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

www.final-yearprojects.co.cc | www.troubleshoot4free.com/fyp/

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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 1st 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 Prof. Smita Sovani

(Director) (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.

CHAPTER NAME PAGE NO.

1 Executive Summary 1

2 Objective and Scope 2

3 Company Profile 3

4 Product information 5

5 Conceptual background 7

6 Cost Sheet 16

7 Allocation and Absorption of indirect

expenses 24

8 Product wise breakeven quantity 26

9 Cost reduction Programme 27

9.1 Purchase management 28

9.2 Production planning and control 30

9.3 Marketing function 32

9.4 Quality assurance function 33

10 Trading and profit and loss account 34

11 Balance sheet 36

12 Ratio analysis 37

13 Business policy 42

14 Conclusion & Recommendations 48

15 Bibliography 49


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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 411026.

Duration of the project was 1st June to 30th July.

Procedure of carrying out the project: - In first week I was observing

various works carried out in the factory and become familiar with all the functions

carried out in the business. After that I started preparing cost sheet. In doing so,

first I gathered all the details related to various parts of 6 RAV. Then from

dimensions I found out prices of various parts from purchase order, challan. After

completing cost sheet of 6 I went for other sizes. After getting total cost of

various RAV s I found out break even quantity of various product 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

time constraint, non availability of data,

respondent was busy.


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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 of-

1) 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 like-

1. Slide gate.

2. Double flap valve

3. Spring hanger assembly for boiler.

Following products are under development-

1. 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 include-

1. Cement

2. Sugar

3. Minerals

4. Grains

5. Plastic

6. Dust

7. Fly ash

8. Flour

9. Gypsum

10. Lime

11. Coffee

12. Cereals.

Features: -

Sturdy eight blades C.I. Rotor with EN8 shaft with fixed or adjustable

blades.

Removable side plate for easy access to replace seals.

Air purge to prevent leakage and protect packing.

Maintains vacuum or pressure up to 20 W.G.

Chain drive with TEFC motor.

Heavy duty Cast Iron body.

Simplified drive assembly.


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Capacities in Cubic Feet per Minute

(Based on 8 vane rotor and 100% fill factor)

Size H.P. 15 RPM 20 RPM 25RPM 30 RPM

6

.5 1.05 1.4 1.75 2.1

8

.5 2.7 3.6 4.5 5.4

10

.75 5.4 7.2 9.0 10.8

12

1.0 15.75 21.0 26.25 31.5

Features of Rotary Air Lock Valves (fabricated): -

1. Heavy gauge all welded construction.

2. Fabricated Rotor with EN8 shaft with Spring Steel Adjustable

Blades.

3. Inspection doors are provided on the body.

4. Maintain pressure/ vacuum up to 20 W.G.

5. Chain/ Coupling Drive with TEFC motor.

6. Removable side plates for easy access to replace seals.

7. Optional: - Zero speed sensor package.


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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 points-

a) Whether wastage of manpower and material is kept to the minimum.

b) Whether any scope is there for reducing idle capacity and increase in

productivity.

c) Whether efficient system of inventory, inspection and stock taking is

there.

d) Whether the incidence of stock losses due to pilferage, deterioration,

obsolescence and other causes are at minimum.

e) Whether the storage, location and other associated costs are kept to

minimum and best method of production has been adopted.

f) Whether production schedule can be improved to match delivery

schedule.

g) Whether there is any scope for reduction in indirect materials and

labour costs.

h) Whether there is any scope for reduction in overhead costs.

4. FACTORY LAYOUT AND EQUIPMENT: - an effective arrangement of

plant and machinery is a fundamental requirement. A successful plant layout

shall contain following features-

a) Optimum use of space.

b) Effective built in flexibility.

c) Efficient control of work flows with least disturbances.

d) Minimum material handling.

e) Minimum waste.

f) Work satisfaction and enhanced productivity.


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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 reduction-

a) 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 Rs. Rs.

Direct material consumed 2725

Direct wages:-

From plant 1000

From outside 844

Direct expenses 720

5289

= prime cost 5289

(add) factory overheads

Indirect wages ( security) 800

Indirect material 200

Rent and rate 60

Lighting and heating 200

Power and fuel 95

Repair and maintenance 50

Water 40

Drawing office expenses 500

Depreciation of plant 50

Welfare service expenses 20

Works manager s salary 830

2845

Works cost 8134

(add) office and administration overheads

Office stationary 50

Financial expenses 50

Salary (office) 600

Telephone 200

Postage 80


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Printing 50

Depreciation of office and furniture 50

Legal expenses 135

Audit fees and consulting charges 380

1595

= cost of production 9729

(add) selling and distribution

Advertising 50

Transport 300

350

= cost of sales 10,079


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Particulars Rs. Rs.


Direct wages:-

From plant 1000

From outside 1000

Direct expenses 1050

8065

= prime cost 8065




Rent and rate 60


Power and fuel 95


Water 40





2845

Works cost 10,910




Salary (office) 600

Telephone 200

Postage 80

Printing 50


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Legal expenses 135


1595

= cost of production 12,505


Advertising 50

Transport 300

350

= cost of sales 12855


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Particulars Rs. Rs.


Direct wages:-

From plant 1000

From outside 1335

Direct expenses( jig, fix, pattern) 1800

11,150

= prime cost 11,150




Rent and rate 60


Power and fuel 95


Water 40





2845

Works cost 13,995




Salary (office) 600

Telephone 200

Postage 80


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Printing 50


Legal expenses 135


1595



Advertising 50

Transport 300

350



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Particulars Rs. Rs.


Direct wages:-

From plant 1000

From outside 1540

Direct expenses 3000

13,165

= prime cost 13,165




Rent and rate 60


Power and fuel 95


Water 40





2845

Works cost 16,010




Salary (office) 600

Telephone 200

Postage 80

Printing 50


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Legal expenses 135


1595



Advertising 50

Transport 300

350


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 follows-

Factory overhead --------------------------- Units of production.

As production of RAV over previous year were 120. So for absorption numbers of

units produced are taken into consideration.

Allocation of overheads:-

1. Indirect wages= 96000/ year.

Therefore indirect cost per unit = 96000/ 120.

= Rs. 800/ unit.

2. Rent and rate = 11, 000/ year.

Allocation of rent and rate is 2:1.

2 parts are for RAV and 1 part is for Eagle Poonawala s outsourced parts.

Therefore cost per unit = 11000/ (1.5 X 120).

= Rs. 60.

3. Lighting and heating = 4000 / month.

Expenditure for factory is 3000, within that 2000 is for outsourced parts

and 1000 is for RAV. Expenditure for office is Rs. 1000.

Therefore cost per unit = 2000/ 10.

= Rs. 200/ unit.


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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 6

8

10

12

overall

Selling price 6900 9200 12,650 16,100

Variable cost 5174 7712 10,836 12,350

Contribution 1726 1288 1814 3750

Quantity wise

proportion 9% 32% 45% 14% 100%

Weighted

contribution

margin

155 412 816 525 1908

Total fixed cost 8,16,890

Overall break

even quantity

8,16,890

1908

=271

Product wise

break even

quantity

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 follows-

1. 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 Week 2

Mon

Tue Wed

Fri Sat Sun Mon Tue Wed

Fri Sat Sun

8 RAV body

8 shaft rotor assembly


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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 Amount Particulars Amount

To opening stock 1,78,680 By sales 36,16,552

To purchases 27,12,211 By closing stock 1,68,680

To freight and

octroi

170,373

To fuel and power 88,688

To gas and water 9,990

To factory rent 11,638

To payment to

contractor

97,755

To labour charges 2,44,970

To repair and

maintenance

1,48,062

To bonus and

ex-gratia

16,700

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

taxes

22,940

To computer

maintenance

8,358

To commission 82,527

To insurance 2238

To audit fees 15,113

To printing and 32,851


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stationary

To postage and

telephone

72,308

To books and

periodicals

1735

To traveling and

conveyance

63,635

To advertisement 67,802

To gardening 8,742

To depreciation on

assets

94,407

To ESIC paid 13,205

To labour welfare 5713

To testing 3402

To sales

promotion

3742

To security

charges

77,783

To sundry

expenses

1,46,651

To financial

charges

40,973 By net loss 9,29,070

10,35,235

10,35,235


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Balance sheet as on 31.3.2006

Liabilities Amount (Rs.) Assets Amount (Rs.)

Capital account of

S.M. Tambekar

Fixed assets 6,29,736

Opening balance 25,63,943 Trade

advances

11,91,718

Income tax refund 2997 Cash in hand

and bank

4,81,654

Director s

remuneration

4,80,000 Sundry debtors 6,94,651

Loss of the year as

per P&L account.

9,29,070 Closing stock 1,68,680

Previous year s

income tax & TDS

(-)1,43,147

Drawings 1,73,014

Net capital 18,01,708

Sundry creditors 4,72,242

Loans 7,02,454

Provisions 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.


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.


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 jawahar Lal.

2) Cost accounting jain Narang.

3) Manufacturing planning and control Vollmen Berry.

4) Financial Management S.M. Inamdar.

5) CWA module (Cost and management accounting).


Pawan

FYP

Project Report on Costing and Cost Reduction

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