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INTRODUCTION

Cost Accounting is a branch of accounting and as been developed due to


limitations of financial accounting. Financial accounting is primarily concerned with
record keeping and preparation of P & L account and balance sheet because of some
serious limitations such as fore casting and planning, decision-making and control the
cost accounting has developed as a branch.

Costing
The technique and process of ascertaining costs.

Cost Accounting
The process of accounting for cost which begins with recording of income and
expenditure and ends with periodical statements and reports ascertaining and controlling
costs.

Cost accountancy
The application of costing and cost accounting principles, methods and techniques
to the science, Art & Practice of cost control and ascertainment of profitability.

Objectives of cost accounting


Ascertainment of cost
Determination of selling price
Cost control and cost reduction
Ascertaining profit at each stage / activity
Assistance in decision making.

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Elements of cost

A diagram as given below shows the elements of cost described as under.

ELEMENTS OF COST:

MATERIALS COST LABOUR COST OTHER EXPENSES

DIRECT INDIRECT DIRECT NDIRECT DIRECT INDIRECT


MATERIAL MATERIAL LABOUR LABOUR EXPENSES EXPENSES

OVERHEADS

PRODUCTION/ WORKS ADMINISTRATION SELLING DISTRIBUTION


OVERHEADS OVERHEADS OVERHEADS OVERHEADS

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Direct materials

Materials which are present in the finished product or can be identified in the
product are called direct materials. For example, cloth in dress making, materials
purchased for a specific job etc.
Note: However in some cases a materials may be direct but it is treated as indirect,
because it is used in small quantities or due to any other suitable reason.

Direct Labour
Labour which can be identified or attributed wholly to a particular job, product
and process or expanded in converting raw materials into finished products is called
Direct Labour. For example, labour engaged on the actual production of the product or in
carrying out the necessary operations for converting the raw materials into finished
product.

Direct Expenses
It includes all expenses other than direct materials or direct labour which are
specially incurred for particular product or process. Examples of direct expenses include
– excises duty; royalty; surveyor’s fees etc.

Indirect Materials
Materials which do not normally form part of the finished product are known as
Indirect Materials. These are --- stores used for maintaining machines & buildings
(Lubricants, cotton, waste etc) --- stores use by service departments like powerhouse,
boiler - house, canteen etc.

Indirect Labour
Labour costs which cannot be allocated but can be apportioned to or absorbed by
cost units or cost centers is known as Indirect Labour. Examples of indirect labour
includes- charge hands, supervisors, maintenance workers; etc.

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Indirect Expenses

Expenses other than direct expenses are known as indirect expenses. Factory rent
and rates, insurance of plant & machinery, power, light, heating, repairing, telephone etc
are some examples of indirect expenses.

Overheads

It is aggregate of indirect material cost indirect labour costs, and indirect


expenses.
The main groups into which overheads may be subdivided are the following.

Production or works overhead


Administration overhead
Selling overhead
Distribution overhead

Cost Management

The techniques and process of ascertaining cost involve three steps, viz.
Collection of expenditure or cost date,

Classification of expenditure as per cost elements, function, etc. and Allocation &
apportionment of expenditure to the cost centric & cost units. The system accumulates
and classifies expenditure according to the elements of costs, and then, the accumulated
expenditure is allocated and apportioned to cost object i.e. cost centers and cost units. We
should therefore, know what are cost elements, cost centers & cost units.

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Calculation of cost of sales:

Direct Materials Cost X


Direct wages X
Direct Expenses X
_____________
Prime Cost X
Factory Overhead X
_____________
Factory Cost X
Administration Overhead X
_____________
Cost of Production X
Selling and Distribution Overhead X
_____________
Cost of Sales X
_____________

The cost of sales has increase during the period 2006-2009. In tandem with sales
but higher sales prices in the material because of high demand in south India. As A.P
government has taken up infortracture and irrigation project the demand may further
increase. Which will ultimately increase the profit.

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REVIEW OF LITERATURE

MEANING OF COST CONTROL:

The institute of cost and Management Accountants, London defines Cost Control
as, the guidance and regulation by executive action of the cost of operating an
undertaking.

The word guidance indicates a goal or target to be guided, “regulation” indicates


taking action where there is a deviation from what is laid down, executive action denotes
action to “regulate” must be initiated by executives i.e., persons responsible for carrying
our the job or the operation, and all this is to be exercised through modern methods of
costing in respect of expenses incurred in operating an undertaking.

To exercise cost control, broadly speaking the following steps should be


observed.

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OBJECTIVE OF THE STUDY:

A. The primary objective of the study is to examine the various cost control and reduction
techniques at TECUMSEH PRODUCTS INDIA LIMITED.

B. In addition to the above, the study also conducts a critical examination and enquiry
about the various elements like fuel cost, consumption cost, inventories turn over etc. for
the purpose of reducing the cost.

SCOPE OF THE STUDY:

The material industry is a capital-intensive industry. The cost of a new material


plant is equivalent to around 3 years' turnover, which ranks the material industry among
the most capital-intensive industries. The Profitability of the material industry is around
14% as a proportion of turnover (on the basis of pre-tax profits before interest
repayments).

The study will analyze the current cost structures, sales and profits realized at
ICL. The study will not evaluate the adequacy of current funding. Rather, it will
investigate modifications and alternatives that might improve the profit realizations.

The study lays more emphasis on the understanding of current cost accounting
procedures rather than taking an analytic view of the same.

Analysis has been done to understand the way the sales and profit realization
trends have been and recommendations made in order to reduce the costs in this highly
capital-intensive industry.

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METHODOLOGY OF THE STUDY:

To achieve the above said objectives the study is collecting the data from
secondary sources, as a major portion of the study is in descriptive manner, collection by
this form is suitable one. The required data for the study was collected from annual
reports of the company, cost records and other records maintained in the cost accounts
department at ICL.
Primary source:-Interaction with finance manager and cost Accountant of ICL.
(Financial Manager:- PONNUNAMB)
(Charted Accountant: - A.V. Raju)
Secondary source: - Secondary data was gathered through the Purchase Records, sales
data,
Time office Records, annual reports of the company and going through various subject
books and journals.

LIMITATIONS OF THE STUDY:

The following are the major limitations identified for the study

As the study is based on cost accounting records extraction of data from the
various sources is time-consuming process and the data for the study is taken for period
of four years. Within limited time duration of only two months, making it more
exhaustive.

Another important limitation of the study is the adjustments made for the unit
prices/quantity prices for the purpose of rounding off. As a result, a few variations were
encountered at the time of analysis of data.

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TECUMSEH
Company Profile:
Mr. Ray Herrick, a former employee of Ford motor company started the company
in 1930. In 1937 the company went into public with an offering of 25000 shares. Mr. Ray
Herrick has passed away in 1973, but vision lived through his son Ken, the current
chairman of the board and his grandson Mr. Todd W Herrick, who has been president and
CEO since 1984. Tecumseh India is a preferred supplier to world’s who’s of the AC & R
industry in India and in Middle East SAARC countries.

Tecumseh Products Company is a US $ 2 Billion cooling giant having a global


presence and a global vision with 24 manufacturing locations in 4 continents a cross 100
countries, employing over 20,000 people. It is the world’s largest independent
compressors manufacturing company with 10% market share of the global 150 million
units a year compressors market.

Tecumseh Products Company products are grouped into 3 principal industry


segments:
(a) Compressors Products
(b) Engine and Power
(c) Pump Products

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ORIGIN OF COMPANY
The company was originally established and registered in 1963 under the name of
USHA Refrigeration Industries Limited (URIL). Thisunit manufacturing compressors for
water cooler, air conditions and water coolers. Lala Sharat Ramji who was from
renowned industrial family of DCM and Coromondal group of companies started URIL.
In 1970 the URIL was changed to Shri Ram Refrigeration Limited, and the business was
divers towards manufacturing of diesel engines and water coolers. Shri Ram Industries
played a great role in the field and capture more than 50% of market share in India. Shri
Ram Industries also kept its hands in Mr. Siddharth C.Shriram became the chairman
cum Managing Director (M.D). The product saw sea change in the industrial policy,
which resulted in a great change in the industrial sector. In the process for survival, Shri
Ram went into technical collaboration with Wastling House US and was named as Siel
Compressors.

Siel Compressors were the first Indian Compressors. Later Wastling House stopped
Manufacturing Compressors and Siel went into technological collaboration with
Tecumseh Products Company USA in 1988. TECUMSEH mean CROUNCHING
PANTHER derived from chief of the SHAWNEE tribe.(1768-1813).It started operation
to offer new state of art AW series to Indian customers .subsequently Tecumseh products
company took over siel group in 1997 and siel group became 100% subsidiary company
of Tecumseh products company. As soon as Tecumseh took over the company stopped
manufacturing water coolness and restricted its production to CFC/hermetically sealed
compressor.
TPIPL is an ISO 140001 and 9001 certified American based company.
Tecumseh India is a 100% subsidiary 10 Tecumseh products company USA, which is
world’s only full line, Independent manufacturing locations is 4 continents across 100
countries employing over 19000 people. In India it has 20 sales offices and an extensive
network of over 200 dealers and move than 600 registered small scales industries. TPIPL
has gained core expertise in R&D, AW assembly and AW machine shops such that it
acquired a lion’s share in India compressors marked by gaining a 50% share.

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Hyderabad Plant:
The Hyderabad plant is on a 54 acres land at the Balanagar Industrial belt 15km away
from Hyderabad city on highway line going towards HMT Limited Narsapur road at
Hyderabad

plant. TPIPL manufacture air conditioner from 1200 BTU to 6lakhs BTU (British
Thermal Unit) and compressors for deep freezer, bottle coolers and water coolers which
are considered to be world’s no 1 in 150 million compressor market a year. The plant has
the manufacture capacity of 3000 units per day. This plant has a technology development
center with full R&D facility. The plant is also supported by two service centers AW
service center and MC Service center Hyderabad plant has six regional offices among
which four offices are metro cities. The remaining two are at Ahemadabad and
Secunderbad. Besides there are branch officers and depots located in prime cities across
the country. This plant also has network of about 177 dealers across the nation and his
preferred suppliers to key original equipment manufacturers like LG, VOLTAS,
BLUESTAR, GODREJ, VIDEOCON, FEDDERS, AMTRIX, HITACHI, etc. TPIPL
Hyderabad plant was successful in getting the ISO 9001 certification for maintaining
quality of compressor in 1994 and for eco friendly environment maintenance the
company has ISO 14001 certification. TPIPL Hyderabad has a total of 829 permanent
employees.

• In 1997 Tecumseh fully acquired SRI, Hyderabad


• In 1998 the turnover for the year was Rs.111.28 Crores with on operational profit
of Rs.14.14 Crores and a PBT of Rs.10.50Crores.
Company not only meets its target but also increase its market share and company think
about amalgamates.

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Employees for the current year are:

Permanent Worker 402


Staff 185
Officers 156
RSO 45
Total To-Dated 2010 Employees is: 788

*Company have 1000 0f contact Worker. It is divided as Badali or Special Badali.

AC Compressors Business:

• The Capacity is 3,00,000(expanding)


• The Plant is certified company with ISO 9001-2000 version, ISO 14001.
• Models AC applications-AW
• Certification VDE,
Products:

• Air-conditioning(12,000-29,500 BTU per/hr)

Compressors manufactured at Hyderabad:

• AW, series- AW, AWQ, AWA, etc.


• Rotaries(to be introduced in 2003)

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The management has started development activities in the following areas.
(a) Effluent Treatment Plant
(b) Tree Plantation
(c) Biological Treatment Plant

(d) Rain water harvesting is to increase the group water level and TPIPL has
the distinctions of being the first organization in this regard.
(e) Vermi culture is the process of utilizing canteen food wastage for
converting in to natural manual .

A new project under the name of VIBHAV ROTARY PROJECT is under


construction this completes by the month of july 2005 on completion of this
project, the production starts from January of 2006, with a production of 10,000
units perday with this project, the market share of production of compressors of
Tecumseh increases to 15%

BALLABGARH PLANT:

At Faridabad, in North India, they have a capacity of about a million


compressors. This plant is being relocated to an integrated unit at Ballabgarh with an
investment of Rs.200 crores (approximately). This state of the art plant for manufacturing
of non-CFC compressors will be one of the best compressors facilities in Asia. This is
located on a 21 acre land on the Delhi-Mathura National highway.

Mr. Vipin Sondhi, Managing Director, head Tecumseh India, which employs
about 2500 people.

Tecumseh India, a 100% subsidiary of Tecumseh Product Company USA will


continue its mission of offering the latest compressors to the discerning India customers.

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Tecumseh India is the manufacturing of compressors in the country catering to
segments of segments air-conditioners; domestic and commercial refigiration and is a
leading player with growing Indian market for compressors in all the three segments.

• The company was incorporated on Jan30, 1997 & operational commenced since
14th July 1997, after take over of compressor division of Whirlpool of India
Limited.
• The company acquired the compressor business from WOIL by taking over the
plant & equipment of the compressors division at Fardabad and the entire
facilities of Ballabgarh excluding the plastic division of WOIL.

• The acquisition was funded by equity, but since taken over, the company
supplies to WOIL its requirement of compressor.

• The company recorded a turnover of Rs. 26 Crores since taken over till 31st Dec
1997, since purchase by WOIL did not materialized the turnover has been less
which led to net loss Rs. 4.93 Crores.

• The company is in process of implementing a major expansion diversification


programme at Ballabgarh to enable the manufacture of Compressor, once the
project implemented by 1998 the company would be the pioneer in India in
manufacturing environment.

• In 1998 the company recorded a turnover of 99.98 crores against turnover of


Rs.26.12 crores for the period July 1997 to Dec 1997.

• The net loss recorded was Rs.6.87 crores against Rs.4.92 crores during 1997.

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Refrigeration +Commercial Business:
• Plant is certified ISO 9001, R-134 a certified Plant, and Own
Limitation, Wire drawing facilities.

• With capacity of 1,500,000


• Models MLA, TIE

Products:

Domestic Refrigeration (330-1200 BTU per hr) and


Commercial (700-3000 BTU per hr)
Compressors manufactured at Ballabgarh:

• TIE Models
• MLA Models
• MLA-CRA Models

TPIPL’S VISION:

“We are not going to simply provide Compressors are going to provide customer
solution”.
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.

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TPIPL’S MISSION:
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 the most effective cost producer by utilizing the
principles 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 on going
effectiveness.
• Incisive, continuous strategic thinking will be well communicated and shared by
the organization.

Our Mission Statement:


“Be the global supplier of choice for refrigeration and for air conditioning
components”
Our Commitments:

KEY BUSINESS ACTIVITIES:

1. Set the World industry standard of excellence for customer satisfaction.


achieve total quality.
2. To attain and surpass global quality and reliability standards for our products.
3. Maintain clear technology leadership.
4. Market share leadership with focus on customer needs.
5. Meet business and financial commitments.

IMAGE:

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To build up a high degree of customers confidence by sustaining International markets in
regard to supply of spare parts and after sale service. The HRD policy of Tecumseh is
manifested in the code of conduct of TPIPL listed below.

 Respect and mutual trust


 Integrity and fairness in all matters
 Team work
 Best customer service

TPIPL QUALITY POLICY:


• Committed to total customer satisfaction by meeting their needs, expectation
• And aspiration stated, implied or Latent
• Striving to provide products and service of global quality standard and to reach a
position of leadership in the field of operations, setting new values.
• Continuous improvement across the organization and up gradation of product,
technology and process supportive environment, at least cost to society share be
the means to achieve the goals.
• The approach will be through proper system and procedures and total
involvement of employee’s vendors and other business associates.

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TPIPL ENVIRONMENT POLICY: The vision of Tecumseh India is to be a
serene green and eco friendly co-operation carrying out all its operation contributing to
preservation of environment and natural resources for 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 waster.
• Realization of tangible objectives and targets set for continual improvement to
control and prevent pollution and conserve resources.
• Variable earning- sharing of value addition.
• Agreement process- Organization needs.
• Non Conformance reporting audits.
• Open house/Communication meeting.
• Team assessment and feed back.
• Changing life styles.

SAFETY POLICY
We, at Tecumseh India, firmly believe that protecting Health & Safety compliance of all
statutory requirement is of Para meal importance and are committed to the continuous
improvement of Safety & Health of employees and all others who are directly associated.
We shall achieve this through:-
1. Education and training.
2. Creating a safe working environment.
3. Providing adequate and required personal protective equipment.
4. Updating safety rules and procedures.
5. Continuous improvement through safety audits, Risk Assessment Audits.

The Employees and all other share:-

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 Follow safety rules and procedures.
 Use all the required personal protective equipment.
 Adopt safe working methods
 Take a proactive interest in maintaining safety standards

TPIPL’S SEVEN DEADLY SINS:


a) Inconsistent product quality.
b) Slow response to market place.
c) Lack of innovate & competitive product.
d) Un competitive cost structure.
e) Inadequate employee involvement.
f) Unresponsive customer service.
g) Ineffective resource allocation.

STRATEGIES & PROCESSES AT TPIPL:


 Work place improvement.
 Creativity club.
 KRA’S (improvement/suggestions)

The management has started development activities in the following areas


 Efficient treatment plant.
 Tree plantation.
 Rain water harvesting is to increase the ground water level and TPIPL has
distinction of being the first organization in this regard.
 Semi culture is the process of utilizing canteen food wastage for converting into
natural manure.

5-S PHILOSOPHIES:

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Tecumseh encourages its employees to follow philosophies which are the Japanese way
of working:
1. SIERI (sorting out)

 Look around yours work area &ask yourself “If it really necessary for all items to
be there”.
 Separate items “OK” rework able and rejected items.
 Rework the rework able items & dispose off the rejected items.

2. SELTON (systematic arrangement)

 Items must be placed in prefixed locations so that they are accessible & can be
easily used.
 Bites should be clearly identified by labeling the properly.

3. SELSO (spic & span)

• Clean the workplace yourself


• Clean all the equipment including table etc, yourself.

4. SELKETSU (Serene Atmosphere)


• A clean work place properly selected and with proper arrangement will soon
become dirty if SEIRI, SELTON and SELSO are not practiced regularly.
• To achieve serene atmosphere the three steps should be continuously repeated.
• We should keep our area of work neat and clean including your own attire.

5. SHITSHUKE (Stick to Self Discipline)

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5.1 Follow rules & regulations strictly.
5.2 Adhere to timing & respect time.
5.3 Conform to standards while working.
5.4 Following the prescribed operational standards.

The company pay an incentives of Rs. 75/- per month to its employees for following
there 5S philosophies.
ADVANTAGES OF 5-S
By through enforcing 5-S in each work area

1) Operation can be performed without error, proceeding in a well – regulated


fashion, resulting in fewer defective items thereby increasing the overall
quality of product.
2) Operations can be performed safely and comfortably, reducing the chances of
accidents.
3) Machinery and equipment can be carefully maintained, reducing the number
of breakdown.
4) Operation can be performed efficiently eliminating waste thereby increasing
the efficiency & productivity.

HOW TO ACHIEVE 5-S


 5’S can be achieved very easily by every employee by having a close look
 at his work place. He is to ensure that.
 No rejected/unwanted items are lying at his workplace.
 All items are kept in proper locations/order.
 Everybody should cooperate in keeping his & other’s area and the machines
clear.
 Follow the rules & regulations & maintain required standards.

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PLEASE CHECK

 Do you have any un useful thing around you?


 Are all the required things kept at their allocated places?
 Are you following the operating standards?
 Are you following the timing?
 Let us all review 5-S

Let us improve if we have any bad practices. Let us have a new in which we have a
more comfort able atmosphere and we manufacture a better quality product.

QUALITY IMPROVEMENT MEASURES:


Your Company’s Hyderabad & Ballinger plant are ISO 9001 (Version 2000)
certification. Your company is constantly meeting the quality requirement of Domestic &
International customers.

Environmental Protection & Conservation of Natural resources:


 During the year , ISO 14001 First Annual Assessment after Re-Certification Audit
carried out by the corporate Director of Environment Control Hyderabad unit had
scored 95 points and reveal any , non conformities.
 During Annual Compliance Assurance review carried out by the corporate
Director of Environmental control Hyderabad unit had scored 95 points and
Ballabgarh unit had scored 89 points out of 115 points for 2004.

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The Following Conservation measures were undertaken by your company.

 Usage of De – mineralized water in place of Municipal/Bore Water in process.


 I MECO BULLOWS Components cleaning equipment have been introduced in
EOU for effective cleaning of components to minimize water & chemicals.
 Export oriented unit is Completely R-134 a compatible plant.
 Energy efficient lighting in Machinery shop and canteen.
 Main factory canteen renovation & new kitchen equipment installation.
 Construction of new septic tank for effective treatment of sewage water.
 Mezzanine floor fabrication & erection to install Dehydration Oven.
 LPG Yard renovation to Accommodate 5 ton LPG bullet to cater pre
treatment plant requirements.
RESEARCH AND DEVELOPMENT:
1) Specific areas in which R & D carried out by the company:
 Designed and developed high out by the energy efficient compressors of
the existing and higher cooling capacity.
 Improvement in product quality
 Introduced new AEV models for R-12, AEVY models for R-134a and
AEG models for R-22 gas applications.
 Introduced AW 1000Q compressor for small size air-conditioners.

2) Benefits derived as a result of above R & D:


 Development of new products.
 Improvement in product quality.
 Optimization of processing parameters.
 Improved customer satisfaction and developed new customers.
 Lower power expense for the customer, thus reducing his recurring
expense.

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3) Future plan of action:
 Design improvements
 High efficiency, low noise compressors.
 Enhanced range of compressors.
 Product ionization of newly developed refrigerator compressor.
1) Efforts:
Technology absorption and innovation Company has focused on innovation
and is working on a refrigeration compressor, which would be equivalent or better
than the best available in the global market. It has upgraded its test lab facilities and
reduced its dependence on foreign test labs. This gives indigenous capability to
develop, test and launch new products.
2) Benefits:
Derived as a result of the above efforts is product improvement, cost
reduction, product development, import substitution etc.
Departments of TPIPL:
 Rotary Project (New)
 Human Resource Development
 IT
 Welfare Department
 FCD
 CTS & S----
 TDC
 Attendance and Pay Office (A & PO)
 Electronic Data Processing (EDP)
 Provident Fund and Credit Cooperative Society (PF & CCS)
 Maintenance and Engineering Department (MED)
 EOU
 Logistics

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 Quality Control Department
 AW PRESS Shop
 AW Machine Shop
 Dispensary
 Canteen
 Chemical and Technological Laboratories
 Legal Compliance and going beyond setting new standards
 Stores
 Material and Purchase
 Accounts and Audit
Finance Management:
1) Cadres
2) Functions of Finance department

Milestones:
1961: Technical Collaboration with Wasting House Electrical International
Company USA.
1962: The name IRI was changed to USHA Refrigeration Industries Limited.
1964: Started production of Wasting House Compressors; this is known as SRX.
1966: The name of USHA Refrigeration Industries limited was again
changed to “Shri Ram Refrigeration Industries Limited.
1967: Manufacturing of water coolers was added.
1969: Added Manufacturing of diesel engines pumps sets.
1986: Started Marketing of Electronics Voltage Connectors.
1987: Added Manufacturing of room air-conditioners, entered into technical
Collaboration agreement with Tecumseh Products Company, USAworld’s
largest Manufacturer of air-conditioning compressors.
1990: Discontinued Manufacturing of diesel engines. The company expanded
the range Of room air-conditioners and launched split air-conditioners.
1992: Shri Ram Refrigeration Industries Ltd was merged with Siel.
1993: First Company in India to get world-bank aid to phase out CFC

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refrigerants under the Montreal protocol.

1994: TPIPL, Hyderabad has been awarded the ISO 9001 for its quality
Management System by BVQI.
1995: Set up world class compressor manufacturing plant to increase volume
and range of Tecumseh Compressors.
1996: 100% acquisition (20 million equity shares) by TPIPL.
1999: TPIPL certified for ISO 14001 by UL India.
2000: Won National award for excellence in energy management.
2007: Won Greentech Environment excellence silver award for outstanding
achievement in environment management.
2008: Won Greentech Environment excellence silver award for outstanding
achievement in environment management.
2009: TPIPL has achieved the prestigious National award for excellence“energy
efficient unit” conducted by CII at Chennai.
2010: Won Greentech safety award.

CERTIFICATIONS:-
ISO 9001-2000 VERSION:
As Tecumseh is ISO 9001-2000 certified company , it makes all the employees aware
of the OSO norms. The topics covered under this training program are:
1. Back ground to revision of ISO 9001 standards.
2. Concepts used in the new standard.
3. Process based quality management system model.
4. Alignment with other standard for example, ISO-EMS 14000, health and safety.
5. Overview of 9001:2000.
• Scope
• Application normative reference
• Terms and definitions

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6. Key definitions in new standards.
7. Concept of continual improvement.

ii. Control of non-conforming product


iii. Data analysis
iv. Corrective actions and improvements
v. Preventive action

Due to exposure to ISO 9001-2000 norms and requirement the employees know
how to carry out their work. They know about record maintenance and its importance.
Thus, making all the employees aware of these standards it will be easy for the
organization to produce quality products.

ISO 14001:1996

Underwriters Laboratories Inc. (UL) issues the certificate to the Firm named
above, after assessing the Firm’s environmental management system and finding it in
compliance with ISO 14001:
1996 Environmental Management System for the following scope of registration;
The Environmental Management System of Tecumseh Products India Private
Limited, Associated with the manufacture and servicing of hermitically sealed
compressors for air conditioning and refrigeration applications at their unit and service
centers located at Hyderabad, India.

This environmental management system refrigeration is included in UL’s


Directory of Registered Firms and applies to the operations of the address (es) shown
above. By issuance of this certificate the firm represents that it will maintain its
registration in accordance with the applicable requirements. This certificate is not
transferable and remains the property of Underwriters Laboratories Inc.

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PRESENCE OF TECUMSEH INDIA

They have 4 regional Sales offices, which are located in metropolitan cities like Delhi,
Mumbai, Chennai, and Calcutta in India. Besides this they have branch offices and depots
located in prime cities all over the country i.e.
Nine Depots: Secundrabad, Ahamdabad, Silwasa, Pune, Indore, Chandhghad, Raipur,
Buhneshwar, Punandichary.

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SUBSIDIARIES AND LICENSEES

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SUBSIDIARY COMPANIES

A Nine Subsidiaries company in different countries

 Little Giant Pump Company in Oklahoma.


 Motoco, a,s, in Czech Republic.
 M P Pumps, Inc in Michigan.
 Tecumseh do Brazil, Ltd in Brazil.
 Tecumseh Europe S.P.A in Italy.
 Tecumseh Europe S.A in France.
 Tecumseh Products India Ltd. in India.
 Tecumseh Products of Canada Ltd. in Canada.
 Virtues, Inc in the Rhode Island

STUDY ON COST ACCOUNTING


COST CONTROL AND COST REDUCTION:

30
The institute of cost and Management Accountants, London defines Cost Control
as, the guidance and regulation by executive action of the cost of operating an
undertaking. The word guidance indicates a goal or target to be guided, “regulation”
indicates taking action where there is a deviation from what is laid down, executive
action denotes action to “regulate” must be initiated by executives i.e., persons
responsible for carrying our the job or the operation, and all this is to be exercised
through modern methods of costing in respect of expenses incurred in operating an
undertaking. To exercise cost control, broadly speaking the following steps should be
observed.
Determine clearly the objective i.e., pre-determine the desired results, Measure
the actual performance, Investigate into the cause of failure to perform according to plan
and Institute corrective action. The target cost and /or targets of performance should be
laid down in respect of each department or operation and these targets should be related
to individuals who, by their action, control the actual and bring them into line with the
targets. Actual cost of performance should be measured in the same manner in which the
targets are set up, i.e., if the targets are set up operation – wise, then the actual costs
should also be collected operation wise and not cost center or department – wise as this
would make comparison difficult.
Cost reduction should not be confused with cost control. Cost Reduction may be
defined as the achievement of real and permanent reduction in the unit cost of goods
manufactured or services rendered
With out impairing their suitability for the use intended or diminution in the
quality of the product. Cost saving could be a temporary affair and may be at the cost of
quality. Cost reduction implies the retention of the essential characteristics and quality of
the product and thus it must be confined to permanent and genuine savings in the cost of
manufacture, administration distribution and selling, brought about by elimination of
wasteful and inessential elements from the design of the product and from the techniques
carried out in connection therewith.
The three – fold assumptions involved in the definition of cost reduction may be
summarized as follows: (a) There is a saving in unit cost (b) such saving is of permanent

31
nature (c) the utility and quality of the goods and services remain unaffected, if not
improved.

Ascertaining the profit of each activity:


The profit of any activity can be ascertained by matching cost with the revenue of
that activity. The purpose under this step is to determine costing profit or loss of any
activity on an objective basis.

Assisting Management in decision making:


Decision making is defined as a process of selecting a course of action out of two
or mare alternative courses. For making a choice between different courses of action, it is
necessary to make a comparison of the out comes which may be arrived under different
alternatives, such a comparison has only been made possible with the help of cost
Accounting information.

Cost Concepts

Cost
The amount of expenditure (actual or notional) incurred on or attributable to a given thing
To ascertain the cost of a given thing.

Note: The word “cost” can rarely on its own and should be qualified as to its limitation
(e.g.,” historical, variable etc) and related to a particular thing or object of thought’ e.g.;”
a given quantity or unit of goods made or services performed.

Types of cost

32
Pre determined cost
A cost which is computed in advance of production on the basis of specification
of all the factors affecting cost.

Standard cost
A cost pre-determined cost which is calculated from management’s standard of
efficient operation and the relevant necessary expenditure. It may be used as a basis for
price fixing and for cost control through various analyses.

Marginal cost
The amount at any given volume of output by which aggregate costs are changed
if the volume of output is increased or decreased by one unit.
Note: In this context a unit may be a single article, an order, a stage of production
capacity, a process of a department. It relates to change in output in the particular
circumstances under consideration.

Cost of sales
The sum of all costs attributable to the sales made.
Note: It is not uncommon to use this in a restricted sense as the production cost of goods
sold.

Total Cost
The sum of all costs attributable to the unit under consideration.
Note: The term should always be qualified as it can mean the total cost of an undertaking
or it can mean the total cost attributed to a process or to a service.

Cost centre

33
It is defined as a location, person or an item of equipment (or group of these) for
which cost may be ascertained and used for the purpose of cost control. Cost centres are
of two types viz, personal and Impersonal.
In a manufacturing concern main types of cost centers as indicated below:

Production Cost Centre


It is a cost centre where raw material is handled for conversion into finished
product. Here both direct and indirect expenses are incurred. Machine shops, welding
shops and assemble shops are examples of production cost centers.

Classification of costs
It means the grouping of costs according to their common characteristics. The
important ways of classification of costs are:

By Nature or element
The costs are divided into three categories
Material cost
Labour cost
Expenses. of classification is useful to determine the total cost.

By function
Under this classification, costs are divided according to the function for which they have
been incurred some of the examples are:

Production cost
The cost of sequence of operations which begins with supplying materials, labour
and services and ends with primary packing of the product.

Selling Cost

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The cost seeking to create and stimulate demand (sometimes termed marketing)
and of securing orders.

Distribution cost
The cost of the sequence of operations which begins with making the packed
product available for dispatch and ends with making the reconditioned returned empty
package if any available for re-uses.
Note: It also include expenditure incurred in transporting articles to central or local
storage. Distribution costs include expenditure incurred in moving articles to and from
prospective customers as in case of goods on sale or return basis. In the gas, electricity
and water industry distribution means pipes, mains and services which may be regarded
as the equivalent of packing and transportation.

Administrative Cost
The cost of formulating the policy, directing the organization and controlling the
operations of an undertaking which is not related directly to a production. Selling and
distribution, research or development activity or function.

Research cost
The cost of the process which begins with the implementation of the decision to
produce a new or improved product or to employ a new or improved method and ends
with commenmaterial of formal production of that product or by that method.

Pre-production cost
The part of development cost incurred in making a trial production run
preliminary to formal product.
Note: This term is sometime used to cover all activities prior to production including
research and development, but in such cases the usage should be made clear in the
context.

Conversion cost

35
The sum of direct wages, direct expenses and overhead cost of converting raw
materials to the finished stage or converting a material from one stage of production to
the next.
Note: In some circumstances this phrase is used to include any excess material cost or
loss of material incurred at the particular stage of production. Which ever meaning is
used should be made clear

As Direct and Indirect

Under this classification costs are divided as


Direct costs
Direct costs are those costs which can be identified either with a cost centre or
with a cost unit costs which are not direct are termed as indirect costs.
Indirect costs
Indirect costs are those which cannot be identified either with a cost centre or with
a cost unit are known as indirect costs.

By Variability
According to this classification costs are classified into three groups
Fixed costs
These are costs which remain constant at all levels of production, they do not tend
to increase or decrease with the changes in volume of production. For example, rent,
insurance of factory building etc.., remain the same for different levels of production.
Variable costs
These costs tend to vary with the volume of output. Any increase in the volume of
production results in an increase in the variable costs and vice-versa.
Semi Variable costs
They costs are partly fixed and partly variable in relation to out put.
By controllability
Costs here may be classified into controllable and un-controllable costs
Controllable costs

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These are costs which can be influenced by the action of a specified member of an
undertaking. A business organization is usually divided into a number of responsibility
centers and each such centre is headed by an executive. Controllable costs incurred in a
particular responsibility centre can be influenced by the action of the executive heading
that responsibility centre. Direct costs comprising direct labour, direct material, direct
expenses and some of the overhead are generally controllable by the shop level
management.

Uncontrollable costs
Costs which cannot be influenced by the action of a specified member of an
undertaking are known as uncontrollable costs. For example, expenditure incurred by,
say, the total – room is controllable by the foreman in charge of that section but the share
of the tool – room expenditure which is apportioned to a machine shop is not to be
controlled by the machine shop foreman.

The distinction between controllable and uncontrollable costs is not very sharp
and is sometimes left to individual judgment. In fact no cost is uncontrollable; it is only
in relation to a particular individual that we may specify a particular cost to be either
controllable or uncontrollable.

By Normality
According to this basis cost may be categorized as follows:

Normal cost
It is the cost which is normally incurred at a given level of output under the
conditions in which that level of output is normally attained.
Abnormal cost
It is the cost which is not normally incurred at a given level of output in the
conditions in which that level of output is normally attained It is charged to costing profit
and Loss Account.
MATERIAL COST CONTROL:

37
The first element of cost is “Direct material cost.” Material constitutes a very
significant proportion of total cost of finished product in most of the manufacturing
industries. A proper recording and control over the material costs is essential because of
the following:

The exact quality of specification of material required should be determined


according to the required quality of the product. If too superior quality of material is
purchase, it would mean higher cost due to high prices, if the quality of materials
purchased is too low, the product will be of inferior quality.The price paid should be the
minimum possible;

There should be no interruption in the production process for want of material and
stores including small inexpensive items like lubricating oil for a machine, it is those that
may be found out of stock suddenly leading to stoppage of machines.

There should be no over stocking because that would result in loss of interest
charges, higher go down changes, deterioration in quality and losses due to obsolescence
(either due to manufacture of certain articles being give up or the material previously
required for the production not being required any longer due to a change in methods of
production).

Wastage and losses while the materials are in store should be avoided as for as
possible.Wastage during the process of manufacture should be the minimum possible.

If may also be added that information about availability of materials and stores
should be continuously available so that production may be planned properly and the
required materials purchased in time.

Control on Purchasing
Centralized Purchasing

38
If a concern can afford it, there should be a separate purchase department for all
purchases to the made on behalf of all other departments. Purchasing should be
centralized i.e., all purchases should be done by the purchasing department except for
small purchases which may be done by the user’s department. What is needed is that
there should be staff wholly devoted to purchasing. Such a staff is bound to become
expert in the various matters to be attended to per units and licenses to be obtained,
transport, sources of supply, probable price etc. The concerned officers in this department
keep themselves in constant touch with the markets either by reading various trade
magazines or by direct association, to have the latest information.

If a concern has a number of factories requiring the same material and stores,
there will be advantage in centralizing purchases since important economies in prices and
even transport may be obtained by placing large orders at a time. In such a case
inspection at a source may also be possible of course, there will be a little delay in supply
because of clerical processes and sometimes, there may be a misunderstanding resulting
in supply of wrong articles.

However, there is no advantage in centralized purchasing if different materials


and stores are required by different plants.

39
Materials purchase Procedure:

Materials purchase department in a business house is confronted with the


following issues.
• What to purchase?
• When to purchase?
• How to purchase?
• From where to purchase?
• At what price to purchase?

To overcome the above listed issues, the purchase department follows the
procedure involving following steps:
• Receiving purchase requisition.
• Employing the source of material supply and selecting suitable material suppliers.
• Preparation and execution of purchase orders.
• Receiving material supplies.
• Inspecting and testing of material.
• Checking and passing bills of payment.

Purchase Requisitions
Since the materials and stores purchased will be used by the production
departments, there should be constant co-ordination between the purchase and production
departments.

Control over Buying


To control overbuying of regular stores materials it is necessary to determine their
maximum, minimum, reorder level and economic.

40
Order quantities.

The use of economic order quantities and various levels constitutes an adequate
safeguard against improper indenting of regular materials. In respect of special materials,
required for a special order or purpose, it is desirable that the technical department
concerned should prepare materials specification list specifying the quantity, size and
order specification of materials to be drawn from the stores and those to specially
procured.

Exploring and selecting material suppliers

A source for the supply of each material may be selected after the receipt of the
purchase requisition purchase department in each business house usually maintain a list
of suppliers for each group of materials, required by their concern at least three quotation
are invited from such suppliers.

On the receipt of these quotations a comparative statement is prepared. For


selecting material suppliers the factors which the purchase department keeps in its mind
are price, quantity, quality offered, time of delivery, mode of transportation, terms of
payment, reputation of supplier; etc. In addition to the above listed factors purchase
manager obtains the necessary information from the statement of quotations, past records,
buyer guides etc. for finally selecting material suppliers.

Purchase Order

Having decided on the best quotation that should be accepted, the purchase
manager or officer proceeds to issue the formal purchase order. It is a written request to
supply certain specified materials at specified rates and within a specified period.

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Objectives of System of Material Control:

The objectives of a system of material control are the following.

Ensuring that no activity, particularly production, suffers from interruption for


want of materials and stores – it should be noted that this requires constant availability of
every item that may be needed howsoever small its cost may be. Lubricating oil may cost
much less than the main raw material but, from the point of view of uninterrupted
production, both have equal importance. Seeing to it that all the material and stores are
acquired at the lowest possible price considering the quality that is required and
considering other relevant factors like reliability in respect of delivery etc.Minimization
of the total cost involved, both for acquiring stocks (apart from the price paid to the
suppler and for holding them).

Avoidance of unnecessary losses and wastages that may arise from deterioration
in quality due to defective or long storage or from obsolescence. It may be noted that
losses and wastages in the process of manufacture concern the production department.
Maintenance of proper records to ensure that reliable information is available for all
items of materials and stores that not only losses and pilferages are detected but also
proper production planning is possible.

The fulfillment of the objectives mentioned above will require that standard lists
of all the materials and stores required for the firm’s work be drawn up with the weekly
consumption figures. Also the lead time for each item has to be determined which will
then enable the firm to ascertain the minimum quantity for each items. It is also necessary
to fix maximum quantity so that capital is not locked up unnecessarily and the risk of
obsolescence is minimized. Costs are minimized through the A.B.C. System (which
means classification of the various items on the basis of investment involved items
requiring very large investment being classified as A, those requiring very little
investment being categorized as C and those in between as B). For any items the quantity
to be ordered (E.O.Q) is carefully worked out.

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Requirement of material control
Material control requirements are as follows

Proper co-ordination of all departments involved; viz, finance, purchasing,


receiving, inspection storage, accounting and payment

Determining purchase procedure to see that purchases are made, after making
suitable enquiries at the most favorable terms to the firm.
Use of standard form for placing the order noting receipt of goods, authorizing issue of
materials etc.

Preparation of budgets concerning materials, supplies and equipment to ensure


economy in purchasing and use of materials.

Operation of a system of internal checks so that all transactions involving


materials, supplies and equipment purchases are properly approval and automatically
checked.Storage of all materials and supplies in a well designated location with proper
safeguards.

Operation of a system of perpetual inventory together with continuous stock


checking so that it is possible to determine at any time the amount and value of each kind
of material in stock.

Operation of a system of stores control and issue so that there will be delivery of
materials upon requisition to departments in the right amount at the tie they are needed.
Development of system of controlling account and subsidiary records which exhibit
summary and detailed material costs at each stage of material receipt and consumption
from the stock room to finished goods.

Regular reports of materials purchased, issue form stock, inventory balances


stock, goods returned to vendors, and spoiled or defective units.

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Minimizing the cost of purchasing and store keeping

There are two types of costs which are involved in making a purchase and
keeping the goods in the store. For placing each order, a certain amount of labour is
required and, therefore, it will involve a not only includes the cost in cured by the
purchasing department but it also includes the cost of receiving and inspecting the goods.
These costs will naturally increase it the number of order is large; there can be saving if
the number of orders is reduced.
The other type of cost is concerned with keeping the goods in stock, it comprises
of the money invested, the loss which is likely to take place if the goods are kept, the
expenses incurred on looking after the items etc. Larger the stock, higher will be this type
of cost. In order to reduce this cost, it is necessary to bring down level of the stock. It
may be noted that the number of orders, can be cut down only if the quantity of each
order is increased; but if that is done, the average quantity on hand will increase and
therefore to have balance between those two costs and to keep total of the two at the
minimum level. With this objective in view, the economic order quantity is worked out as
stated earlier. But different items for stock have to be treated differently. The name given
to such classification is the ‘ABC’ system, or the selective inventory control.

Storage of material
The function of storage of materials is performed by the storekeeper. His duties
include accepting, identifying, classifying and proper placing of materials. Efficient
storage requires the consideration of the following points:

Checking of materials
The store-keeper should accept materials only after proper checking. He should
verify the materials received with the consignment note, inspection report and materials
received report. He should send the copy of materials received report received by him,
after verification, to the Accounts department.

44
Classification and codification of materials
A proper system of classification and codification is necessary to prevent mixing
of one type of materials with the other availability of materials and supplies in required
quantities.
Materials should be classified according to their nature in appropriate categories,
e.g. materials of an engineering concern may be classified as mild steel, bronze, copper,
etc, and each of these categories may be further classified suitably. In order to save time
in handling of materials and prepare written documents and to remove ambiguity in
description of materials, it will be better if each store item is giving a code number. There
are two important methods of codification of materials.

Alphabetical methods
In this method alphabets or letter is used far codification of each category of
materials. E.g.: copper wire may be coded as CW or steam coal may be coded as SC, etc.

Numerical method
Numerical coding should invariably be used where material accounting is to be
mechanized or computerized. The first thing to be alone in numerical coding is to prepare
a list of the various departments and allotting to each of them a number. A list of the
various departments and allotting to each of them a number. A list of materials should
also be prepared and each type of materials should also be prepared and each type of
materials should also be given a number.

Codification of materials helps in two ways


In the absence of coding the title of an account may have to be written a number
of times. This results in unnecessary clerical work, particularly in case of lengthy account
titles.Secrecy, about the exact nature of the transaction from the general office
employees, can be kept.

45
Putting materials into bins and racks
The store should be divided into several sections, each meant for one particular
type of material. Such containers are termed as bins or racks.
Each bin or rack should also be appropriately numbered and indented for easy
identification. For example, the store may have a separate section for bolts. This section
may keep bolts of different sizes in different bins. To facilitate material handling and
their easy location it will be better if floor plans are exhibited at the entrance of each store
exhibiting the location of various sections.

Observance of levels
In order to avoid over and under-investment in materials, the management should
decide the maximum and the minimum quantity of materials to be kept in store. The
limits set by the management should be observed by the storekeeper.

Inventory Control
The main objective of inventory control is to achieve maximum efficiency in
production and sales with the minimum investment in inventory. Inventory comprises of
stocks of materials, components, work-in-progress, and finished products. The techniques
commonly applied for inventory control are as follows.

Setting of various stock levels.


ABC analysis, two bin system
Establishment of system of budgets
Use of perpetual inventory records and continuous stock verification
Economic order quantity
Review of slow and non-moving items
Use of control rations.
Some of the above techniques have been discussed as below:
Setting a various stock levels

46
Minimum level
It indicates the lowest figure of inventory balance, which must be maintained in
hand at all times, so that there is no stoppage of production due to non-availability of
inventory.
The main considerations for the fixation of minimum level of inventory are as
follows:
Information about maximum consumption and maximum delivery period in
respect of each item to determine the re-order level.
Average rate of consumption for each inventory item.
Average delivery period for each item. The period can be calculated by averaging
the maximum and minimum period.

The formula used for its calculation is as follows:


Minimum level of inventory = Re-order level – (Average rate of consumption X
average time of inventory delivery)

Maximum level
It indicates the maximum figure of inventory quantity held in stock at any time.
The important considerations which should govern the fixation of maximum level for
various inventory items are as follows:
The fixation of maximum level of an inventory item requires information about its
re-order level. The re-order level itself depends upon its maximum consumption of
inventory item and its maximum delivery period.Knowledge about minimum
consumption and minimum delivery period for each inventory item should also be
known.
The determination of maximum level also requires the figure of economic order
quantity.Availability of funds; storage space; nature of items and their price also are
important for the fixation of minimum level.
In the case of imported materials due to their irregular supply, the maximum level should
be high.

47
The mathematical formula used for its determination is as follows:

Maximum level of inventory = Re-order-level - ( Minimum consumption X


Minimum re-order period) + Re-order quantity.

Re-order level
This level lies between minimum and the maximum levels in such a way that
before the material ordered is received into the stores, there is sufficient quantity on hand
to cover both normal and abnormal consumption situations. In other words, it is the level
at which fresh order should be placed for replenishment of stock.

Mathematically:
Re-order level = Maximum re-order period X maximum usage(Or)= Minimum
level + (Average rate of consumption X Average time To obtain fresh supplies)

Average Inventory Level


This level of stock may be determined by using the following formula:
Average inventory = Minimum level+ ½ Re-order quantity
(Or) = Maximum level + Minimum level

Danger level
It is the level at which normal issues of the raw material inventory are stopped
and issues are only made.

48
ABC Analysis
It is a system of inventory control it exercises discriminating control over
different items of stores classified on the basis of the investment involved. Usage the
items are divided into three categories according to their importance, namely, their value
and frequency replenishment during a period.
‘A’ Category Items consists of only a small percentage i.e., about 10% of the total
items handled by the stores but require heavy investment about 70% of inventory value,
because of their high prices and heavy requirement.
‘B’ category of items is relatively less important; they may be 20% of the total
items of material handled by stores. The percentage of investment required is about 20%
of the total investment in inventories.
‘C’ category of items does not require which investment; it may be about 10% of
total inventory value but hey are nearly 70% of the total items handled by store.
‘A’ category of items can be controlled effectively by using a regular system
which ensures neither over-stocking nor storage of materials for production. Such a
system plans its total material requirements by making budgets. The stocks of materials
are controlled by fixing certain levels like maximum level, minimum level and re-order
level. A reduction in inventory management costs is achieved by determining economic
order quantities after taking into account ordering cost and carrying cost. To avoid
shortage and to minimize heavy investment in inventories, the techniques of value
analysis, variety reduction, standardization etc., may be used.

In the case of ‘B’ category of items, as the sum involved is moderate, the same
degree of control as applied in ‘A’ category of items is not warranted. The orders for the
items, belonging to this category may be placed after reviewing their situation
periodically.

For ‘C’ category of items, there is no need of exercising constant control. Orders
for items in this group may be placed either after six months or once in a year, after
ascertaining consumption requirements. IN this case the objective is to economies on
ordering and handling costs.

49
The advantages of ABC analysis are the following:

It ensure that, without there being any danger of interruption of production for
want of materials or stores, minimum investment will be made on inventories of stocks of
materials or stocks to be carried.

The cost of placing orders, receiving goods and maintaining stocks is minimized
especially if the system is coupled with the determination of proper economic order
quantities.
Management time is saved since attention need be paid only to some of the items
rather than all the items as would be the case if the ABC system was not in operation
With the introduction of the ABC system, much of the work connected with purchases
can be systematized on a routine basis to be handled by sub-ordinate staff.

Two Bin Systems


Under this system each bin is divided into two parts-one, the smaller one, to stock
the quantity equal to the minimum stock or even the re-ordering level, and the other to
keep the remaining quantity. Issues are made out of the larger portion, but as soon as it
becomes
Necessary to use quantity out of the smaller portion, fresh order is placed. “Two
bin systems” is supplemental to the record of respective quantities on the bin card and the
stores ledges card.

Establishment of System of Budgets


To control investment the inventories, it is necessary to know the advance about
the inventories requirement during a specific period usually a year. The exact quantity of
various types of inventories and the time when they would be required can be known by
studying carefully production plans and production schedules. Based on this, inventories
requirement budget can be prepared. Such a budget will discourage the unnecessary
investment in inventories.

50
Periodic inventory system
In case of this system quantity and value of inventory is found of only at the need
of the accounting the period after having a physical verification of the units in hand. The
system does not provide the information regarding the quantity and value of materials in
hand on a continuous basis. The cost of material used is obtained by adding the total
value of inventory purchased during the period to the value of inventory at the end of the
period. For example, if the value of the inventory in the beginning was Rs.10, 000/-
purchases during the period were of Rs.50000/- and the closing inventory Rs.15, 000/-,
the cost of material used will be taken as Rs.45, 000/-(i.e. Rs.10, 000+Rs.50, 000 - Rs15,
000) it is thus assumed that materials not in stock have been used no accounting is done
for shrinkage losses, theft and wastage.

Perpetual Inventory
It is also known as automatic inventory system. According to the chartered
institute of management accountant (CIMA), London, it is “a system of records
maintained by the controlling department, which reflects the physical movement of stock
and their current balance”.
The definition given by Weldon is more exhaustive and explanatory. According
to him it is” a method of recording stores balance after every receipt and issue, to
facilitate regular checking and to make available details about the quantity and value of
stock of each items at all times”. The system thus provides a rigid control over stocks of
materials as physical stock can regularly be verified with the stock records kept in the
stores and the cost office.It represents a system of records maintained by the stores
department it is fact comprises of:

Bin cards
Bin card maintains a quantitative record of receipts, issues and closing balances of
each item of stores. Separate bin cards are maintained for each item. Each card is filled
up with the physical movement of goods i.e., on its receipt and issue

51
Stores ledger
Like bin cards, the store ledger are maintained to record all receipt and issue
transactions in respect of materials. It is filled up with the help of goods received note
and material issue requisitions.
A perpetual inventory is usually checked by a programmed of continuous stock
taking. Continuous stock taking means the physical checking of those records (which are
maintained under perpetual inventory). With actual stock. Perpetual inventory is essential
for material control. It incidentally helps continuous stock taking. The success of
perpetual inventory depends upon the following:
• The stores ledger-(showing quantities and amount of each item)
• Stock control cards (or Bin cards)
• Reconciling the quantity balances shown above.
• Checking the physical balances of a number of items every day systematically and
by rotation.
• Explaining promptly the causes of discrepancies, it any, between physical
balances and book figures.
• Making corrective entries were called for after step (e) and
• Removing the causes of the discrepancies refereed to in step (e)
Advantages
• The main advantages of perpetual inventory are as follows:
• Physical stocks can be counted and book balances adjusted as and when desired
without waiting for the entire stocktaking to be alone.
• Quick compilation of profit and loss mounts (for interim period) due to prompt
availability of stock figures.
• Discrepancies are easily located and thus corrective action can be promptly taken
to avoid their recurrence
• A systematic review of the perpetual inventory reveals the existence of surplus,
dormant, obsolete and slow-moving materials, so that remedial measures may be
taken in time.Fixation of the various levels and checking of actual balances in

52
hand with these levels assist the storekeeper in maintaining stocks within limits
and in initiating purchase requisitions for correct quantity at the proper time.
Continuous stock taking
The checking of physical inventory is an essential feature of every sound system
of material control. Such a checking may be periodical or continuous. Annual stock-
taking, however, has certain inherent shortcomings which tend to detract from the
usefulness of such physical verification. For instance, since all the items have to be
covered in a given number of days, either the production department have to be shutdown
during those days to enable through checking of stock or else the verification must be of
limited character. Moreover, in the case of periodical checking there is the problem of
finding an adequately trained contingent. It is likely to be drawn from different such
temporary duties some that perfunctorily. The element of surprise, that is essential for
effective control is wholly absent in the system. Then if there are stock discrepancies,
they remain undetected until the end of the period. It means that the figures of stock
during the period continue to be supplies in correctly. Often, the discrepancies are not
corrected.

The system of continuous stock-taking consists of counting and verifying the


number of items daily throughout the year so that during the year all items of stores are
covered three or four times. The stock verifiers are independent of the stores, and the
stores staff has no fore knowledge as to the particular items that would be checked on any
particular day. But it must be seen that each item is checked a number of times in a year.

Advantages:
The advantages of continuous stock-taking are:
Closure of normal functioning is not necessary.
Whole time specialized staff can be engaged for the purpose since the work is
spread throughout the year. In smaller concerns, duties may be assigned to various
officers of middle rank by rotation to the checking, say, of 20 items. This would be easy
because the store ledger caral and the lying there and enter the quantity on the form

53
provided for the purpose. The rest of the work (comparison with book figures) can be
done by the stores ledger clerk.
Stock discrepancies are likely to be brought to the surface and corrected much
earlier than under the annual stock-taking system.The system generally has a sobering
influence on the stores staff because of the element of surprise present there in.
The movement of stores items can be watched more closely by the stores auditor
so that chances of obsolescence buying are reduced.Final Accounts can be ready quickly.
Interim accounts are possible quite conveniently.

Economic Order quantity (EOQ)


Purchase department in manufacturing concerns is usually faced with the problem
of deciding the “quantity of various items” which they should purchase. If purchases of
material are made in bulk then inventory carrying cost will be high. On the other hand it
order size is small each time, and then the ordering cost will be high. In order to
minimize ordering and carrying costs it is necessary to determine the order quantity
which minimizes these two costs. The size of the order for which both ordering and
carrying cost are minimum is known as economic order quantity;

Assumptions Underlying E.O.Q


The calculation of economic order quantity of material to be purchased is subject
to the following assumptions:
• Ordering cost per order and carrying cost per unit per annum are known and they
are fixed.
• Anticipated usage of material in units is known.
• Cost per unit of the material is constant and is known as well.
• The quantity of material ordered is received immediately i.e., the lead time is
zero.

54
Losses due to obsolete stores
Obsolescence is defined as “the loss in the intrinsic value of an asset due to its
suppression”. Materials may become obsolete under any of the following circumstances.
Where it is a spare part or a component of machinery used in manufacture and
that machinery becomes obsolete;
Where it is used in the manufacture of a production, which has become obsolete;
Where the material itself is replaced by another material due to either improved quality or
fall in price.

Store Ledger
A modern stores ledger is a collection of cards or loose leave specially ruled for
maintaining a record of both quantity and cost of stores received, issued and those in
stock. It being a subsidiary ledger to the main cost ledger, the cost account department
maintains it. It is posted from goods received notes and materials requisition.

The advantages of writing up stores ledger mechanically are:

It enables distribution of work among a number of clerks due to which receipt and
issue are posted quickly and regularly.
It enables stock records to be centralized in case of an organization having a
number of depots.
The accuracy of posting can be mechanically tested more convenientlyThe
records are clearer and neater also the recurring cost of maintaining them is much less
than those kept manually.
If up to date records are available, the management will be able to exercise greater
control over quantities held in stock from time to time which may result in a great deal of
saving in both the amount of investment in stock and their cost.

55
Now-a-days, mostly a duplicate record of issues and receipt of materials is kept
one on bin cards in the store and the second in the stores ledger in the stores.

DATA ANALYSIS & INTERPRETATION

OVERHEADS COST PER TONNES

2007 2008 2009 2010


Factory overheads
Depreciation 813946000 815126000 1369925000 1367786000
Stores consumed 120530000 93148000 133821000 174588000
Power and maintenance 3103152000 3561625000 43397400 4830165000
Repairs and maintenance 163292000 215818000 31446000 238609000
Cost of construction including land 392000 386000 1150000 1399000
Machinery lease rents 0 0 0 0
Trade purchase 0 0 0 0
Total factory overheads 4201313200 4686103000 5876116000 6612547000
0
Add Opening work in progress 501786000 368462000 366888000 64731000
Less Closing work in progress 368462000 366888000 434213000 75233000
Total factory cost 4334636000 4687677000 5808791000 6602045000
Add Office overheads 1401685000 1309884000 1163983000 1327553000
Add Selling & distribution
overheads
Packing charges 760739000 767882000 81563100 1045044000
Fright out wards 1008678000 1416328000 1641417000 1641417000
Advertisement 44047000 24225000 32461000 64209000
Additional state term 121633000 132732000 132732000 114089000
Control over heads 1935097000 2341167000 2621414000 3014820000
Total overheads cost 7671418000 8398728000 9594215000 115444180010
Total production 4946026 5409830 5492687 7261700
Cost per ton 1551.02 1550 1549.85 1548

56
COLUMN CHART OF OVERHEAD COST

1552
1551
1550
(Rs In Crores) 1549
OVERHEAD COST
1548
1547
1546
2007 2008 2009 2010
years

INTERPRETATION:

The overhead cost per ton has decreased slightly during a period 2007-10. This is
due to a reduction in the factory overheads and control overheads.
Even though selling and distribution have increased slightly have no effect on the
overhead reduction

57
SALARIES WAGES AND ADMINISTRATION ANALYSIS

2007 2008 2009 2010


Salaries wages and Amenities
Salaries, wages and bonus 5,793.16 5,489.99 5,257.19 5,595.40
Contribution to provident fund 532.13 513.22 471 467
Gratuity 149.1 651.19 160.01 180
Superannuation 200.35 120 300 180
Employees, provident fund 36 37.72 32.17 32.17
Employees, state insurance exp 6.48 5.24 7.99 6.74
Workmen and staff welfare exp 1,614.57 1,627.88 1669.44 1,645.55
Total 8,445.25 8,331.79 7,897.80 8,106.86
Administration and other charges
Insurance 602.74 546.47 521.12 573.69
Rent 101.85 99.76 102.38 95.56
Rates and taxes 211.52 224.55 257.15 242.48
Printing and stationery 68.63 68.45 76.18 78.33
Postages, Telephones and Telegrams 394.24 298.38 284.83 259.86
Other administration exp 1,647.51 1677.73 1,879.43 2,234.58
Legal Fees 42.68 45.02 63.13 115.58
Directors sitting Fees 1.76 1.52 3.08 5.65
Amortization of deferred Revenue 1301.12 45.02 51.06 55.2
Loss on sale of assets 18.59 1323.74 568.14 535.06
Provision for doubtful debtors 337.46 565.01 7.5 46.33
Auditor expenses 37.85 300 151.51 357.21
Total 4,765.95 5,192.72 3,965.51 4,599.53

COLUMN CHART OF SALARIES WAGES & ADMINISTRATION ANALYSIS

58
9,000.00
8,000.00
7,000.00
6,000.00
5,000.00
crores
Rs in

4,000.00
3,000.00
2,000.00
1,000.00
0.00
2007 2008 2009 2010
YEARS

INTERPRETATION:

The salaries and wages per ton have decreased slightly during a period 2007-10.
This is due to a reduction in the factory overheads and control overheads.
Even though administration and other charges have decreased slightly have no
effect on the overhead reduction.

STATEMENT OF CURRENT ASSET ANALYSIS:

Current assets 2007 2008 2009 2010


Inventories 5422.36 5687.48 8738.25 11908.17

59
Stores/spares 2245.57 2647.73 3224.32 3501.91
Raw material 602.02 591.1 647.31 752.33
Work in process 3,082.62 3077.78 3694.82 2022.15
Semi-finished goods 1522.82 1461.94 1685.42 1113.48
Finished goods 12,875.37 13,466.03 17,990.12 19,297.84

The inventory control is adequate for the company and effective control was placed on all
inventors and by maintaining adequate stock without interruption in production.
The inventory control techniques applied by the company are.
Continuous stock taking.
Perpetual and periodical inventory.
ABC analysis.
E.O.Q

60
DIRECT AND INDIRECT LABOUR:

Labour can be direct as well as indirect. Direct labour is that of which is not
possible in other words, if allocation of wages to different jobs or products on a
convenient basis can be done and the wages are paid to workers engaged in the
fabrication of products, the wages are direct. The wages are indirect when the workers
engaged in the fabrication of products, the wages are direct. The wages are indirect when
the workers are not directly engaged in the manufacturing of products and the wages are
paid to supervisors, repair workmen, chowkidars, inspectors, material handlers, time-
keepers, foremen, watchmen, cleaners etc. the example of direct labour is wages paid to
workmen put on definite jobs or products in the factory.

Sometimes it is difficult to distinguish between direct labour and indirect t labour.


A worker might be engaged in doing a particular work concerned with manufacturing a
commodity and after an hour the same worker might be placed on a different job
concerned with, say, time-keeping or repairing. In such a case the wages paid for the first
hour should be treated as direct and for the rest of the period, indirect. It is to be noted
that the classification of labour between direct and indirect also depends upon the criteria
laid down by the management for the work and the nature of the industry. The distinction
must be observed because direct labour is a part of prime cost of production whereas
indirect labour is treated as Factory overheads and, therefore, included under words on
factory cost.

As stated earlier proper employment and efficient utilization of labour is vital


factory which determine the cost and quality of an organization’s products and
consequently its results as a whole. This requires employment of efficient workers,
proper recording of time taken by them in production and accounting for the wages paid
to them. In a large industrial organization there are five departments for control over
labour costs.

61
Personnel Department

The personal department has to recruit the labourers. Train them and thereafter
place them to the jobs they are best suited. It is responsible for control and administration
of the scheme for the efficient utilization of the services of labour. Whenever a new
worker is employed, the personnel department sends a notification to the time-keeping
and paymaster’s departments also. Following are the two important records used in
connection with the recruitment and placement of workers.

Labour Placement Requisition: The process of recruitment starts when the


personal department receives a duly signed “Labour Placement Requisition” from the
department in need of workers. On receipt of such a requisition the personal department
first consults its own records to find out whether he has in his records persons required
available for employment. Afterwards, he writes to local employment exchange,
technical colleges and educational institutes, advertiser in newspaper etc. action is then
taken to receive formal applications, interview and select persons. The department
concerned will be informed of the selection.

Employee’s History Card: The personal department keeps a record of each


employee. The record is kept on a card which contains the details about the name,
address, department, the name of former employer, date of joining occupation, rate of pay
and clock number etc. whenever the services of an employee are terminated, or he
himself leaves the job on his own accord, the reasons for such termination or for leaving
are also recorded. This helps the management to find out solution of frequent labor
turnover and to improve the working conditions in the factory. A specimen of an
employee’s card may be modified according to the needs of the concern. Columns are
provided generally on the reverse side of the employee’s history card to insert
information regarding leave entitlement, leave taken, medical and other benefits taken by
the worker. Sufficient space is also provided for noting the change of address, the
progress of the workers, details regarding his promotion and transfer from one
department to another.

62
Engineering and works study department

This department helps in maintaining control over following functions:


Preparation of plans and specifications for each job scheduled for production.
Supervision of production activities within production departments.
Initiation and supervision of research and experimental work.
Maintaining safety and efficient working conditions
Making time and motion studies
Making job analysis.
Setting piece rates.
Conducting job evaluation and merit rating.

Time Study

The study involves determination of standard time for an operation by direct time
measurement. Generally ten to twelve observations are made for each labour operation by
the time study Engineer with the help of a stop watch.
An average normal time is obtained by multiplying the individual timing’s with
the respective merit or performance rating. Due adjustment is also made for the time
taken by the workers for rest, fatigue and personal requirements. The time so calculated
after these adjustments is known as ‘standard time’.

Fixation of a structure
Job evaluation helps in establishments of a simplified and balanced wage
structure. This favors both the employees and the employee.

Discloses anomalies
It discloses anomalies in current wages of individual employees by means of
allotting the actual wages vis-à-vis the job rating points in the form of a scatters diagram.

63
Helps in recruitment of new workers

Job evaluation tells the exact requirement for each job and thus makes it possible
for the personnel department to select the most suitable man out of a number of
candidates applying for the job. On the same basis it is also helpful at the time of transfer
or promotion of different employees in the organization.

Improves labour relations


It improves labour relations since it rules out unfairness, nepotism etc.

Merit rating

It is the comparative appraisal of individual merits of an employee. It is the


qualitative or quantitative assessment of an employee’s performance or his personality
made by his supervisor or any other competent person. The following factors are usually
taken into account for merit rating purposes.

Quality of work done


Quantity of work done
Initiative
reliability
Integrity
Sense of responsibility
Co-operation and discipline
Sense of judgment
knowledge and skill
Aptitude for work.

Each of the above factors is assigned points and the employees are ranked in order
of the points they secure.

64
Importance of merit rating: Merit rating is helpful to the management in the
following respects:

It helps in ascertaining the suitability of the workers for a particular job, the
objective is achieved by linking merit rating with job evaluation.
It helps in ascertaining an employee’s merit for grant of promotion, increment etc.
It helps in introducing a system for incentive wage payment and simplification of
the wage structure.
It analyses the worker’s dejects and brings out the strong points and special
abilities.

Difference between Job Evaluation and Merit Rating


The following are the points of difference between job evaluation and merit rating.

Job evaluation is the assessment of relative worth of jobs in a business while merit
rating is the assessment of the relative worth of the men behind the jobs. Thus job
evaluation rates the jobs while merit rating rates the employees.

The objective of job evaluation is to set up a rational wage and salary structure.
However, merit rating provides a scientific basis for determining fair wages for each
worker based on his ability and performance.

Job evaluation simplifies wage administration by rationalizing and bringing


uniformity in the wage rates while merit rating helps in determining fair rate of pay to
different workers on the basis of their relative performance.

65
Time – keeping Department

The time keeping department is primarily concerned with the following:

Time- keeping
This involves recording of each worker’s time ‘in’ and ‘out’ of the factory
distinguishing between regular time and overtime.

Time-Booking
The method involves recording the time of each employee for each employee for
each department operation or production order.

Thus the time keeper has to maintain two sets of records.


Time- keeping or attendance, time records: These records tell about the total time
by the worker in the factory. They are useful for calculating the total amount of wages
payable to the workers in case of time wage system.

Time-Booking or Job-Time records: These records tell about the time spent by
each worker on different jobs. They are helpful for calculating the cost of labour to be
charged to a specific job, production order or process.

66
MANUFACTURING COST ANALYSIS:
2007 2008 2009 2010
Direct cost
Raw material consumed 116066000 1285931000 1285931000 1898848000
Excise duty on material 1753537000 2160025000 2160025000 2876927000
Stores consumed 120530000 93148000 133821000 174588000
Purchase 120530000 112250000 1224203000 1642505000
Own generarion 1136208000 14035000 170006000 137316000
HSDI finance oil 10594000 5892000 10163000 10079000
Salaries,wages and bouns 57936000 548999000 525719000 559540000
Contribution to provident fund 53213000 51322000 47100000 46700000
Gratuity 14910000 65119000 16001000 18000000
Superannuation 120035000 12000000 30000000 18000000
Employees provident fund 3600000 3772000 3217000 3217000
Employee state insurance staff 648000 524000 799000 674000
Work men staff welfare 261457000 162788000 166944000 164555000
Total Direct cost 530140000 5755094000 6027932000 7550949000
Total production 4946026 5409830 5492687 7261700
Cost per tonne 1077 1063.82 1050.82 1039.83
Indirect cost
Depreciation 913946000 815126000 787696000 768665000
Administration other overheads 576595000 519272000 396551000 429953000
Selling and distribution 833179000 2607693000 2682336000 4143894000
Repairs and maintance 163292000 215818000 183137000 238609000
Total indirect cost 4287012000 4157909000 40497200000 5031121000
Total production 4946026 5409830 5492687 7261700
Cost per tonne 866.75 768.58 737.29 692.82
Total cost 9387012000 9913003000 9977672000 13182010000
Total production 4946026 5409830 5492687 7261700
Cost per tonne 1897.88 1832.4 1816.53 1815.27

67
CONTROL OF MANUFACTURING OVERHEADS:

We have already seen that overhead are by nature working out the total cost of a
product or a unit of service, the overheads must be included. Thus we have to find out a
way by which the overheads can be distributed over the various units of production.

One method of working out the distribution of overheads over the various
products could be to ascertain the amount of actual overheads and distribute them over
the products. This however, creates a problem since the actual amount of overheads can
be known only after the financial accounts are closed. If we wait that long, the cost sheets
lose their main advantages and no utility to the management. All the decisions for which
cost sheets are prepared are immediate decisions and cannot be postponed till the actual
overheads are known. Therefore, some method has to be found by which overheads can
be included in the cost of the products, as soon as prime cost, the cost of raw materials,
labour and other direct expenses, is ascertained.

One method is to work out predetermined rates for absorbing overheads. These
rates are worked out before an accounting period begins by estimating the amount of
overheads and the level of activity in the ensuing period. Thus, as soon as the prime cost
of a product or a job is available, the various overheads are charged by these rates. Of
course, this implies that the overheads are charged on an estimated basis. Later when the
actual overhead are known, the difference between the overheads charged to the products
and actual overheads is worked out and adjusted.

68
Manufacturing Overheads:

Generally manufacturing overheads form a substantial portion of the total


overheads. It is important, that such overheads should be properly absorbed over the cost
of production.

Estimation and Collection of Manufacturing Overheads

The first stage is to estimate the amount of overheads, keeping in view the past
figures and adjusting them for known future changes. There are four main sources
available for the collection of factory overheads viz (a) Invoices, (b) Stores requisition,
(c) Wage analysis book, (d) Journal entries.

Cost allocation

The term allocation implies relating overheads directly to the various


departments. The estimated amounts of various items of manufacturing overheads should
be allocated to various cost centers or departments. The salary of the works manager
cannot be directly allocated to any one department since he looks after the whole factory.
It is, therefore, obvious that many overhead items will remain unallocated after this step.

Cost apportionment

At this stage, those items of estimated overheads (like the salary of the works
manager) which cannot be directly allocated to the various departments and cost centers
are apportioned. Apportionment implies “the allotment of proportions of items of cost to
cost centers or departments.” It implies that the unallowable expenses are to be spread
over the various departments or cost centers on an equitable basis. After this stage, all the
overhead costs would have been either allocated to or apportioned over the various
departments.

69
Re apportionment

The next stage is to re-apportion the overhead costs of services departments over
production departments. Services departments are those departments which do not
directly take part in the production of goods. Such departments provide ancillary services.
Examples of such departments are boiler house, canteen, stores, time office, dispensary
etc. the overheads of these departments have to be re-apportioned over the production
departments since service departments. At this stage, all the factory overheads are
collected under production departments.

Absorption

The production department’s overheads are absorbed over production units. These
overhead expenses can be absorbed by estimating the overhead expenses and then
working out an absorption rate. When overheads are estimated, their absorption is carried
out by adopting a pre-determined over absorption rate. This rate can be calculated by
using anyone method to be discussed later. As the actual accounting period begins, each
unit of production automatically absorbs a certain amount of factory overheads through
pre-determined rates. During the year a certain amount will be absorbed over the various
products. This is known as the total amount of absorbed overheads.

Treatment of Over and Under Absorption of Overheads

After the year end the total amount of actual factory overheads is known. There is
bound to be some difference between the actual amount of overheads and the absorbed
amount of overheads. The difference has to be adjusted keeping in view the event of such
differences and the reasons therefore.

70
The whole discussion of above is meant to serve the following two purposes:

To charge various products and services with an equitable portion of the total
amount of factory overheads, and
To charge factory overheads immediately as the product or the job is completed without
waiting for the figures of actual factory overheads.

Accounting and Control of Administrative Overheads

According to I.C.M.A Terminology, Administrative overhead is defined as “The


sum of those costs of general management and of secretarial accounting, and
administrative services, which cannot be directly related to the production, marketing,
research or development functions of the enterprise.” According to this definition,
administrative overhead constitutes the expenses incurred in connection with the
formulation of policy directing the organization and controlling operations of an
undertaking. These overheads are also collected and classified in the same way as the
factory overheads.

Control through Budgets

According to this methods administration budgets (monthly or annually) are


prepared for each department. The budgeted figures are compared with actual ones to
determine variances. The variances are analyzed and responsibility assigned to the
concerned department to control these variances.

Control through Standard

Under this method, standards of performance are fixed for each administrative
activity, and the actual performance is compared with the standards set. In this way,
standards serve not only as yardstick of performance but also facilitate control of costs.

71
Accounting and Control of Selling and Distribution Overhead

Selling cost or overhead expenses incurred for the purpose of promoting the
marketing and sales of different products. Distribution expenses, on the other hand, are
expenses relating to delivery and dispatch of sold. Examples of selling and distribution
expenses have been discussed earlier. From the definition it is clear that the two types of
expenses represent two distinct types of functions. Some concerns group together these
two types of overhead expenses into one composite class, namely, selling and distribution
overhead, for there purpose of cost Accounting.

The collection and accumulation of each expense is made by means of appropriate


standing order numbers in the usual way. Where it is decided to apportion a part of the
administrative overhead to the selling division the same should also be collected though
appropriate standing order numbers.

As in the case of administrative overheads, it is not easy to determine an entirely


satisfactory basis for computing the overhead rate absorbing for selling overheads. The
bases usually adopted are: (a) sales value of goods (b) cost of goods sold (c) gross profits
on sales (d) number of orders or units sold. It is considered that the sale value is
ordinarily the most logical basis, there being some connection between the amount of
sales and the amount of expenses incurred to achieve them. The cost of production,
however, is not so satisfactory a basis as it is difficult to conceive of any relationship
even remote, between the cost of production of any article and its selling cost. Articles
having a high cost of production may require little effort in their sale and vice versa.

The basis of gross profit on sales results in a large share of the selling overhead
being applied to goods yielding a large margin of profit and vice versa. The basis
therefore follows the principle of ‘ability to pay’ it may not reflect costs or incurred
efforts.

72
EXPENSES BASIS

Salaries in the sales department and Estimated time devoted to the sale of various
of the salesmen products.

Advertisement
Actual amount incurred for each product since these
days it is usual to advertise each product separately,
common expenses, such as in an exhibition, should
be apportioned on the basis of advertisement
expenditure on each product.

Average space occupied by each product.


Showroom expenses
Rent of finished goods go downs
Average quantities delivered during a period.
Expenses on own delivery vans

If a suitable basis for apportioning expenses does not exist it may be apportioned
in the proportion of sales of various products.

The total of fixed expenses apportioned in this manner, divided by the number of
units sold or likely to be sold, will give the fixed expenses per unit. To this should be
added the variable expenses which will be different for each product. These expenses are,
packaging, freight outwards, insurance in transits, Commission payable to salesmen,
rebate allowed to customers etc. All these items will be worked out per unit for each
product separately. These items added to fixed expenses per unit will give an estimated
amount of the selling and distribution expenses per unit.

73
Control of Selling & Distribution Overheads

Control of selling and distribution expenses is a difficult task. The reasons for this
are as follows:

The incidence of selling and distribution overheads depends mainly on external


factors such as distance of market, extent and nature of competition, terms of sales, etc.
which are beyond the control of management.

These overheads are dependent upon the customer’s behaviors, their liking and
disliking, tastes etc. Therefore, as such control over the overheads may result in loss of
customers.

These expenses being of the nature of policy costs are not amenable to control.
In spite of above difficulties, the following methods may be used for controlling them.
Budgetary control

A budget is set up for selling and distribution expenses. The expenses are
classified into fixed and variable. If necessary, a flexible budget may be prepared
indicating the expenses at different levels of sales. The actual expenses are compared
with the budgeted figures and in the case of variances suitable actions are taken.

74
STATEMENT OF CONSUMPTION PER UNIT

2007 2008 2009 2010


A. power and fuel consumption
1.Electricity
Purchased
Total amount 11,362.08 12,252.17 12,242.03 16,425.05
Cost per tonne 3.59 3.34 3.25 3.23
Own generation
Through diesel/ furnace oil generation
Units of KWH in lacs 4,116.76 4,379.57 5,304.18 5,506.30
Cost per tonne 2.94 3.12 3.12 4.01
Thought steam turbine /general
Units KWH-lacs 0 0 0 0
Cost per tonne 0 0 0 0
2. COAL FOR KILNS
Total cost 15217 18,924 26,471 28680
Average rate 2568 2644 3073 3192
3. HSD/FURNANCE OIL FOR KILNS
Total cost 105.94 58.92 101.63 100.79
Average rate 17,300 18162 23763 242.31
4. Consumption per unit of production
Wet process 99.38 37.66 37.07 40.62
Dry process 94.28 89.31 88.39 88.98
Total 30,995.44 35,741.19 44,244.30 50,841.81
Total production 91.47 103.4 108.44 131.38
Cost per tonne 338.85 345.65 408 386.98

INTERPRETATION:

The power cost per tonne is at 3.5 Rs in 2006 and it came down to 3.2 in 2009.
Because of energy saving equipment and own generation through wind power.

Even though own generation cost has increase slightly it has no effect over.
Overall power consumption cost per tonne.

75
The coal consumption cost and HSD oil has also decrease. The consumption cost
per tonne have decrease all most by 50% in wet process and by 7% dry process. Because
of cost reduction measures.

COMPONENT COST ANALYSIS

2007 2008 2009 2010


RAW MATERIAL
Material Division 5987138 7084357 7724964 8118827
Lime stone 200989 289578 353680 574076
Gypsum 826351 836092 956834 1165728
TOTAL RAW MATERIAL 7014478 8210027 9035478 9858631
Add Salaries and Wages

76
Salaries, wages and bonus 579316 5489.99 5257.19 5595.4
Contribution to provident fund 532.13 513.22 471 467
Gratuity 149.1 651.19 160.01 180
Superannuation 200.35 120 300 180
Employees provident fund admn 36 37.72 32.17 32.17
change
Employees state insurance scheme 6.48 5.24 7.99 32.17
Workmen and staff welfare exp. 1614.57 1627.88 1669.44 1645.55
8331.79 8445.24 7897.8 8106.86
Add: Administration & other charges 4765.95 5192.72 3965.51 4599.53
Add: Selling and distribution 21812.41 26076.93 29823.36 41438.94
Cost of production 7049388.2 8249741.9 9077164.7 9908176.8
Total production(in lacs) 49.46 54.09 54.93 72.62
Plant capacity 76.9 76.9 76.9 76.9
% of per tones 64.31 70.33 71.43 94.43

INTERPRETATION:
` The control over gypsum and iron ore purchase. Through effective internal
controle system.
And centralized purchase department have contributed cost reduction. Because of
control over wastage in raw material consumption and decrease in the royalty in mine hav
contributedtothroughcostreduction.

77
CAPACITY UTILIZATION:

2007 2008 2009 2010


Detailed quantitative information of
Goods manufactured during the year
A. Installed capacity 76,90,000 76,90,000 76,90,000 76,90,000
B. Production 49.46,026 54,09,830 54,92,687 72,61,700
C. Sales-quantity 49,99,156 54,14,750 54,84,384 72,91,810
Sales-value 1,02,136.83 1,17,717.54 1,24,555.28 1,79,395.78
Per tonne 172.66 157.27 149.86 139.86
D. Opening stock of goods produced 1,42,622 89492.00 84572.00 92875.00
Value 2531.93 1522.82 1461.94 1685.42
Per tonne 56.32 58.76 57.85 55.10
E. Closing stock of goods produced 89492.00 84572.00 92875.00 62765.00
Value 1522.82 1461.95 1685.42 1113.28
Per tonne 58.76 57.84 55.10 56.38

INTERPRETATION:

The company has utilized its spare capacity to the optimum level and it’sat64%.In
the year 2007 and reached 92% of utilization of plants idle capacity to produce clinker.

Similarly the companies’ expenses programmed and control measures. Have


contributed to maximum capacity utilization.

ANALYSIS AND INTERPRETATION OF DATA:

In 2007 the supply overhang coupled with tax concessions for the incremental
capacities that were added in the last few years continued to adverse affect the prices.

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Consequently the realization per ton of material for your company declined by about
RS.388 PER MT as compared to the financial year 2005-2006.

The cumulative decline in prices during the financial year as opposed to financial
year 2004-2005 was about RS per MT. The company has been able to improve
marginally on the sales volume from a level of 4862 lakhs tones to 49.99 lakh tones huge
drop in sales realization was the single major factor affecting the financial results during
2006-2007. The sales and other income decrease marginal higher volume has dropped
from RS1194.35crore, to Rs1033crores.

Income from operations has decline from RS166.50 crores. To Rs32.72 resulting
in erosion of the operating margin from a level 13.93% during the financial year 2005-
2006 to the level of 3.17% in 2005-2006. The all in the operating margins of the
companies as mention earlier has been primarily caused by decline in the sales
realization.

The company incurred a loss, prior to tax adjustment, of Rs307.23 during the year
under review as against a loss of Rs7.56 crores in the previous year; concluding in come
from sale of investment. However last quarter of the year under review, the decline trend
has been haled and the prices were stable but still at unremonerative levels. While the
supply demand in balance is expected to be corrected, consequent to robust demand
growth, remunerations prices for material expected as a direct a fall out

B. The pre and post election lull in economic activity the material off take during
April-march 2007 and affected industry performance. All TECUMSEH PRODUCTS
INDIA LIMITED demand grew by a paltry 4.35%, the consumption in the south decline
by sharp 9% as compared April-may 2005. a demand scenario, year company could
achieved fairly good level of production and sale achieving April-may 2007 with clinker

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production increase 8.91 lakh TS as against 7.41 lakh TS achieved during April-may
2006 material production was slightly lower at 8.48 lakh TS as against 8.54 but sale of
material and clinker was higher at 9.44 lakh TS as against 8.40 lakh TS during the
respective two month periods.

With new government now in place and with all indications pointing to a
continuance of economic reforms albeit with a “human face continued thrust on
infrastructure and roads, the material demand for 2006-2007 is still expected to grow by
8% or more, with such grow consumption and with the export market for material and
clinker showing buoyancy, the overall demand supply scenario in India is likely or less
balanced by end 2007-2008. The supply demand gap in the south is also expected to e
bridged to a large extent by 2009-2010. The indications of the company are fairly good
in the medium and long term with the restructuring of the debts and the interest payments
and other measures to improve the liquidity and profitability of the company.

C. With the partial recovery in prices of material, the gross realization increased
by 97% per ton of the back of significant increase clinker exports and marginal increase
in material volume, the sales and other income of your company grew by an impressive
13% to 14.02 crores as against Rs1236.88 crores in the previous year. The income from
operations improved by 46% at Rs153.44 crores against crores in the previous year and
the operating margins have improved to 10.94% from 8.5% in the previous year.

As mentioned in the directors report your company has undertaken further steps
on debt restructuring and consequently, the interest and other charges were lower at
Rs133.50 crores against Rs161.68 crores in the previous year. The depreciation charges
were also marginally lowers 78.77 crores against 81.51crores in the previous year.

Consequently, the net loss for the year was more than halved to Rs58.82 crores
against Rs138.39 crores in the previous year. Beside the above, there is an extraordinary
income of Rs63.40 crores representing the remission in liability arising out of the
repayment of some of the existing debts in excess of interest accrued during the current

80
financial year and the result is a net profit 4.58 crores for the current year as against a loss
of Rs112.73 crores towards reduction in interest charges under the CDR scheme relating
to January-march 2006 your directors are happy to report that the company has returned
to back after a break of years.

D. Fay 2009 was as anticipated a very year for the material industry. The
buoyancies in demand noticed during the second half of 2007-2008 sustained during the
year under report with the industry registering a growth of 10.14% in domestic material
consumption during the year. The overall production of material in the country during
2008-2009 at 141.80 million tones registered an increase of 11.2% over the production of
127.60 million tones recorded during the previous financial year. While domestic
consumption of material increased by 10.14% to 135.60 million tones from 123.10
million tones in the previous year. However, export of clinker by the industries fell
3.18million tones form 6million tones in the previous year. The scenario in south India
which is the main market for your company was even better; demand in south grew by
17.75% to 39.40 million tons for the year as against 33.40 million tones in the previous
financial year.

The capacity utilization of the industry peaked to a dream 90% as against 84% in
the precious financial year and was well above the normal 85% capacity utilization
associated tons in the industry the effective utilization of the operating plants was above
93% and the industry has practically no further material to offer, shortage were reported
in pockets of north, west and east during the last quarter of the financial year, resulting in
a fillip to material process in the market. With anticipated 8to10% growth in demand for
material and with very little capacity immediately on the industry can be said to have
entered been phased in the near to medium term.

Given the substantial increase in demand in the southern states the capacity
utilization of the southern plants also increased from 78% in financial year 2005-2006 to
88% in financial year 2008-2009 and material prices in the south have also packed up
smartly since march 2010 with the study conducted by national council for applied

81
economic research forecasting a domestic demand for 213 million tons on an average
growth scenario by 2010-2011 at a compounded annual growth rate of 8.6% which calls
for creation of over 60 million tons over the next 5 years. All indications are that the
material industry is poised for a period of growth and profitability.

The company has reduced its non operating expenses such as interest payments
every year. 14% interest bearing debentures were redeemed or repaid, as and when it
matured or prematurely by taking 12.5% interest cash credits from financial institutions.
The reduction in non-operating expenses and management overhead controlling policy.
Contributed to reduction cost per ton every higher interest bearing fund with lower
interest bearing fund increase in profit after tax.

Depreciation will play an important role in tax savings the more depreciation you
provide the more will be saving in tax. Depreciation is being a part of operating expenses
which is also part of cost of sale has decrease the profit and increase the cost of
production. The revaluation of assets and revaluation reserve is near a book entry and we
cannot attribute it as a real profit. Form year 2004 onwards the material industry is in
slum and is making huge book loss. But not cash losses. As the machinery has more than
25 years life the depreciation fund appearing is equal to almost the total cost of assets. Is
a good sigh and it is useful per taking further loans form the financial institutions

In 2006 the sales are at 1, 02, 136 lakhs and cost of sales 1, 05,151 lakhs. There
fore resulting to a loss of 3,000 lakhs. This is due to excess consumption of material in
manufacturing casts and in increase in excise duty. The other factors or increasing the
factory overheads and selling distribution overheads.

In 2007 the sales have increased by 19.62% and resulting in a profit of 4,175
lakhs. This is due to decreasing in the factory overheads and there was no increase in
office and administration overheads. Selling and distribution overheads have increased
considerable and it is less than the % of increase of sales.

82
In 2008 the sales have increased by 12.5% but cost of sales increased by 13.7%
there fore reducing profit marginally this is due to % of increase of raw material
consumption which is less than the sales increase and over absorption of factory
overheads, and over absorption of office overheads. Even marginal decrease in the selling
overheads. Have contributed to increase in profit over previous year.

In the year 2010 the company utilized it’s to almost total capacity 90% and
achieve higher % of profit than that of previous years. This due to reduction in cost of
reduction, power consumption, raw material controlled consumption. And decline in the
overheads contributed to higher profit.

Depreciation on fixed assets will also play as an important factor for the profit and
as tax shield. Land and buildings additions and their depreciations have contributed to
less profit in 2008. Almost 10,000 lakhs was invested in plant and machinery installation
and for processing modernize equipment installation of energy saving equipment have
contributed to cost reduction and decrease in the cost per ton vehicles and other moveable
assets for also acquired every year there by reducing profit before tax.

Form 2007 onwards till 2009 a steep increasing in the administration overheads
such as rates, and taxes, rent, other administration charges have contributed to increased
cost of sales, but in the year 2010 all administration overheads have came down
drastically because of the control measures in the other administration overheads is a
concern to the company. Decrease in the administration overheads have contributed to
higher profit in 2010.

The company policy of making investments have resulted in increased non


operating income in the form of dividend and interest every year in the year 2009 and
2010. The non operating incomes have tapped its peak level. The sales of assets and the
resulting profit have contributed to increase in non operating income. The company
policy has resulted in study increase of miscellineous income by 34.64% in 2006 and
48% in 2008 respectively.

83
The study decrease of overheads such as factory overheads, office and
administration overheads and selling and distribution overheads have contributed to cost
reduction programme implemented by the management. This is due to effective control
over factory overheads and controlling the labor turnover and effective utilization of
labor force. The selling and distribution overhead have increased considerably in tandem
with sales. The overhead cost per ton has decreased to Rs1548.00 per ton in 2008 from
1551 per ton in 2007

The companies cost reduction policy resulted in decrease in production cost per
ton from 2007 to 2010. The cost per ton is 1897 in the year 2006 and Rs1832 in 2007 and
for other decrease to 1815 in the year 2009. Played an important role in huge profits. The
decrease in the direct cost and indirect cost has contributed to the above.

The effective control overheads such as salaries and wages and other employee
related expenses. Have come down considerably in the year 2009. The attributable
salaries and wages per ton of production came down to Rs111 the year 2008, which was
Rs168 per ton in the year 2007.

The attributable selling and distribution overheads per ton of production have
marginally decreased. Form Rs441 per ton in 2007 to Rs413 in 2010. Fuel and power
cost per ton of cost have decrease by almost 10%. Because of the cost reduction measures
such as wind electricity generation project, installation of energy saving equipment in the
machinery. With the help of IREDEA loan have contributed to decreased cost per ton.
Investments were made in the last few years in energy saving equipment have resulted in.
ENERGY EFFICIENCY
There was further reduction in coal consumption which was as under.
Coal consumption-Kg tons of clinker
2005-06 2004-05
Dry process 139.50 140.50
Wet process 227.40 238.30

84
However, due to stop and start operations during the year, there was marginal
increase in power consumption with consumption for the dry process plants going up to
99.48 KWH/ton. Material and the wet process plants to 94.28 KWH/Ton.

The company also continued to focus on higher production of blended material


which was at 46% of the total material production during the financial year 2005-06.

All initiatives taken by the company in the earlier years in improving the kiln
output and process efficiencies have contributed in arresting the adverse financial results.
As mentioned, the erosion in the top line by about Rs.388 per Mt amounting to Rs.194
crores on the sales volume for financial year 2005-07, adversely impacted of which on
the sales volume for financial year 2005-07 is Rs.326 crores.

Power generation from your company’s wind mills, which has been utilized in
Tamilnadu plants, was 161 lakh units during the year under review, as against 162 lakh
units in the previous year.

As mentioned in our last report, the company is proceeding with the


implementation of the waste heat recovery project at vishnupuram plant and a MOU has
been signed between new energy development organization (NEDO), Japan, ministry of
commerce and industry, government of India and your company, to set up a model
project for power generation of 7.7 MW utilizing waste heat gases from kiln No.11 at
vishnupuram. The company has stared the civil works required for the project and the
first consignment of equipments has been received. The project is expected to be
commissioned by march 2007.
ENERGY EFFICIENCY
The company continued its efforts towards reduction of energy costs. Significant
savings were achieved in consumption of power per ton of material as under:
Power consumption KWH/Tonne of material
2006-07 2005-06
Dry process 89.31 94.28

85
Wet process 37.66 40.25
Power consumption of 72 KWH/ton of material achieved at dalavoi is one of the
best in the industry. There was marginal increase in consumption of coal/ton of clinker at
the dry process plants at 145 Kg/ton pf clinker in the previous year, reflecting the
variation in quality of coal used. The company continued its thrust towards increasing
production of blended material with PPC production constituting 49.3% of its total
material production as against 45.5% in the previous year.

Power generation from your company wind mills, which has been utilized in
Tamilnadu plants, was 173 lakh units during the year under review, as against 161 lakh
units in the previous year Waste heat recovery system for generation of power from waste
gas at the Vishnupuram material plant is nearing completion. All the equipment have
been installed and the plant will undergo cold run and pre commissioning tests July 2006
and is expected to be commissioned by earn August 2008. This will provide the
vishnupuram plant with 7.7 mw of very cheap power and help to bring down power costs
at this unit.

ENERGY EFFICINCY
There was further reduction in power consumption for the dry process plants to
88.39 KWH/Ton in the previous year. While the heat consumption was marginally
higher, the coal consumption per tonne of clinker has increased due to a drop in the
calorific value of coal supplies. Indonesia, which is a traditional source for import of coal
into India, had shifted its supplies to Korea and Japan due to paucity of Chinese coal,
which meat that more of high moisture and lower calorific value coal was supplied into
India, resulting in increase in per calorie cost and consumption.
COST REDUCTION

The company continued its efforts to increase production of blended material and
during 2007-08 the production of blended material production was increased to 54% from
49.30% in the previous year, thereby contributing to cost reduction.

86
The company has been continually reducing its manpower through voluntary
separation schemes and by not filling up vacancies caused by natural attribution wherever
surplus. During the financial year, the number of employees of the company was further
reduced to 3518 from 3815 as at the end of the previous year. The company has effected
reduction in manpower by 1123 employees or 24% since March 2001. Manpower
reduction is an ongoing exercise and we expect to further prune our employee strength.

ALTERNATE POWER

The power generation from your company’s wind mills was 158 lakh units during
the year under review, which was used by the company’s plants in Tamil Nadu
The unique waste heat recovery system for generation f power from waste gas at
vishnupuram material plant was commissioned during the yea under review; the
generation of power from the waste heat recovery system was 293 lakh units.

The company is also availing the gas power from plant commissioned by
coromandel electric company limited, from 28th October 2007. The entire power from this
plant is being utilized by the units in Tamilnadu, which is available at a considerably
cheaper price as compared to the EB tariff applicable. During the year ended 31 march,
2008, your company has availed 501 lakh units of power from coromandel electric
company Ltd.

ENERGY EFFICIENCY

The company has taken a lot of initiatives in containing the energy costs. The
consumption is at optimum levels considering the age of the plants and further
improvements are likely with more investment which are being contemplated. Your

87
company could achieve significant in the cost of energy through souring of power from
alternative sources.

Your company’s wind mill generated 152 lakh units of power during the year
under review, which was used by the company’s plants in Tamil Nadu. The unique waste
heat recovery system at vishnupuram plant generated 648 lakh units during the year
review through waste heat recovery.

Coromandel electric company Ltd, commissioned their third engine at their plant
in Ramanathapuram during the 4th quarter of the year under review, the entire power from
this plant is being stylized by the units in Tamilnadu, which is available at considerably
cheaper price as compared to the electricity board tariff applicable. During the year under
review your company has availed 1489 lakh KWH of power.

All the above efforts reduced the average cost of power, as detailed in annexure to
Directors report.

COST REDUCTION

88
The company continued its efforts to increase production of blended material and
during 2006-07 production of blended material increased to 37.50 lakh tons as compared
to 29.56 lakh Tons in 2006-07 contributing significantly to the bottom line

Your company’s ongoing efforts towards manpower reduction through voluntary


separation scheme resulted. In further reduction of manpower during the year under
review. The total number of employees of the company was further reduced to 3008 from
3518 as at the end of the previous year. The company has so far affected a reduction of
1633 employees since March 2000. The company expects to pursue its efforts towards
timing its manpower in the coming years also.

Through judicious mix of imported coal, your companies bring down the coal
consumption per ton of clinker to 153 Kegs from 161Kgs in the previous year.

CONCLUSIONS:

89
The internal control system should be adequate and better control should be
exercised on each element of cost.

The company’s policy of redemption of ICD’S and other high Interest bearing
funds with low interest working capital finance contributed to the increase in PAT in
2005. The company should explore the new areas of financing so that it can cut down the
operating expenses.

The global recession is a cause of concern and the manufacturing Sector, the
demand – supply mismatch and price war should be carefully monitored and steps to be
taken to overcome.

SUGGESTIONS:

90
Relationship should be maintained to decrease labor turnover.

The royalty on mining aggregate should be reviewed from time to time and steps
have to be taken for reduction in above cost.

The overhead cost per ton has decreased slightly during a period 2007-10. This is
due to a reduction in the factory overheads and control overheads.

Even though selling and distribution cost have increased slightly have no effect on
the overhead reduction but it effect on increase in rate of final product.

The salaries and wages have decreased slightly during a period 2007-10. This is
due to a reduction in the factory overheads and control overheads.

Even though administration and other charges have decreased slightly have no
effect on the overhead reduction.

Even though own generation cost has increase slightly it has no effect over.
Overall power consumption cost.

BIBLIOGRAPHY:

91
TEXT BOOK

• “I.M Pandey”, “Financial Management”, (8th Edition), “Vikas Publishers


2010”
Page no.121-124.

• “Prasanna Chendra”, “Analysis of Fixed Assets management”, (5th


Edition),
“TATA McGRAW HILL, Publication Company Ltd New Delhi, page no:
234-235.

• “M Y KHAN”, Financial Services, (4th Edition), McGRAW HILL publication


Company Ltd, New Delhi, page no: 45.

• “M Y KHAN”, Management Accounting and Financial Analysis, (2nd Edition) ,


TATA McGRAW HILL, publication, company Ltd, New Delhi page no: 67-68.

• “SANDRA ROWE”, Fixed control, (1st Edition), TATA Mc GRAW HILL


Publication Company Ltd, New Delhi, page no: 456-458.

• “JHON STEEMERS”, Supply chain Inventory Management, The Dryden press 1993
Page no: 25-28.

• “ROGER BROOKS”, Inventory Record Accuracy, (7th Edition), The Dryden press
Page no: 45-47

Websites: Web Site : www. tecumseh India.com

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