Project Report On Costing and Cost Reduction

BANSILAL RAMNATH AGRAWAL CHARITABLE TRUST S
VISHWKARMA INSTITUTE OF MANAGEMENT

KONDHWA, PUNE 411048
A
PROJECT REPORT
ON
COSTING ANDCOST REDUCTION

OF
ROTARY AIR LOCK VALVE
AT
SNEHA INDUSTRIES
SUBMITTED BY
PRASHANT R. TAMBEKAR
MBA II
SUBMITTED IN PARTIAL FULFILMENT FOR DEGREE OF MASTER OF

BUSINESS ADMINISTRATION
DURING THE YEAR

2006-2007
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www.final-yearprojects.co.cc | www.troubleshoot4free.com/fyp/
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 TRUSTS
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
INDEX
CHAPTER CHAPTER NAME PAGE NO.
NO.
1 Executive Summary 1
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2 Objective and Scope 2
3 Company Profile 3
4 Product information 5
5 Conceptual background 7
6 Cost Sheet 16
Allocation and Absorption of indirect
7 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
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 thats 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
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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 RAVs 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.
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:-
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So as to study the firm from various points of view, studying different
areas, their importance and finding inefficiency of that particular area.
SCOPE OF THE PROJECT:-

1) Cost sheet will be useful for price restructuring. Mr. S.M.Tambekar can
decide profit margin and thereby decide the selling price. It is observed
that manufacturing price is more than market price; in this regard I have
advised to adopt business policies like competitive advantage using
Product Differentiation.
2) I added some techniques of cost reduction in some functional areas
which will reduce the manufacturing cost of the Rotary Air lock Valve and
thereby increase the profits.
3) Ratio analysis helps to appraise the firm in terms of their profitability and
efficiency of performance. Ratio analysis may be able to locate and point
out the various areas which need management attention in order to
improve the situation.
COMPANY PROFILE:-
Sneha group of Companies had started its operations in 1984.group of

companies consists of- 1) Shree trading corporation.
2) Sneha Industries.
3) Sneha Bearing 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
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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.
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, RAVs 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. Companys bearings are also installed in some of the
countries like Egypt, Indonesia, and New Zealand.
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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.
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
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11. Coffee
12. Cereals.
Features: -
Sturdy eight blades C.I. Rotor with EN8 shaft with fixed or adjustable
blades.
Removable side plate for easy access to replace
seals.
Air purge to prevent leakage and protect
packing.
Maintains vacuum or pressure up to 20 W.G.
Chain drive with TEFC motor.
Heavy duty Cast Iron body.
Simplified drive assembly.
Capacities in Cubic Feet per Minute
(Based on 8 vane rotor and 100% fill factor)
Size H.P. 15 RPM 20 RPM 25RPM 30 RPM

6 .5 1.05 1.4 1.75 2.1
8 .5 2.7 3.6 4.5 5.4
10 .75 5.4 7.2 9.0 10.8
12 1.0 15.75 21.0 26.25 31.5
Features of Rotary Air Lock Valves (fabricated): -
1. Heavy gauge all welded construction.
2. Fabricated Rotor with EN8 shaft with Spring Steel Adjustable
Blades.
3. Inspection doors are provided on the body.
4. Maintain pressure/ vacuum up to 20 W.G.

5. Chain/ Coupling Drive with TEFC motor.
6. Removable side plates for easy access to replace seals.
7. Optional: - Zero speed sensor package.
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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.
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.
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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
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
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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
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.
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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.
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
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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 salesmens working time.

b) Whether rearrangement of territories can bring about cost reduction;
c) Whether channels of distribution are efficient and economical;
d) Whether there is an effective systems of sales promotion;
e) Whether market research is adequate;
f) Whether any alternative media of advertisement can lead to cost
reduction; and
g) Whether the method of distribution chosen is most efficient in terms of
factory and warehouse locations, distribution and customer locations
so on;
7. FINANCE: - the effective employment of capital in a business is of
paramount importance. For example, the investment in the right
machinery at the right time can yield significant cost 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.
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:
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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
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
supervisors salary is not so much per unit. But it can be said that supervisors
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
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(add) office and administration overheads
Office stationary 50
Financial expenses 50
Salary (office) 600
Telephone 200
Postage 80
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
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Salary (office) 600
Telephone 200
Postage 80
Printing 50
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
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Salary (office) 600
Telephone 200
Postage 80
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
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Salary (office) 600
Telephone 200
Postage 80
Printing 50
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 Poonawalas 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.
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= Rs. 200/ unit.
4. Expenditure for water is apportioned in the same way like lighting and
heating. Yearly expenditure for water = Rs. 1100.
5. works managers 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
9% 32% 45% 14% 100%
proportion
Weighted
contribution 155 412 816 525 1908
margin
Total fixed cost 8,16,890
8,16,890
Overall break
even quantity 1908
=271
Product wise
break even 24 87 122 38 271
quantity
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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 Vendors end.
2. Vendors 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.
- 30 -
2. Receipt of good may be of inferior quality due to lesser time taken to
manufacture the required material.
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 firms 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
- 31 -
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 organizations success.
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.
- 32 -
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
- 33 -
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
- 34 -
MARKETING FUNCTION:-
Functions of Marketing are as follows: -
Procure maximum profitable orders, reliable customers 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 debtors period is 45 days, so give emphasis of
recovery from debtors and try to reduce debtors 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.
- 35 -
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 customers complaints.
Every time after the receipt of the customers complaints the
company has to send Sachin Phasale to check the intensity and correct
the error.
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 170,373
octroi
To fuel and power 88,688
To gas and water 9,990
To factory rent 11,638
- 36 -
To payment to 97,755
contractor
To labour charges 2,44,970
To repair and 1,48,062

maintenance
To bonus and 16,700

ex-gratia
To G/P 1,06,165
37,85,232 37,85,232
To office salaries 2,71,110 By G/P b/d 1,06,165

To office rent and 22,940
taxes
To computer 8,358
maintenance
To commission 82,527
To insurance 2238
To audit fees 15,113
To printing and 32,851
stationary
To postage and 72,308

telephone
To books and 1735

periodicals
To traveling and 63,635
conveyance
To advertisement 67,802
To gardening 8,742
- 37 -
To depreciation on 94,407
assets
To ESIC paid 13,205
To labour welfare 5713
To testing 3402
To sales 3742
promotion
To security 77,783
charges
To sundry 1,46,651
expenses
To financial 40,973 By net loss 9,29,070
charges
10,35,235 10,35,235
- 38 -
www.final-yearprojects.co.cc |
www.troubleshoot4free.com/fyp/
Balance sheet as on 31.3.2006
Liabilities Amount (Rs.) Assets Amount (Rs.)

Capital account of Fixed assets 6,29,736
S.M. Tambekar
Opening balance 25,63,943 Trade 11,91,718
advances
Income tax refund 2997 Cash in hand 4,81,654

and bank
Director s 4,80,000 Sundry debtors 6,94,651

remuneration
Loss of the year as 9,29,070 Closing stock 1,68,680

per P&L account.
Previous year s (-)1,43,147

income tax & TDS
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
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.
- 39 -
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, 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
- 40 -
----------------------
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: -

1) Fixed assets turnover ratio
Net sales
= -------------------
Fixed assets
36, 16,552
= ----------------
9, 29,736
= 5. 74
- 41 -
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

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.
- 42 -
5) Debtors 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) Creditors turnover ratio

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.
- 43 -
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%
- 44 -
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.
2.1.2 Product factors, such as, the demand, image, features,
utility, function, design, life cycle, price, promotion, distribution,
- 45 -
differentiation, and the availability of substitutes of products or
services.
2.1.3 Marketing intermediary factors such as, levels and quality

of customers 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.
- 46 -
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 competitors products.
3.5 low cost financial sources.
- 47 -
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.
A differentiation firm can change a premium price for its products or
- 48 -
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 organizations 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,
- 49 -
4. Threat is an unfavourable condition in organizations environment which

creates a risk for, or causes damage to the organization. eg. high prices
of products, outsourcing.
- 50 -
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.
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).
- 51 -

Project Report On Costing and Cost Reduction

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BANSILAL RAMNATH AGRAWAL CHARITABLE TRUST S

VISHWKARMA INSTITUTE OF MANAGEMENT

COSTING ANDCOST REDUCTION

SUBMITTED IN PARTIAL FULFILMENT FOR DEGREE OF MASTER OF

DURING THE YEAR

DATE: - 5TH AUGUST 2006

TO WHOMSOEVER IT MAY CONCERN

This is to certify that Mr. PRASHANT R. TAMBEKAR, a MBA student of

For Sneha Industries

VISHWKARMA INSTITUTE OF MANAGEMENT

DATE: - 1ST AUGUST 2006

This is to certify that Mr. PRASHANT R. TAMBEKAR is a Bonafied

This is the Original study of Prashant R. Tambekar and the important

Dr. Sharad. Joshi Prof. Smita Sovani

I avail this opportunity to give my thanks to Mr. D. D. kulkarni;

Manager, Sachin Phasale; production supervisor, Sachin and Rajat; Accountant

8 Product wise breakeven quantity 26

This project includes costing and analysis of financial statement. In

1. To extract information Cost sheet and Ratio analysis.

SCOPE OF THE PROJECT:-

Sneha group of Companies had started its operations in 1984.group of

1) Shree Trading Corporation:-

Mission statement for Sneha Industries is Customer delight at cost paid.

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

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

Cost is defined as THE AMOUNT OF EXPENDITURE INCURRED ON

THE GIVEN THING MAY BE:-

Cost reduction exercises are planned campaigns to cut the expenditure.

2. ORGANIZATION: - A considerable amount of cost reduction can be

3. PRODUCTION PLANNING AND CONTROL: - Production planning and

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

6. MARKETING: - the marketing function may not lead itself so easily to

a) Whether there is optimum utilization of salesmens working time.

MAJOR DIFFICULTIES IN COST REDUCTION:-

Resistance by the employees of the organization to pressure to reduce

Cost Reduction Programme may demand attention of a number of experts from

COST BEHAVIOR (IN RELATION TO CHANGES IN OUTPUT OR ACTIVITY

COST SHEET FOR 6 RAV.

Particulars Rs. Rs.

From plant 1000

From outside 844

Direct expenses 720

= 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

Drawing office expenses 500

Welfare service expenses 20

Works manager s salary 830

Works cost 8134

(add) office and administration overheads

Salary (office) 600

Depreciation of office and furniture 50

Legal expenses 135

Audit fees and consulting charges 380

= cost of production 9729

(add) selling and distribution

= cost of sales 10,079

COST SHEET FOR 8 RAV.