Project Report on Costing and Cost Reduction

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BANSILAL RAMNATH AGRAWAL CHARITABLE TRUST S

VISHWKARMA INSTITUTE OF MANAGEMENT KONDHWA, PUNE 411048

A PROJECT REPORT ON

COSTING ANDCOST REDUCTION OF ROTARY AIR LOCK VALVE
AT SNEHA INDUSTRIES

SUBMITTED BY

PRASHANT R. TAMBEKAR
MBA II

SUBMITTED IN PARTIAL FULFILMENT FOR DEGREE OF MASTER OF BUSINESS ADMINISTRATION

DURING THE YEAR 2006-2007

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DATE: - 5TH AUGUST 2006

TO WHOMSOEVER IT MAY CONCERN

This is to certify that Mr. PRASHANT R. TAMBEKAR, a MBA student of Vishwakarma Institute of Management Pune, was working with us as a summer trainee during the period of 1 st JUNE 2006 to 30th JULY 2006. He is sincere and hardworking. He was successfully completed his project entitled Costing and Cost reduction of Rotary Air Lock Valve. We wish him success in his future career.

Thank you.

For Sneha Industries

Authorized signatory

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BANSILAL RAMNATH AGRAWAL CHARITABLE TRUST S

VISHWKARMA INSTITUTE OF MANAGEMENT KONDHWA, PUNE 411048 DATE: - 1ST AUGUST 2006

CERTIFICATE
This is to certify that Mr. PRASHANT R. TAMBEKAR is a Bonafied student of our Institute. He has successfully carried out his Summer Project Titled COSTING AND COST REDUTCTION OF ROTARY AIR LOCK VALVE.

This is the Original study of Prashant R. Tambekar and the important sources used by him, have been acknowledged in his report.

The report is submitted in the Partial Fulfillment of Two years Full time Course MASTER OF BUSINESS ADMINISTRATION (M.B.A.) as per rule of PUNE UNIVERSITY.

Dr. Sharad. Joshi (Director)

Prof. Smita Sovani (Project Guide)

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ACKNOWLEDGEMENT: I am very grateful to Mr. S.M. Tambekar the Proprietor and Managing Director of Sneha Industries for providing me an opportunity to complete my summer training in the Sneha Industries.

I avail this opportunity to give my thanks to Mr. D. D. kulkarni; Manager, Sachin Phasale; production supervisor, Sachin and Rajat; Accountant for guiding me at every stage in my project. In spite of their busy schedule they took out the time to answer my queries patiently and helped me throughout the project.

My sincere thanks to all staff of Sneha Industries for all the cooperation and assistance to me at any time without which the project would have been incomplete.

I am proudly indebted to my Project Guide Prof. Smita Sovani for all her support and guidance towards the completion of my project.

Last but not least I am thankful to The Director, All Departmental Staff of Vishwakarma Institute of Management and my friends for providing me the moral support towards the completion of this project.

Prashant R. Tambekar

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INDEX
CHAPTER NO.
1 2 3 4 5 6 7 8 9 9.1 9.2 9.3 9.4 10 11 12 13 14 15 Executive Summary Objective and Scope Company Profile Product information Conceptual background Cost Sheet Allocation and Absorption of indirect expenses Product wise breakeven quantity Cost reduction Programme Purchase management Production planning and control Marketing function Quality assurance function Trading and profit and loss account Balance sheet Ratio analysis Business policy Conclusion & Recommendations Bibliography 1 2 3 5 7 16 24 26 27 28 30 32 33 34 36 37 42 48 49

CHAPTER NAME

PAGE NO.

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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 Sneha Industries, Mr. S.M. Tambekar who is my uncle and 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
st th

411026.

Duration of the project was 1 June to 30 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 mix 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 respondent was busy. time constraint, non availability of data,

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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 05-06. 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.

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COMPANY PROFILE:Sneha group of Companies had started its operations in 1984.group of companies consists of1) Shree trading corporation. 2) Sneha Industries. 3) Sneha Bearing Pvt Ltd.

1) Shree Trading Corporation:This is an organization mainly deals in marketing of materials handling equipments.

2) 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 like1. Slide gate. 2. Double flap valve 3. Spring hanger assembly for boiler. Following products are under development1. Screw conveyor. 2. Dampers.

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3. 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 . 3) Sneha Bearings:The company is located in Ganesh nagar, Talawade, behind Bajaj Auto Ltd. This company is manufacturing various structural bearings from last 10 years. 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:i. Bridges: - plate girder, truss, arch, suspension, cable stayed, movable. ii. Structural: - building, sports complex, auditoriums, pipe supports, vessel supports, gantry supports. iii. Pollution control: - precipitators, bag houses, valves, ducts. iv. Off shore: - platforms, turn tables, crane pivot. v. Oil and chemical refinery equipments: - heat exchangers, pipe lines, hanger bearings.

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PRODUCT INFORMATION: Rotary Air Lock Valves are used for discharging the dust from Bagfilter/ 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 include1. 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.

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Capacities in Cubic Feet per Minute (Based on 8 vane rotor and 100% fill factor)

Size 6 8 10 12

H.P. .5 .5 .75 1.0

15 RPM 1.05 2.7 5.4 15.75

20 RPM 1.4 3.6 7.2 21.0

25RPM 1.75 4.5 9.0 26.25

30 RPM 2.1 5.4 10.8 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.

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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 ON OR 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.

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

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 works well, 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

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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, ie, 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 suggestions leading to cost reduction.

3.

PRODUCTION PLANNING AND CONTROL: - Production planning and control function is a very large area for cost reduction scrutiny. It covers

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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 pointsa) 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.

4.

FACTORY LAYOUT AND EQUIPMENT: - an effective arrangement of

plant and machinery is a fundamental requirement. A successful plant layout shall contain following featuresa) 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.

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5.

UTILITY SERVICES: - utility services include power, water, steam, repair

and maintenance and transport etc. the following points of consideration can lead to effective cost reductiona) Whether the utilities are supplied at economic costs or whether there is scope 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.

6.

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;

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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 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.

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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.

Cost Reduction Programme may demand attention of a number of experts from different fields. A 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 with the help of unit cost reduction by curtailing expenditure and by increasing the productivity.

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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 a 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 or job. 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 labour and 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 they cost of making the sales and delivering/ dispatching the products.

COST BEHAVIOR (IN RELATION TO CHANGES IN OUTPUT OR ACTIVITY OR VOLUME) 1. 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

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fixed 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 supervisor s salary is not so much per unit. But it can be said that supervisor s salary is so much per month.

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COST SHEET FOR 6 RAV.

Particulars Direct material consumed Direct wages:From plant From outside Direct expenses

Rs. 2725

Rs.

1000 844 720 5289

= 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 800 200 60 200 95 50 40 500 50 20 830 2845 Works cost (add) office and administration overheads Office stationary Financial expenses Salary (office) Telephone Postage 50 50 600 200 80

5289

8134

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Printing Depreciation of office and furniture Legal expenses Audit fees and consulting charges

50 50 135 380 1595

= cost of production (add) selling and distribution Advertising Transport 50 300 350 = cost of sales

9729

10,079

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COST SHEET FOR 8 RAV.
Particulars Direct material consumed Direct wages:From plant From outside Direct expenses 1000 1000 1050 8065 = 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 800 200 60 200 95 50 40 500 50 20 830 2845 Works cost (add) office and administration overheads Office stationary Financial expenses Salary (office) Telephone Postage Printing 50 50 600 200 80 50 10,910 8065 Rs. 5015 Rs.

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Depreciation of office and furniture Legal expenses Audit fees and consulting charges

50 135 380 1595

= cost of production (add) selling and distribution Advertising Transport 50 300 350 = cost of sales

12,505

12855

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COST SHEET FOR 10 RAV.

Particulars Direct material consumed Direct wages:From plant From outside Direct expenses( jig, fix, pattern)

Rs. 7016

Rs.

1000 1335 1800 11,150

= 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 800 200 60 200 95 50 40 500 50 20 830 2845 Works cost (add) office and administration overheads Office stationary Financial expenses Salary (office) Telephone Postage 50 50 600 200 80

11,150

13,995

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Printing Depreciation of office and furniture Legal expenses Audit fees and consulting charges

50 50 135 380 1595

= cost of production (add) selling and distribution Advertising Transport 50 300 350 = cost of sales

15,590

15,940

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COST SHEET FOR 12 RAV.
Particulars Direct material consumed Direct wages:From plant From outside Direct expenses 1000 1540 3000 13,165 = 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 800 200 60 200 95 50 40 500 50 20 830 2845 Works cost (add) office and administration overheads Office stationary Financial expenses Salary (office) Telephone Postage Printing 50 50 600 200 80 50 16,010 13,165 Rs. 7625 Rs.

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Depreciation of office and furniture Legal expenses Audit fees and consulting charges

50 135 380 1595

= cost of production (add) selling and distribution Advertising Transport 50 300 350 = cost of sales

17,605

17,955

Other expenditures are not considered for cost sheet purpose. They are debited to Profit and Loss account.

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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 can not 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 followsFactory 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.

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4. Expenditure for water is apportioned in the same way like lighting and heating. Yearly expenditure for water = Rs. 1100. 5. 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. 6. Salary (factory) = Average salary of 3 workers for a month is Rs. 10,000. Therefore, direct wages are Rs.1000/ unit. 7. Salary (office) = Rs. 9000/ month for two accountant. Therefore allocation for RAV and other jobs is 2:1. Allocation for RAV = 6000/ 10 = Rs. 600/ unit. 8. Telephone = Rs. 2000/ month. 1:1 allocation for RAV and other jobs. Telephone charges are Rs.100/ unit.

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PRODUCT WISE BREAK-EVEN 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 break even point at lesser number of units will definitely be better from another concern where break even point is achieved at more number of productions. Break even point 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 Overall break even quantity Product wise break even quantity

6 6900 5174 1726 9%

8 9200 7712 1288 32%

10 12,650 10,836 1814 45%

12 16,100 12,350 3750 14%

overall

100%

155

412

816

525

1908

8,16,890 8,16,890 1908 =271

24

87

122

38

271

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COST REDUCTION PROGRAMME:Cost reduction Programme carried out in Sneha Industries consists of following functions. 1. Purchase function 2. Production planning and control 3. Marketing function 4. Stores management 5. Quality assurance function There are other functions which the firm is performing like finance function, human resource function but due to time constraint these functions are excluded from the cost reduction Programme. The procedure of cost reduction Programme I carried out is as follows:For few days try to recognize the operations carried out in the particular function then see the various documents handled in the particular function and lastly point out the weak areas of the particular function.

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PURCHASE MANAGEMENT:FUNCTIONS:The main function of purchase department is purchasing the necessary Raw Material, tools and accessories, sundries required for the production. The objective of this function is to find out new vendor who will supply the required raw material as per the requirement at reasonable cost. The new vendor is selected on the basis of following three criteria:1. Cost 2. Quality 3. Service as per the schedule. Following are the supplementary criteria for selection:1. Inspection facilities available at the Vendor s end. 2. Vendor s customer base 3. Finding out the status of the Vendor (Whether the vendor is ISO certified or not) Sneha industry procures castings of cast iron and alloy steel from Mahalakshmi foundry situated in Belgaon. Vendor reduction is the new trend in the industry. Especially since the automobile business affected badly in last few years, the companies like Telco and Bajaj are adopted this trend.

AREAS OF COST REDUCTION IN PURCHASING: On the basis of the observations and discussion with the proprietor, purchase found following alternatives for bringing further reduction in the cost incurred in purchasing. USE OF JUST IN TIME CONCEPT: The organization should follow the just in time concept. But some problems associated in adopting just in time are as follows1. Suppliers are spread over a long distance, so that it is difficult to procure required materials at the right time and at right quality. 2. Receipt of good may be of inferior quality due to lesser time taken to manufacture the required material.

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3. There may be shortage of raw material due to time taken to manufacture and transportation. MAKING CONTRACT WITH THE SUPPLIER: This is the main area where Sneha Industries should concentrate. The contract should include the assurance to the supplier that the company will not purchase the contracted material from the competitors of the supplier. ABC ANALYSIS: ABC analysis provides a tool for identifying those items that will make the largest impact on the firm s overall inventory cost performance when improved inventory control procedures are implemented. A perpetual inventory system, improvements in forecasting procedures, or a careful analysis of the order quantity and timing decisions for A items will provide a larger improvement in inventory cost performance than will similar efforts on the C items. Therefore, ABC analysis is often a useful first step in improving inventory performance. ABC analysis helps focus management attention on what is really important. Managers concentrate on the vital few (the A items) and spend less time on the trivial many (the C items). A type items should have one or two supplier who can supply quality products at optimum cost and at minimum time.

THE INTERNET AND VENDOR SCHEDULING: The internet provides several ways in which manufacturing companies and their vendors can share information for the purpose of improving the timing and reliability of supplier deliveries. For manufacturing companies the use of information technology can provide improvements such as quicker delivery response to customers, improved delivery reliability, and reductions in operating costs involving both purchasing staff cost and inventory. These improvements have also had an important effect on the national economy. Rapid response times are a result of technological advances. Increased usage of real time information, such as computerized order tracking, enables business to know when demand is shifting and to instantly change output schedules, work shifts, inventory levels, and capital spending plans. In this way quick reflexes can be a key factor for organization s success.

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PRODUCTION PLANNING AND CONTROL: -

Function of production planning and control are as follows-

The function of production planning and control is beginning with this function. It is the preparation of monthly plan of production. This production plan is based on the schedules provided by the customers, and based on minimum inventory of finished goods stock. In this how many parts to be manufactured are found out.

Raw material includes study of raw material in hand and expected material from supplier on this basis job is selected for production.

Customer requirement planning is concerned with marketing function for determining the production plans as per requirement of the customers. This also concerned with planning the job priorities.

AREAS

OF

COST

REDUCTION

IN

PRODUCTION

PLANNING

AND

CONTROL: As much of the production work is outsourced there is little scope in cost reduction. SAVE TIME FOR REWORK: Some jobs needed rework due to change in the clearance between rotor and body. Permissible clearance is 0.3 mm, but due to change in the diameter of rotor or little burr on bearing, rotor is jammed. Lot of time is wasted in removing this problem. So my suggestion is before doing assembly use polish paper to remove any burr present on inner side of body or on bearing. GANTT CHART: It is a principle tool for both loading and scheduling. Vertical lines divide the chart in days and horizontal lines divide the chart in to number of operations, in this

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case as the parts are outsourced the total part should be considered as shown in the figure.

Week 1 Mon Tue 8 RAV body 8 shaft rotor assembly Wed Fri Sat Sun

Week 2 Mon Tue Wed Fri Sat Sun

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MARKETING FUNCTION:Functions of Marketing are as follows: Procure maximum profitable orders, reliable customer s base, and recovery in time and feasible orders in time. To find new customers and recovery of payments after credit sales are some of the functions of marketing. AREAS OF COST REDUCTION IN MARKETING ARE AS FOLLOWS: 1. Emphasis on recovery: - average credit period is 70 days and average debtor s period is 45 days, so give emphasis of recovery from debtors and try to reduce debtor s period ultimately it will reduce the annual interest paid in the bank against cash credit. 2. Try to save expenditure on communication: - try to make contract with the supplier and if he can store some of the inventories in his plant then it will reduce procurement time. Try to use email facility to the larger extent as it is cheaper and faster medium to communicate.

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QUALITY ASSURANCE FUNCTION: Quality assurance function is playing vital role in purchasing raw material and selling finished goods. Functions are as follows: Inspection of incoming material and comparing it with specified size, quality and quantity. As company is giving after sales service, therefore company sometimes has to deal with complaints received by the customers. The receipt of any complaint received from any customer is affecting the reputation of the company. AREAS OF COST REDUCTION: 1. Arrangement of chemical facility in house will reduce the expenditure incurred on testing the parts. 2. Avoiding customer complaints: The receipt of any complaint from any customer affects name and reputation of the company. But during the course of business the company needs to give priority to solve the customer s complaints. Every time after the receipt of the customer s complaints the company has to send Sachin Phasale to check the intensity and correct the error.

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Sneha industries Trading and profit and loss account for the year ended at 31.3.06

Particulars To opening stock To purchases To octroi To fuel and power To gas and water To factory rent To payment freight

Amount 1,78,680 27,12,211 and 170,373

Particulars By sales By closing stock

Amount 36,16,552 1,68,680

88,688 9,990 11,638

to 97,755

contractor To labour charges To repair 2,44,970

and 1,48,062

maintenance

To

bonus

and 16,700

ex-gratia To G/P 1,06,165 37,85,232 37,85,232

To office salaries

2,71,110

By G/P b/d

1,06,165

To office rent and 22,940 taxes To computer 8,358

maintenance To commission To insurance To audit fees To printing 82,527 2238 15,113 and 32,851

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stationary To postage and 72,308 telephone To books and 1735

periodicals To traveling and 63,635 conveyance To advertisement To gardening 67,802 8,742

To depreciation on 94,407 assets To ESIC paid To labour welfare To testing To promotion To charges To expenses To charges 10,35,235 10,35,235 financial 40,973 By net loss 9,29,070 sundry 1,46,651 security 77,783 13,205 5713 3402 sales 3742

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Balance sheet as on 31.3.2006

Liabilities Capital account of S.M. Tambekar Opening balance

Amount (Rs.)

Assets Fixed assets

Amount (Rs.) 6,29,736

25,63,943

Trade advances

11,91,718

Income tax refund

2997

Cash in hand 4,81,654 and bank

Director s remuneration

4,80,000

Sundry debtors

6,94,651

Loss of the year as 9,29,070 per P&L account. Previous year s (-)1,43,147

Closing stock

1,68,680

income tax & TDS Drawings Net capital Sundry creditors Loans Provisions 1,73,014 18,01,708 4,72,242 7,02,454 1,85,035 31,66,439 31,66,439

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RATIO ANALYSIS:ROLE OF RATIO ANALYSIS:

It is true that the technique of Ratio analysis is not a creative technique in the sense that it uses the same figures and information which is already appearing in the financial statements. At the same time, it is also true that what can be achieved by the technique of Ratio Analysis cannot be achieved by the mere presentation to financial statements. Ratio Analysis helps to appraise the firms in terms of their probability and efficiency of performance, either individually or in relation to those of other firms in the same industry. The process of this appraisal is not complete until the ratios so computed can be compared with something, as the ratios all buy themselves do not mean anything. This comparison may be in the form of intra-firm comparison, or comparison with standard ratios. Thus, proper comparison of ratios may reveal where a firm is placed as compared with earlier periods or in comparison with other forms in the same industry. Ratio Analysis is one of the best possible techniques available to the management to impart the basic functions like planning and control. As the future is closely related to the immediate past, ratios calculated on the basis of historical financial statements may be of good assistance to predict the future. E.g. On the basis of inventory turnover ration or debtors turnover ratio in the past, the level of inventory and debtors can easily be ascertained for any given amount of sales. Similarly, the ratio analyses may be able to locate and point out the various areas which need the management attention in the order to improve the situation. E.g. Current Ratio which shows a constant declining trend may indicate the need for the further introduction of long term finance in order to improve the liquidity position. It should be remembered that a few specific ratios indicate certain specific aspects of the conduct of business. As such, the importance of various ratios may vary from different category of persons as well. E.g. the commercial binders, trade creditors and lenders of short term credit are basically interested in the liquidity position of the organization and such as the ratios like current ratios,

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acid test ratio, inventory test ratio and average collection period are more important. On the other hand, the financial institutions and lenders of long term finance are basically interested in solvency and profitability position of the organization and as such the ratios are like debt equity ratio, debt service coverage ratio, interest coverage ratio and return on investments are more important.

I. Liquidity group: 1) Current ratio= Current assets ---------------------Current liability 25, 36,703 = ---------------9, 44,690 = 2.69 Remark: - proper backing is available to current liabilities in the form of current assets and current assets can be converted into cash in shorter period of time. Industry norm is 2:1 2) Liquid ratio / acid test ratio Current assets- stock- prepaid expenses = -----------------------------------------------------Current liability- bank overdraft

=

11, 76,305 -------------9, 44,690

= 1.24 Remark: - higher liquid ratio indicates that there are sufficient quick assets available with the organization which can be immediately converted into cash. Industry norm is 1:1

II. Turnover ratio: -

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1) Fixed assets turnover ratio = Net sales ------------------Fixed assets

36, 16,552 = ---------------9, 29,736 = 5. 74 Remark: - this ratio indicated that how efficiently company is using fixed assets over the period of year. 2) Current assets turnover ratio = Net sales ------------------Current assets 36, 16,552 ---------------25, 36,703

=

= 1.42 Remark: - this ratio indicated that how efficiently company is using current assets over the period of year 3) Working capital turnover ratio = Net sales --------------------Working capital

= 36, 16,552 --------------15, 92, 013 = 2. 27 Remark: - this ratio indicated that how efficiently company is using working capital over the period of year.

4) Stock turnover ratio

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=

Net sales --------------------Average stock

= 36, 16,552 --------------173, 680 = 20 Remark: - some investment in stock may be beneficial at least from getting customer patronage point of view.

5) Debtor s turnover ratio Net credit sales = ---------------------Sundry debtors

36, 16,552 = ----------------6, 94, 651 = 5.2 = 365/ 5.2 = 70 days Remark: - it is within given limit of 60 to 90 days. 6) Capital turnover ratio = Sales ----------------------Capital employed 36, 16, 552 ----------------------22, 21, 749

=

= 1.63 Remark: - higher ratio indicates the capability to use capital in efficient manner.

7) Creditor s turnover ratio

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Credit purchases = -----------------------Average creditors

36, 16, 552 = ----------------4, 72,242 = 47 days Remark: - if possible revised plans related to increasing credit period can reduce the interest paid in the bank. III. Operating ratio = operating cost ---------------------Net sales Operating cost= cost of goods sold + administrative, selling and financial expenses. = 36, 16, 552 -----------------46, 19, 895 =78%

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BUSINESS POLICY:-

Business policy is the study of the function and responsibilities of senior management, the crucial problems that affect success in the total enterprise, and the decisions that determine the direction of the organization and shape its future.

1. The purpose of Business policy: - the viewpoint adopted in business policy is different from that adopted in the functional area courses. For instance a marketing problem is not viewed purely as a problem of marketing but as an organizational problem. A course in business policy helps in understanding a business as a system consisting of number of sub-systems. Any action taken on any sub-system has an impact on other sub-systems, and on the system as whole. It is of vital importance for the top management in any organization to adopt such a systems approach to decision making. Business policy helps management to become a generalist by avoiding the narrow perspective generally adopted by the specialists, and to deal with business problems from the viewpoint of the senior management.

2. Environmental appraisal: - since environment influences an organization in multitudinous ways, it is of crucial importance to understand it.

2.1 market environment: - The market environment consists of the factors related to the groups and other organizations that compete with and have and impact on an organizations markets and business. Some of the important factors are:2.1.1 Customer or client factors, such as, the needs, preferences, perceptions, attitudes, values, bargaining power, buying behavior and satisfaction of customers.

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2.1.2 Product factors, such as, the demand, image, features, utility, function, design, life cycle, price, promotion, distribution, differentiation, and the availability of substitutes of products or services. 2.1.3 Marketing intermediary factors such as, levels and quality of customer s service, middlemen, distribution channels, logistics, costs, delivery systems, and financial intermediaries. 2.1.4 Competitor-related factors, such as, the different types of competitors, entry and exit of major competitors, nature of competition, and the relative strategic position of major competitors.

2.2 Technological Environment: Technological Environment consists of those factors that are related to the knowledge applied and the material and the machine used in the production of goods in services which have an impact on business of organization. Some of the important factors are:2.2.1 Sources of technology, like, company sources, external sources, and foreign sources; cost of technology acquisition; collaboration in and transfer of technology. 2.2.2 Technological development, stages of development, change and rate of change of technology, and research and development. 2.2.3 Impact of technology on human beings, the man-machine system, and the environmental effects of technology. 2.2.4 Communication and infrastructural technology in management.

2.3 supplier environment: The supplier environment consists of factors related to the cost, reliability, and availability of the factors of production or service that have an impact on the business of an organization. Some of the important factors are:2.3.1 Cost, availability and continuity of supply of raw materials,

subassemblies, parts and components. 2.3.2 Cost and availability of finance for implementing plans and projects.

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2.3.3 Cost, reliability, and availability of energy used in production. 2.3.4 Cost and availability and dependability of human resource. 2.3.5 Cost and availability and existence of sources and means for the supply of plants and machinery, spare parts and after sales service. 2.3.6 Infrastructural support and ease of availability of the different factors of production, the bargaining power of suppliers, and the existence of substitutes.

2.4 Economic environment:The economic environment consists of macro-level factors related to the means of production and distribution of wealth which have an impact on the business of an organization. Some of the important factors are:2.4.1 The economic stage at which a country exists at a given point of time. 2.4.2 The economic structure adopted, such as, a capitalist, socialist or mixed economy. 2.4.3 Economic policies, such as, industrial, monetary and fiscal policies. 2.4.4 Economic planning, such as, five- year plans annual budgets.

3. Critical Success Factors:Critical success factors are those critical factors which will lead to success for their organizations. Critical success factors sometimes referred to as strategic factors for success, are those which are crucial for organizational success. When strategists consciously look for such factors and take them into consideration for strategic management, they are likely to be more successful, while putting in relatively lesser effort. Some of the Critical Success Factors related to Rotary Airlock Valve are:3.1 Cost efficiency. 3.2 Product mix 3.3 Superior product quality. 3.4 Creation of a market niche by supplying highly- specialized products to a particular market segment when the price of the product is high as compared to the competitor s products.

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3.5 low cost financial sources. 3.6 Regular availability of vital raw material in sufficient quantities.

4. Competitive advantage:If the firm has to compete in a market with other rival firms, one of the positioning approach may be to offer mass production and distributed through mass marketing there by resulting in low cost per unit. Other type positioning approach could be marketing relatively high priced products of limited variety but intensely focused on identified customer groups who are willing to pay the higher price. These are produced through batch production and marketed through special distribution channels. What the firm should do is to differentiate its products on some tangible basis from what its rivals have offered so that the customers purchase the products even at premium. 4.1 product quality 4.2 special features 4.3 After sales service These are some of the characters of product differentiation. Sneha Industries can use brand image of Sneha Bearings.

Differentiation business strategy:When the competitive advantage of a firm lies in special features incorporated into the product/ service, which are demanded by the customers who are willing to pay for those, then the strategy adopted is the differentiation business strategy. The firm outperforms its competitors who are not able or willing to offer the special features that it can and does. Customers prefer a differentiated product/ service when it offers them a utility that they value, and are willing to pay more for getting such a utility. A differentiated product or service stands apart in the market and is distinguishable by the customers for its special features and attributes.

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A differentiation firm can change a premium price for its products or services, gain additional customers who value differentiation, and command customer loyalty. Profits for the differentiator firm come from the difference in the premium price charged and the additional cost incurred in providing the differentiation. To the extent the firm is able to offer differentiation by maintaining a balance between its price and costs, it succeeds. But it may fail if the customers are no longer interested in the differentiated features, or are not willing to pay extra for such features. An illustrative list of measures that a differentiator firm can adopt is as below:4.1 A firm can incorporate features that offer utility for the customers and match their preferences. 4.2 A firm can incorporate features that lower the cost of running for the buyer in using the product/ service. 4.3 A firm can incorporate features that raise the performance of the product. 4.4 A firm can incorporate features that increase the buyer satisfaction in tangible or non- tangible ways. 4.5 A firm can incorporate features that can offer the promise of a high quality of product/ service.

5. SWOT analysis:The environment in which an organization exists can, therefore, be in terms of opportunity and threats operating in the external environment apart from the strengths and weaknesses existing in the internal environment. The four environmental influences could be as follows:1. An opportunity is a favourable condition in organization s environment which enables it to consolidate and strengthen its position. eg. Growing demand and multiple uses of product. 2. Strength is an inherent capacity which an organization can use to gain strategic advantage. eg. good quality products and R&D skills. 3. Weakness is an inherent limitation or constraint which creates strategic disadvantage. eg. low capacity production,

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4. Threat is an unfavourable condition in organization s environment which creates a risk for, or causes damage to the organization. eg. high prices of products, outsourcing.

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CONCLUSION & RECOMMENDATIONS: There is good scope for cost reduction of RAV which will ultimately increase the profits. Mentioned techniques can be used for other manufacturing firm producing similar kind of products.

Recommendations have been given at that particular point, but in brief recommendations are as follows: 1) Price restructuring should be carried out. Due to increase in selling price, demand for RAV has been decreased in this financial year. From cost sheet, cost of production can be known and selling price can be decided after adding fixed percentage of profit. 2) So as to achieve competitive advantage, product differentiation strategy should be adopted. 3) In materials function, techniques such as Just in time, contract with supplier, ABC analysis, vendor scheduling using internet medium. 4) In production planning and control, saving time in rework, Gantt chart should be used. 5) As seen in balance sheet, there are high trade advances which is affecting in terms of high interest on trade advances. Generally payment policy should be delay the payment terms as far as possible . 6) Proportion of sundry debtors are high as compared to sales, so try to reduce debtors and for customers other than regular customers, try for immediate payments or reduce the debtors period.

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BIBLIOGRAPHY: 1) Cost accounting 2) Cost accounting jawahar Lal. jain Narang. Vollmen Berry.

3) Manufacturing planning and control 4) Financial Management

S.M. Inamdar.

5) CWA module (Cost and management accounting).

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