Raw Material Consumed

Every production unit normally converts the raw material into finished goods and then sells it into the market. This raw material either may be purchased from the market or it can even be manufactured by the unit itself, depending upon particular situation.

The term “Material” refers to the commodities supplied to an undertaking for the purpose of consumption in the process of manufacture or of rendering service or for transformation into products.⁶ There are two types of materials: Direct Materials and Indirect Materials. All the materials which becomes an internal part of the finished product and which can be conveniently assigned to specific physical units is termed as

“Direct Material”⁷ While all material which is used for purpose ancillary to the business and which cannot be conveniently assigned to specific physical units is termed as “Indirect Material”⁸ For example: Consumable Stores, Oil and waste, etc

The calculation of raw material cost is done as under:

The opening stock of raw material is taken as the base for the current year’s total expenses on raw materials consumed. Additional purchases of raw materials are added to this opening stock of raw materials. Purchase of trading goods is also added to the total expenses for the raw materials. Further direct expenses on the purchases of this raw material like the expenses paid on freight or such incidental expenses made for the purchase of raw material is added to the raw material expenses. Finally the closing stock of raw materials is adjusted in order to arrive at the final figure of raw material consumption of the year.

Table: 4.1

Table Showing Proportion of Raw Materials Cost to Total Cost of Pharmaceutical Companies under Study [in percentage]

Period: 1997-98 to 2004-05 Co.Name 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 Aurobindo 73.66 76.86 75.25 76.85 74.55 72.88 68.78 63.05 Cadila 55.98 58.1 56.98 48.43 48.5 45.17 40.02 45.48 Cipla 63.07 58.12 59.59 59.72 58.32 58.86 59.27 58.5 Dr. Reddy 40.42 43.99 37.22 40.92 39.18 35.85 36.41 32.73 IPCA 61.45 56.92 54.04 52.64 52.95 52.23 53.35 50.36 Matrix 84.57 70.96 71.42 69.39 67.03 58.59 63.21 62.68 N.Piramal 47.94 51.02 53.55 51.93 50.94 50.54 48.99 47.24 Sun 52.01 58.39 56.03 55.08 54.01 52.73 55.19 59.55 (Source: Annual Reports of Companies from the year 1997-98 to 2004-05)

From the above Table no. 4.1 it is evident that proportion of raw material cost to total cost for Aurobindo Pharma for the year 1997-98 was73.66% it increased to 76.86% in the year 1998-99 to 76.86 and showed a stead trend until in the year 2001-02 declining

trend started which continued till the end. The ratio is between 76.86% (1998-99) to 63.05%(2004-05) with an average of 72.74% which is very high as compared to the overall average of 56.09% for the study period. For six years the ratio was higher than the average and it remained lower than the average for two years of the study period.

The proportion of raw material cost to total cost for Cadila Healthcare for the year 1997-98 was 55.98% and it increased to 58.1% which was the highest throughout the study period. The lowest ratio was observed in the year 2003-04 as 40.02% with an average of 49.83. There are three instances where the ratio was higher than the average otherwise in the remaining five years the ratio was lower as compared to the average.

The proportion of raw material cost to total cost for Cipla Ltd. was 63.07% in the year 1997-98 which was highest for the entire study period, the lowest value observed was 58.12 which was in the year 1998-99. The average for the entire study period was 59.43% which is slightly higher than the overall average 56.09% for the study period.

There are three instances in which the ratio is higher than the average otherwise for the five years the ratio has remained lower than the average.

The proportion of raw material cost to total cost for Dr. Reddy’s Laboratories was 40.42% in the year 1997-98 which increased to 43.99% in the next year i.e. 1998-99 which was the highest value for the entire study period. The lowest value was 32.73%

which occurred in the year 2004-05. The average value is 38.34 and there are four instances in which the ratio was higher than the average otherwise remaining four

times the ratios were lower than the average. The average is lower than the overall average of 56.09% for the same study period.

The proportion of raw material cost to total cost for IPCA Labs was 61.45% for the year 1997-98 which remained the highest value for the entire study period, while the value 50.36% in the year 2004-05 was the lowest observed during the study period.

The average ratio for the company is 54.24% and there are two instances when the ratio was higher than the average otherwise in the remaining six instances the ratio remained lower than the average.

The proportion of raw material cost to total cost for Matrix Laboratories was 84.57%

in the year 1997-98 which was highest in the entire study period. The lowest ratio 58.59% was observed in the year 2002-03. The average is 68.48 which is higher than the overall average of 56.09.

The proportion of raw material cost to total cost for Nicholas Piramal was 47.94 in the first year of the study period. It was highest 53.55 in the year 1999-2000 while it was lowest 47.24 in the year 2004-05. The average is 50.27 which is lower than overall average 56.09 for the same study period.

The proportion of raw material cost to total cost for Sun Pharmaceuticals lies in between 59.55(2004-05) and 52.01(1997-98) with an average of 55.37 which is lower than the overall average of 56.09 for the same study period. For three years the ratio was higher as compared to average and for rest four year the ratio remained lower than the average.

F – Test (ANOVA) Analysis

In order to establish relationship in the ratio of raw material cost to total cost among different Pharmaceutical companies under study during the study period and for establishing relationship in the ratio of raw material cost to total cost among different years for each (individual) company, F-Test ANOVA is used. The statements of hypothesis for the comparison among different companies and for comparison among different years for individual companies during the study period are as under:

Hypothesis for comparison between different companies:-

Null Hypothesis (H0):- “The ratio of raw material cost to total cost between different companies under study during the study period is same.”

Alternate Hypothesis (H₁):- “The ratio of raw material cost to total cost between different companies under study during the study period is not same.”

Hypothesis for comparison between different years:-

Null Hypothesis (H₀):- “The ratio of raw material cost to total cost between different years during the study period in each company under study is same.”

Alternate Hypothesis (H₁):- “The ratio of raw material cost to total cost between different years during the study period in each company under study is not same.”

In the following Table 4.1(a) the calculation of F Test (ANOVA) is shown of raw material cost to total cost ratio for the pharmaceutical companies under study, during the study period.

Table: 4.1(a)

Table showing calculation of F-Test (ANOVA)

S V d f S. S. M. S. S. F cal

Between

Companies 7 6670.360425 952.9086321 68.18768486

Between

Years 7 468.1026 66.8718 4.785173594

Error 49 684.76475 13.97479082

Total 63 7823.227775

The above Table 4.1(a) shows the F value of 68.19 at 5% level of significance and at (7,49) degree of freedom for different Pharmaceutical Companies under study during the study period which is greater than the table value of 2.16 hence the null hypothesis is rejected and the alternate hypothesis is accepted, which means that there is a significant difference among the different companies under study in the ratio of raw material cost to total cost. F value of 4.79 at 5% level of significance and at (7,49) degree of freedom is also greater than the Table value of 2.16 hence null hypothesis is rejected and alternate hypothesis is accepted, which means that there is a significant difference between different years’ ratios for all the individual companies.

Hence it can be concluded that the raw material to total cost ratio among different companies under study is not same and the raw material to total cost ratio between different years of each company is also not same.