. A simple monthly dashboard

The blended cost is an average across three different products. It should not replace the separate product-wise costs. A useful dashboard can also show product yield, cost per kg, electricity use, downtime, rejects, labour hours, contribution and any costs not yet allocated.

11. Factory visit checklist

This checklist helps the team collect the information needed to build a costing system based on factory activity, rather than unsupported assumptions.

12. Implement the system in stages

We recommended a monthly meeting involving finance, production, engineering and quality teams. They would review yield changes, energy use, machine utilisation, cost movements and missing data. A costing system is useful only when its information is reliable, updated and used.

Conclusion — Start with the factory, not just the accounts

The assignment began with a simple request: “Tell us what each product costs.” The factory visit showed that we first needed to understand the production process, measure material and resource use, identify cost centres, collect expenses and share common costs on a reasonable basis.

The sequence was straightforward: factory visit → process mapping → cost centres → resource measurement → cost collection → cost allocation → product-wise costing → review and action.

A costing system should not begin and end with a spreadsheet. It should connect what happens on the factory floor with the company’s accounts and turn that information into practical decisions. This is where a CMA can help management understand not only what a product costs, but also why it costs that much and what can be improved.

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Disclaimer: This article is intended for educational and professional knowledge-sharing purposes. The company name, operational details, production quantities, cost figures, machine capacities and calculations used in the case study are illustrative and do not represent any actual company or verified industrial data. The costing methodology and allocation bases discussed are indicative and should be adapted to the specific manufacturing process, available records and applicable cost accounting requirements. The article should not be treated as a substitute for professional advice or a statutory compliance document.