Cost Analysis

FINANCIAL ACCOUNTING REAL LIFE STUDY ON COST ACCOUNTING OF BHARAT AUTO MACHINE INSTRUMENTS ROHTAK

Submitted to: Dr. G. L. Sharma Date of Submission: 8th December, 2008 Submitted by: Group 2 (PGDM-Finance) Abhay Verma(53/08) Amit Saxena(28/08) Aditi Khurana(19/08) Ankit Katarya(04/08) Varun Jain(52/08) S S Gupta(77/08) Tameesh Sud(75/08)

LETTER OF TRANSMITTAL

To: Dr. G. L.Sharma From: Group 2, Section-C

Date: December 6, 2007

Subject: Project study on “REAL LIFE STUDY ON COST ACCOUNTING OF BHARAT AUTO MACHINE INSTRUMENTS ROHTAK” This is regarding the project done by our group for Cost Accounting And Control. In this project study we have tried to go through and take reference from various books, articles and websites. The project study has been done to critically analyze cost accounting of Bharat Auto Machine Instruments - Rohtak and also for the purpose of evaluation of our group for internal assessment, by the authorization of our faculty members Dr. G. L. Sharma. We are indebted to him for helping us with our report preparation and in future also we will be privileged to take assistance from him.

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Acknowledgement We would like to acknowledge the help and support of Dr. G.L.Sharma without whose support this project would not have seen the light of the day. We are grateful to him for not only guiding us through this project but also providing us unflinching support and endless resources in making our endeavor a success. We are also extremely thankful to all the members of the group for their support to finish the project.

Table of Contents

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1. Company Profile

2. Management Accounting – Objectives – Advantages – Limitations 3. Activity Based Cost Accounting 4. Bharat Auto Machine Instruments – Rohtak, Costing Procedure 5. Suggestions

COMPANY PROFILE

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Bharat Auto Machine Instruments(BAMT) is a reputed Gear manufacture & supplier in India. It is a specialist in printing & pouch packing machine parts. They have a large number of valued customers of printing and packaging machine manufacturer. They manufacturer gears, shaft, roller, bracket, slides, sprocket, timing pulley, worms, worm wheels, fabricated jobs etc. The Unit is situated in the heart of Rohtak city and is easily accessible. The unit follows a dynamic approach & continuous improvement upon its operation through technology up-gradation, innovating approach through TPM. In this global competitive market, BAMT has sustained because of more customer focus and energy management for reducing the operational & energy cost. Core Values: • Customer Satisfaction • Concern for environment • Commitment to quality and excellence • Innovation Strengths: • Robust and differentiated product pipeline of state of the art twowheelers • Rich insight into consumer and market behaviour • R&D capability driving new product development • Extensive vender supply chain •

In-house instrumenting and industrialisation capability.

MANAGEMENT ACCOUNTING 5

Focusing on internal customers, measures and reports financial and other information that assists managers in fulfilling goals of the organization. Financial accounting focuses on external reporting through financial statements to investors, govt., authorities and other parties. Cost accounting is management accounting plus a part of financial accounting-to the extent that cost accounting provides information that helps the requirements of external reporting. ‘The means by which cost accounting information is reported is called a cost accounting system or costing system’. Cost accounting is a branch of accounting which deals with the accumulation,

classification,

analysis,

recording,

allocation,

summarization, interpretation, reporting and control of current and prospective cost. It also includes determination of forecasted future costs, standard costs and historical costs of product, services, activities, functions, responsibility, etc. The term cost management has become widely used in recent years. We use cost management to describe the actions by managers to satisfy customers while continuously reducing and controlling cost. An important component of cost management is the recognition that prior management decisions often commit the organization to the subsequent incurrence of costs.

OBJECTIVES OF COST ACCOUNTING:

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The objectives of cost accounting are: • To ascertain and analyze costs: the primary objective of cost accounting is to ascertain and analyze costs incurred on the production of various products, jobs and services, etc. • To control costs: cost accounting has developed various techniques such as standard costing and budgetary control for controlling costs. • To fix the selling price: cost accounting provides reliable data on the basis of which selling price can be fixed. • To reduce costs: of late, the objectives of cost accounting have been extended to reducing costs. Value analysis, time and motion study, standardization, simplification, etc. are important techniques of cost reduction. • To prepare monthly or quarterly cost statements for periodic review of operating results. • To provide useful information for planning and control and for taking various decisions regarding increase in production, installation or replacement of machine, the making or buying of a component, continuing or closing down of business, etc. ADVANTAGES OF COST ACCOUNTING: The following are the advantages of cost accounting: • Cost accounting is very helpful in controlling expenditure and economizing in the manufacture of products. •

Cost accounting relates various expenses to their functions and provides an effective instrument for control over such expenses.

• Cost accounting provides useful data not only about product costs but also about production efficiency and performance. 7

• It helps the management to initiate action to rectify delays, inefficiencies and wastage. • Centralization of purchasing is facilitated by the use of cost accounting. • Maintenance of time and jobs records for workers reveals losses incurred due to idle time. Such records assist in taking steps to minimize these losses. • A cost accounting system provides information about availability of materials, labor, and machine capacity. In the absence of such information, proper production plans cannot be drawn up. • Cost accounting entails identifying normal and abnormal losses and gains. This task becomes simpler when standards are set up. • Cost accounting lays the basis for the system of standard costing and budgetary control. These two are instrumental in the control of expenditure. Variance analyses and comparison of actual performance with budgets pinpoint areas where economies can be affected. • Cost accounting data are very useful for the management for planning carious activities. A wise manager takes a decision only after he has carefully studied the cost implications of carious alternatives. LIMITATIONS OF COST ACCOUNTING: In spite of so many advantages, some people feel that cost accounting is an unnecessary luxury for business establishments. This is not true. Perhaps they feel so because of a few limitations of cost accounting such as: Cost accounting is not an exact and foolproof science. Classification of cost into its elements, pricing of material issues on the basis of average or standard costs, etc., appointment and allocation of joint costs and overheads to joint/by-products and cost centres, division 8

of overheads into fixed and variable, division of costs into normal and abnormaln, controllable and uncontrollable, etc., are based on conventions, estimation and arbitrariness. The information provided by a cost accountant, therefore, may not be necessarily being absolutely true. It may be noted that such limitations are also found in any other system of accounting. Principles and practice of cost accounting are based on sound reasoning and keen common sense. ACTIVITY BASED COSTING METHOD Activity based costing is a costing method that first assigns cost to activities and to the goods and services based on how much each good or service used the activity. Activity based costing is a commonly used approach to improve a traditional costing system. ABC, is a costing method that first assigns cost to activities and the to goods and services based on how much each good or services used the activities. A activity is any discrete task that an organisation undertakes to make or deliver a god or services. To reduce the cost of goods and services, managers must modify the activities required to produce the goods and services. An increasing number of companies in the world are using ABC system. ABC is used to establish product cost primarily for decision –making purpose, such as whether to continue offering a product, not for inventory valuation for external reporting. FOUR STEPS ARE USED ARE USED TO DETERMINE THE COST OF GOODS AND SERVICES USING ACTIVITY BASED COSTING

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Step 1: Identify and classify the activity related to the company’s products. The first step for the organization is to identify the set of activities being performed by its indirect and support resources. Activities are associated with purchase items, inspect items, move material, respond to customer, etc. The list of activities defines all the activities being performed in production facility. Four major categories of activities could be identified in ABC framework: • Unit level activities are those performed each time unit is produced or sold. • Batch level activities are those that are performed when it makes a group of units in a batch. • Product sustaining activities arises because the company does particular types of business or maintain a particular product or service. • Facility or general operations sustaining activities relate to an entire plant, office or company as a whole. Step2: Estimate the cost of activities identified in step 1 ABC system maps from resources expenses to activities, using resource cost drivers. The resource cost drivers links spending and expenses as captured in the organizations financial or general ledger system to the activities performed. Step3: Calculate a cost driver rate for each activity. 10

Activity cost drivers links activity cost to objects. An activity cost driver is a quantitative measure of the output of an activity. Their cost driver measure the average demand placed on each activity by the various products. Then activity costs are assigned to products in promotion to demand that the product place on average on the activities. Step4: Assign activity cost to products. After costs are measured, each cost is assigned to the individual product. After completing these four steps, a company can calculate the cost to provide existing goods and services, which can be used to better understand the profitability of each. The activity-based costing data could be used to estimate the cost of future product

Bharat Auto Machine Instruments - Rohtak Costing Procedure The Bharat Auto Machine Instruments - Rohtak produces various components of different machines. The costing procedure is as follows:-

Cost Volume Profit (CVP) Analysis Profit planning is a function of the selling price of a unit of product, the variable cost of making and selling the product, the volume of product unit sold and in case of multi-product companies, sales mix and finally the total fixed cost. The CVP analysis is a management 11

accounting instrument to show the relationship between these ingredients of profit planning. The entire gamut of profit planning is associated with CVP interrelationship. A widely used technique to study CVP relationship is break- even analysis. Break-even analysis is concern with the study of revenues and cost in relation to sales volume and particularly the determination of that volume sales at which the firm’s revenues and total cost will be exactly equal. Thus, the break-even point may be defined as a point at which the firm’s total revenues are exactly equal to total cost yielding zero income. No profit no loss point is a break even point or a point at which losses ceases and profit begins.

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ANALYSIS OF THE DATA Raw Materials Required As the company is in the production of metal sheets business, the raw material required is SAE 1095 steel. Depending upon the requirements they also take other steel SAE 1030, SAE 1020, SAE 1195. As it has been previously mentioned that Suneel Auto component private limited produces auto parts for Maruti. We have done activity based accounting for 5 different parts namely Gears, Brackets, Sprocket, Shaft and Timing pulley. Production Total Production= 29,00,000 Product Gears Bracket Sprocket Shaft Timing pulley

Unit Produced 12,00,000 4,00,000 6,00,000 2,00,000 5,00,000

Cycle Time Product

Cycle Time(in

No of Units in One

Gears Bracket Sprocket Shaft Timing pulley

seconds) 45 50 55 50 55

Cycle 4 3 4 2 4

TOTAL M/C TIME = 10,495 Hr

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AVERAGE INSTRUMENTING LIFE Product Gears Bracket Sprocket Shaft Timing pulley Product

Machine Hours 3750 1850 2290 695 1910 AVERAGE INSTRUMENTING

Gears Bracket Sprocket Shaft Timing pulley

LIFE(No of PIECES) 8000 3000 4000 1600 4200

INSTRUMENTING Product

Instrumenting

Unit

Cost Total

Gears Bracket

Required 575 525

(Rs) 275 425

cost(Rs) 158125 223125

Sprocket Shaft

575 500

300 600

172500 300000

Timing pulley

500

240

120000

Total =Rs 9,73,750

PACKAGING AND CARRYING COST ARE CALCULATED ON THE BASIS OF NO OF UNITS PRODUCED . TOTAL PACKAGING COST=Rs 150000 Gears =(12,00,000/29,00,000)*150000=62070 Bracket =Rs 20,690 14

Sprocket =Rs 31,035 Shaft =Rs 10,350 Timing pulley =Rs 25,860 INSPECTION COST: IT IS CALCULATED ON THE BASIS OF NO. OF UNITS PRODUCED. INSPECTION COST= Rs200000. Gears= (1200000/2900000)*200000=Rs 82760 Bracket =Rs 27585 Sprocket =Rs 41,380 Shaft =Rs 13,795 Timing pulley =Rs 34,485 ELECTRICITY COST: IT IS CALCULATED ON THE BASIS OF NO OF MACHINES HOURS TAKEN. TOALAL ELECTRICITY COST = Rs 6,00,000 TOTAL MACHINE HOUR=Rs 10,495 Gears =(3750/10,495)*600000 = 214390 Bracket = Rs 105765 Sprocket =Rs 130920 Shaft =Rs 39735 Timing pulley =Rs 109195 SALARY: IT IS THE INDIRECT COST . IT IS CALCULATED ON THE BASIS OF NUMBER OF UNITS PRODUCED TOTAL=Rs8,00,000 Gears =RS 331035 Bracket =Rs110345 Sprocket =RS165515 15

Shaft =Rs55175 Timing pulley =Rs137930 TOTAL = Rs800000 RENT : IT IS ALLOCATED ACCORDING TO NUMBER F UNITS CONSUMED. RENT =Rs1000000 Gears = (1200000/2900000)*1000000 = Rs 413795 Bracket =Rs 136550 Sprocket =Rs 206895 Shaft =Rs 68965 Timing pulley =Rs 172415 DEPRECIATION:

DEPRECIATION IS ALLOCATED ON THE BASIS OF

MACHINE HOUR. TOTAL MACHINE HOURS= 10495 Hr DEPRECIATION CHARGD = Rs800000 Gears =(3750/10495)*800000 = Rs285850 Bracket =Rs 141020 Sprocket =Rs 174560 Shaft =Rs 52975 Timing pulley =Rs 145595

DIRECT MATERIAL:

IT IS CALCULATED BY DIVIDING COST OF

METAL SHEET BY NO. OF PIECES PRODUCED FROM ONE SHEET Gears =Rs 1.4 Bracket =Rs1.7 16

Sprocket =Rs2.1 Shaft =Rs3.4 Timing pulley =Rs2.5 MAINTENANCE: IT IS CALCULATED FROM MACHINE HOUR . TOTAL MAINTENANCE COST= Rs500000 Gears =(3750/10495)*500000 =Rs 178655 Bracket = Rs 88135 Sprocket =Rs 109100 Shaft =Rs 33110 Timing pulley =Rs 90995 OFFICE EXPENSE: THESE ARE CALCULATED FROM THE NO OF PIECES PRODUCED. TOTAL OFFICE EXPENCES: Rs 300000 Gears =Rs(1200000/2900000)*300000 =Rs 124140 Bracket =Rs 41380 Sprocket =Rs 62070 Shaft =Rs 20690 Timing pulley =Rs 51720 LABOUR LABOUR RATE= Rs 25 /Hr THIS CALCULATED BY MULTIPLYING MACHIE HOUR AND LABOUR RATE. FOR ALL PRODUCTS EXCEPT PRODUCT D REQUIRES ONE PERSON PER MACHINE . PRODUCT PER MACHINE Gears =25*3750= Rs 93750 17

D REQUIRES

TWO PERSONS

Bracket =Rs 46250 Sprocket =Rs 57250 Shaft =Rs 17375 Timing pulley =Rs 47750 TOTAL LABOUR CHARGS Rs 262375 LABOUR CHARGES

= LABOUR/ NO OF UNITS PRODUCED

Gears (93750/1200000) = 0.0781 Bracket =0.1156 Sprocket =0.0974 Shaft =0.0868 Timing pulley =0.0955

Gears

Bracket

Sprocke t

Shaft

Timing pulley

12,00,00 0

4,00,00 0

6,00,00 0

2,00,00 0

5,00,00 0

Rs1.4

Rs1.7

Rs2.1

Rs3.4

Rs2.5

29,00,00 0 55,60,00 0

DIRECT LABOUR

Rs 0.08

Rs. 0.12

Rs. 0.10

Rs. 0.09

Rs. 0.10

2,62,000

PRIME COST

1776000

728000

132000

698000

130000

5822000

PARTICULRS UNITS SOLD DIRECT MATERIAL

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TOTAL

0

0

OVERHEADS INSTRUMENTIN G COST

158125

223125

172500

300000

120000

973750

PACKAGING

62070

20690

31035

10350

25860

150000

INSPECTING

82760

27585

41380

13795

34485

200000

ELECTRICITY OFFICE

214390

105765

130920

39375

109195

6,00,000

MAINTENANCE

178655

88135

109100

33110

90995

500000

DEPRECITION

285850

141020

174560

52975

145595

8,00,000

OFFICE SALARY

331035

110345

165515

55175

137930

800000

OFFICE EXP. RENT

124140 413795

41380 136550

62070 206895

20690 68965

51720 172415

3,00,000 1000000

OVERHEADS

1850820

894595

109397 5

594435

888195

5323750

TOTAL COST

PRIME COST

=

+

OVERHE ADS

PARTICULARS TOTAL COST

Gears 3626820

Bracket 1622595

Sprocket 2413975

Shaft 1292435

Timing pulley 2188195

TOTAL 11145750

PERUNIT TOTAL COST SELLING PRICE PROFIT

3.02 3.4 456000

4.056 4.5 177600

4.023 4.5 286200

6.46 7 108000

4.38 5 310000

1337800

CVP ANALYSIS FIXED COST= RENT +DEPRECIATION+SALARY+OFFICE 19

EXPENSES+.7*MAINTENANCE+.3*ELECTRIC ITY+ .25*INSTRUMENTING = Rs 28,73,440 VARIABLE COST= DIRECT MATERIAL +DIRECT LABOUR+ .75*TOLING+PACKAGING+INSPECTION+ .03MAINTENANCE+.7*ELECTRICITY

Gears = 1.4+.08+(0.75*158125+62070+82760+214390*0.7+178655*0.3) /1200000 =Rs1.87 Bracket =Rs2.6 Sprocket =Rs2.79 Shaft =Rs4.923 Timing pulley =Rs3.25 BEP:LET 2X UNITS OF Shaft ARE PRODUCED Gears =12X Bracket =4X Sprocket =6X Timing pulley =5X FOR BEP REVENUE-FC-VC=0 S.P*NO. OF UNITS PRODUCED-FC-NO. OF UNIS PRODUCED *VC=0 CONTN*NO.OF UNITS PRODUC-FC=0 .38*12X+.444*4X+.477*6X+0.62*2X+.54*5X-2873440=0 20

4.56X + 1.776X + 2.862X + 1.24X + 2.7X – 2873440 = 0 13.138 X = 2873440 X = 218712 UNITS TO BREAK EVEN FIRM IT HAS TO PRODUCE Gears = 2624544 UNITS Bracket = 874848 UNITS Sprocket = 1312272 UNITS Shaft = 437424 UNITS Timing pulley = 1093560 UNITS

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SUGGESTIONS

To implement more effective ways of handling inventory: Currently the method for handling inventory is that the materials, which come from the sub vendors are first checked qualitatively and then quantitatively and then approved, this process take time and thus wastage of resources is done. The process should be streamlined and multiple quality check officers should be employed to check the intake simultaneously. To include fixed costs in the costing process: As it being a “LALA” company the initial investment in the plant is not considered while costing of finished products, this should be done. To reduce the distance between the machines and the warehouse: Currently it is very large thus are wastes important processing time.

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LIMITATIONS

Being a “LALA” company most of the people were not aware of the accounting system they are following. We had to guess it ourselves only that which system of accounting they are following.

As the company is small and the accountants are not well qualified so they were not aware of the ways of the activity based accounting system. They were not able to carry the system very effectively

As they were very closed they were really hesitant of sharing any of their accounting. Even after explaining our purpose and motive even some of them tried to explain us the system they were following, but it was really difficult to understand their complex system.

Being a small company they have a poor system of schedule and time. We had to wait for long to know some of the relevant information. About the accounting system.

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