SCHOOL OF MANAGEMENT AND BUSINESS STUDIES

A PROJECT REPORT ON

A STUDY ON COST BEHAVIOUR AND OPERATING LEVERAGE AT

INDIAN TELEPHONE INDUSTRIES LTD.

BY

RESHMA RAVI

(REG: 1213366)

SUBMITED TO SCHOOL OF MANAGEMENT AND BUSINESS STUDIESIN PARTIAL FULFILLMENT OF REQUIREMENT FOR THE AWARD OF THE MASTERS OF BUSINESS ADMINISTRATION

UNDER THE GUIDANCE OF

INTERNAL GUIDE:

EXTERNAL GUIDE:

Dr. BIJU M.K.

Mr. RAJESH.H (FE-R)

FACULTY ADVISOR.

ITI LTD,

CERTIFICATE

This is to certify that Miss. RESHMA RAVI student of this college, studying in final year Master of Business Administration has prepared the project report on A STUDY ON COST BEHAVIOUR AND OPERATING LEVERAGE at ITI LTD Bangalore, as per the Mahatma Gandhi university syllabus.Staff Guide

Head of Department

DECLARATION

I, RESHMA RAVI hereby declare that the project report entitled A STUDY ON COST BEHAVIOUR AND OPERATING LEVERAGE WITH SPECIAL REFERENCE TO INDIAN TELEPHONE INDUSTRIES LTD. BANGALORE prepared by me under the guidance of Dr. BIJU M.K.

I also declare that this project report is partial fulfillment of the university regulation for the award of degree of Master of Business Administration by Mahatma Gandhi University, Kottayam.

I have also undergone a summer project for a period of two months. I further declare that this project based on the original study undertaken by me and has not been submitted to the award of any degree/ diploma from any other university/ institution.

DATE:

PLACE:

(Signature of student)

ACKNOWLEDGEMENTAny work visible is not the work of presenter only but there are many Others behind the scene and my project report is an exception to this the successful completion of my project is attributed to dedicated to concrete efforts of various people who have sensibly and systematically been behind with their thoughts and efforts in achieving goals

So in the process of recognizing the efforts of those behind scene, I would like to acknowledge a deep sense of sincere gratitude to the honorable director DR. SREERANGANATHAN and DR. BIJU M.K. faculty advisor of SCHOOL OF MANAGEMENT AND BUSINESS STUDIES and for his valuable guidance, constant encouragement and keep interest throughout the entire course of project.I also thank INDIAN TELEPHONE INDUSTRIES FOR granting me an opportunity to undertake the project work in the concern. I would also like to thank Mr. RONNY (HRD) and Mr. RAJESH. H (FINANCE EXECUTIVE) for their valuable suggestion.

I would like to express my heartfelt gratitude to my parents and my friends for their priceless encouragement and support all through the course of my project. INDUSTRY PROFILE

Introduction to Telecom Industry

Telecommunication industry deals with the activities and services of electronic

System for transmitting messages through cables, telephones, radio or television. In the

Modern age of electricity and electronics, telecommunications now also includes the use of radio and microwave communications, as well as fiber optics and their associated electronics, plus the use of the orbiting satellites and the internet. Telecommunications play an important role in the world economy and the worldwide telecommunication industrys revenue was estimated to be $3.85 trillion in 2008. The service revenue of the global telecommunications industry was estimated to be $1.7 trillion in 2008, and expected to touch $2.7 trillion by 2013.

The introduction of advanced technologies makes the telecommunications industry a competitive one, where a number of multinational companies have shown there to invest in this industry and consequently the prices are reduces, the quality is also improved. During the period of 1990, the telecommunication industry showed a speedy growth in terms of investment and eventually increased the competition.

The conventional telephone now in use worldwide was first patented by Alexander Graham Bell in March 1876 .That first patent by Bell was the master patent of the telephone ,from which all other patents for electric telephone devices and features flowed. The key innovators were Alexander Graham Bell and Gardiner Greene Hubbard, who created the first telephone company, Bell Telephone Company of the United States, which later evolved into American Telephone and Telegraph (AT&T). The world telecommunication market was expected to rise at an 11 percent compound annual growth rate at the end of year 2010

The United States telephone service was supplied by the regulated monopoly, AT&T. Telegraph services was provided mainly by the Western Union Corporation.

In almost all other countries both services were the monopolies of government agencies known as PTTs (for post, Telephone, and telegraph).AT&T now offers long distance service in competition with half a dozen major and many minor competitors while retaining ownership of a subsidiary that produces telephonic equipment ,computers and other electronic devices. During the same period Great Britains national telephone company was sold to private investors as was Japans NTT telephone monopoly.

Around the world we are witnessing remarkable changes to the telecoms environment .after years of debate, structural separation is now taking place in many parts of the world including Hong Kong, New Zealand, Singapore and some European markets.

The Indian telecommunications industry is one of the fastest growing in the world.

The industry has witnessed consistent growth during the last year on the back of rollout of newer circles by operators ,successful auction of third-generation (3G) and broadband wireless access(BWA) spectrum, network rollout in semi-rural areas and increased focus on the value added services(VAS) market .The Reserve Bank of India(RBI) has liberalized the investment norms for Indian telecom companies by allowing them to invest in international submarine cable consortia through the automatic route. According to the Telecom Regulatory Authority of India (TRAI), the number of telephone subscriber base in the country reached 742.12 million as on October 31st 2010, an increase of 2.61 percent from 723.28 million in September 2010. With this the overall tele-density (telephones per 100 people) has touched 62.51 Meanwhile, Indian Global System of Mobile communication (GSM) telecom operators added 17.45 million new subscribers in November 2010, taking the all-India GSM cellular subscriber base to 526.18 million, according to the Cellular Operations Association of India (COAI). The GSM subscriber base stood at 508.72 million at the end of October.

As per a report, India telecom 2010 currently by KPMG in December 2010, currently ,the VAS(Value Added Services) market is worth US$2.45 billion-US$2.67 billion ,which is around 10 percent of the total revenue of the wireless industry .The share of VAS in wireless revenue is likely to increase to 12-13 percent by 2011, on the back of increased operator focus on VAS due to continuous fall in voice tariffs , increasing penetration of feature rich handsets ,availability of vernacular content and increased user adoption of VAS applications . AN OVER VIEW OF THE TELECOMMUNICATION INDUSTRY IN INDIA

Talking of telecommunication sector in India today, we can primarily identify two segments namely Fixed Service Providers (FSPs) and cellular service. Some of the essential and basic telecom services forming part of India telecom industry include telephone, radio, television and internet. Telecom industry in the country lays a special emphasis on some of the advanced and the latest technical innovation like GSM (Global System for Mobile Communication) CDMAS (Code Division Multiple Access), PMRTS (Public Mobile Radio Trucking Services), Fixed Line and WLL(wireless local loop). Especially, India has a flourishing market in GSM mobile service, while the number of subscribers is on rapid and dramatic increase.

BSNL the state-managed telecom operator has introduced 3G services in more than 318 cities benefiting 856,000 subscribers. BSNL has been venturing to cross more than 400 cities in the near future eventually rolling this service across 760 cities by September 2010. While the debate on 3G is seen continuing, TRAI has already started consulting on the next higher level of telecom services. 4G or the forth generation enables downloads faster than all the earlier versions.

Today, India is the largest market in the world adding up a dramatic number of about 20 million mobile subscriber lines every month in an average. On the other hand, the number of landlines if found gradually decreasing.

At the end of first quarter in 2010, we find that the overall telecom subscriber penetration has gone up by more than 52%.

It is predicted that mobile number portability (MNP) will be available throughout India by the second quarter of 2010, initially in the cities of Chennai, Delhi, Kolkata and Mumbai, the four metros of India.I CURRENT STRUCTURE OF THE INDIAN TELECOM INDUSTRY;Currently , both public sector players as well as the private sector players are actively catering to the rapidly growing telecommunication needs in India .Private participation is permitted in all segments of the telecom industry , including ILD, DLD ,basic cellular ,internet ,radio paging ,etc all the broad structure of the telecom industry (in terms of service providers ) is depicted .

Public Sector:

After the privatization of VSNL in 2002, only two PSUs, MTNL operate in India and provide various telecom services. As noted earlier, MTNL operates in Delhi and Mumbai and BSNL provides services to the remaining country .In the post liberalization era, these PSUs not only have made significant progress but also have made significant progress but also have provided stiff competition to their private counterparts.

Private Sector:

Private operates have played a very crucial role in the growth of the telecommunication industry, primarily in the mobile services. With the liberalization of the telecom industry, the private sector has been increasing its foothold in the telecom services space. After the introduction of NTP-99, the contribution of private players towards telecom services has witnessed rapid strides. while the private sector is instrumental in providing both fixed lines account for only about 2% of private sectors total subscriber base .while some private players have a pan-India presence ,there are many regional players that cater to only certain services area.

Change in Market Share:

The subscriber base of the public as well as private players has grown rapidly post-liberalization .The subscriber base of telecom industry grew from around 18.68mn during FY98 to 429.72mn during FY09 and a significant proportion of this growth has emanated from the private sector . The private players registered an absolute growth of around 339.30mn in subscriber base during FY98-FY09. This could be largely attributing to rapid growth in mobile subscriber base of the private players. With the gradual opening up of the telecom industry, the private players have been able to garner strength and improve their hold on the telecom service provision .Further, the introduction of the New Telecom policy (NTP-99),which enabled migration in the license fee payment mechanism from a fixed regime to a revenue-sharing regime ,provided a major boost to private sector players .Moreover, initiatives such as allotting third and fourth cellular licenses, shifting to a unified access licensing regime ,execution of calling party pays (CPP) regime ,making incoming calls free, also drew significant growth in the cellular subscriber base.

Although the subscriber base of public entities has also expanded, it has grown at a much lower rate as compared with private players. During 1998-2008, the subscriber base of PSU operators grew by merely 71.72mn. The public sector has witnessed sustained depletion in its share in the total subscriber base over the years, as it has been on a comparatively lower growth trajectory.

The share of private sector in the total subscriber base has increased substantially from 4.7% in FY09. Even though these figures signify the dominance of the private and public sector service providers varies in different segments of the telecommunication industry.

Bottlenecks in the telecom industry

The bottlenecks for Indian Telecom Industry are:

1. Slow reform process.

2. Low penetration.

3. Service providers bear huge initial cost to make inroads and achieving breakeven is difficult.

4. Lack of infrastructure in semi-rural areas, which makes it difficult to make inroads into this market segment as service providers have to incur a huge initial fixed cost.

5. Huge initial investments.

6. Limited spectrum availability and interconnection charges between the private and state operators.

COMPANY PROFILE

Indias first Public Sector Unit (PSU) ITI ltd was established in 1948. Ever since, as a pioneering venture in the field of telecommunications, it has contributed to 70% of the Present national telecomm network. With state-of-the-art manufacturing facilities spread across six locations and a county wide network of marketing/service outlets, the Company offers a complete range of telecomm products and total solutions covering the whole spectrum of switching, transmission, access and subscriber premises Equipment. ITI joined the league of world class vendors of global system for mobile (GSM) technology with the inauguration of mobile equipment manufacturing facilities at its mankapur and raibareli plants in 2005-06. This ushered in a new era of indigenous mobile equipment production in the country. These two facilities supply more than nine million lines per annum to both domestic as well as export markets. ITI has a dedicated network systems unit for carrying out installation and communication of equipment as well as for understanding turnkey jobs and providing value added services. The successful completion of the mammoth strategic communication network ASCON for Indian army underlines ITI ability in standing up to the challenge of enhancing the reach of communication and information seamlessly over diverse media.

The success of technology induction and up gradation is visible across all units of ITI which fully conform to ISO 9001. 2000 Quality management system. By taking rapid strides in new technology, ITI has geared itself up to meet the requirement of emerging markets with turnkey solution for GSM networks, WILL-CDMA, CDMA- IFWT (Integrated fixed wireless terminals) and defense projects. On the anvil are projects such as broadband networks with ADSL DSLAM (Asymmetric digital subscriber line Digital subscriber line access multiplexer), Antenna and microwave equipment for GSM, GPON (GIGABIT PASSIVE OPTICAL NETWORK), e-governance for which technologies have already been acquired. The also include smart cards.

The company is consolidating its diversification into information and communication Technology (ICT) to hone its competitive edge in the convergence market by deploying its rich telecom expertise and vast infrastructure. Network management systems, Encryption and networking solutions for internet connectivity are some of the major Initiatives taken by the company. Secure communications is the companys forte with a proven record of engineering strategic communication networks for Indias Defense Forces. Extensive in house R&D work is devoted towards specialized areas of encryption NMS, IT and access products to provide complete customized solutions to various customers. OBJECTIVES To use new cost effective solution.

Training to all employees regular intervals in plan period of 5 years.

To provide value added services.

Enhancing professional creativity.

To update knowledge to avoid obsolesce scheme.MOTO Effective quality system

Time and cost conscious

Enhanced value addition

Empowered human resources

Team work

InnovationHISTORICAL BACK GROUND.

The history of ITI goes back to the year 1948 when it was setup as a departmental undertaking of government of India. Subsequently it was incorporated as company on 25th January 1950. ITI has the destination of being the first most independent public sector enterprise in India. The factory was located in a small village near Bangalore. It consisted of a single production shop for the assembly of 25000 lines of strowger exchange and 25000 telephone instruments from annum from imported components. From such a small begning the company has to grow in to a mammoth multi unit industrial complex with expertise in the field of designing, marketing, service and production, the total range of telecommunication equipments catering to the need of P&T, railways, defence and other customers.

The rime span of more than two decades since its inception the company has witnessed phenomenal growth and ITI has emerged as the leader in telecommunication industry contributing a variety of equipment to telecommunication network of the company. The largest manufacturing complex of ITI consisting of four factories and an R&D unit is located in Bangalore. The product range of the company includes;

Telephone instruments of various types.

Switching equipments of the strowger and crossbar type for local and trunk telephone system.

PABXs and PAXs of the strowger and electronic types.

Tele printer exchanges.

Electronic switching systems.

Transmission equipments of all types working open-wire lines, cables, microwave systems, satellites or any other media.

Testing instruments and miscellaneous apparatus for communication or tele control applications.ITI LTD AT BANGALORE PLANT Starting with assembling imported parts of telephone and switching exchanges in 1948, the Bangalore plant blossomed into a self contained manufacturing facility having all infrastructural Changes, then progressed to crossbar type exchanges and electronic era with manufacture of Electronic switches in Collaboration with M/S CITR ALCATEl, FRANCE and also indigenously Developed C-DOT switches. In late 1990s as the cellular and mobile technology revolutionized.

The telecomm world, Bangalore plant went for CDMA WLL technology in collaboration with M/S LG, KOREA. It also introduced in the year 2002-2003 as a manufacture of CDMA200-IX, The latest technology in switching was been taken up with the collaboration with ZTE, a global Mobile communication leader from china.

The telephonic instruments developed grew from assembly of imported parts to complete Manufacture and assembly of various types of instruments. From rotary dial phones with lot of Mechanical part we are now in manufacture of PCs Decadic/pulse, DTMF and switch able Phones. The latest additions to these include ISDN, CLID, IP PHONES & MOBILE PHONES.A separate division takes care of specific needs of Defense communication. The equipments and Are designed, developed and manufactured to rigid specifications for defense needs like magneto Phones, head gear set, sound powered phones, (navy) & dedicated phones for air force, field Telephones model 5 band for army etc. transmission equipment for defense include VST,TST ADM,MUX,DATASWITCH, DIG.M/W

On the quality front, the entire Bangalore plant Is certified for ISO 9001-2000.the Bangalore Plant has in line with companys image as a total solution provider, taken up TURNKEY projects Like CIVICON for the ministry of home affairs and ASCON & CARNATION for the army. Other measures on diversification include manufacture of PCs marketing our space capacities In SMT, CTR, environment protection & chemical / metallurgical testing labs, quality assurance Related consultancy etc. It has been the constant endeavor of Bangalore plant to accept and face the challenges of changes in technology, customer preferences, and economic scenario and reposition itself to continue to retain the leadership in telecomm equipment manufacturing in the country. Today having Equipment that go to make up the communication network like CDMA-WLL,COREDECT, FWTs INFOKIOSKS, ISDN and IP PHONES etc, as also handling of major installation and Commissioning of all related facilities.NATURE OF BUSINESS

Manufacture of telecom equipment. Research and development. Defense Products like Fax Encrypt.

Marketing and Customer services. Value added service. Railways Network management. Police & Internal Security.

Indian Space Research Organization (ISRO).

Mahanagar Telephone Nigam LimitedThe various Departments of ITI Ltd

Finance departments Human resources departments public relation department Legal department Personnel and administration department Welfare department Marketing department Purchase and material management department Production department Research and development department Information technology departmentBASIC INFORMATION ABOUT ITI:

NAME: ITI LIMITED

ESTABLISHED: 1948

CORPORATE OFFICE : Dooravani Nagger, Bangalore

MANUFACTURING UNITS: Bangalore, Naini (UP), Rae

Bareli (UP), Mankapur (UP),

Palakkad (Kerala), Srinagar

(Jammu & Kashmir)

CORE R&D : Bangalore, Naini, & Mankapur

INSTALLATION &

MAINTAINANCE: Bangalore

REGIONAL OFFICES: New Delhi, Bangalore, Kolkata,

Luck now, Mumbai, Chennai,

Hyderabad, Bhubaneswar,

Bhopal, Ahmadabad Kochi by

36 Area officers all over the

Country.

AREA OFFICES : Forty two (42)

QUALITY SYSTEM : ISO 9000, recent 14000

ISO ACCREDITATION: 10 Divisions

COMPANY WEBSITE: www.itiltd-india.comCOMPANY LOGO : VISION, MISSION, QUALITY POLICY, ENVIRONMENTAL POLICY

VISION:

To be the leader in the domestic market and an important global player in Voice, Data and Image communication by providing total solution to customer, to build on core competencies to enter new business areasMISSION:

To establish leadership in manufacturing and supply of a new technology telecom product and all so to retain status of top turnkey solution provider

QUALITY POLICY:

ITI is committed to provide Competitive & Reliable Products, Solutions and Services.

ITI will achieve this through:

Sound Quality Management System

Empowered Human Resources

Innovation

Continual Improvement, Mutual Respect and Customer Delight will be our guiding philosophy.

ENVIRONMENTAL POLICY:

ITI Ltd., Bangalore Plant, engaged in the manufacturing and supply of Telecommunication Products, Technical Equipments, IT Products and providing Total Telecom Solutions, recognize the total impact of our operations on the environment.

We resolve to pursue continual improvement to preserve environment through:

Compliance to legal and statutory requirement related to environmental aspects.

Prevention of pollution of environment i.e., air, water and soil.

Minimizing waste and conservation of natural resources.

Control of significant impact of our activities on environment.

Establishing and reviewing periodically environmental objectives and targets.

Promoting environmental awareness among all employees and their participation to improve environment.

This environmental policy is communicated to all employees working for and on behalf of Bangalore Plant.SERVICES OFFERED:

Turnkey project including installation and commission of telecom equipment

Customized software development

Development of ASICs

Repair of PCs

V-SAT service licensable by department of telecommunication (DOT) government of India

Mobile radio trunked service licensed by DOT

Packing service through joint venture(Under Formation)

MLLN- Managed Leased Line Network

Customer Care Service

Service for all Products/ projects

System integration IT

System integration telecom Infrastructure

Inhouse Research & Development

Network System Unit capable of undertaking turnkey jobs

Self contained component evaluation centre

Fully automated assembly lines

In circuit tester (ICT)

Modern Chemical, Metallurgical Labs

Mechanical fabrication/Machine shops with modern CNC machines

Moulding & Die casting

Full fledged state of the art tool rooms

SMT (Surface mount technology)

Environmental testing

Component approval center approved by BSNL

Facilities

PCB manufacturing facilities

Mechanical Fabrication / Machine Shop with modern CNC machines and Finishing shop

Card assembly and Testing including Incircuit tester

SMT Line

Plastic Injection Technology

Through-Hole Component Assembly

Manufacturing facilities for Mechanical items

Fabrication of Towers and Shelters for GSMCOMPETITORS INFORMATION:

1. AT & T: The world premier provider of voice and data communications.2. Bosch: One of the Europes leading vendors in the field of telecommunications.3. Apple electronics: An Italian company, where value added network systems services Have always represented the core business.4. Cosmat: the leading provider of global service satellite and digital networking Services to multinational enterprise.5. Infornet: Infornet Services Corporation is a single source service of global.6. Kenwood: Kenwood is refining key technologies that will give rise to dramatic Innovation in home audio and car electronic equipment.7. Mitsubishi electronic: with more than 75years of experience in providers and Independent software vendors (ISV) to develop the solution that service quickly Reliable and cost effective.8. Motorola: it is the global leader in providing integrated communication solutions and embedded electronic solution.FUTURE GROWTH AND PROSPECTS

1. The domestic requirement of telecom products projected in the 11th plan document is a total of US $ 72.8 billion or about Rs. 327600 cr.

2. The e-governance initiatives of the government envisage a capital investment of Rs 23000 cr.

3. National ID card, USO infrastructure, comprehensive security for railways are some of the mega projects of the government moving with the times ITI has addressed many opportunities in telecom and IT with acquisition of emerging telecom and IT technologies from renowned technology partners.

4. ITI is exploring setting up of data center in its different units (other than Bangalore) to encash huge market potential in the area of secured data storing.

5. The estimated value of the project allocated to BSNL, Network for Spectrum (NFS) by Ministry of communication for release of spectrum for defense is Rs 10000 crore. ITI is also trying to get orders for this project.

6. ITI is contemplating to be a significant contributor to the Government ambitious solar mission (Jawaharlal Nehru solar mission) ITI has plant to manufacture solar power equipment and fuel cell power systems for rural sites, which will help for better penetration of mobile communication into rural areas where availability of power is a major constraint.

7. Formation of Joint Venture Companies (JVCS) with equity participation of 51% to 74% by the strategic partners who are Global manufactures and balance equity by the Government with an ambitious goal providing 100 million broadband connections in the next 3 to 5 years.

ITI has also made for ways into the area of IT with implementation of major turnkey projects for: Campus network for institutions

Secure state-of-the-art networks for defense

Smart cards for students and staff Rajiv Gandhi University for health science

ITI has proposed a state wide wireless network Bihar police for which order is expected.FUTURE OUTLOOK; Communication for defense

Turnkey projects like NFS, NOFN etc.

Smart card products

Data Centre applications

Solar , LED lighting system

AREA OF OPERATION

International Presence & exports (Global)

ITI has exported products such as ADPCM, C-DOT MBM / SBM Switches SMPS Power Plant, VRLA batteries, CDMA WLL Equipments, FWTs, DG Sets, Shelters, Towers, MW Radios rural exchanges, Telephones of different types, spare cards for E-10B, exchange single channel VHF radio, Multi Access Rural Radio (Analog & Digital both) & ASICs to countries in Afghanistan, Asia, Africa & Europe. Besides various projects in India, ITI has successfully executed turnkey projects overseasACHIEVEMENT / AWARD

Three plants of ITI (Rai Bareli, Palakkad and Bangalore) have won the National Safety Awards for outstanding performance in industrial safety during the year 2004. Energy conservation Award ITI Mankpur plant which saved energy to the tune of Rs. 384 lakhs during the last 3 years has won the National energy conservation Award 2004. ITI has received the prestigious ISO 9001-2000 certificate for its excellence in product quality.

ITI has also won ASCON award which was presented by P.V. Narasimha Rao. Awards won by ITI quality circle. ITI annual quality circle convention 1996, Bangalore plant won 1st prize. ITI won the 3rd prize in 5th annual quality circle convention 1991. 6th annual quality convention 1992, Bangalore won the 1st prize. Confederation of India industry 10 state level quality circle composite awards ITI won 1st prize in the year 1997-98.

The awards constituted by the ministry of Labour and employment, Government of India are given annually in recognition of good safety performance by industrial establishment. RB and Palakkad plants received the awards for their achievement based on longest accident free year and lowest average frequency rate respectively. The runner up awards based on longest accident free year and lowest average frequency rate awarded to Bangalore and RB respectively. The former has posted the longest accident free period 87, 36,672 man hours. Three plants of ITI have won the National safety Awards for outstanding performance in industrial safety during the year 2004 which were presented at a function held in New Delhi recently.RESEARCH DESIGN

A research design is purely and simply the frame work or plane for a study that guides the collections and analysis of data. It is the blue print that followed in completing the study. A research design is an arrangement of condition for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure. For the present study descriptive research is adopted to find out procession of cost behaviour in ITI Ltd Dooravaninagar.

DEFINITIONDefinition of research is given by Martyn Shuttleworth - "In the broadest sense of the word, the definition of research includes any gathering of data, information and facts for the advancement of knowledge."

TITLE OF THE STUDY:

A STUDY ON COST BEHAVIOUR AND OPERATING LEVERAGE IN ITI LIMITED BANGALORE

INTRODUCTION

Cost management is one of the important functions of any business. The purpose of inventory management is to develop policies that will achieve an optimal inventory investment. A company can maximize its rate of return and minimize its liquidity and business risk by optimally managing inventory. Inventory management involves comparison between the costs associated with keeping inventory versus the benefits of holding inventory. Successful inventory management minimize inventory, lowers cost and improves profitability. An optimal inventory level can be based on consideration of the incremental profitability to the opportunity cost of carrying the higher inventory balances.

STATEMENT OF THE PROBLEM

The main reason to take up the study is to know how the finance department of ITI Ltd analyses the cost behaviour and operating leverage;

To analyses the cost behaviour of the company.

To understand the operating leverage used by the company.

To reduce the loss and improve the profitability by providing suggestions to the company.

To identify various sources of cost in the company.

To understand the importance of cost management.

SCOPE OF THE STUDY

A study was conducted in ITI Ltd (at Dooravaninagar, Bangalore) hence the scope of the study was limited to the above mentioned company only.OBJECTIVE OF THE STUDY

To identify various cost involved in operation at ITI Ltd. To understand how the fixed and variable cost behaves with respect to the sales and how it is used to predicted cost.

To analyse the operating leverage.

To understand the degree of operating leverage

To study the break even analysis of the company.

DATA COLLECTION

In any report the most important part is the data which provides the information needed for interpretation and analysis. Two kind of data collection are being used in this project. They are:-

Primary data:

The data has been collected by interacting and discussing with the company guide relating to the company profile and its operation with relation to my study.Secondary data:

Data has been gathered from the following sources:

Accounting manual of the company.Profit and loss account and the Balance Sheet for 5 years.Company website.TOOL USED FOR ANALYSIS:

The tools of analysis used for the study are tabulation, charts and graphs which represents the data collected. Data analysis, interpretation, summary of findings is done on the basis of the collected data.LIMITATIONS:

This analysis is based on the information available in the company and the same would be reflected in the study.

Time was limited to two months, so the in depth study was not possible.

The facts and figures obtained from the secondary data are assumed to be true.

The conclusion made on the study is based on the data collected for this research period only, therefore the results may or may not be constant in the future.

Some data where not provided because of the confidential issues.

INTRODUCTION

The term cost means the amount of expenses [actual or notional] incurred on or attributable to specified thing or activity. As per Institute of cost and work accounts (ICWA) India, Cost is measurement in monetary terms of the amount of resources used for the purpose of production of goods or rendering services. Costs are usually considered as an expense. It can be expressed in terms of money; it means the amount of expenses incurred on or attributable to some specific thing or activity.

The costing system of the company is designed to the extent necessary, to meet the requirement of the agreement, bulk products are sold to the P&T department with which ITI has a pricing agreement which lays down the manner in which selling price of products are to be fixed

COST CONCEPTS

Cost concepts are usually classified in to the following:

Concept of objectivity. Concept of materiality.

Concept of time span.

Concept of relevant range of activity.

Concept of relevant cost and benefit.

CONCEPT OF OBJECTIVITY.

This concept directs activities relating to cost finding, cost analysis, recording and cost reporting. It mainly necessitates goal congruence, that is cost exercise have to be in harmony with objectives.CONCEPT OF MATERIALITY

This concept that stress accuracy must be tempered by good judgments, if no distortion of product cost is likely to result. Material is determined with reference to nature of companys activities, managerial policies and competitors practice.

CONCEPT OF TIME SPAN

All assumptions relating to different cost exercise remain valid only during related time span. No cost will remain fixed all the time. Time span selected by a company should be long enough to permit the procedures to record the associated cost, output, labour hours and other factors needed in the analysis.

CONCEPT OF RELEVANT RANGE OF ACTIVITY

Relevant range activity represents the span of volume over which the cost behaviour is expected to remain valid. Different cost exercise and based on certain assumptions relating to cost behaviour patterns, which are valid only with in the relevant range of activity.

CONCEPT OF RELEVENT COST AND BENEFIT

This concept is vital for decision making purposes. In evaluating alternative course of action, management should consider only relevant cost and relevant benefit to alternatives under consideration. And ignore irrelevant cost and benefit.ELEMENTS OF COST MATERIALS;

A substance from which a product is made is known as material. It is further divided as;

Direct material

It is that material which is an integral part of a finished product.

Indirect materialIt is those materials which are used as an ancillary to the finished product.

LABOUR;

It is the human effort needed to convert the raw materials in to a finished product.

Direct labour

It is the person who plays an active and direct part in the production of a particular commodity. Indirect labour

It is a person employed to carry out task incidental to the produced product.

EXPENSES;

These are classified as mentioned below:

DIRECT EXPENSES;

These are expenses which are directly, conveniently and wholly allocated to specific cost unit.

INDIRECT EXPENSES;

These are expenses which cannot directly, conveniently and wholly allocated to cost units.

FUNCTIONS OR OPERATIONS;

PRODUCTION COST;

It is a cost which begins from the supply of materials, labour and services and ends with the packing of the product. ADMINISTRATION COST;

It is the cost of formulating policy, directing the organization and controlling the operations of the undertaking, which is not related directly to the product or a service.

SELLING COST;

It is a cost of seeking to create and stimulate demand and securing orders.

DISTRIBUTION COST;

It is the cost of sequence of operations which begins with availability of packed products for dispatch and ends with reconditioned returned empty package, if any available for reuse. RESEARCH COST;

It is a cost involved in searching of new or improved products, new application of materials, new or improved methods.

CONTROLLABILITY;

CONTROLLABLE COST

It is a cost which can be controllable by a specified member of the organization. UNCONTROLLABLE COST

It is a cost which cannot be influenced by the action of specified member of the organization.

NORMALITY;

NORMAL COST;It is cost which is normally incurred at a given level of output in the conditions in which that level of output is normally attained.

ABNORMAL COST;

It is cost which is not normally incurred at a given level of output in the conditions which that level of output is normally attained.

TIME OR PERIODICITY;

HISTORICAL COST;

It is the actual cost, determined after the events. Its valuation states cost of plant and materials. FUTURE COST

These are cost expected to be incurred at future date and are the only cost that impacts the managerial decisions.

PRODUCT;

PRODUCT COST;

It is which is associated with and directly identifiable with the product.

PERIOD COST;

These are cost which are not assigned to the product but are charged against revenue cost of the period in which they are incurred.

DECISION MAKING;

MARGINAL COST

Marginal cost is an amount at any given volume of output by which aggregate cost are changed if the volume of output in incurred or decreased by one unit. DIFFERNTIAL COST;

It is a difference of cost between one course of action and another. If a decision results in an increased cost, differential cost is known as incremental cost and if cost is decreased then its known as decremental cost.

JOINT COST;When ever two or more products are produced out of the same basic raw material or process, the cost of material purchased or processed is known as joint cost.

SHUT-DOWN COST;

A cost which will still be required to be incurred even though a plant is closed or shut-down for a temporary period.

SUNK COST;

A cost which has been incurred in the past or sunk in the past and is not relevant to the particular decision making is referred to as sunk cost. OPPORTUNITY COST;

Opportunity cost is the value of a benefit sacrificed in favour of an alternative course of action.

INPUT COST;

It is a hypothetical cost required to be considered to make costs alternative course of action. OUT OF POCKET COST;

It is the cost which involved current or future expenditure or outlay, based on managerial decision.

REPLACEMENT COST;

It is a cost of replacing a material or asset, by purchase from current market.

PROGRAMMED COST;

It is a cost that is subject to both management discretion and management control but which has little immediate relevance to current operations although it is generally incurred to ensure long term survival.COST BEHAVIOUR

Cost behavior is associated with learning how costs change when there is a change in an organization's level of activity. The costs which vary proportionately with the changes in the level of activity are referred to as variable costs. The costs that are unaffected by changes in the level of activity are classified as fixed costs. Understanding of cost behavior is very important for management's efforts to plan and control its organization's costs. Budgets and variance reports are more effective when they reflect cost behavior patterns. The understanding of cost behavior is also necessary for calculating a company's break-even point and for any other cost-volume-profit analysis. Cost behavior refers to the way different types of production costs change when there is a change in level of production.

Cost management is the process of effectively planning and controlling the costs involved in a business. It is considered one of the more challenging tasks in business management. Generally, the costs or the expenses in a business are recorded by a team of experts using expense forms.

The process involves various activities such as collecting, analyzing, evaluating and reporting cost statistics for budgeting. By implementing an effective cost management system, a companys overall budgeting can be brought under control.

COST BEHAVIOUR ANALYSIS

The of specific cost respond to changes in the level of business activity is known as cost behavior analysis. The importance of cost behavior analysis are;

It helps the management in decision making.

It helps to plan organizations cost.

It helps to control organizations cost.

Budgets and variance report a more effective when they reflect cost behavior patterns.

It is necessary for calculating the companys break-even point and for any other cost-volume-profit analysis.

ADVANTAGES OF COST BEHAVIOUR ANALYSIS Understand how fixed and variable costs behave and how to use them to predict costs. Use a scatter graph plot to diagnose cost behaviour. Analyse a mixed cost using the high-low method. Prepare an income statement using the contribution format. Analyse a mixed cost using the least-squares regression method. Explain how changes in activity affect contribution margin and net operating income.

Prepare and interpret a cost-volume-profit (CVP) graph. Use the contribution margin ration (CM ratio) to compute changes in contribution margin andnet operating income resulting from changes in sales volume. Show the effects on contribution margin of changes in variable costs, fixed costs, selling price, and volume. Compute the break-even point. Determine the level of sales needed to achieve a desired target profit. Compute the margin of safety and explain its significance. Compute the degree of operating leverage at a particular level of sales and explain how the degree of operating leverage can be used to predict changes in net operating income. Compute the break-even point for a multiple product company and explain the effects of shifts in the sales mix on contribution margin and the break-even point.

DISADVANTAGES OF COST BEHAVIOUR ANALYSISOBJECTIVES OF COSTING SYSTEM

Cost identification and cost control are the major objectives of cost system. It provides the following; Cost of individual shop orders or capital orders by elements of cost. Cost of components, sub assemblies/assemblies final equipments. Analysis of variance from standards. Collection of actual overhead. Provides the basis for pricing and quotations. Valuation of work in progress in respect of both production and capital.

ORGANIZATION OF GENERAL COSTING IN ITI LTD Determination of shop average rate for direct labour, budgeted and actual overhead percentage.

Collection of cost of components, sub assemblies, equipments etc. that are manufactured in the factory and maintenance of shop order accounts. Collection of cost of items of capital nature manufactured in factory. Furnishing cost data for guidance and preparation of estimates. Comparison of actual cost with standard cost, analysis and investigation of varience and reporting significant varience to those concerned for taking significant action. Conducting special reviews on cost and submission of report thereon. Preparation of profit and loss account. Submission of periodic report for effective cost control and decision making. To make profitability studies or analysis.

COST VARIATION ACCOUNTS

This account is operated in cost ledger. Cost variation is the difference between actual cost and standard cost. Cost variation is tapped at various accounting stages as follows;a) Material cost variation arising out of the following;

i. IGA valuation

ii. Accounting of deliveries from fabrication orders.

iii. Accounting of completion of social organization orders

iv. Stock revaluation (purchased/manufactured items in the stock, stillage)

v. Cost of sales.

b) Cost variation on shop orders;

i. Completed shop ordersii. Valuation of WIP.

c) Under or over absorption of overhead.

1) IGA valuation As and when IGA is accounted the difference between actual rate and standard rate is transferred to cost variation accounts.

2) Deliveries from fabrication orders.

Fabrication order is relates to those of jobs which are done by outsiders and for which the company supplies raw material, when an item is to be fabricated outside, quotations are called for and negotiations are conducted with prospective fabricator for fixing the fabricator charge. Cost card is maintained in respect of each fabrication order A fabrication order unit cost statement is prepared every month showing the following details;

1. Fabrication order number.

2. Finished code number.

3. Quantity received and references.

4. Value of material in finished products.

5. Labour charges.

6. Total.

3) COMPLETION OF SOCIAL ORGANIZATION ORDERS.a) When the social organization order is completed the difference between the actual booking and the standard value of deliveries is transferred to cost variation.

b) At the year end, cost variation is tapped in respect of work in progress order to the extend deliveries have taken place . proportionate value in material for quantity delivered plus labour booking less value of deliveries of stock and store at ITI standard is taken to cost variation accounts.4) STOCK REVALUATION.

At the year end closing stock of purchased items and the manufactured items and stillage are revalued at the rate applicable for the subsequent year. The difference between the old value and the new value is taken to cost variation.

5) COST OF SALES (WORK BACK METHOD)

Billing is done at the provisional rates approved by P & T during the year. At the year end the rate applicable for the year is worked out using condensed method. The difference in sales value at these two rates, for the supplies made during the year to P& T is claimed as price differences. Further under the ITI P&T agreement, material and labour escalations are also claimed as well as extra mark ups on spares supplied. While recknoning all these additional claims, the sale value of supplies to P&T get revised and the corresponding cost of production is determined after deducting sales overhead and profit margine. The difference between cost of production as adopted for valuing delivery challans during the year and revised cost of production is adjusted to cost of sales by debit / credit to cost variation account. 6) COMPLETED SHOP ORDERS

In respect of all shop orders completed during the year , the difference between the actual booking and the value of deliveries at standard cost is taken to cost variation.

7) WIP VALUATION

Cost variation also is tapped between values of WIP reflected in cost ledger. At the end of the physical verification of work in progress is carried out in production shops the code number, quantities in process, degree of completion in respect of labour and overhead are listed and these are evaluated at standard material, labour and overhead rates.8) OVERHEAD Actual overhead expenses, both production and administration, is debited to production overhead account. Overhead recovered through job is accounted as credit to production overhead. The difference between the debit and the credit represents under or above absorption of production overhead which is transferred to cost variation.COST CONTROL

Control of cost is one of the important objectives of any costing system. The costing system highlights variations from standards in respect of different elements of costs viz. direct material, direct labour, and overheads so that these may be investigated for taking necessary corrective action. Physical work in progress in shop is valued on the basis of rates reimbursable from the customer. In some cases cost/ reimbursable rate which ever is lower is adopted.a) Cost of material costs.

Control on the use of direct material is exercised by issuing only the standard quantity of material required for a productio9n order as per layout. This is ensured by the planning department. Variation from standard are also computed on completion of shop orders and these are analyses to find the underlying causes which may be due to poor quality of material, bad workmanship or tool etc. Further investigation may suggest remedial action. Analysis of rejection as recorded on delivery tickets, analysis of scrap exchange notes may also provide information relevant to the control of material costs.b) Control of labour costs.

Labour costs are kept under control by keeping a constant watch on the utilization and efficiency of direct labour. The costing system provides information on labour utilization, labour efficiency and machine utilization by any analysis of job cards. This provides information to shop management to enable control of costs.

Review of bookings in respect of idle time and granted time:

An ideal time and granted time are booked under CT numbers. Computer gives an analysis of idle time and granted time for each department. These are reviewed in the light of the budget or actual of previous years and any abnormal variance is bought to the notice of shop superintendents. Reason-wise analysis of total time booked is submitted to shop superintendents for their review.

When the shop order is completed, any analysis is made by computer indicating the varience from standard by different shop in respect of;

1) Direct labour hour.

2) Direct labour cost.

These variances may be investigated to find out the underlying causes for remedial action.c) Control of overheads.

The costing system collects different items of overheads and allocates/ apportions these overheads to different cost centers. Control of overhead is affected by relating the actual incurrence of the month by month to the budgeted overhead for the cost centre. Abnormal variations in any item reported through departmental performance statements are investigated with a view to exercising control.

Determination of quantum of cost variation recoverable from P&T in respect of nonstabilized supplies.

The non stabilized supplies made during respective year will be initially priced at the standard rates as applicable for stabilized items. In other words, the material cost will be recovered as per quantities indicated in the layout and labour overhead calculated on the basis of the hours specified by industrial engineering. At the year end, the actual cost variation being the difference between standard cost and actual cost is arrived at the same recovered from P&T in terms of agreement.

The cost variation is tapped out at four stages as indicated below;

1) Material cost variation.

2) Under or over absorption of overhead.

3) Completed order cost variation, and4) Under or over absorption of selling overhead.

In the first instance, the cost variation collected in the above four categories would be allocated between P&T and NON-P&T and the quantum obtained under P&T will further distributed between stabilized and non stabilized in proportion to the cost of production of the supplies rendered during the respective years. The cost of production for purposes of allocating material cost variation includes the cost of purchased items stacked and sold whereas the same is not included in cost of production for allocating completed orders and overhead cost variations. The cost of production is obtained as per the releases from the manufacturing account and updated to the current level of pricing by application of necessary condensed percentage in respect of supplies to P&T. The percentages are determined on the basis of the cost of production between P&T and NON-P&T and stabilized and non-stabilized. Thus percentages are used for distribution of cost variation between P&T and NON-P&T stabilized and non-stabilized.

In so far as allocation of sales overhead is concerned, the net selling expenses would be arrived at after deducting the purely identifiable selling expenses in respect of supplies to NON-P&T. The actual selling expenditure for P&T supplies would be arrived at in proportion to cost of production between P&T and NON-P&T.

The sales overhead recovered from P&T would be arrived at by applying agreed percentage of cost of production applicable to P&T. The difference between allocated actual sales overhead and sales overheads recovered would give under or over absorption of sales overhead. Such under or over absorption would be further allocated between stabilized and non stabilized based on cost of production.

In so far as the cost variation in respect of material valuation is concerned, the same include the difference between the standard rate applicable at the begning of the year and the actual price paid for the material from time to time and also the revaluation impact of closing stock which will be done at the year end. The net manufacturing expenses would be arrived at after deducting from the total overhead, the expenses like interests, ex-gratia, sales overhead, and other expenditure not relevant to the cost of production. The difference between the net manufacturing expenses and the applied production overhead as per books would depict the net under or over absorption of overhead.

The cost variation applicable to non stabilized supplies during the year would be arrived at as stated above and the bulk adjustment would be arrived at after adding the impact of all the four cost variations tapped out at various stages as stated above, Bulk adjustment cover 10% of profit margine.

LEVERAGE

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