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A
STUDY ONBUDGETING AND BUDGETARY CONTROL
AT
TECUMSEH PRODUCTS INDIA PRIVATE LIMITED
A CASE STUDY ON
TECUMSEH PRODUCTS INDIA PRIVATE LIMITED
HYDERABAD
UNDER PARTIAL FULFILLMENT FOR THE AWARD OF
MASTERS DEGREE IN BUSINESS ADMINISTRATION
BY
K.ANTHONY JOSEPH
(05508119)
ST.JOSEPHS PG COLLEGE
(AFFILIATED TO OSMANIA UNIVERSITY)
(2008-2010)
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DE CLARATION
I Mr.K.ANTHONY JOSEPH, a bonafide student of ST.JOSEPHS P.G COLLEGE
affiliated to OU, Hyderabad would like to declare that the entitled project work A
STUDY ON BUDGETING AND BUDGETARY CONTROL AT TECUMSEH
PRODUCTS INDIA PVT LTD is being carried out in original and submitted by
me in partial fulfillment for the award of Master of Commerce from OU-Hyderabad.
The results and facts embodied in this thesis work have not been submitted to any
other University or Institute for the award of any degree or diploma.
Date :
Place : Hyderabad (K.ANTHONY JOSEPH)
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ACKNOWLEDGEMENT
I take this opportunity to express my gratitude and wish to thank all those who were
responsible in helping me to undertake this project work.
I sincerely thank Mr. Sanjay Tangri (Senior Manager-Accounts Dept) Tecumseh
products India Pvt. Ltd., for giving me an opportunity to work on my project in
consensus to this companys progress and be a part of it for the project work.
It is my duty to place on record my deep gratitude for Mr. Sunil Kumar, Finance
Manager (Accounts-Dept), Tecumseh Products India Pvt. Ltd., Hyderabad, for
permitting me to undertake this project work. I also would like to express my heart
felt thanks to him for all the guidance and support he has given me during the course
of this project work.
I wish to express my cordial thanks to Mr. Raju (Accounts-Dept), my internal guide
for his active guidance and well support to cross the difficult ladders in accumulatingthe information.
I also wish to thank Mr. Sambasiva Rao (EOU), for referring me to do the project
work, I evenly express my sincere gratitude to Mr. A.Rajeshwara Rao, Manager-HR
(Dept of HR), for providing me an opportunity, immediately on my approach.
I sincerely thank Mr. Chandrasekhar, and all other staff members of Tecumseh
Products India Pvt. Ltd. for giving their at most co-operation and timely help to have
better study at the company premises.
I wish to convey my sincere thanks to our project guide Ms.Sangeetha and all other
faculty members of M.B.A for their sustained help, encouragement, and coordination
during the period of my project work.
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ABSTRACT
This project titled A Study on Budgeting and Budgetary Control at Tecumseh
Products India Pvt. Ltd. is a study conducted at Tecumseh products India Pvt.
Limited, Hyderabad. The purpose of the project is to study the budgetary system in a
Manufacturing Company.
The project work consists of introduction to budgets and budgetary control with
various advantages and disadvantages of the same. The study methodology adoptedwas both, interaction with both the concerned staff at Tecumseh Company and also
through various manuals and journals published in-house.
The objectives of the study being primarily to understand the budgeting system in a
manufacturing company (concern) and the advantages of the same. To assimilate the
budgetary control system adopted at Tecumseh, and to see the performance of the
company over a period of three years and make suggestions wherever necessary.
The study takes into consideration the budgeted estimates, the revised estimates and
actual figures for some of the important sources of budgetary variance like, sales,
consumption of raw material, salaries and wages etc., The relevant figures are from
the years 2007 onwards which have been taken for the analysis.
The analysis of the budget variations primarily gives an insight into whether there has
been an over estimation or under-estimation of resources allocated, and the reasons
for the variations are evaluated through consultations with the concerned managers at
Tecumseh.
Suggestions have been made as to, how the existing system can be improved to have a
better control over the budgetary system in the organization.
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INDEX
Particulars
Chapter No Page No.
1. INTRODUCTION (1-6)
1.1. Introduction
1.2. Scope of the study 1.3. Objectives of the study1.4. Research methodology1.5. Limitations of the study
2. COMPANY PROFILE (7-33)
3. REVIEW OF LITERATURE (34-53)
4. DATA ANALYSIS (54-70)
5. CONCLUSION & SUGGESTIONS (71-73)
BIBILIOGRAPHY (74-75)
LIST OF TABLES
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Page no.
1. Budgetary Control 50
2. Production Budget 55
3. Production Cost per Unit 56
4. Actual Production 56
5. Production Variance 57
6. Direct Labour Budget 58
7. Actual Labour 59
8. Direct Labour Variance 59
9. Sales Budget 60
10. Actual Sales 61
11. Sales Variance 61
12. Budgeted Income Statement 62
13. Actual Income Statement 63
14. Income Statement Variance 63
15. Material Purchase Budget 64
16. Quarterly Sales Volume Budget 65
17. Quarterly Budgeted Income Statement 67
18. Quarterly Total Material Cost Budget 68
19. Quarterly Total Labour Absorption Budget 69
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CHAPTER-1
INTRODUCTION
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. 1.1. INTRODUCTION
A budget is a comprehensive plan of action expressed in
physical and financial terms. Its a blue print of a companys
financial estimates for the future. Budgeting forms the most
important part of the planning function. Its a system of planning
and control covering all the segments of an organization and also
giving a sense of direction to the goals and objectives of an
organization. A budget constitutes the principal instrument forprojecting the future cost revenues, which form an essential part of
the management accounting and the foundation of firms financial
control.
A budget system should be such that it becomes imperative
for the management to establish goals and objectives, define
policies, allocate resources, set targets, and try to take corrective
action if there are any deviations. A management is said to be
effective if it can accomplish the objectives of an organization. But it
is equally important for the organization to attain the objectives
efficiently with minimum amount of resource utilization. In order to
attain these set goals within a given set of constraints is a difficult
job; hence with the help of a proper budget one can achieve the
organizational goals and objectives.
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1.2. SCOPE OF THE STUDY
The study is conducted with the available data from the
Annual Reports, Internal Reports, and other available data
from several interactions with the staff of Tecumseh Products
India Pvt. Ltd., and analysis was made accordingly.
The data is secondary in nature as the records and
statements, which shows their own limitations, and up to a
certain extent it is even said to be primary while the collection
of data regarding actual facts are collected from the
concerned staff.
The budgeting is done only for the next three years and it
clearly explains the limitation regarding the duration of the
study.
All the budgets are prepared in the Organization by the
concerned departments and they share the same as and when
they required for proper adjustments and necessary updates.
Hence the data collected from them is regarded as fair and
absolute. The intension behind preparation of budgets is to
forecast the sales and expenses to be incurred in the near
future and compare with actuals.
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1.3. OBJECTIVES OF THE STUDY
To study the budgetary control system and techniquesimplemented in Tecumseh Products India Pvt. Ltd.
To study the performance of the company and various costcontrol techniques implemented and their impact.
To examine the feasibility of present system in TecumsehProducts India Pvt. Ltd.
To compare the present sales, production, raw-materials andothers with actuals.
To predict the better way of improving the sales forecasted inrelation to production.
To understand and assimilate the existing system and make
suggestions if any.
The organization was following till recent past mostly cost plus
system for its product pricing and was a leading manufacturer in
cooling and refrigeration compressors supplying not only to
domestic markets but also exports to various international markets
across the edges of the globe. Due to Liberalization and
Globalization, and the increase in competition from private players,
the organization is in a situation where it has to control its costs and
make proper use of the existing financial resources. Control of costs
is possible through an effective budgetary control system.
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1.4. RESEARCH METHODOLOGY
Primary data it is primary data collected from thecompany records and one to one interaction withemployees of the company
Secondary data it is collected through literary booksannual report of the company and web based resources .
WEBSITES:
www.netmba/finance/capitalbudgeting.com
www.tecumsehindia.com
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1.5. LIMITATION OF THE STUDY
The day-todays cut throat competition in the world of
business, trade and commerce is leading to many complexities
which when is not predicted properly according to the fast growing
changes that are taking place in the market situations may result in
adverse progress and some times may leads to exit from the
industry or domestic markets.
To avoid these kinds of threats endangering the survival
prospects, there is a compulsion today to have a proper plan of
action in predicting the prices, costs, funding the proposals,
controlling the same and implementing the framed budgets and
utilize the scarce resources avoiding maximum extent of wastages.
Budget shows the real need to know the SWOT-analysis which
in turn is simply known as Strengths, Weaknesses, Opportunities,
and Threats. Following these guidelines it is very simple to make
proper budget allocations according to requirement and maketimely decisions. Budgeting and Budgetary control helps in this
context of dynamism.
Preparation of Budgets in various fields like purchases,
production, salaries and wages, and sales process of the company
on a monthly basis, quarterly and half-yearly basis gives effective
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control system in financial management and thus makes the
management aware of the regular price changes.
CHAPTER-2
REVIEW OF LITERATURE
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CONCEPT OF BUDGETNG AND BUDGETARY
CONTROL
Budget:
A budget is a financial and quantitative statement, prepared and
approved prior to defined period of time, of the policy to be pursued
during that period for the purpose of attaining a given objective. It
may include income, expenditure and the employment of capital.
In other words, a budget is a systematic plan for the utilization of
manpower and material resources. In a business organization a
budget represents an estimate of the future costs and revenues.
ESSENTIAL FEATURES OF A BUDGET:
1. Its a written plan of activities for the future period of time.
2. It is expressed in quantitative form, physical of monetary units
or both.
3. It relates to the income and expenditure for individual functions
of the business.
4. It is prepared for a definite period of time, usually for one year.
5. It relates to the future period for which the objectives or goals
have already been laid down.
6. It is prepared in advance and is derived from the long-term
strategy of the organization.
OBJECTIVES OF A BUDGET:
Budgets serve as a Blue Print of the desired plan of action.
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Budgets help in reduction of wastage and losses by revealing
them in time for corrective action.
Budgets serve as means of communication. The organization
communicates the policies and targets to the managers in theorganization who are responsible to carry out the plan.
Budgets serve as the benchmark for controlling ongoing
operations.
Budgets help to coordinate, integrate and balance various
operations to achieve set objectives of the organization.
Budgets are a way of communicating to the departmental,
sectional, and divisional heads their responsibilities and
making them accountable to the same if any deviations from
the actuals arise.
Budgets facilitate centralized control with delegated authority
and responsibility. A system of control can be exercised by
having a plan against which the actual results can be
progressively compared and corrective actions are taken when
ever necessary.
Budgets compel advance planning. By having a formal
budgeting procedure, management is forced to look to the
future instead of living hand to mouth without any clear idea
or purpose.
Budgetary control:
Budgetary control is a system of controlling costs that
includes the preparation of budgets, coordinating with the
departments and establishing responsibilities, comparing actual
performance with that of the budget and acting upon results to
achieve maximum profitability. Its a very important activity to
ensure that the actuals confirm to the plans set through the
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budgets. The meaning and purpose of setting of budgets will not be
achieved without effective budgetary control system.
No system of planning can be successful without
having an effective and efficient system of control. Budgeting is
closely connected with control. The exercise of control in the
organization with the help of budgets is known as budgetary
control. The process of budgetary control includes
Preparation of various budgets
Continuous comparison of actual performance with the
standard or the budgetary performance.
Revision of budgets in the light of changed circumstances.
A system of budgetary system should not become
rigid; there should be enough scope for flexibility to provideindividual initiative and drive, budgetary control is an important
device for making the organization more efficient on all fronts. It is
an important tool for controlling and achieving the organizational
objectives.
STEPS INVOLVED IN BUDGETARY CONTROL SYSTEM:
Establish a plan or target of performance, which coordinates
all the activities of the business.
Record the actual performance.
Compare the actual performance with the standards set.
Calculate the variances and analyze the reasons for the
difference.
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Take the necessary corrective action to set the actual
performance right.
OBJECTIVES OF BUDGETARY CONTROL:
To act as a guide for the management decision making when
unforeseen conditions affect the business.
To coordinate all the activities of the business
To plan and control income and expenditure so that maximum
profitability is achieved. To combine all the levels of management in preparation of the
budget so that there is individual initiative.
To direct capital expenditure in the most profitable direction.
To provide a benchmark against which actual results can be
compared.
To guide the management to remedy a given situation.
To ensure that sufficient funds and working capital is available
for the efficient functioning of the organization.
To clearly lay down responsibility and authority of each
employee so that valuable time is not wasted.
ADVANTAGES OF BUDGETARY CONTROL:
1. Budgeting helps to coordinate, integrate, and balance the
efforts of various departments in the light of the overall
objectives of the enterprise.
2. Budgets compel management to plan for the future and
become more effective and efficient in administrating the
business operations, it also instills into the manager the habit
of evaluating carefully their problems before making a
decision.
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3. Budgeting increases the participation of the employees in the
policy formulation and implementation, thus increasing their
morale and motivating them to work in harmony with the
organizational goals.4. Budgeting helps in proper utilization of existing resources,
both human and capital and also helps in minimizing wastage.
5. Budgeting improves the quality of communication as all the
procedures and rules are written and communicated to all the
employees in the organization, which results in better
understanding and harmonious relations among managers
and subordinates.
6. Budgeting helps the management to focus on significant
issues affecting the business, thus facilitating management by
exception and also helps in saving the precious time of the
top management by not involving in day-to-day affairs.
7. Budgeting measures efficiency and thereby enables self-
evaluation by the management. It also indicates the progress
made in attaining the enterprise objectives.
8. Budgeting facilitates control as all the relevant details are
clearly laid down. It also helps in making the management
more cost conscious.
CHARECTERISTICS OF A GOOD BUDGETING:
A good budgeting system should involve persons at different
levels while preparing the budgets. The subordinates should
not feel any imposition on them.
There should be a proper fixation of authority and
responsibility. The delegation of authority should be done in a
proper way.
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The targets of the budgets should be realistic, if the targets
are difficult to be achieved then they will not enthuse the
persons concerned. A good system of accounting is also essential to make the
budgeting successful.
The budgeting system should have a whole-hearted support
of the top management.
The employees should be imparted budgeting education.
There should be meetings and discussions and the targets
should be explained to the employees concerned.
A proper reporting system should be introduced; their actual
results should be promptly reported so that their performance
appraisal is undertaken.
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BUDGETING FACTORS AT TECUMSEH PRIVATE
LIMITED
PROCUREMENT:
Modes of procurement: There are two main modes of
procurement of raw material.
1) DIRECT PROCUREMENT: - Direct procurement means that the raw
materials are directly identifiable as part of the final product and are
directly used on machine.
2) CONVERSION: - In this process the base material is being
converted into final products through various processes applied on
to shape them and give them the need satisfaction power.
Conversion process not only converts the material into final
products but also gives an ultimate solution.
SOURCE OF PROCUREMENT:
It has mainly two sources of procurement of raw material.
1) DOMESTIC: - In this system mainly the procurement of raw
materials can be made from with in the country.
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2) IMPORTED: - In this system the procurement of raw materials can
be made from outside the country.
STRATEGIES OF MATERIALS MANAGEMENT: - The following
are the strategies followed by materials management in Tecumseh
Product India Ltd.
Two sources for all materials: Even though there is shortage of supply
from one supplier, it could be accommodated by the other source.
Price: The price can be fixed based on the competitors price.
Quality: Quality of materials differs from one supplier to the other.
Decision making: The activity of making a decision to buy the material
directly from supplier or to import the same.
PLANNING: - Budget planning determined how much of which
material, components, goods, labour, and other requirements are
needed and when. This activity is the responsibility of the planner or
controller. Planning process initiates coordination and classification
of sub goals to achieve major corporate goals.
TYPES OF BUDGETS: - The budgets are usually classified
according to their nature. The following are the types of budgets
which are commonly used:
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(A) CLASSIFICATION ACCORDING TO TIME:
(1)Long term budgets
(2) Short term budgets
(3) Current budgets
(B) CLASSIFICATION ACCORDING TO FUNCTIONS:
(1)Operating budgets
(2)Financial budgets
(3)Master budgets
(C) CLASSIFICATION ACCORDING TO FLEXIBILITY:
(1)Fixed budgets
(2)Flexible budgets
(A) ACCORDING TO TIME:
1) Long term Budgets: The budgets are prepared to depict long term
planning of the business. The period of long term budgets varies
between five to ten years. The long term planning is done by the
top management; it is not generally known to lower levels of
management. Long time budgets are prepared for some sectors of
the concern such as capital expenditure, research and development,
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long term finances, etc. These budgets are useful for those
industries where gestation period is long i.e., machinery electricity,
engineering etc.
2) Short Term Budgets: - These budgets are generally for one of two
years and are in the form of monetary terms. The consumers foods
industries like sugar, cotton, textile, etc. use shorter, budgets.
3) Current Budgets: - The period of current budgets is generally of
months and weeks. These budgets relate to the current activities of
the business, according to ICWA London. A current budget is a
budget which is established for use over a short period of time and
is related to current conditions.
(B)CLASSIFICATION ON THE BASIS OF FUNCTION: -
1. Operating budgets: - These budgets relate to the different
activities or operation of a firm. The number of such budgets
depends upon the size and nature of business. The commonly used
operating budgets are:
a) Sales budget
b) Production budgetc) Production Cost budget
d) Purchases budget
e) Raw Materials budget
f) Labour budget
g) Plant Utilization budget
h) Administrative and selling expenses budget, etc.
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The operating budget for a firm may be
constructed in terms of programmers or responsibility areas, and
hence may consist of:
(i) Programmed Budget(ii) Responsibility Budget
(i) Programmed Budget: It consists of expected revenues and costs of
various products or projects that are termed as the major
programmers of the firm. Such a budget can be prepared for each
product line or project showing revenues, costs and the relative
profitability of the various programmers. Programmed budgets are
thus, useful in locating areas where efforts may be required to
reduce costs and increase revenues. They are also useful in
determining Imbalances and inadequacies in programs so that
corrective action may be taken in future.
(ii) Responsibility Budgets: - When the operating budget of a firm is
constructed in term of responsibility areas it is called the
responsibility budgets. However responsibility areas may be
classified under three broad categories.
(a)Cost/expense center
(b)Profit center
(c) Investment center
2. Financial Budgets: - Financial budgets are concerned with cash
receipts, disbursements, working capital, capital expenditure,
financial position and results of business operations. The commonly
used financial budgets are;
(a) Cash budget
(b) Working capital budget
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(c) Capital expenditure budget
(d) Income statement budget
(e) Statement of retained earnings budget
(f) Budget balance sheet or position statement budget
3. Master budget: - Various functional budgets are integrated into
master budget. This budget is prepared by the ultimate integration
of separate functional budgets. According to ICWA London The
master budget is the summary budget in corporations functional
budget. Master budget is prepared by the budget officer and it
remains with the top level management. This budget is used to
coordinate the activities of various functional departments and also
to help as a control device.
(C) CLASSIFICATION ON THE BASIS OF FLEXIBILITY:
1) Fixed budget: - According to ICWA London, fixed budget is a
budget which is designed to remind unchanged irrespective of
the level of activity actual attained. Fixed budgets are
suitable under static conditions. If sales, expenses and costs
can be forecasted with greater accuracy than this budget can
be advantageously used.
2) Flexible budget: - A flexible budget consists of a series of
budgets for different levels of activity. It therefore, varies
with the level of activity attained. A flexible budget is
prepared aftertaking intoconsideration unforeseen changes in
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the condition of the business. A flexible budget is defined as a
budget which is by recognizing the difference between fixed,
semi-fixed and variable cost is designed to change in relation
to the level of activity.
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REQUISITES FOR A SUCCESSFUL BUDGETARY CONTROL
SYSTEM: - For making a budgetary control system successful,
following requisites are required: -
Clarifying objectives : The budgets are used to realize
objectives of the business. The objectives must be clearly
spelt out so that budgets are properly prepared. In theabsence of clear goals, the budgets will also be unrealistic.
Proper delegation of Authority and Responsibility : Budget
preparation and control is done at every level of management.
Even though budgets are finalized at top level but
involvement of persons from lower levels of management is
essential for their success. This necessitates proper delegation
of authority and responsibility.
Proper communication system: An effective system of
communication is required for a successful budgetary control.
The flow of information regarding budgets should be quick so
that these are implemented.
Budget Education : The employees should be properly
educated about the benefits of budgeting system. They should
be educated about their role in the success of this system.
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Participation of all Employees : The success of budgetary
control system depends upon the participation of all
employees of the organization.
Flexibility : Flexibility in budgets is required to make them
suitable under changed circumstances.
Motivation : Budgets are to be implemented by human beings.
Their successful implementation will depend upon the interest
shown by the employees.
BUDGETARY CONTROL
ADVANTAGES LIMITATIONS
Maximization of profit
Proper coordination
Provides specific aims
Tools for measuring
performance
Economy
Corrective action
Creates budget consciousness
Reduced cost
Determines weaknesses
Uncertain future
Revision required
Discourages efficient persons
Problem of coordination
Conflict among different
departments
Depends upon support of top
management
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COST VARIANCE ANALYSIS.
In Tecumseh Products India Pvt. Ltd. Cost variance analysis is
prepared based upon the actual cost of the period by comparing
actual cost with the budgeted or estimated cost.
The cost variance analysis is the process of analyzing the difference
between budgeted cost allowed for manufacturing a product and
actual cost incurred. It is the process of analyzing flexible budget
variances.
A variance is the variation between the standard or estimated cost
and the actual element. A variance or cost variance is the difference
between standard cost and the comparable actual cost for a
particular period.
Types of Variances:
The following three classes of variances are:
Cost variance:- Direct materials, direct labour overheads.
Sales variance.
Profit or Loss variance.
1. Cost Variance:
Managers make two major types of decisions in the planning and
controlling of costs.
A) Price Decisions.
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B) Quantity Decisions and the basis of these two
types of decisions.
There are two major sets of cost variances:(i). Price or rate variance and
(ii) Quality usage or Efficiency variance.
The sum of above two variances is the total variance.
2. Sales Variance:
A sales variance shows either the effect on
business changes in quantities of sales or prices obtained for sales
i.e., profit.
3. Profit or Loss Variance:
Profit or loss variance is the difference between
the total cost variance and the sales variance.
MATERIAL COST VARIANCE:
Material cost variance is the difference between the total
standard materials cost (SC) for the actual productions and the
actual cost (AC). It is the difference between the standard cost and
the actual cost of materials.
The formula for material cost variance would be:
MCR = (Standard cost of materials Actual cost of materials)
((SP * SQ) (AP * AQ))
Where SP stands for Standard Price
SQ stands for Standard quantity
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AP stands for Actual Price
AQ stands for Actual quantity
MATERIAL USAGE VARIANCE:
The material usage variance is equal to difference
between the standard quantity (SQ) required for actual production
and the actual quantity (AQ) used multiplied by the standard
material price (SP).
The formula for material usage variance would be:
MUV = (Standard Qty for actual production Actual Qty) x
Standard Price.
(SQ AQ)*SP
The material usage variance is divided into:
(i) Material Mix or Mixture
Variance
(ii) Material Yield Variance.
MATERIAL MIX VARIANCE:
When a product requires two or more raw materials in its make-up
then that is material mix variance. It is the difference between the
total quantity in standard production, priced at the standard
production, priced at the standard price and actual quantity of
material used priced at the standard price.
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The formula for material mix variance would be:
MMV = (Standard Qty Actual Qty) x Standard Price per unit.
MATERIAL YEILD VARIANCE:
In industries, it is possible to lie down that output will be a
particular percentage of total input of materials. In particular
situation, it may be given that normal less in production will be 20%
of input of materials. In a case like this, 80% of the total input of
material will be expected output. It actual yield obtained happens to
be different from the standard yield specified, there will be yield
variance is that portion of material usage variance which is due to
difference between actual yield obtained and standard yield
specified.
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CHAPTER-3
COMPANY PROFILE
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2.1.COMPANY PROFILE
The company was originally established and registered in 1963 under the name of
USHA REFRRIGERATION INDUSTRIES LIMITED (URIL). Usha Refrigeration
Industries Limited (URIL) started in 1963. URIL manufactured compressors for water
cooler, air-conditioners and air-coolers. Lala Charath Ramji who was from a
renowned industrial family of DCM and Coromendal Group of Companies started
URIL.
In 1970 the URIL was changed to Shriram Refrigeration Limited and the
business was also diversified towards manufacturing of diesel engines and water
coolers. Shriram Industries played a great role in the field and captured more than
50% of the market share in India. Shriram Industries also kept its hands in
international trade and were successful in exporting their products to the neighboring
countries, Nepal and Bangladesh.
In 1980 Lala Charath Ramjis son, Siddharth C. Shriram, became the
chairman cum Managing Director of the company. The period saw sea change in
industrial policy, which resulted in a great change in the industrial sector. In the
process for survival, Shriram went into Tech collaboration with Westing House, US
and was named as Siel Compressors.
Siel Compressors were the first Indian Company to
manufacture compressors. Later Westing House stopped manufacturing compressors
and Siel went into Technological Collaboration with Tecumseh Products Company
(TPC), USA in 1988.
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Tecumseh means Crouching Panther derived from chief of the Shawnee
Tribe (1768-1813), it started its operations to offer new state of art AW Series to
Indian customers. Subsequently TPC took over Siel Group in1997 and Siel Group
became 100% subsidiary of TPC. As soon as Tecumseh took over the company it
stopped manufacturing water coolers and restricted its production to
CFC/hermetically sealed compressors.
TECUMSEH PRODUCTS INDIA LIMITED (TPIL) was incorporated in New Delhi,
India with limited liability on January 30, 1997. TPIL is principally promoted on
behalf of Tecumseh Products Company (TPC), USA and its nominees hold its shares.
Tecumseh India is a 100% subsidiary to Tecumseh Products Company (TPC) USA,
Which is the worlds only full line, independent manufacturer of compressors. TPC
has 29 manufacturing locations in 4 continents. In India the company has 20 sales
offices and extensive networks of over 200 dealers and more than 600 registered
small-scale manufacturers.
TPC invested $80 million in Indian operation known as Tecumseh
Products India Pvt. Ltd (TPIPL). TPIPL has two states of art manufacturing facilities
at Hyderabad (Andhra Pradesh) and Ballabgarh (Haryana) with CADEM Center at
Hyderabad plant to meet Global Engineering needs.
TPIPL has gained core expertise in Research & Development, AW
Assembly and AW Machine Shops such that it acquired a Lions share of the Indian
Compressor market by gaining 50% share.
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TPIPL is an ISO 14001 and 9001 certified; American based Multi-
National Company, Which has core expertise in manufacturing compressors (mostly
hermetic) in the air conditioning and refrigeration industry in India. Tecumseh
Products Companys (TPC) entered India through a dual acquisition of Siel
Compressors Limited Hyderabad and the compressor division of Whirlpool India
Limited at Ballabgarh in July 1997. Tecumseh Products India Pvt. Ltd (TPIPL) is the
largest independent manufacturer of both air-conditioning and refrigerator
compressors in India. It has two state-of-the-art manufacturing facilities at Hyderabad
(Andhra Pradesh) and Ballabgarh (Haryana).
Tecumseh India is the preferred supplier to those who deal in the
AC&R Industry in India and in the Middle East, SAARC countries.
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HYDERABAD PLANT
The plant at Hyderabad manufactures compressors only for the Air-conditioners and
compressors for deep freezers, bottle coolers, and water coolers which are considered
to be the Worlds No. 1 in the 150 million compressor market a year. At Hyderabad
both reciprocating (AW series) and Rotary (RN series) compressors are
manufactured, with an installed capacity of 0.75 and 0.60 million units per annum
respectively. It is spread across 55-acres of land at Balanagar Industrial belt, 15 km
away from the Hyderabad City on the highway line going towards HMT Ltd,
Narsapur Road, and has been accredited with ISO 9001 and ISO 14001 certification
for best operational and environmental practices. The in house application
engineering testing facility is well equipped to constantly improve the performance of
compressors. The CADEM center started in 2001 as a center for Tecumsehs global
design needs. Today CADEM center undertakes not only the in sourced work from its
different manufacturing plants but also outsourced
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CAD/CAE work from the companies in automobile, aeronautical and
other verticals. Even this engineering facility is ISO 9001 certified.
The Hyderabad plant has six regional offices among which four
offices are at the metro cities: Delhi, Mumbai, Kolkata, and Chennai and the
remaining two are at Ahmedabad and Secunderabad. Besides these there are branch
offices and depots located in prime cities across the country.
The Hyderabad plant also has a network of about 177 dealers across the
nation and are preferred supplies to key original equipment manufactures (OEMs)
like LG, Voltas, Blue Star, Godrej, Videocon, Fedders, Amtrex, Hitachi, etc., TPIPL
Hyderabad plant was successfully in getting the ISO 9001 certification for
maintaining quality of the compressors in 1994 and for the eco friendly environment
maintenance the company has got ISO 14001 certification.
The management has started development activities in the following areas:
Effluent treatment plant
Tree Plantation.
Rainwater harvesting is to increase the ground water level and TPIPL
has the distinction of being the first organization in this regard.
Vermiculture is the process of utilizing canteen food wastage for
converting into natural meaner.
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DEPARTMENTS OF TPIPL (HYDERABAD):
Human Resource Department
Accounts Department
Attendance and Pay Office (A&PO)
Export Oriented Unit (EOU)
Research and Development (R&D)
Maintenance and Engineering Department
Quality Development of AW assembly
AW Press Shop
AW Machine Shop
Service Center
Dispensary
Chemical and Technological Laboratories
TPIPL Hyderabad has a total of 766 permanent employees as on which includes:
172 officers
232 Staff
362 Workers
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BALLABGARH PLANT
At Ballabgarh, Haryana TPIPL has invested Rs.200 crores for manufacturing
of Non-CFC compressors for refrigeration appliances. The Ballabgarh plant is one of
the best compressors manufacturing unit in Asia. The plant is extended on 21-acre
land on the Delhi Mathura, National highway and is an ozone-friendly zone. This
manufacturing facility has a production capacity of 1.5 million units per annum. It is
also an ISO 9001 certified facility.
The company strives to provide prompt, accessible after sales services,
and technological assistance. And in such a case it is critical and essential to have a
free flow of manufacturing information between its manufacturing plants and the
other offices like four regional sales offices, two branch sales offices, 9 depots, 194
registered dealers, and 600 registered assemblers nationwide.
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Tecumseh India deployed a gigabit LAN solution
using updated hardware and passive components. The solution design was based on
layer 3 switching technology, supported by a fiber backbone, on a gigabit interface for
interdepartmental connectivity.
The company now enjoys the benefits of a backbone, which offers high
throughput and bandwidth, and is capable of handling increased load in future. The
links are reliable and has very little downtime. And all this has helped the company to
carry out online ERP transaction with various other nationwide locations.
Tecumseh has notched up significant increase in business volume and
expanded customer base in the last few years, including overseas customers.
II. MARKETS
Competitors:
The Indian compressor industry has been in low gear for the past few years, recording
sluggish top line and moderate bottom line growth. Most companies faced a tough
time maintaining profitability levels. However, this was due to the overall economic
conditions rather than company specific factors. In fact, companies have taken some
tough decisions, in preparation for an economic up turn. In the recent years, the
compressor and drilling equipment industry has undergone a massive restructuring
and consolidation exercise. The several strategic moves made by the companies
helped them emerge leaner and stronger organizations, better equipped to face
challenges.
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Competition has been constantly intensifying in this industry with more
compressor manufactures going for strategic partnerships and the old players
revamping their operations. Atlas Copco Ltd, ELGI equipments, Kirloskar-Copeland,
BPL, Danfoss Industries, and Ingersoll-Rand Air solutions division are just some of
the major competitors to Tecumseh. Apart from these big names there are many mass
merchandisers which are becoming competitive in the local markets day-by-day.
One major development in the industry that has significantly altered the
markets dynamics has been the merger of Chicago Pneumatic (India) with Atlas
Copco (India) subsequent to the merger of their parents at the global level. This has
implications not only for Atlas Copco, but also for leading players like Tecumseh and
others. Atlas Copco discontinued manufacturing of compressor elements and decided
to assemble the product. According to the company, India lacks comparative
advantage in the manufacturing of compressor elements. Only the financial
performance would reveal the actual benefits of these initiatives.
Ingersoll-Rand hived off its gas compressors and pumps business in line
with its parents decision. Instead, it has decided to focus more on the growth of its
residual businesses. It has also forayed into new areas such as equipment rental and
refrigerator storage systems. These are relatively new businesses and the impact of
these businesses on the future cash flows and its contribution to the top line is yet to
be seen.
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ELGI has hived off unfavorable businesses in which it did not have a
competitive advantage and decided to concentrate more on core compressor business.
Its Pneumatic break business has already been hived off and its has tapered down the
production of multi-utility vehicles and plans to gradually close the multi-utility
vehicle business in which he does not have enough competitive advantage. It has
rearranged its entire operations by creating separate business units to concentrate on
core products. Apart from these initiatives, ELGI also undertakes turnkey projects for
setting up exclusive service stations for all major manufacturers and offers annual
maintenance contracts for all service station equipments. It has consistently been
increasing its presence in the compressor market to command 11.08% share as of
2009.
Even after such reign exercises taken up by the main competitors of Tecumseh
India, it continues to lead the pack of compressor manufacturers in India with a
whopping Rs. 300.8 crores sales (2004). Even though the market share of Tecumseh
India has come down to 14% (2003-04) from 18% (2002-03), it continues to be the
leader.
Customers:
Tecumseh India is the preferred supplier of compressors for many a best brands in
India, middle East and SAARC countries. Most of its customers are original
equipment manufactures (OEMs), distributors form a minor portion. Tecumseh is a
silent partner powering many big OEMs; few of them are discussed below:
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Fujitsu General is the fourth Japanese air-conditioner company to enter India after
Hitachi, Matsushita and the $4.5 billion Daikin Industries. Fujitsu General tied up
with Chennai based ETA engineering private Ltd to make the famed O General
brand window and split air-conditioners in Pondicherry sourcing completely knocked
down kits and technology from Fujitsu General. Mr. Yagi, President, Fujitsu General,
inaugurated ETA generals Rs. 30 crore, 60000 units per annum plant in Pondicherry
and formally launched the air-conditioners India. The ETA group plans to invest
similar amount in the second phase and gradually scale up the capacity to 2.5 lakh per
annum, by 2006.
Voltas-Fedders JV was a result of Fedders corporation, NJ, USA and Voltas
Limited, a TATA company, coming together to form a joint venture for the
manufacture of a range of room air-conditioners in India. The joint venture company,
universal comfort products Pvt Ltd is based in Dadra, India. Fedders and Voltas each
have a 50% interest in the joint venture, which will produce room and ductless split
system air conditioners. This way the very first time that such a manufacturing only
alliance has been formed in the air-conditioner industry in India. Voltass operations
are organized into four independent business specific clusters: air-conditioning and
refrigeration business group, international operations business group, unitary products
business group, and engineering products business group. As in 2004, Voltas has sales
amounting to Rs. 143 crores and Rs. 271 crores enjoys a market share of 7.8% and
7.1% in air-conditioning and refrigerator markets respectively.
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Whirlpool India was formed when Whirlpool Corporation entered into a joint
venture agreement with the TVS group to produce automatic washers at a plant setup
in Pondicherry. A modest beginning was made to establish the whirlpool brand in
India. In 1995 the whirlpool corporation acquired Kelvinator India ltd and entered
into the refrigerator market. Later in 1995, majority ownership was gained in the TVS
joint venture and the two entities were merged to form whirlpool India Ltd. The
whirlpool plant went from having no awareness to claim an awareness of up to 85%
and a market share of 25%. It has achieved a sale of Rs. 54.92 crores in 2004 in air
conditioning equipment with a market share of 2.14%. In contrast to air conditioning
equipment whirlpool is a behemoth in the refrigerators market with Rs. 803 crores
sales and a dominant market share of 29.88% in 2004.
Zamil Air Conditioners (ZAC) was founded in 1974 as one of the first air
conditioning business to be established in Saudi Arabia and today is a leading
international manufacturer of air-conditioning systems and is No. 1 in the Middle
East. ZAC manufactures both consumer and commercial range of air conditioners and
has sales operations in over 55 countries in the Middle East, America, Africa,
Australia and the Far East. The company operations are structured into six Strategic
Business Units (SBUs) supporting six in-house products and service brands as well as
a number of international brands under the OEM sales. The six in-house brands are
Classic, Cooline, Coolcare, Clima Tech, Geoclima, and Kessler Clima Tech. Besides
the several business distinct business units, ZAC is also partners with GE appliances
Europe, since 1997, in the form of joint venture called Middle East Air Conditioners
(MEAC), for manufacturing and marketing of GE brand air conditioners.
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Haier Electrical Appliance is a china based $9.2 billion consumer durables and
electronics major, Haier Group, has recently taken control of 100% stake in Haier
appliances (India) Pvt. Ltd by buying out the initial Indian promoters. Haier
appliances (India) forayed into the Indian market when the Koreans, LG and
Samsung, had swamped the countrys consumer durable and electronics market. The
company had sought the Governments permission to carry out manufacturing
directly through original equipment manufactures (OEMs) as well as through contract
manufacturers in India. At present, the company is outsourcing its products from
domestic appliances manufacturers such as BPL and Voltas. The company plans to
make India as a production base for exports to neighboring countries in the near
future.
III. OPERATIONS:
Tecumsehs operations can be organized into three business clusters. Each of these
commands into own well defined infrastructure for market coverage and service to
original equipment manufacturers (OEMs).
Compressors for air-conditioning:
Residential Air-conditioners.
Commercial Air-conditioning systems (both room and central) and
contract manufacturing.
Compressors for refrigeration:
Household refrigerators and freezers.
Commercial refrigeration applications including the freezers,
dehumidifiers and vending machines.
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CADEM center for global design needs and services:
CAD (computer aided-design) for product design, design automation,
re-engineering and cost reduction.
CAE (computer aided engineering) for structural and CFD analysis.
CAM (computer aided manufacturing) for designing tools and moulds.
Software and web development.
TPIPLS Vision:
To provide comprehensive solutions to customers in the field of cooling while
providing autonomous working environment for employees, to tap their creative
potential, bring out the best in them and optimize stake holders returns.
Vision Statement
It is our goal to be the global leader in all of
the Markets in which we choose to participate.
We will pursue disruptive technologies to
redefine our products.
TPILS Mission:
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To be recognized as the world leader in the supply of refrigerator and
air conditioning compressors.
To provide our customers superior products and services.
To create an environment in which our employees can grow to their
full potential and make difference.
To provide superior value to our stake holders.
To be driven to reach the highest possible standards of excellence in all
our endeavors.
Nothing will be done to compromise our integrity.
Mission Statement
We will leverage our global expertise in mechanical,
electrical, fluid handling, related components and services to
provide comprehensive solution for our customers needs
Compressors, Engines, Electric Motors, Pumps, Electronics and
Controls.
We will be best in class and most cost effective producer by
utilizing the principals of TQM, 6 sigma and lean.
Our organization will modify itself in response to changes
in environment at a pace and amount of change that can be made
without eliminating or impeding our ongoing effectiveness.Incisive, continuous strategic thinking will be well
communicated and shared by the organization.
5-S. Philosophies:
Tecumseh encourages its employees to follow these philosophies, which is the
Japanese way of working:
1. SEIRI (Sorting Out):
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a. Look around your work area and ask yourself is it really necessary for all
items to be there?
b. Separate items OK re-workable and rejected items.
c. Re- works the re-workable items and disposes off the rejected items.
2. SEITION (Systematic arrangement):
a. Items must be placed in pre fixed locations so that they are accessible and
can be easily used.
b. Items should be clearly identified by labeling them properly.
3. SEISO (Spic and Span):
a. Clean the workplace your self.
b. Clean all the equipment including tables etc., yourself.
4. SEIKETSU (Serene Atmosphere):
a. A clean workplace properly selected and with proper arrangement will
soon become dirty ifSEIRI, SEITON and SEISO are not practiced regularly.
b. To achieve a Serene Atmosphere the three steps ofSEIRI, SEITON and
SEISO should be continuously repeated.
c. We should keep our area of work neat and clean including your own attire.
5. SHITSHUKE (Stick to Self Discipline):
a. Follow rules and regulations strictly.
b. Adhere to timings and respect time.
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c. Conform to standards while working.
d. Follow the prescribed operational standards.
TPIPLs Quality Policy:
Committed to total customer satisfaction by meeting their evolving needs,
expectations and aspirations stated, implied or latent.
Striving to provide products and service of global quality standards and to
reach a position of leadership in the field of operations, setting new values.
Continuous improvement across the organization and upgradation of product,
technology and process supportive environment, at least const to society shall be the
means to achieve the goals.
The approach will be through proper systems and procedures and total
involvement of employees, vendors and other business associates.
TPIPLs Environmental Policy:
The vision of Tecumseh India is to be a serene green and eco-friendly co-operation
carrying our all its operations contributing to preservation of environment and natural
resources for the benefit at large.
Among others this can be achieved through:
Allocation of company wide priority for sustainable development with total
involvement and commitment.
Evaluation and up gradation of current technologies, products and raw
materials for minimization, handling and disposal of solid, liquid and gaseous wastes.
Realization of tangible objectives and targets set for continual improvement to
control and prevent pollution and conserve resources.
Legal compliance and going beyond setting new standards.
Meeting international expectations such as Montreal protocol, 1987 in phasing
our CFCs as refrigerants in our compressors.
Training and propagation of Knowledge on environment.
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TPIPLs Key Business Objective:
Set the world industry standard of excellence for customer satisfaction.
Achieve total quality.
To attain and surpass global quality and reliability standards for our products.
Maintain clear technology leadership.
Market share leadership with focus on customer needs.
Meet business and financial commitments.
TPIPLs Seven Deadly Sins:
1. Inconsistent product Quality
2. Slow response to market place
3. Lack of innovative and competitive product
4. Uncompetitive cost structure
5. inadequate employee involvement
6. Unresponsive customer service
7. Ineffective resource allocation
Advantages of 5-S:
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Operations can be performed without error.
Proceeding in a well regulated fashion resulting in fewer defective items
thereby increasing the overall quality of products.
Operations can be performed safely and comfortably, reducing the chances
of accidents. Machinery and equipment can be carefully maintained, reducing
the number of break downs.
Operations can be performed efficiently, eliminating waste thereby
increasing the efficiency and productivity.
Strategies and processes at TPIPL:
Workplace improvements (5 S Philosophies)
Creativity club
KRAs (improvements/suggestions)
Variable earnings sharing of value addition
Agreement process organization needs
Non conformance reporting /audits
Open house/communication meetings
Team assessment and feedback
Changing life styles.
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IMPORTANT EVENTS
In the year 2000:
TECUMSEH fully acquired
Sri Ram, Hyderabad
Whirlpool compressor, facility at Faridabad/Ballabgarh.
In the year 2001:
Development of Plant in Ballabgarh
In the year 2002:
Amalgamation with TIPL
In the year 2003:
Voluntary Retirement Scheme
Industrial Unrest and lockout in the first half of the
year.
Export obligations not met during the year.
High foreign outgo.
Obligations met towards customers by importing
finished goods and selling at a loss.
In the year 2004:
Setting up of the CADEM Center
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In the year 2005:
Setting up of a 100% EOU for export of compressors
and its parts.
Expansion in installed capacity at the Hyderabad plant.
Total foreign outgo reduced drastically.
Improvement in the market for compressors as a result
of an improvement in the market for air-conditioners
and refrigerators.
In the year 2006:
This year export showed a growth of 3 times over
previous years involvement.
AW capacity expansion program
Company has launched two new commercial models of
MLA series compressors.
Has won the Green Tech Environment Excellence
Silver Award in the countrywide competition among
the engineering industries.
In the year 2007:
Tecumseh compressors for china.
Tecumseh posts 84% rise in export earnings.
Tecumseh India to setup rotary compressors unit.
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BOARD OF DIRECTORS
Mr. Todd W Herrick : Chairman & CEO
Mr. RKP Shankerdass : Director
Mr. MG Ramachandran : Director
Mr. Vipin Sondhi : Managing Director (till Jan 7th, 2007)
Mr. John H Ferguson : Director
Mr. James F Curley : Director (till Nov 7th, 2006)
Mr. Kent B Herrick : Director
Mr. James S Nicholson : Director
Mr. Eric L. Stolzenberg : Director (from Jan 19th
. 2007)Mr. R.K. Sachdeva : Director & CFO (from Nov 7th, 2006)
Company Secretary
T. Venkat
Registered Office
Balanagar Township, Hyderabad-500 037
Andhra Pradesh
Auditors
M/s Price Waterhouse, Chartered Accountants
Bankers
Allahabad Bank
State Bank of Hyderabad
Standard Chartered Bank
ICICI Bank
HDFC Bank
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3.2.INDUSTRY PROFILE
Indian electronics and IT plays a major role in both the production and exports.
During the year (1992-97), the electronics industry has achieved an annual growth of
20% in production and over 40% in exports.
The production in the year (1997-2002) is targeted at about Rs.380 billion with a
growth rate of 37% and exports at about Rs.490 billion with a growth rate of 52%.
Overall production is based on Indian Electronics industry which is widely distributed
and there are more than 3500 units engaged in the electronic production. Which
include in 13 central public sector units with 29 manufacturing establishments, 65
units in state public sectors, 600 units in organized private sector and more than 2800
units in small scale sectors.
Electronics has made life simple. All of us in some form or other, directly or
indirectly are using electronics goods. Demand for electronics goods has led to the
establishment of many manufactures and development is on day-to-day basis. The
thermal, hydro, nuclear plants and power transmission industries play a vital role for
the establishment of heavy electronics industry.
The industry having a wide scope because of rapid improving technologies because of
such wide applications of electronics, there are several producers in different fields of
electronics, with the announcement of new industrial policy (NIP) in 1991 all the
Indian firms were exposed to global competition and foreign currency transactions in
a big way.
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ABOUT AIR COMPRESSORS:
Air compressors provide air at pressures higher than atmospheric. Refrigeration
compressors and air conditioning compressors are designed specifically for airconditioning, heat pumping, and refrigeration enclosure air conditioners remove the
heat generated by electronic devices from the inside of cabinets or enclosures.
Industrial air filters reduce the number of particles in the air that passes through
them. Breathing and ventilation air systems provide reliable and safe air supply
sources to workers in hazardous industrial environments.
Compressed air-purgers and vortex coolers are used for spot heating or cooling
applications.
Industrial air filters reduce the number of particles in the air that passes
through them. Air filtration supplies the means to reduce the level of particulates in
the air to a cleanliness standard required by any definition of air conditioning. It
extends from the simple task of preventing lint and other debris from plugging
heating/ cooling coils to removing particles as small as 0.1 micron which could cause
a short circuit on microchips.
Refrigerant compressors are designed specifically for air conditioning,
heat pumping, and refrigeration. Small, stand-alone compressors are not included
within this grouping. Refrigerant compressors are large-scale units specifically
designed to be the heart of an industrial cooling or air-conditioning system (HVAC).
They are integral components of the refrigeration cycle, in which refrigerant gases are
cyclically evaporated and condensed, absorbing heat from the load to be cooled, and
moving to an open environment where it is dissipated. The compressor serves two
main functions: to compress low pressure, low volume gases into high pressure and
temperature gases, and to remove vapor from the evaporator to maintain a low boiling
point. There are three main types of refrigerant compressors: scroll, screw, and piston.
Other compressor styles are available, but they are less common.
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CHAPTER-4
DATA ANALYSIS
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ANNUAL BUDGETS
TABLE 1: PRODUCTION BUDGET
AW all Models In Units
Particulars Year
2007 2008 2009
Sale of units 750000 625000 600000
Add: Closing Stock (as on 31st December) 110500 30000 50000
860500 655000 650000
Less: Opening Stock (As on 1st January) 110500 110500 30000
Total Production in Units 750000 544500 620000
GRAPH 1: PRODUCTION BUDGET
750000
544500620000
-50000
50000
150000
250000
350000
450000
550000
650000
750000
850000
Units
2007 2008 2009
Years
Production Budget
INTERPRETATION
Here production budgets for three years i.e., from the year 2007 to2009 are compared. The production, by observation, to the chartabove is self explanatory that the estimations or the budgetedfigures of production in units has constantly decreased andincreased in the year 2009. The slight change in the production ofunits is acceptable as it shows a favorable change.
The product cost figures are available in the followingchart for the reference purpose only.
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While calculating percentage changes year 2007 is taken as baseyear:The percentage change in the year 2009 decreased to 72.6%.
The percentage change in the year 2009 decreased to 82.67%, but
slightly increased from the year 2008
.TABLE 2: PRODUCTION COST PER UNIT
AW (Domestic and Exports) all models
Particulars Year
2007 2008 2009
AW 1500 Q Actual Material Cost 2387 2417 2782Add:Consumables 181 186 175Rejection Cost 27 25 20Power Cost 100 85 65Wage Cost (Labour) 290 250 278New Lines (Stomat, Talent, andLamination) 30 - -Freight Inwards (1.14%) 29 29 22
Warranty 40 44 38PRODUCTION COST PERUNIT 3084 3036 3380
TABLE3: ACTUAL PRODUCTION
AW all Models In Units
Particulars Year
2007 2008 2009
Total Production in Units 411013 591323 213476
Total Production in Units 411013 591323 213476
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TABLE 4: CALCULATION OF PRODUCTION VARIANCE
CALCULATION OF PRODUCTION VARIANCE
(BUDGETED VS ACTUALS)
In Units
Year Budgeted Actual Variance Result
2007 750000 411013 -338987 Adverse
2008 544500 591323 46823 Favorable
2009 155000 213476 58476 Favorable
1449500 1215812 -233688
GRAPH 2:PRODUCTION VARIANCE
INTERPRETATION
The variance in the year 2007 comparing to budget vs. actual isvery unsatisfactory and the result is expressed as adverse. Thereason behind is, the overestimation of the budgeted figures overactual.
In the year 2008 & 2009, the variance is positive and it isexpressed to be favorable performance.
The overall variance of the three years i.e., from 2007 to2009 is negative. Hence, there is a curious requirement to reviewthe budgets. Concentration of performance appraisal in productionis at most desired.
Note: In the year 2009, the actual direct labour costs are availableonly till March '08 i.e., for three months. Hence budgeted figures forvariance purpose are adjusted for three months.
TABLE 1: DIRECT LABOUR BUDGET
ProductionVariance
-400000-200000
0200000400000600000800000
1000000
20072008 2009
Years
Units
Budgeted Actual Variance
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Particulars Year
2007 2008 2009
Production in Units 750000 544500 600000Labour hours per unit (in hrs) 3.93 1.93 2.24
Total Hours (in Hrs) 190600 280825 267300
Rate per hour (in Rs.) 78.17 56.32 43.56
Total Direct Labour Amount 119193770 126531000 93169261
GRAPH 1: DIRECT LABOUR BUDGET
119193770 126531000
93169261
0
20000000
40000000
60000000
80000000
100000000
120000000
140000000
DirectLabourCost
2007 2008 2009
Years
Direct Labour Budget
INTERPRETATION
From the above data direct labour budget for three years right from 2007 to2009 are compared. The direct labour cost has increased in tune withdecreased production. This shows there is a lot of expenditure incurred in theyear 2008.
A gradual decrease has been found in the year 2009 comparing tothe base year 2007.
The level of expenditure is controlled up to a maximum level bythorough revisions.
While calculating percentage changes, 2007 is taken as base year.The percentage change in the year 2008 increased to
106.16%, which is beyond the limit. This shows over expenditure.
The percentage change in the year 2009 decreased to 78.17%,showing that the strict management control on this issue in this year.
TABLE 2: ACTUAL LABOUR COST
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Particulars Year
2007 2008 2009
Production in Units 411013 591323 213476
Labour hours per unit (in hrs) 2.45 2.72 3.74
Total Hours (in Hrs) 167480 217087 56967.5Rate per hour (in Rs.) 68.35 55.99 59.18
Total Direct Labour Amount 91581564 97243000 26974347
TABLE 3: CALCULATION OF DIRECT LABOUR VARIANCE
CALCULATION OF DIRECT LABOUR VARIANCE(BUDGETED VS ACTUALS)
Year Budgeted Actual Variance Result
2007 119193770 91581564 27612206 Favorable
2008 126531000 97243000 29288000 Favorable
2009 23292315 26974347-
3682031.8 Adverse
269017085 215798911 53218174
GRAPH 2: DIRECT LABOUR VARIANCE
INTERPRETATION
In The year 2007 and 2008, all the budgeted actual and variancefigures are showing positive expenditures hence the variance is
Direct Labour Variance
-50000000
0
50000000
100000000
150000000
2007 2008 2009
Years
DirectLabourCost
Budgeted ActualVariance
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favorable, but whereas in the year 2009 the variance is showingadverse as the actual expenditure is exceeding the budgeted figure.
It is suggested that strict supervision may yield favorable results.
Note: In the year 2009, the actual direct labour costs are availableonly till March '08 i.e., for three months. Hence budgeted figures forvariance purpose are adjusted for three months.
TABLE 1: SALES BUDGET
Particulars Year (Rs. In Lakhs)
2007 2008 2009
Domestic Sales: Rate 3765 4492 4205
Quantity17500
010000
010000
0Value (Rs. In Lakhs) 6589 4492 4205Exports: Rate 3600 3918 4145
Quantity57500
052500
050000
0
Value (Rs. In Lakhs) 20700 20570 20725Combined Sales Value (Domesticand Exports):
Value (Rs. In Lakhs) 27289 25062 24930
GRAPH1:SALES BUDGET
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27289
25062 24930
23500
24000
24500
25000
2550026000
26500
27000
27500
Sales(Rs.in
Lakhs)
2007 2008 2009
Years
Sales Budget
INTERPRETATION
The year 2007 is clearly indicating high sales while comparing to thesuccessive years. It is the combination of total sales includingdomestic and exports. The increase in sales in the year 2008 is dueto excess production.
In the year 2008, the total sales value has drastically decreased dueto less production. Quite improvements are required for furtherrecovery.
In the year 2009, though the production has increased, sales did
not improve. Variation is very huge. Hence, quick redressal to theproblem of sales is desired.
The percentage decreased to 92 and 91 for the years 2008 and2009 respectively compared to base year 2007.
TABLE 2: ACTUAL SALES
Particulars Year
2007 2008 2009
Combined Sales Value(Domestic andExports): 2115514759 2313188784 727495314
Value (Rs. In Lakhs)211551475
9231318878
472749531
4
TABLE 3: CALCULATION OF SALES VARIANCE
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Year Budgeted Actual Variance Result
2007 27289 21155 -6134 Adverse2008 25062 23132 -1930 Adverse2009 6233 7275 1042 Favorable
GRAPH 2:SALES VARIANCE
INTERPRETATION
The budgeted sales value is overestimated to the actual salesthrough which the result of sales budget in the year 2007 and 2008is showing adverse.
In the year 2009, excellent improvement is evident from the abovegraph and as such it indicates favorable result. The performance insales budget in the year 2009 is expressed to be excellent.
Keeping the same spirit, may yield fruitful results andleads to further growth opportunities. Domestic sales are to beincreased as a remedy.
Note: In the year 2009, the actual sales value is available only tillMarch '08 i.e., for three months. Hence budgeted figures forvariance purpose are adjusted for three months.
Sales Variance
-10000
0
10000
20000
30000
2007 2008 2009
Years
Sales(inLakhs)
Budgeted Actual Variance
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TABLE 1: BUDGETED INCOME STATEMENT
(RECIP, ROTARY AND CADEM)
ParticularsYear (Rs. In
Lakhs)
2007 2008 2009
Net Sales 41159 37632 30707Less: Cost of Sales (total) or COGS 36218 32503 26522
Gross Profit 4941 5129 4185Less: Total Overheads 4698 4639 5106
Profit Before Tax 243 490 -921Add: Other Income/DEPB 1829 1298 1245
CADEM Profitability - - 270Profit (including other income) Before Tax 2072 1788 594Less: Tax Provisions 30 - -Net Profit/Net Income/(Loss) 2042 1788 594
GRAPH 1: BUDGETED INCOME STATEMENT
2042 1788
594
0
500
1000
1500
2000
2500
Profit/Income(in
Lakhs)
2007 2008 2009
Years
Budgeted Income Statement
INTERPRETATION
From the year 2007-2009 there is a gradual decrease in thebudgeted figures of profit or income statement, which is evidentfrom the above chart. This is due to unexpected increase in thevalue of raw materials (copper per kilogram increased thrice to thenormal value).
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The variation between 2007 and 2008 is negligible as we see only anormal difference, but there is a drastic decline in the year2009almost predicting losses.
The percentage change has been showing a drastic decrease to
87.56% in the year 2008and to 29% in the year 2009 comparing tothe base year 2007.
TABLE 2: ACTUAL INCOME STATEMENT
Particulars Year
2007 2008 2009
Net Profit/Net Income/(Loss) 6192051-
76331610 93310955
TABLE 3: CALCULATION OF INCOME VARIANCE
S
(BUDGETED VS ACTUALS)
Year Budgeted Actual Variance Result
2007 2042 62 -1980 Adverse2008 1788 -763 -2551 Adverse2009 149 933 785 Favorable
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GRAPH 2 : INCOME VARIANCE
INTERPRETATION
There is an over estimation with regards to profits in the year
2007by looking into the chart , as the actual income is very lesscomparing to the budgeted income/profit which has resulted inadverse result. Lack of proper planning is visualized.
Though the budgeted income/profit statement in the year2008 is declined, even then the actual profit went into losses. i.e.,the actual loss is above 7 crores. Hence, the result is adverse.
In the year 2009, due to proper revisions and effectivebudgetary controlling techniques they recouped their profit back.
This is evident by seeing only three months statement, which isabove 9 crores. This is indicated to be excellent progress.
Income Variance
-3000
-2000
-1000
0
1000
2000
3000
2007 2008 2009
YearsBudgeted Actual Variance
ProfitorIncome(Rs.InLakhs)
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TABLE 1: MATERIAL PURCHASE BUDGET
Particulars Year (In Units)
2007 2008 2009Annual Production 750000 544500 620000Add: Closing Inventory 131400 23140 32806
Quantity 881400 567640 652806Less: Opening Inventory 36000 107438 32903
Materials to be Purchased 845400 460202 619903
GRAPH 1: MATERIAL PURCHASE BUDGET
845400
460202
619903
0100000
200000
300000
400000
500000
600000
700000
800000
900000
Units
2007 2008 2009
Years
Material Purchase Budget
INTERPRETATION
A zigzag curve is framed if a graph is plotted, by
observing the above chart. In the year 2007, material purchase is
very high. This may be due to high production volume.
In the year 2008, a sudden steep decline is visualizedshowing very less material volume. The reason behind is thedecrease in production volume. The performance in this year is verypoor, which can be affidavit by seeing income statements for theyear 2008.
In the year 2009, a good estimation, a proper revise, strict
supervisory control enabled the management to have an effectivecontrol over materials purchased.
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QUARTERLY BUDGETS
TABLE 1: SALES VOLUME BUDGET
MODEL UNITS
SEP OCT NOV DEC
AW 67541 70805 57060 81169RN 1000 2500 2500 7500AK 750 750 1800 1800AK- Kits 20833 20833 20833 20833AWJ - Kits 8333 8333 8333 8333
Total 98457 103221 90526 119635
GRAPH 1: SALES VOLUME BUDGET
98457 103221 90526
119635
0
20000
40000
60000
80000
100000
120000
Sales
(in
Units)
SEP OCT NOV DEC
Months
Sales Volume Budget
INTERPRETATION
The above mentioned configured figures are the extractsfrom sales volume budget prepared in the year 2009, which is thelatest data.
The models included in the sales volume budget are AW, RN,AK, AK Kits, and AWJ Kits.
Keen concentration required on sales volume in the monthof NOV in the successive years.
Seasonal fluctuations should be considered as very severefactors for sales variances. As the booms and depressions (business
cycles) changes at a fast phase during odd months or off seasonsTABLE 1: BUDGETED INCOME STATEMENT - 2009
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(RECIP, ROTARY AND CADEM)
Particulars AMOUNT (Rs. In Lakhs)
SEP OCT NOV DEC
Net Total Sales 3102 3302 2804 3961Less: Cost of Sales (total) or COGS:Materials Consumed 2110 2252 1888 2716Copper Hedging savings (50:50) -5 -4 -2 -1Consumables 150 157 134 183Power 50 53 45 64Rejection 16 17 15 21Warranty 10 13 16 19Repairs and Maintenance 15 15 15 15Direct Labour - Variable 79 79 79 79
Fixed Salary - Direct (Unionized) 101 101 101 101Fixed Salary - Indirect (White collar) 97 97 97 97Depreciation - US GAAP - Prod. 100 100 100 100Depreciation - US GAAP - Prod. Bldg 3 3 3 3Depreciation - US GAAP - Admin 4 4 4 4Depreciation - US GAAP - Admincomputers 9 9 9 9Travel 10 10 10 10Administration 81 81 81 81OHSAS implementation 0 0 0 0E&Y Audit fee 9 9 9 9Freight Outwards 50 55 50 68Publicity 4 4 4 4Sea Freight 20 20 13 21Commission 10 10 7 11C&F agents commissions 1 1 1 1Interest 113 113 113 106TDC expenses - Gen & Elec 8 8 8 8Contingency 6 6 6 6
Total Cost 3051 3213 2806 3735
Profit Before Tax 51 89 -2 226DEPB AW 146 146 97 158DEPB RN 0 1 1 4DEPB AK 0 0 0 0Profit (including other income)Before Tax 197 236 96 388CADEM Profitability -19 -20 -7 7Total Profitability 178 216 89 395
GRAPH 1: BUDGETED INCOME STATEMENT
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INTERPRETATION
The quarterly budgeted income statement mentioned above is thepictorial connotation of the year 2009. The months are taken fromSEP to DEC.
The net total sales are expressed to be satisfactory in the month ofSEP, OCT, and DEC. whereas in the month of NOV, a slight decreaseis notified.
Basically, the total cost of sales is to be controlled as it is anoutcome of the expenditure incurred on material consumed,consumables, power, rejection, lab our, a major difference in freightoutwards and so on.
The risk hedging factors by preparing quarterly budgets is indicated
as one of the effective budgeting control tool.
The profit before tax in the month of NOV is Negative, whereas inDEC an unexpected hike is visualized. The DEPB rate is running at7% in the current year. The profits including other income like DEPBbenefit is leading the profits towards satisfactory paths.
The CADEM Profitability is already in negative figures in the monthof SEP, OCT, and NOV. Hence the total profit ability is the outcome.Expertise guidance, strict supervision, in controlling costs is almost
required for keeping the same growth pace in total profitability.
Budgeted Income Statement
01000
2000
30004000
5000
SEP OCT NOV DEC
Months
Value(inLakhs)
Net Total Sales Total Cost Total Profitability
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TABLE 1: TOTAL MATERIAL COST BUDGET
TOTAL MATERIAL COST BUDGET
MODEL AMOUNT (Rs. In Lakhs)
SEP OCT NOV DEC
AW 1761 1696 1838 1772RN 54 92 160 121AK 18 18 44 44AK- Kits 124 124 124 124AWJ Kits 49 49 49 49Total 2007 1979 2215 2110
GRAPH 1: TOTAL MATERIAL COST BUDGET
2006 1979
2215
2110
1850
1900
1950
2000
2050
2100
2150
2200
2250
Value(inLakhs)
SEP OCT NOV DEC
Months
Total Material Cost Budget
INTERPRETATION
The quarterly total material cost budget witnessed above is the
clear indication for the months of September to December, 2009.The values are expressed in Rupees in Lakhs for themodels combined, naming AW, RN, AK, AK Kits, and AWJ Kits.
The material cost is moderately high in the month of sep, nov, anddec.
The costs incurred for AK, AK Kits, and AWJ Kits areexpressed to be absolutely normal.
The costs incurred on AW and RN models had drasticchanges. The total material cost control is absolutely satisfied. Theperformance in handling material cost is very high in the currentyear.
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TABLE 1: TOTAL LABOUR ABSORBTION BUDGET
MODEL AMOUNT (Rs. In Lakhs)
SEP OCT NOV DEC
AW 174 167 181 174RN 5 9 16 12AK 2 2 4 4AK- Kits 12 12 12 12AWJ Kits 5 5 5 5Total 198 195 218 207
GRAPH 1: TOTAL LABOUR ABSORBTION BUDGET
198195
218
207
180
185
190
195
200
205
210
215
220
LabourCost(in
Lakhs)
SEP OCT NOV DEC
Months
Labour Absorbtion Budget
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INTERPRETATION
Total labour absorption budget in the above chart is the imitation
for the months of SEP to DEC 2009.
The allocation of budget on permanent workers is
constant, whereas on temporary and contract basis workers are
fluctuating. Expenditure on blue collars and technicians is always
desired, whereas opting for badlis who are called to be surplus
workers is to be reduced.
For fruitful results and getting excellent profitability labour
budget controlling is always suggested.
Utilization of skilled labour progressively gives desired
results and it is also possible to curtail down unnecessary
expenditure on untrained workers.
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CHAPTER-5
CONCLUSION & SUGGESTIONS
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CONCLUSIONS
The study at Tecumseh Products India Pvt. Ltd. at
Hyderabad Plant is defined to be the most technical and
analytical study. The professionalism that encapsulates the
various degrees of performances at every step of financial
study is like a new game.
The actual subject matter, naming the project work on
BUDGETING and BUDGETARY CONTROL in a
manufacturing concern is the practical exposure drawn out
from the efforts of management of Tecumseh, Hyderabad.
The various budgets called financial budgets, operating
budgets, and their performances are studied and interpreted
according to the actual performance evidenced from past
three years.
The budgets are prepared on the basis of ANNUAL
BUDGETS AND QUARTERLY BUDGETS. By studying annual
budgets, it is well understood that the estimations, their
revisions, are factualized according to the past performances,
which are overestimated in the initial stages and got adjusted
in their successive stages.
Preparation of master budgets, fixed budgets, flexible
budgets are desired to be prepared to have easy and fast
access to the data required by the staff and line management.
As the company incurred huge unexpected losses in the
previous two years there is a lot of requirement to review its
standards, estimations and follow accordingly.
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SUGGESTIONS
Financial interpretations for each and every budget are
required to be clearly analyzed and frequent revisions for
setting dynamic goals according to the changing market
conditions may lead to the chasing of the actual target i.e.,
becoming the global leader in the markets which ever they
choose to participate.
Good review of mission, not from the point of theory,but required exact practical implementations. Preparation of
complicated data always leads to many conflicts, requires lot
of time and labour and this may delay decision making as well
as the information costs.
Collection of latest market information regarding the
cost of raw materials, quality of raw materials, competitor
prices, alternative suppliers, growth opportunities, the
diversifying marketing expansion, upgradation of technology,
observation of business cycles, SMART production methods,
SWOT analysis, concentration of skilled labour are some of
the important pre-requisites.
As the business of Tecumseh depends basically on
exports up to a larger extent, increasing global standards is a
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