mendations 48 15 Bibliography 49 EXECUTIVE SUMMARY: This project includes costing and analysis of financial statement.

In costing part, cost sheet of Rotary Air lock Valve, break even quantity of different product mix for Rotary Air lock Valve in current situation, financial statement includes ratio analysis. Ratio analysis is one of the best possible techniques available to the management to impart the basic functions like planning and control. In second year of MBA I am taking Finance as specialization and after MBA I want to join ICWAI that s why I have chosen project on product costing and cost reduction. I think Production and Finance are core functions in any manufacturing industry, I have taken book knowledge of these two functions and so as to get practical experience I have chosen manufacturing industry instead of any bank. Proprietor of Snaeha Industries, Mr. S.M. Tambekar who is my unclean therefore there was no problem in handling various types of financial data. For project purpose uncle told me to change some figures. Location of company is Plot no X- 11, M.I.D.C, Bhosary, Pune 411026. Duration of the project was 1st June to 30th July. Procedure of carrying out the Project: - In first week I was observing various works carried out in the factory and become familiar with all the functions carried out in the business. After that I started preparing cost sheet. In doing so, first I gathered all the details related to various parts of 6 RAV. Then from dimensions I found out prices of various parts from purchase order challan. After completing cost sheet of 6 I went for other sizes. After getting total cost of various RAV s I found out break even quantity of various product mixes using marginal costing which gives no profit no loss situation in current situation i.e. outsourcing the parts. Then I worked on cost reduction in different areas and lastly I have done ratio analysis for planning and control purpose. I was also working on capital budgeting (purchasing of one lathe machine) decision but I excluded that from project as it was giving negative profits. Limitation of the project is time co -

OBJECTIVE OF THE PROJECT: 1. To extract information Cost sheet and Ratio analysis. Sneha Industry started producing Rotary air lock valve in 2001. Proprietor Mr. S.M. Tambekar has quoted price of RAV according to market price. It was necessary to find out actual cost of the product, as due to wrong quoted price; company had suffered huge losses in the financial year 10-11. So as to become familiar with balance sheet and profit and loss account, I have done ratio analysis, and other way this ratio analysis can be useful for controlling operational inefficiency of the industry. 1. To study different areas of cost reduction:-So as to study the firm from various points of view, studying different areas, their importance and finding inefficiency of that particular area. SCOPE OF THE PROJECT:1) Cost sheet will be useful for price restructuring. Mr. S.M. Tambekar can decide profit margin and thereby decide the selling price. It is observed that manufacturing price is more than market price; in this regard I have advised to adopt business policies like competitive advantage using Product Differentiation. 2) I added some techniques of cost reduction in some functional areas which will reduce the manufacturing cost of the Rotary Air lock Valve and thereby increase the profits. 3) Ratio analysis helps to appraise the firm in terms of their profitability and efficiency of performance. Ratio analysis may be able to locate and point out the various areas which need management attention in order to improve the situation COMPANY PROFILE: Sneha group of Companies had started its operations in 1984. Group of companies consists of 1) Shree trading corporation. 2) Sneha Industries. 3) Sneha Bearing Private Ltd. 4) Shree Trading Corporation: This is an organization mainly deals in marketing of materials handling equipments. Sneha Industries:-The plant is situated in MIDC Bhosari and main activity is selling of Rotary Air Lock Valves. It acquires 6000 sq. land and connection of 40 HP power. Since establishment

up to 2000 company was engaged in job work and ancillary works for automobile industry in Pune. Company was remained vendor for Telco, Cummins India Ltd, KOEL and DGP Hinoday. From 1990 to 2004 company was producing magnets for Honda motorcycles at the rate of 6 lakh units per month. Company was using special purpose machines for machining automobile parts. But proprietor Mr. S. M. Tambekar was thinking to develop their own products, so in 2001 company started producing Rotary Air Lock Valves. Initially company was supplying RAV to Thermax and later started supplying to the customers all over India. Company has good marketing network to make ease in distribution. Every year company is participating in Exhibitions. Now company is focusing on own products like 1. Slidegate. 2. Double flap valve 3. Spring hanger assembly for boiler. Following products are under development 1. Screw conveyor. 2. Dampers Expansion joints (vibration joints). Currently as the rate of production is lower, company is outsourcing the parts and assemble in own production shop. Sneha bearings have some machines like lathe machines, milling machine, drilling machine. So whenever the machines are idle, RAV s parts are processed on these machines, otherwise there are many workshops nearby Bhosari MIDC for processing the parts. Mission statement for Sneha Industries is Customer delight at cost paid. 2) Sneha Bearings: The company is located in Ganesh nagar, Talawade, behind Bajaj Auto Ltd. This company is manufacturing various structural bearings from last 10years. Bearings are manufactured in house on sophisticated and special purpose machines. Company acquired load testing machine for testing strength of bearings. Company s bearings are also installed in some of the countries like Egypt, Indonesia, and New Zealand Bearings are needed to transfer the vertical forces from one structural member to another. They are also required to restrict or permit linear or rotational movement. Where horizontal movement is restricted, the horizontal forces will be transferred through bearing to the lower structure. Mission statement for Sneha Bearings is We build bridges and not walls.

Application: Bridges: i) ii) Plate girder, truss, arch, suspension, cable stayed, movable Structural: building, sports complex, auditoriums, pipe supports, vessel supports, gantry supports. Pollution control: precipitators, bag houses, valves, ducts. Off shore: Platforms turn tables, crane pivot. Oil and chemical refinery equipments: - heat exchangers, pipe lines, hanger bearings.

iii) iv) v)

PRODUCT INFORMATION: Rotary Air Lock Valves are used for discharging the dust from Bag filter / Cyclomax hopper. They seal against loss of air/ gas and thus maintain the operating pressure in the system. They are also used as Volumetric Feeders to maintain an even flow of material through processing systems. Sneha Rotary Air Lock Feeders have wide application in industry wherever dry free flowing powders, granules, crystals or pallets are used. Typical material handled with Sneha units include 1. Cement 2. Sugar 3. Minerals 4. Grains 5. Plastic 6. Dust 7. Fly ash 8. Flour 9. Gypsum 10. Lime

11. Coffee 12. Cereals Features: Sturdy eight blades C.I. Rotor with EN8 shaft with fixed or adjustable blades. Removable side plate for easy access to replace seals Air purge to prevent leakage and protect packing Maintains vacuum or pressure up to 20 W.G Chain drive with TEFC motor Heavy duty Cast Iron body Simplified drive assembly Capacities in Cubic Feet per Minute (Based on 8 vane rotor and 100% fill factor) Size H.P. 15 RPM 20 RPM 25RPM 30 RPM 6 .5 1.05 1.4 1.75 2.1 8 .5 2.7 3.6

4.5 5.4 10 .75 5.4 7.2 9.0 10.8 12 1.0 15.75 21.0 26.25 31.5 Features of Rotary Air Lock Valves (fabricated) 1. Heavy gauge all welded construction. 2. Fabricated Rotor with EN8 shaft with Spring Steel Adjustable Blades. 3. Inspection doors are provided on the body. 4. Maintain pressure/ vacuum up to 20 W.G. 5. Chain/ Coupling Drive with TEFC motor. 6. Removable side plates for easy access to replace seals. 7. Optional: Zero speed sensor package CONCEPTUAL BACKGROUND OVERVIEW: Cost is a general term. It is measured in terms of money. Cost does not carry any meaning unless some explanatory word attached to it.

Example: Production cost. Total cost, etc. In other words cost means expenses to be incurred or likely to be incurred for a specific objective. Money cost therefore related to the expenditure by the firm on the factors of production which enables the firm to produce and sell the product. DEFINITION OF COST: Cost is defined as THE AMOUNT OF EXPENDITURE INCURRED ONOR ATTRIBUTABLE TO A GIVEN THING THE GIVEN THING MAY BE: A tangible product such as job component or product obtained form a process. A service such as Transport, repairs, research, etc A function such as Production, Selling, Distribution, etc The meaning of cost depends upon the purpose and the use for which it is incurred. The cost may be fixed, Variable, semi variable, etc

COST REDUCTION Definition: COST REDUCTION IS A EXPENDITURE INCURRED. PLANNED POSITIVE APPROACH TO REDUCE

Cost reduction exercises are planned campaigns to cut the expenditure. It is a continuous process with the object of getting a more or less permanent benefit. Cost reduction should not confuse with Cost Control. Cost Control is the regulation of costs of operating a business is concerned with keeping expenditure within acceptable limits. The major assumption in cost Control is that unless costs exceed the budget or standard by an excessive amount the control of cost is satisfactory. Cost Control is a routine exercise, which almost concurrently carried out for attainment of operational efficiency. Cost Reduction brings real and preventive savings by continuous and planned research. Cost Control is thus a preventive function and acts within the frame work of some targets or standards. Cost Reduction is a corrosive function by continuous process of analysis of costs, functions etc. for further economy in the application of the factors of production. In the Cost Reduction standards are set earlier are constantly challenged for further improvements. Products, processes, procedures organizations and methods and personnel are continually scrutinizing in order to improve efficiency and reduced costs. It is based on the philosophy that every person can be improved by continuous efforts. It is thus a process of continuous self-analysis and self-criticism. In practice, Cost Reduction is a real and more or less permanent reduction in unit cost of goods and services without impairing with the stability or goodwill of the concern. Cost reduction may extend to design stage, Factory organization, Methods or process, Marketing and Finance. In order that Cost Reduction work. a Cost Reduction forms all level to determine priority of actions, methods to be employed in Carrying out the investigation and finally to take steps for implementing the recommendations. By continuous follow- up the Cost Reduction plan will be successful. AREAS COVERED BY COST REDUCTION: Following are the critical areas of application of various cost reduction techniques: 1. DESIGN: The design function offers management the greatest potential for cost reduction as the impact of any economies or cost reduction effected at this stage shall be felt throughout the manufacturing life of a product. In other words application of value analysis method at the designing stage itself would go a long way in maximizing the profits. But this does not mean that the design cost reduction should be restricted solely to new products only. In fact, it should include critical analysis for all products within the product range of the organization.

2. ORGANIZATION: A considerable amount of cost reduction can be affected by improvement in organization. The organization can be improved by taking following steps: a) Defining each stage of responsibility. It should be ensured that there is no overlapping of duties and responsibilities. b) There should be well defined channels of communication between various management levels. c) Delegation of responsibility should be encouraged to ensure quick and effective decision making. d) Efforts should be made to implement management by objective, i.e. individual objective must be in line with organizational objectives. e) Cooperation and close relationship between the various executives should be encouraged. f) Encouragement in the form of incentive etc, should be offered to the employees for coming up with suggestion s leading to cost reduction. 3) PRODUCTION PLANNING AND CONTROL: - Production plans and control function is a very large area for cost reduction scrutiny. It cover planning, inventory control, material handling and usage, and production offering considerable scope of savings. The four principal components of cost are material, labour, overheads and capital. An efficient cost reduction plan should aim at reducing the per unit costs on these counts by examining the following points a) Whether wastage of manpower and material is kept to the minimum. b) Whether any scope is there for reducing idle capacity and increase in productivity. c) Whether efficient system of inventory, inspection and stock taking is there. d) Whether the incidence of stock losses due to pilferage, deterioration, obsolescence and other causes are at minimum. e) Whether the storage, location and other associated costs are kept to minimum and best method of production has been adopted. f) Whether production schedule can be improved to match delivery schedule. g) Whether there is any scope for reduction in indirect materials and labour costs.

h) Whether there is any scope for reduction in overhead costs. F i) FACTORY LAYOUT AND EQUIPMENT: - an effective arrangement of plant and machinery is a fundamental requirement. A successful plant layout shall contain following features as follows: a) Optimum use of space. b) Effective built in flexibility. c) Efficient control of work flows with least disturbances. d) Minimum material handling. e) Minimum waste. f) Work satisfaction and enhanced productivity 4) UTILITY SERVICES: utility services include power, water, steam, repairand maintenance and transport etc. the following points of consideration canlead to effective cost reduction a) Whether the utilities are supplied at economic costs or whether there isscope for any further increase in utilization. b) Whether the proper system for preventive and curative maintenance is there. c) Whether wastage and other losses in distribution have been kept to minimum. d) Whether work flow and loading factor has received due attention. 5) MARKETING: - the marketing function may not lead itself so easily to cost reduction as other business functions. But a number of techniques do exist for reducing such costs and these can result in substantial savings for business. This function includes selling function and distribution function. The marketing function covers salesman salaries and their sales offence expenses and administration, marketing research, advertising and after sales service. The distribution function includes the method of disposition of products, i.e., wholesale, (retail of direct), the method and location of warehousing, the packing and transport. There can be considerable scope for comprehensive reorganization of existing methods and substantial reductions in costs. Following points may attract attention in his connection. a) Whether there is optimum utilization of salesmen s working time.

b) Whether rearrangement of territories can bring about cost reduction; c) Whether channels of distribution are efficient and economical; d) Whether there is an effective systems of sales promotion; e) Whether market research is adequate; f) Whether any alternative media of advertisement can lead to cost reduction; and g) Whether the method of distribution chosen is most efficient in terms of factory and warehouse locations, distribution and customer locations so on; 7) FINANCE: The effective employment of capital in a business is of paramount importance. For example, the investment in the right machinery at the right time can yield significant cost a advantages. Following points are relevant in this connection: a) Whether the methods of funding capital expenditure are cost effective b) Whether capital is secured at economical cost; and c) Whether the capital is economically employed so as to give the maximum return

MAJOR DIFFICULTIES IN COST REDUCTION: Resistance by the employees of the organization to pressure to reduce costs usually because the nature and the purpose of the campaign has not been properly explained to them and they feel threatened by the change. They may be confirmed to small area of the business e.g. To one department} with the result that costs are reduced in one cost center only to reappear as an extra cost in another cost center. Efforts to cut material and Labor cost may erode confidence in established system for estimating material usage and labor productivity standards. Cost reductions are campaigns are often introduced as a rushed, Desperate measure instead of a carefully organized exercise as: Cost Reduction Programmed may demand attention of a number of experts from different fields. Cost Reduction committee may be formed with representative of major departments or divisions like marketing, production planning, purchases, etc. A cost or management accountants acts in the capacity of an interpretation and advisor. The committee studies principle phases programmed for Cost Reduction. It decides the areas of potential savings and determines the

priorities and allocates assignments to appropriate staff. Cost Reduction is possible withthe help of unit cost reduction by curtailing expenditure and by increasing the productivity. COSTING OF RAV: CONCEPT OF COST: Cost is the amount of expenditure, actual (incurred) or notional (attributable), relating to a specific thing or activity. The specific thing or activity may be product, job, service or any other activity. NATURAL CLASSIFICATION OR COSTS: The term natural classification refers to the basic physical characteristics of the cost in a manufacturing concern, generally, the following costs are incurred: 1. Direct material: - direct materials refer to the cost of the materials which are conveniently and economically traceable to the specific units of output. 2. Direct labour: - direct labour is defined as the labour of those workers who are engaged in the production process. It is the labour expended directly upon the materials comprising the finished product. 3. Direct expenses (chargeable expenses):- these include any expenditure other than direct materials and direct labour directly incurred on a specific product orjob. Such special necessary expenses can be identified with product or job and are charged directly to the product as part of the prime cost. 4. Factory overhead: - factory overhead, also called manufacturing overhead or factory burden may be defined as the cost of indirect materials, indirect labored indirect expenses. They are production supplies and other materials that cannot conveniently or economically be charged to a specific unit of output. 5. Selling, distribution and administrative overheads: - Selling and distribution overheads usually begin with when factory costs end. Such expenses are incurred when the product is in saleable condition. It covers the cost of making the sales and delivering/ dispatching the products. COST BEHAVIOR (IN RELATION TO CHANGES IN OUTPUT OR ACTIVITY OR VOLUME) Fixed cost: - Fixed cost is a cost which does not change in total for a given time period despite wide fluctuations in output or volume of activity. These costs are also known as standby costs, capacity costs or period costs. Examples of 20 set costs are rent, property taxes, supervising salaries depreciation on office facilities, advertising, insurance, etc. They accrue or are incurred with the passage of time and not with the production of the product or the job. This is

the reason why fixed costs are expressed in terms of time, such as per day, per month or per year and not in terms of unit. It is totally illogical t say that a supervisors salary is not so much per unit. But it can be said that supervisor salary is so much per month.

1. COST SHEET FOR 6 RAV. Particulars Direct material consumed Direct wages: From plant From outside Direct expenses Prime cost (Add) factory overheads Indirect wages (security) Indirect material Rent and rate Lighting and heating Power and fuel Repair and maintenance Water Drawing office expenses Depreciation of plant Welfare service expenses Works manager s salary Total Factory Overheads 800 200 60 200 95 50 40 500 50 20 830 2845 1000 844 720 5289 Rs 2725 Rs

Works cost (Add) office and administration overheads Office stationary Financial expenses Salary (office) Telephone Postage Depreciation of office and furniture Legal expenses Audit fees and consulting charges Total office and administration overheads Cost of production (Add) selling and distribution Advertising Transport Total Selling and distribution Cost of sales 50 300 350 50 50 600 200 80 50 35 380

8134

1595 12,505

12,855

2. COST SHEET FOR 10 RAV. Particulars Direct material consumed Direct wages From plant 1000 Rs 7016 Rs

From outside Direct expenses (jig, fix, pattern) Prime cost (Add) factory overheads Indirect wages (security) Indirect material Rent and rate Lighting and heating Power and fuel Repair and maintenance Water Drawing office expenses Depreciation of plant Welfare service expenses Works manager s salary Total Factory Overheads Works cost (Add) office and administration overheads Office stationary Financial expenses Salary (office) Telephone Postage

1335 1800 11,150

800 200 60 200 95 50 40 500 50 20 830 2845 13,995

50 50 600 200 80

Printing Depreciation of office and furniture Legal expenses Audit fees and consulting charges Total Office and administration overheads Cost of production (Add) selling and distribution Advertising Transport Total Selling and distribution Cost of sales 3. COST SHEET FOR 12 RAV. Particulars Direct material consumed Direct wages From plant From outside Direct expenses Prime cost (Add) factory overheads Indirect wages (security) Indirect material

50 50 135 380 1595 15,590

50 300 350 15,940

Rs 7625

Rs

1000 1540 3000 13,165

800 200

Rent and rate Lighting and heating Power and fuel Repair and maintenance Water Drawing office expenses Depreciation of plant Welfare service expenses Works manager s salary Total Factory Overheads Works cost (Add) office and administration overheads Office stationary Financial expenses Salary (office) Telephone Postage Printing Depreciation of office and furniture Legal expenses Audit fees and consulting charges Total Office & Administration Overheads Cost of production

60 200 95 50 40 500 50 20 830 2845 16,010

50 50 600 200 80 50 50 135 380 1595 17,605

(Add) selling and distribution Advertising Transport Total Selling & Distribution Expenses Cost of sales 50 300 350 17,955

Other expenditures are not considered for cost sheet purpose. They are debited to Profit and Loss account. ALLOCATION AND ABSORPTION OF INDIRECT EXPENSES: Concept:

Allocation:
Some factory overheads can be directly identified with a particular department or cost centre as having been incurred for that cost centre. Examples of such factory overheads are repairs and maintenance for specific departments, indirect materials etc. Expenses such as power, rent depreciation of factory building, expenses shared by all the departments cannot be charged directly to a specific department; therefore they are allocated and apportioned.

Absorption:
After allocation, next step is to spread factory overhead to different products or jobs produced. I have done absorption using unit of production basis. The unit of production basis is simplest and most direct method of charging factory overheads. As a formula, the computation is as follows

Factory overhead
Units of production . As production of RAV over previous year were 120. So for absorption numbers of units produced are taken into consideration. Allocation of overheads: 1. Indirect wages = 96000/ year. (Therefore indirect cost per unit = 96000/ 120.)

= Rs. 800/ unit 2. Rent and rate = 11, 000/ year. Allocation of rent and rate is 2:1.2 parts are for RAV and 1 part is for Eagle Poonawala s outsourced parts. Therefore cost per unit = 11000/ (1.5 X 120) = Rs. 60 3. Lighting and heating = 4000 / month. Expenditure for factory is 3000, within that 2000 is for outsourced parts and 1000 is for RAV. Expenditure for office is Rs. 1000. Therefore cost per unit = 2000/ 10 = Rs. 200/ unit. 4. Expenditure for water is apportioned in the same way like lighting and heating. Yearly expenditure for water = Rs. 1100. Works manager s salary= Rs. 25,000 Currently manager is working for Sneha Bearings and Sneha Industries, So, the allocation will be 2:1, as there is more work in Sneha Bearings. 5. Salary (Factory) = Average salary of 3 workers for a month is Rs. 10,000. Therefore, direct wages are Rs.1000/ unit. Salary (office) = Rs. 9000/ month for two accountants Therefore allocation for RAV and other jobs is 2:1. Allocation for RAV = 6000/ 10 = Rs. 600/ unit.

6. Telephone = Rs. 2000/ month 1:1 allocation for RAV and other jobs, Telephone charges are Rs.100/ unit. PRODUCT WISE BREAKEVEN QUANTITY: A business is said to be break even when its total sales are equal to its total costs. It is a point of no loss no profit. At this point, contribution is equal to fixed cost. A concern which attains breakeven point at lesser number of units will definitely be better from another concern where breakeven point is achieved at more number of productions.

Breakeven point
Total Fixed Expenses Total fixed expenses = ======================================== Selling price per unit - Marginal cost per unit

Particular Selling price Variable cost Contribution Quantity wise proportion Weighted contribution Margin Total fixed cost

6 6,900 5,174 1,726 9% 155

8 9,200 7,712 1,288 32% 412

10 12,650 10,836 1,814 45% 816

12 16,100 12,350 3,750 14% 525

Over All

100% 1908 816,890 816,890 1908 = 271

Overall breakeven quantity

Product quantity

wise

breakeven

24

87

122

38

271