FINANCIAL FINANCIA L ACCOUNTING ACCOUNTIN G REAL LIFE STUDY ON COST ACCOUNTING OF BHARA BHA RAT T AUTO MACHI M ACHINE NE INSTRUMEN INSTRUMENT TS 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 OF BHARAT AUTO MACHINE MAC HINE INSTRUMENT INSTRUM ENTS 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 this project would not have seen the light of the day. We are grateful grateful to him for not only guiding guiding us through through this project project but also also provid providing ing us unfli unflinch nching ing support support and endless endless resourc resources es 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
4
Bha Bharat rat Auto Auto Machi chine Inst Instrrume uments( nts(BA BAM MT) is a repu reputted Gear manufacture & supplier in India. It is a specialist in printing & pouch pac packi king ng mach machin inee part parts. s. They They have have a larg largee numb number er of valu valued ed customers of printing and packaging machine manufacturer. They manufactu manufacturer rer gears, gears, shaft, shaft, roller roller,, bracket, bracket, slides, slides, sprocket, sprocket, timing timing pulley, 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 throug through h techno technolog logy y up-gra up-gradat dation ion,, innova innovatin ting g approa approach ch throug through h TPM. TPM. In this this glob global al comp compet etit itiv ivee mark market et,, BAMT BAMT has has sust sustai aine ned d bec becau ause se of more more cust custom omer er focu focuss and and ener energy gy mana manage geme ment nt for for reducing the operational & energy cost. Core Values: •
Customer Satisfaction
•
Concern for environment
•
Commitment to quality and excellence
•
Innovation
Strengths: •
Robust and differentiated 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. capability.
MANAGEMENT ACCOUNTING 5
Focusing on internal customers, measures and reports financial and other other informa informatio tion n that that assists assists manage managers rs in fulfil fulfillin ling g goals goals of the organiz organizati ation. on. Financ Financial ial accoun accountin ting g focuse focusess on extern external al rep report orting ing through financial statements to investors, govt., authorities and other parties.
Cost Cost acco account untin ing g is manag managem emen entt accou account ntin ing g plus plus a part part of fina financ ncia iall 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 Cost acco accoun unti ting ng is a bran branch ch of acco accoun unti ting ng whic which h deal dealss with with the the accu accum mulat ulatiion, on,
clas classi sifficat icatio ion, n,
anal analy ysis, sis,
reco record rdiing, ng,
all allocat ocatio ion, n,
summa summari riza zati tion on,, inte interp rpret retat atio ion, n, repo report rtin ing g and and cont control rol of curr curren entt and prospective cost. It also includes determination of forecasted future costs, stan standar dard d cost costss and and hist histor oric ical al costs costs of prod produc uct, t, servi service ces, s, acti activi viti ties es,, functions, responsibility respon sibility,, etc. The term cost management has become widely used in recent years. We use cost management to describe the actions by managers to satisfy cust custom omer erss whil whilee cont contin inuo uous usly ly redu reduci cing ng and and cont contro roll llin ing g cost 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 ascertain and analyze costs: the primary objective objective of cost accounting 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 exten extende ded d to redu reduci cing ng costs costs.. Value alue anal analys ysis, is, time time and and moti motion on stud study y, standar standardiz dizati ation, on, simpli simplifi ficat cation ion,, etc. etc. are import important ant techni techniques ques of cost 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 vario various us decis decisio ions ns regar regardi ding ng incr increa ease se in prod produc ucti tion on,, inst instal alla lati tion on or repl replac acem emen entt of mach machin ine, e, the the maki making ng or buyi buying ng of a comp compon onen ent, t, continuing or closing down of business, etc.
ADVANTAGES OF COST ACCOUNTING:
The following are the advantages of cost accounting: •
Cost Cost acco accoun unti ting ng is very very hel helpful pful in cont contro rollling ling expe expend ndiiture ure and 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 cost accoun accountin ting g system system provid provides es inform informati ation on about about availab availabili ility ty of mater ateriials, als, labo laborr, and and machi achine ne capa capaci citty. In the abse absenc ncee of such such information, proper production plans cannot be drawn up.
•
Cost accoun accountin ting g entail entailss identi identify fying ing normal normal and abnorm abnormal al losses losses and gains. This task becomes simpler when standards are set up.
•
Cost accounting lays the basis for the system of standard costing and bud budge geta tary ry cont contro rol. l. Thes Thesee two two are are inst instru rume ment ntal al in the the cont contro roll of expenditure. expenditure. Varianc Variancee analyses analyses and comparison comparison of actual actual performance 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 spit spitee of so many many adva advant ntag ages es,, some some peop people le feel feel that hat cost cost accounting accounting is an unnecessary unnecessary luxury for business business establishme establishments. nts. This is not true true.. Perh Perhaps aps they they feel feel so beca becaus usee of a few few limi limita tati tion onss of cost 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 abno abnorm rmal aln, n, cont contro rolllabl able
and and
unco uncont ntro rolllabl able,
etc. etc.,,
are are
base based d
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
Acti Activi vity ty based based cost costin ing g is a cost costin ing g meth method od that that firs firstt assig assigns ns cost cost to activities and to the goods and services based on how much each good or service used the activity. activity. Acti Activi vity ty based based cost costin ing g is a comm common only ly used used appro approac ach h to impro improve ve 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 goods and service services, s, manage managers rs must must modify modify the activi activitie tiess 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 St ep 1: Ident Identify ify and class classify ify the activi activity ty relate elated d to the compan company’ y’ss
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 inspect items, items, move material, material, respond to customer customer,, etc. The list of activities defines all the activities being performed in production facility. 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 measu measure re the the aver averag agee demand demand plac placed ed on each each acti activi vity ty by the the vari variou ouss 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 pro provi vide de exis existi ting ng good goodss and and serv servic ices es,, whic which h can can be used used to bett better er 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 Rohtak Costing Procedure
The Bharat Auto Machine Instruments - Rohtak produces 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
accoun acc ountin ting g instru instrumen mentt to show show the relatio relations nship hip betwee between n these 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 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 raw mate materi rial al requ requir ired ed is SA SAE E 1095 1095 steel steel.. Depe Depend ndin ing g upon upon the 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 9,73,7 50
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)*15 =(12,00,000/29,00,000)*150000=62070 0000=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)*20000 (1200000/2900000)*200000=Rs 0=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 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 RENT : IT IS AL ALLO LOCA CATE TED D ACCO ACCORD RDIN ING G TO NUMB NUMBER ER F UNITS NITS CONSUMED. RENT =Rs1000000
Gears = (1200000/2900000)*1000000 = Rs 413795 Bracket =Rs 136550 Sprocket =Rs 206895 Shaft =Rs 68965 Timing pulley =Rs 172415
DEPRECIATION: DEPRECIATION:
DEPRECIATION DEPRECIATION IS IS ALLOCA ALLOCATED TED 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 DIRECT MATER MATERIAL IAL::
IT IS CALCULA CALCULATED TED BY DIVIDIN DIVIDING G 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: MAINTENAN CE: 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
OFFI OFFICE CE EX EXPE PENS NSE: E: THES THESE E ARE ARE CALC CALCUL ULA ATED TED FROM FROM THE THE NO OF PIECES PRODUCED.
TOTAL 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. RATE. FOR ALL PRODUC PRODUCTS TS EX EXCEP CEPT T PRODUC PRODUCT T D REQUIR REQUIRES ES ONE PERSON PERSON PER PER MACHINE MACHINE . PRODUC PRODUCT T PER MACHINE
Gears =25*3750= Rs 93750 17
D REQUI REQUIRES RES
TWO PERSONS 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
214390
105765
130920
39375
109195
6,00,000
MAINTENANCE
178655
88135
109100
33110
90995
500000
DEPRECITION
285850
141020
174560
52975
145595
8,00,000
SALARY
331035
110345
165515
55175
137930
800000
OFFICE EXP.
124140
41380
62070
20690
51720
3,00,000
RENT
413795
136550
206895
68965
172415
1000000
OVERHEADS
1850820
894595
109397 5
594435
888195
5323750
OFFICE
OFFICE
TOTAL COST
PRIME COST
=
OVERHE +
ADS
PARTICULARS
Gears
Bracket
Sprocket
Shaft
Timing pulley
TOTAL
TOTAL COST
3626820
1622595
2413975
1292435
2188195
11145750
PERUNIT COST
3.02
4.056
4.023
6.46
4.38
SELLING PRICE
3.4
4 .5
4.5
7
5
PROFIT
456000
177600
286200
108000
310000
TOTAL
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 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 PRODUC-FC=0
.38*12X+.444*4X+.477*6X+0.62*2X+.54*5X .38*12X+.444*4X+.477*6X+ 0.62*2X+.54*5X-2873440=0 -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 thu thus was asta tag ge
of reso resou urces rces is don done. The The pro roce ces ss sho hou uld 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 redu reduce ce the the dist distan ance ce betw betwee een n the the mach machin ines es and and the the warehouse: Currently it is very large thus are wastes important processing time.
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LIMITATIONS
Being a “LALA” company 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 time.. We had had to wait wait for for long long to know know so some me of the the rele relev vant ant information. About the accounting system.
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