The client in question is one of India’s largest integrated power generation and coal mining organisation. The project has provided reliable and low-cost power for 25 years to more than 42 crore people in seven Indian states. Coal is produced by deploying the latest and most advanced mining technology to exact international operations standards.
The client seeks effective mapping of its coal mining process through efficient implementation of cost accounting processes which produce reliable and accurate results to facilitate prompt and timely decision making.
Understanding the Coal Mining Business Environment:
The coal mining cycle operates through a sequence of stages: exploration, discovery, development, production and reclamation. 
Coal Mining Process:
Exploration takes many forms by both prospectors and exploration companies and usually begins with research to select target areas. Once the target areas are chosen, geological mapping and many geochemical and geophysical surveys take place. Even in its simplest form, this activity can lead to coal discoveries. However, exploration activity rarely leads to new coal discoveries.
Discovery happens when new coal seams are found. Discoveries rely on good field work, quality geoscience, investment and planning to bring them to the development stage. Permits, leases, and licenses are required at this stage, and the project may be referred for environmental assessment.
The coal mine development stage includes feasibility, geoscience and engineering studies. The company’s decision to go ahead with any project depends on whether all of these outcomes are favourable and if all approvals are in place. Finally, the company raises funds to construct and develop a coal mine. This is the most expensive phase of the coal mining cycle.
The production phase includes the extraction, milling and processing of coal. The time a mine is in production depends on the amount and quality of the coal in the seam and the profitability of the operations.
Coal mine site reclamation and protection of the environment starts at the beginning of a project and continues after closure. Therefore, mines must have closure and reclamation plans.
Methods of Coal Mining
The two basic mining methods are surface (Opencast) and deep underground mining. The choice of mining method depends primarily on depth, density, overburden (OB), and thickness of the coal seam; seams relatively close to the surface, at depths less than approximately 55 m (180 ft), are usually surface mined. Coal seams at depths of 55 to 90 m (180 to 300 ft) are usually deep drilled. 
Business Environment in India
In India, the Ministry of Coal must approve the reclamation plan. The Mine owner shall be required to obtain a mine closure certificate from Coal Controller to affect the protective, reclamation, and rehabilitation work. He has to follow the approved mining plan covering final mine closure provisions/ activities for surrendering the reclaimed land to the State Government.
Regarding mining methods, much emphasis is currently given to opencast mining than underground mining because it can recover more of the coal resource (usually up to 100% within the mining excavation), is cheaper, and is safer.
In the case of Opencast mining, the mine waste materials (“overburden”), which consists of soil and rock on the top of the coal seam, must be removed to access the coal and its extraction. This waste removal activity is known as ‘Stripping’. Removal of OB and its placement at a rented premise requires time and cost resources. Also, OB characteristics vary from geography to geography and from different layers of soil (i.e. topsoil and subsoil). The rocky terrain in certain areas, whereas the landscape is loose in others. Therefore, OB removal (OBR) becomes challenging or suitable depending on the OB characteristics and location.
Usually, the OBR cost is more than the mineral extraction cost. OBR cost is charged to coal because OB does not have a market. Following are the costs associated with OBR:
2) Detonators, explosives, etc.
3) Heavy Machine Running (HMR) costs, including depreciation, AMC, etc.
4) High-Speed Diesel (HSD) Consumption
5) Power Consumption
6) Consumables and spares costs – tyres, lubes, etc.
7) Security, carriages, etc.
The OB removed in a particular period affects the quantum of coal extracted. The higher the OBR in a period, the higher will be the coal extraction in the subsequent period. This means that the cost of one year of OBR increases the revenue from mine in the following year or years. Therefore, the cost of OBR needs to be apportioned systematically and logically, like deferred revenue expenditure, so that the matching principle of cost with its revenue of a particular period can be enforced. Cost Accounting Standard - 23 (CAS-23)  on OBR cost issued by The Institute of Cost Accountants of India highlights the industry-specific guidelines that must be followed to develop a robust cost accounting system for the mining process.
The OBR cost attributable to the developed area of mine shall be charged to the production of ore at the standard stripping ratio.
The cost of advance stripping activity whose economic benefit is likely to flow to the entity during the subsequent years shall be capitalised and amortised.
Suppose the removal of coal is more than the Standard stripping ratio. In that case, the cost of short removal of OB shall be charged to the cost of roduction either by creating the reserve or by adjusting the earlier capitalised OBR cost.
To develop a cost accounting system for computing accurate mining costs. This majorly involved calculating process costs through quantitative parameters. To this end, the following accurate analytical reports should be generated on a real-time basis:
1) Heavy Machine Running (HMR) Costs Analysis
2) High-Speed Diesel (HSD) Consumption Analysis
3) Explosives Analysis
4) Power Consumption Analysis, etc.
After in-depth deliberations and continuous collaboration with the client for over a month, our team at Chandra Wadhwa & Co. developed a detailed-oriented costing decision support system to help the company determine accurate costs and analyse the above-mentioned key metrics.
At the top of the cost centres hierarchy, we identified three major cost centre groups: Coal Mining, OBR and Common Activities. In addition, close to a hundred operation and support function cost centres formed part of the hierarchy for seamless cost monitoring. With regards to cost elements identification (based on the materiality principle) following are the computation methodologies:
Refer the below table:
If possible, identify the manpower costs for coal mining and OBR; otherwise, the (direct and indirect) manpower costs are accounted for as common activity. This is further allocated into Mining and OBR based upon the Stripping Ratio. [Refer to Footnote 3]
Consumables and spares costs
Consumables and spares involve the following:
Used for Heavy Engineering Mining Machinery (HEMM) like Shovel and dragline.
All above costs are assigned to cost centre groups based on usage consumption, i.e. cause and effect relationship.
Spares cost is bifurcated into two categories:
Consumables and Spares costs used for common activities are allocated to Mining and OBR based on the stripping ratio.
This generally involves the power consumption cost used for running HEMM used in mining. Expenses are assigned to cost centre groups based on usage consumption, i.e. cause and effect relationship. Utility cost used for common activity is allocated to Mining and OBR based on the stripping ratio.
It includes the expenses like contractual employees, AMC charges for equipment, etc., used in mining.
This involves the depreciation of all the HEMM and other equipment used in the mining process.
Costs are assigned to cost centre groups based on usage consumption, i.e. cause and effect relationship. Depreciation cost used for common activity is
allocated to Mining and OBR based on the stripping ratio.
Since royalty is paid on coal production, it is charged directly to coal cost.
Production, Administration and Selling & Distribution overheads
All other indirect costs relating to production, administration and selling and distribution overheads are accumulated here.
Costs are assigned to cost centre groups based on usage consumption, i.e. cause and effect relationship. Overheads used for common activity are allocated to Mining and OBR based on the stripping ratio.
This involves costs relating to mine reclamation and redevelopment. This cost is generally directly charged to the coal mining activity.
Composite production: the mineral is produced in tonnage, whereas OB is produced in volume like cubic meters. To calculate the cost per tonne of mineral, the OBR is converted into tonnages using some factor; in the coal industry, this factor is usually 0.70. OBR is produced in cubic meters and multiplied with a factor for calculating Equivalent production in tonnage.
Stripping activity: It is the activity of overburden removal that benefits the identified component of ore to be mined by the entity.
Stripping Ratio: The stripping ratio is the excavation ratio of overburden to coal. Generally, overburden is measured in cubic metres and ore in tonnes. Therefore, the Stripping ratio equals the Volume of overburden (m3)/ Weight of ore (in tonnes).
The standard stripping ratio: is the ratio between the total quantity of overburden to be removed (in cubic meters) and the total mineral to be extracted (in tonnes) during the Projected life of the project.
Suppose in an opencast mine, 20 lacs m3 OB will be removed during the lifetime (suppose 15 years) against the production of 10 lakh Tonne of coal; the standard stripping ratio will be 2:1
Reach us if you have any concerns regarding cost management accounting issues in your organization.
Partner, Chandra Wadhwa & Co. (Cost Accountants) | B.Com, FCMA, ACA, DISA | Certified SAP-CO Consultant | Executive Program on Management and Finance (IIM, Ahmedabad)
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