hal

PREFACE

Finance as a subject of study, has received wide-spread support from both

academic and business segment people.

The topic “FINANCE MANAGEMENT, COST REDUCTION & COST

CONTROL” in HAL was selected as to understand the financial need and

importance with special reference to HAL ACCESSORIES DIVISION

LUCKNOW.

As the cost control refers to the administration of all the analysis of cost control

ratios and sources and application of funds and the company by studying,

interpreting various financial statements using various techniques such as

comparative statements analysis etc.

Even efforts have been made to collect the relevant information about the topic.

The present study about “FINANCE MANAGEMENT, COST REDUCTION &

COST CONTROL” in HAL Accessories Division, Lucknow it based on my six

weeks project study in FINANCE AND ACCOUNT DEPARTMENT in HAL.

This training gives me an opportunity to make a study and analysis the system

adopted by the organization. It enables me to build the practical knowledge

acquired during the class study with practical training received during my project.

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ACKNOWLEDGEMENT

This is to express my heartiest gratitude towards all those who helped and

inspired me to complete my project report.

I feel immense pleasure in submitting my summer training project report.

I am highly thankful to my Director Prof. J.K.Johari for his support and

encouragement that he provided me during the tenure of the project report.

I am also thankful to my H.O.D Mr. K.K.Mishra and to my faculty guide

Mrs. SHRUTI KHARE for their kind and con1stant support and guidance.

At the end I would like to mention about the constant motivation and help

that I received from my family, teachers, friends and batch mates for completing

my project report.

NIDHI YADAV

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EXECUETIVE SUMMARY

Topic: - Finance Management, Cost Reduction and Cost Control.

Objective:-

1. COST REDUCTION AND CONTROL:

To have full coverage of finance control by following various budgets i.e.

capital budget, revenue budget (manpower budget, purchase budget, welfare

budget, maintenance budget, ways and means etc) and making all efforts to

reduce the cost from each element of cost by curtailing the expenditure

estimated in the budget to a reasonable cost, so as to reduce the cost and

increase the profitability of the organization.

2. FINDING VARIOUS METHODS FOR IMPLEMENTATION :

To find out various methods like EOQ (Economic Order Quantity), ABC

analysis etc which are implemented by the organization to control cost under

various heads.

Research Methodology:-

Types of Research: - Descriptive research design for the final survey.

Source of Data: - Questionnaire, Personal Interviews and Departmental

Analysis.

Sample Design: - Probability sampling design.

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Sample Size: - 50 people.

Recommendation:-

There should be facility of intranet so fax and such other things must be

done through it that can reduce time and money.

For attendance finger print system should be adopted so that actual

person’s attendance can be mentioned.

The time delay between rising of purchase order and preparation of RDR

should be reduced.

Wages to direct workers should be given through piece rate system.

Efficiency of indirect workers should be measured so that slackness can

be sorted out.

Conclusion:-

HAL is one of the largest PSU under the department of defense production, GOI

and is a “NAVRATNA” company ranked 34th in the list of world’s top 100 defense

companies. HAL with its wide spectrum of expertise in design, development and

manufacture of aircrafts, helicopters, engines, accessories and avionics has

emerged as major aeronautical complex in Asia.

As herein, the projects and items need huge investments than any other

organization and confidential factor is also there too much extent but as much

information is extracted shows that cost control is being performed quite good

that’s why it is in so much profit.

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PROFILE OF THE COMPANY

HINDUSTAN AERONAUTICS LIMITED

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GENERAL PROFILE

Hindustan Aeronautics Limited (HAL) based in Bangalore, India, is one of

Asia’s largest aerospace companies. Under the management of the Indian

Ministry of Defence, this public sector company is mainly involved in aerospace

industry, which includes manufacturing and assembling aircraft, navigation and

related communication equipment, as well as operating airports. HAL built the

first military aircraft in South Asia and is currently involved in the design,

fabrication and assembly of aircraft, jet engines, helicopters and their

components and spares. It has several facilities throughout India including Nasik,

Korwa, Kanpur, Koraput, Lucknow, and Hyderabad. The German engineer Kurt

Tank designed the HF-24 Marut fighter-bomber, the first fighter aircraft made in

India.

HISTORY OF THE COMPANY

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Hindustan Aeronautics has a long history of collaboration with several other

international and domestic aerospace agencies such as the Airbus Industries,

Boeing, Sukhoi Aviation Corporation, Israel Aircraft Industries, RSK MiG,

BAESystems, Rolls-Royce plc, Dassault Aviation, Dornier Flugzeugwerke,

Aeronautical Development Agency and Indian Space Research Organization.

HAL was established as Hindustan Aircraft in Bangalore in 1940 by Walchand

Hirachand to produce military aircraft for the Royal Indian Air Force. The initiative

was actively encouraged by the Kingdom of Mysore, especially by the Diwan, Sir

Mirza Ismail. The British Government bought a one-third stake in the company by

April 1941 as it believed this to be a strategic imperative. Later in April 1942, it

bought out the stakes of Walchand Hirachand himself and other promoters so

that it can act freely. The decision by United Kingdom was primarily motivated to

boost British military hardware supplies in Asia to counter the increasing threat

posed by Imperial Japan during Second World War. However, the Mysore

Kingdom refused to sell its stake in the company but yielded the management

control over to the British Government. Thus, within 2 years of establishment, it

was nationalized.

Hindustan Aeronautics Limited (HAL) came into existence on 1st October

1964.HAL was set up as an amalgamation of Hindustan Aircraft Limited along

with Aeronautics India Limited and Aircraft Manufacturing Depot located in

Kanpur, India. Hindustan Aeronautics Limited has it headquarter located at

Bangalore, India. HAL is one of the largest aerospace companies which are run

by the Ministry of Defense. The principal activities of

HAL involve manufacturing aircraft, aerospace,

navigation, and instruments for communication

purposes. Apart from these, few other activities

performed by HAL are Designing, manufacturing, and

collecting aircraft, jet engines, helicopters, along with

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their elements and spares. Hindustan Aircraft Limited which located at Bangalore

was incorporated by the industrialist the late Seth Walchand Hirachand

December 1940. The Government of India became a stakeholder of the company

in 1941 and seized the management department in 1942. HAL has 19Production

Units and 9 Research and Design Centers in 7 locations in India. The Company

has an impressive product track record - 12 types of aircraft manufactured with

in-house R & D and 14 types produced under license. HAL has manufactured

over 3550 aircraft, 3600 engines and overhauled over 8150 aircraft and 27300

engines. HAL has been successful in numerous R & D programs developed for

both Defence and Civil Aviation sectors. HAL has made substantial

Progress in its current projects:

Dhruv, which is Advanced Light Helicopter (ALH)

Tejas - Light Combat Aircraft (LCA)

Intermediate Jet Trainer (IJT)

Various military and civil upgrades.

Dhruv was delivered to the Indian Army, Navy, Air Force and the Coast Guard in

March 2002, in the very first year of its production, a unique achievement.

HAL has played a significant role for India's space programs by participating in

the manufacture of structures for Satellite Launch Vehicles like.

PSLV (Polar Satellite Launch Vehicle)

GSLV (Geo-synchronous Satellite Launch Vehicle)

IRS (Indian Remote Satellite)

NSAT (Indian National Satellite)

HAL has formed the following Joint Ventures (JVs):

BAeHAL Software Limited

Indo-Russian Aviation Limited (IRAL)

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Snecma HAL Aerospace Pvt. Ltd.

SAMTEL HAL Display System Limited

HALBIT Avionics Pvt. Ltd.

HAL-Edgewood Technologies Pvt. Ltd.

INFOTECH HAL Ltd

Apart from these seven, other major diversification projects are Industrial Marine

Gas Turbine and Airport Services. Several Co-production and Joint Ventures with

international participation are under consideration.

Hal’s supplies / services are mainly to Indian Defence Services, Coast Guards

and Border Security Forces. Transport Aircraft and Helicopters have also been

supplied to Airlines as well as State Governments of India. The Company has

also achieved foothold in export in more than 30 countries, having demonstrated

its quality and price competitiveness.

HAL has won several International & National Awards for achievements

in R&D, Technology, Managerial Performance, Exports, Energy

Conservation, Quality and Fulfillment of Social Responsibilities.

HAL was awarded the “INTERNATIONAL GOLD MEDAL AWARD” for

Corporate Achievement in Quality and Efficiency at the International

Summit (Global Rating Leaders 2003), London, UK by M/s Global Rating

and UK in conjunction with the International Information and Marketing

Centre (IIMC).

HAL was presented the International - “ARCH OF EUROPE” Award in

Gold Category in recognition for its commitment to Quality, Leadership,

Technology and Innovation.

At the National level, HAL won the "GOLD TROPHY" for excellence in Public

Sector Management; instituted by the Standing Conference of Public

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Enterprises (SCOPE).The Company scaled new heights in the financial year

2006-07 with a turnover of Rs.7, 783.61 Cores.

PRODUCT OF HAL

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PRODUCTS IN CURRENT MANUFACTURING RANGE

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SU 30 MKI

Twin-seater, Multi-role, Long range Fighter /

Bomber / Air Superiority Aircraft.

MIG-27 MSingle-seater Tactical Fighter / Bomber withVariable sweep wings.

MIG-21 VARIANTSSingle-seater Front line Tactical Interceptor/

Fighter Aircraft.

AIRCRAFT WESTERN ORIGIN

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JAGUAR INTERNATIONAL

HAL commenced production of Jaguar International - deep penetration strike and

battlefield tactical Support Aircraft in 1979 under license from British Aerospace,

including the engine, accessories and

avionics. Jaguar aircraft is designed with 7

hard points (4 under wing, 2 overawing and 1

under fuselage) capable of carrying a huge

load of several of weapons in different

combinations to meet the Customers’ needs.

DHRUV (ADVANCED LIGHT HELICOPTER)

With a proven track record and established technology for manufacture of

helicopters and its components, the Helicopter Division commenced series

production of Dhruv (Advanced Light

Helicopter) in 2000 - 2001. The ALH is a multi-

role, multi-mission helicopter in 5.5 ton class,

fully designed and developed by HAL. Built to

FAR 29specifications, Dhruv is designed to

meet the requirement of both military and civil

operators.

CHETAK

The Helicopter Division manufactures the versatile and multi-purpose Chetek

Helicopters for Civil and Military applications both for Domestic and International

customers

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OBJECTIVES OF HAL

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To ensure availability of Total Quality People to meet the Organizational

Goals and Objectives.

To have a continuous improvement in Knowledge, Skill and Competence

(Managerial, Behavioral and Technical)

To promote a Culture of Achievement and Excellence with emphasis on

Integrity, Credibility and Quality

To maintain a motivated workforce through empowerment of Individual

and team building.

To enhance Organizational Learning

To play a pivotal role directly and significantly to enhance Productivity,

Profitability and improve the Quality of Work Life

VISION OF THE COMPANY

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"To make HAL a dynamic, vibrant, value-based learning organization with human

resources exceptionally skilled, highly motivated and committed to meet the

current and future challenges. This will be driven by core values of the Company

fully embedded in the culture of the Organization".

MISSION OF THE COMPANY

Enable all those working for HAL to give their best to ensure their all-round

growth as well as that of the organization. To become a globally competitive

aerospace industry while working as an instrument for achieving self-reliance in

design, manufacture and maintenance of aerospace Defence equipment and

diversifying to related areas, managing the business on commercial lines in a

climate of growing professional competence. "To become a globally competitive

aerospace industry while working as an instrument for achieving self-reliance in

design, manufacture and maintenance of aerospace Defense equipment and

diversifying to related areas, managing the business on commercial lines in a

climate of growing professional competence ".

VALUES OF THE COMPANY

CUSTOMER SATISFACTION

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We are dedicated to building a relationship with our customers where we become

partners in fulfilling their mission. We strive to understand our customers ' needs

and to deliver products and services that fulfill and exceed all their requirements.

COMMITMENT TO TOTAL QUALITY

We are committed to continuous improvement of all our activities. We will supply

products and services that conform to highest standards of design, manufacture,

reliability, maintainability and fitness for use as desired by our customers.

COST AND TIME CONSCIOUSNESS

We believe that our success depends on our ability to continually reduce the cost

and shorten the delivery period of our products and services. We will achieve this

by eliminating waste in all activities and continuously improving all processes in

every area of our work.

INNOVATION AND CREATIVITY

We believe in striving for improvement in every activity involved in our business

by pursuing and encouraging risk-taking, experimentation and learning at all

levels within the company with a view to achieving excellence and

competitiveness.

TRUST AND TEAM SPIRIT

We believe in achieving harmony in work life through mutual trust, transparency,

co-operation, and a sense of belonging. We will strive for building empowered

teams to work towards achieving organizational goals.

RESPECT FOR THE INDIVIDUAL

We value our people. We will treat each other with dignity and respect and strive

for individual growth and realization of everyone's full potential.

INTERNATIONAL AND DOMESTIC DEALS

INTERNATIONAL DEALS

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The US$10 billion fifth-generation fighter jet program with the Sukhoi

Corporation of Russia.

US$1 billion contract to manufacture aircraft parts for Boeing.

Multi-role transport aircraft project with Ilyushin of Russi US$600 million.

120 RD-33MK turbofan engines to be manufactured for MiG-29K by HAL

for US$250 million.

Contract to manufacture 1,000 TPE331 aircraft engines for Honeywell

worth US$200,000 each (estimates put total value of deal at US$200

million).

US$120 million deal to manufacture Dornier 228 for RUAG of Switzerland.

Manufacture of aircraft parts for Airbus Industries worth US$150 million.

US$100 million contract to export composite materials to Israel Aircraft

Industries.

US$65 million joint-research facility with Honeywell and planned

production of Garrett TPE331 engines.

US$50.7 million contract to supply Advanced Light Helicopter to

Ecuadorian Air Force [11] HAL will also open a maintained base in the

country.

US$30 million contract to supply avionics for Malaysian Su-30MKM.

US$20 million contract to supply ambulance version of HAL Dhruv to

Peru.

Contract of 3 HAL Dhruv helicopters to Turkey in a deal worth US$20

million.

Supply of HAL Dhruv helicopters to Mauritius' National Police in a deal

worth US$7 million.

Unmanned helicopter development project with Israel Aircraft Industries.

DOMESTIC DEALS

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180 Sukhoi Su-30MKI being manufactured at HAL's facilities in Nasik and

Bangalore. The total contract, which also involves Russia's Sukhoi

Aerospace, is worth US$3.2 billion.

200 HAL Light Combat Helicopters for Indian Air Force and 500 HAL

Dhruv helicopters worth US$5.83 billion.

US$900 million aerospace hub in Andhra Pradesh.

US$57 million upgrade of SEPECAT Jaguar fleet of the Indian Air Force.

US$55 million fighter training school in Bangalore in collaboration with

Canada's CAE.

64 MiG-29s to be upgraded by HAL and Russia's MiG Corporation in

program worth US$960 million. Licensed production of 82 BAe Hawk132.

CUSTOMERS OF THE COMPANY

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International Customers Domestic Customers

Airbus Industries, France APPH Bolton, UK BAE Systems, UK Chilton, UK Coast Guard, Mauritius Corporate Air, Philippines Cosmic Air, Nepal Dassault Aviation, France Dowty Aerospace

Hydraulics, UK EADS, France ELTA, Israel Gorkha Airlines, Nepal Hampson, UK Honeywell International,

USA Island Aviation Services,

Maldives Israel Aircraft Industries,

Israel Messier Dowty Ltd., UK Mitsubishi Heavy

Industries, Japan MOOG, USA Namibian Air Force,

Namibia Peruvian Air Force , Peru Rolls Royce Plc, UK Royal Air Force, Oman Royal Malaysian Air

Force, Malaysia Royal Nepal Army, Nepal Royal Thai Air Force,

Thailand

Air India Air Sahara Airports Authority of India Bharat Electronics Border Security Force Coal India Defense Research & Development

Organization Govt. of Andhra Pradesh Govt. of Jammu & Kashmir Govt. of Karnataka Govt. of Maharashtra Govt. of Rajasthan Govt. of Uttar Pradesh Govt. of West Bengal Indian Air force Indian Airlines Indian Army Indian Coast Guard Indian Navy Indian Space Research Organization Jet Airways Kudremukh Iron ore Company ltd. NALCO Oil & Natural Gas Corporation Ltd. Ordnance Factories Reliance Industries United Breweries

EVOLUTION AND GROWTH OF THE COMPANY

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The Company's steady organizational growth over the years with consolidation

and enlargement of its operational base by creating sophisticated facilities for

manufacture of aircraft / helicopters, aero engines, accessories and avionics is

illustrated below.

ORGANIZATION STRUCTURE

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ACHIEVEMENTS / AWARDS

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HAL has won several International & National Awards for achievements in R&D,

Technology, Managerial Performance, Exports, Energy Conservation, Quality

and Fulfillment of Social Responsibilities.

HAL is the only one PSU which has been included in “NAVRATNA”

category.

 HAL was awarded the “INTERNATIONAL GOLD MEDAL AWARD” for

Corporate Achievement in Quality and Efficiency at the International

Summit (Global Rating Leaders 2003), London, UK by M/s Global Rating

and UK in conjunction with the International Information and Marketing

Centre (IIMC).

HAL was presented the International - “ARCH OF EUROPE” Award in

Gold Category in recognition for its commitment to Quality, Leadership,

Technology and Innovation.

 At the National level, HAL won the "GOLD TROPHY" for excellence in

Public Sector Management,  instituted by the Standing Conference of

Public Enterprises (SCOPE)

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SERVICES

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FINANCIAL HIGHLIGHTS OF HINDUSTAN AERONAUTICS LTD

Hindustan Aeronautics Limited (HAL) has cruised past the Rs.10, 000 crore mark for the first time with a sales turnover of Rs.10260 crores during the Financial Year 2008-09. The profit of the Company (Profit before Tax) soared to Rs.2260 crores.

The highlights are given below:

(Rupees in Crores)

Particulars 2007-08 2008-09 Growth-over

Sales 8625 10260 18.96%

VOP 8791 11162 26.97%

Profit before tax 2164 2260 4.44%

Profit after tax 1632 1559 -4.47%

Gross Block 2255 2661 18.00%

INTRODUCTION OF HAL ACCESSORIES DIVISION LUCKNOW

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HAL Lucknow Division was established in 1973. The Division was setup with the

objective of supplying six types of systems equipment of Kiran and Marut

aircrafts. But now is holds a peculiar position in the company’s setup practically,

all other divisions are dependant for supply of accessories from Lucknow

Division. A mind boggling range of about 550 different products are being

produced and assembled under one roof, using totally diverse technologies.

The Division has also built up design and development capability and

indigenously developed electrical, hydraulic and other items which are

manufactures for use in aircraft as well as for fighting vehicles.

At present division has 3207 employees out of which 2625 are workmen (1356

direct and 1269 indirect) and 582 officers. The division being a public sector

organization has extended a lot of statutory and non-statutory welfare facilities.

The human relations and discipline matters are regulated in the division through

well-defined system. Service matters of workmen are regulated through certified

Standing Orders while in the case of officers are taking care of by the Conduct

Appeal and Discipline Rules. There are 7 registered Trade Unions presently

functioning in the Lucknow Division in which H.A.E.A (Hindustan Aeronautics

Employees Association) is the majority union and has been recognized by the

management along with these is one officer’s Association H.A.O.A (Hindustan

Aeronautics Employees Association) to represent the officers of HAL.

HAL Lucknow Division is having 293 acres land area. In 48 acres factory

premises is constructed and rest 2445 acres are used of township.

HAL AT A GLANCE

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1940 Hindustan Aircraft Ltd. Was set up by Late. Sri Walchand

Hirachand in association with then Govt. of Mysore, as a Private

Ltd. Company.

1941-42 First product Harlow Trainer and curliest hawk Aircraft handed over

to Govt. of India Company was handed over United States Air

Force.

1942-45 HAL repaired over 1000 different varieties of aircraft and 3800

piston engines.

1945 Govt. of India took over the management of HAL again after the

world war.

1948-49 First Percival prentice aircraft assembled.

1951 The control of HAL was shifted from ministry of industries to

Ministry of Defence.

1953-54 The first Hindustan Trainer (HT-II) had its maiden flight.

1956 HAL came under the public sector.

1960 Aircraft manufacturing depot was established at Kanpur.

1662 Aeronautics India Ltd was formed to manufacture MIG-21 Aircraft

Three factories at Nasik, Koraput and Hyderabad established.

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1964 HAL was dissolved and its assets were merged with Aeronautics

India Ltd and the company by the name of Hindustan Aeronautics

Limited was formed.

1969 An agreement with USSR was reached for the license production of

MIG-21 aircraft.

1970 Helicopter Division was established to manufacture helicopters.

1973 Lucknow Division established to manufacture, instruments and

accessories.

1979 Agreement with British Aerospace for manufacturing Jaguar

Aircraft.

1982 Agreement with USSR for license production of MIG-27M aircraft.

1983 Korwa Division of HAL formed.

1990 Design and development of Light Combat Aircraft (LCA).

1991 Development of Advance Light Helicopter (ALH).

1993 Certification of ISO-9001.

1998 IMGT, a new division established at Bangalore.

2000 Certification of ISO-14001.

2003 License permitted by Russia for manufacturing of SU-30 Aircraft.

PRODUCTS OF LUCKNOW DIVISION

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Electronics 1.State investment

2.DC system control and Production unit

3. AC system control and protection unit

4. Fuel management system

5. Land management system

Gyro-Instruments 1. Direction Gyros

2. Gyro Horizons

3. Rate Gyros

4. Synctors

Hydraulics 1. Accumulators

2. Servo Jacks

3. Gear Pumps

4. Activators

5. Motors

6. Value

Ground Support 1. Ground Power Units

Equipment 2. Hydraulic Trolleys

3. Customs Built fuel/Hydraulic test rigs

Wheels & Brakes 1. Main Wheels

2. Nose Wheels

3. Carbon composite brake pads

Sensors and Switches 1.Capacitancetypefuel content qualifying

Probes.2. Temptation Sensor + Switches

Conventional 1. Altimeters

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2. Vertical Speed Indicators

3. Jet pipe temperature indicators

4. Engine RPM indicators

Electrical 1. D. C. Generators

2. Alternators

3. Transformers Rectifier Units

4. Integrated Drive Generator

Fuel System 1. Main Pumps

2. Heat Pumps

3. Fuel Control Units

4. Booster Pump

Environment Control 1. Cold Air Units

System 2. Ventures

3. Water Extractors

4. Valves

Precision 1. All ranges NC Machines up to 5 Axis

Manufacturing 2. Precision Conventional machine

Capabilities

FUTURE PROSPECTS

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Company is planning to provide “AJT” (Advance Jet Trainer) named-

“HAWK” in September 2008 to the “Air Force of India”.

The projects which are in line for future includes HJT (Hindustan Jet

Trainer) named- “KIRAN”, Sukhoi-30 named “OJAS”, PTA (Pilotless

Target Aircraft) named “Lakshay” etc.

The company has got permission to provide LCA (Light Combat Aircraft)

named- “TEJAS” to “Indian Air Force” up to 2010 with all facilities.

The company has also planned to start the projects like CAT (Combat

Aircraft Trainer), LCH (Light Combat Helicopter) and MLH (Medium Light

Helicopter).

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TRADE UNIONS IN HAL LUCKNOW DIVISION

1. HAEA Hindustan Aeronautics Employees Association (Recognized)

2. HALU Hindustan Aeronautics Limited Employees Union

3. HARSS Hindustan Aeronautics Rastriya Sharam Sansthan

4. HADEA Hindustan Aeronautics Diploma Engineers Association

5. HAPKS Hindustan Aeronautics Prashikshit Karamachari Sangh

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PROJECT PROFILE

Financial Management

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Financial Management can be defined as:-

The management of the finances of a business/organization in order to

achieve financial objectives

Taking a business as the most common structure, the key objectives of

financial management would be to:

• Create wealth for the business

• Generate cash, and

• Provide a return on investment keeping in mind the risks that the business is

taking and the resources invested

There are three primary elements to the process of financial management:

FINANCIAL PLANNING

Management need to ensure that sufficient funding is available to meet the

needs of the business. In the short term, funding may be needed to invest in

equipment and stocks, pay employees and fund sales made on credit.

In the medium and long term, funding may be needed for significant additions

to the productive capacity of the business or to facilitate acquisitions.

FINANCIAL CONTROL

Financial control is a critically important activity to help the business ensure

that said business is meeting its goals. Financial control addresses questions

such as:

• Are assets being used efficiently?

• Are the businesses assets secure?

•Does management act in the best interest of the shareholders and in

accordance with business rules?

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FINANCIAL DECISION MAKING

The primary aspects of financial decision making relate to investment,

financing and dividends:

• Investments must be financed in some way; however there are always

financing alternatives that can be considered. For example it is possible to

raise funds from selling new shares, borrowing from banks or taking credit

from suppliers.

• A key financing decision is whether profits earned by the business should be

retained rather than distributed to shareholders via dividends. If dividends are

too high, the business may be starved of funding to reinvest in growing

revenues and profits.

COST MANAGEMENT (CONTROL AND REDUCTION)

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COST CONCEPT

The term "cost" is synonymously used for the term "expense", which refers to

sacrifice. According to Committee of cost concepts-"Cost is foregoing, measured

in monetary terms, incurred or potentially to be incurred to achieve a specific

objective."

Controlling Cost via Responsibility Accounting-

To control cost these fundamentals should be observed-

Fixing responsibility to control.

Limiting the individuals control efforts to his controllable costs

Reporting the performance of individual.

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CLASSIFICATION OF COSTS

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Classification by Nature:

i. Direct cost - Direct cost is that cost which can be identified

with a cost centre or a cost unit. For e.g. cost of direct

materials, cost of direct labour.

ii. Indirect cost - Cost which cannot be identified with a

particular cost centre or cost unit is called indirect costs. For

e.g. wages paid to indirect labour.

Cla ssification By Behavior:

i. Fixed cost - Fixed cost is that cost which remains constant

at all levels of production. For e.g. rent, insurance.

ii. Variable cost - The cost which varies with the level of

production is called variable cost i.e., it increases on

increase in production volume and vice-versa. For e.g. cost

of materials, cost of labour.

iii. Semi-variable cost - This cost is partly fixed and partly

variable in relation to the output. For e.g. telephone bill,

electricity bill.

C lassification by Element: The cost is classified into (a) Direct Cost,

and (b) Indirect Cost according to elements, viz, Materials, Labour and

Expenses

Cl assification by Function:

i. Production cost - It is the cost of the entire process of

production. In other words it is nothing but the cost of

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manufacture which is incurred up to the stage of primary

packing of the product.

ii. Administrative cost- It is the indirect cost pertaining to the

administrative function which involves formulation of policies,

directing the organization and controlling the operations of

an undertaking. This cost is not related to any other

functions like selling and distribution, research and

development etc.

iii. Selling cost - Selling cost represents the indirect cost which

isincurredfor

(a) seeking to create and stimulate demand

(b) securing orders.

iv. Distribution cost - It is 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-use.

v. R&D cost - "Research Cost" and "Development cost" are

two different types of costs.

Research cost is the cost of researching for new products,

methods and applications. Development cost is the cost of

the process which begins with the implementation of the

decision to produce the new product or apply the new

method and ends with the commencement of formal

production of that product or by that method.

vi. Pre-production cost - It is that part of the development cost

which is incurred for the purpose of a trial run, before the

commencement of formal production.

vii. Conversion cost - It is the cost incurred for converting the

raw material into finished product. It comprises of direct

labour cost, direct expenses and factory overheads.

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viii. Prime cost - Prime cost is the aggregate of direct material

cost, direct labour cost and direct expenses. The term ‘direct’

indicates that the elements of cost are traceable to a

particular unit of output.

Classification By Controllability:

i. Controllable cost - The cost, which can be influenced by

the action of a specified person in an organization, is known

as controllable cost. In a business organization, heads of

each responsibility centre are responsible to control costs.

Costs that they are able to control are called controllable

costs and include material, labour and direct expenses.

ii. Uncontrollable cost - The cost which cannot be influenced

by the action of the person heading the responsibility centre

is called uncontrollable cost. For e.g. all the allocated costs

and the fixed costs.

Classification by Normality:

i. 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. Normal cost is charged to the

respective product / process.

ii. 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.

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Classification by Time when Computed:

Sunk cost -Historical cost which is incurred in the past is

known as sunk cost. This cost is not relevant in decision

making in the current period. For e.g. In the case of a

decision relating to the replacement of a machine, the written

down value of the existing machine is a sunk cost and hence

irrelevant to decision making.

Estimated cost - It is an approximate assessment of what

the cost will be. It is based on past data adjusted to

anticipated future changes.

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ELEMENTS OF COST

The following diagram depicts the various elements of cost:

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Material Cost:

Direct Materials - Materials which are present in the finished product or can be identified in the finished product are called direct materials. For e.g. Coconuts in case of coconut oil or wood in a wooden cupboard.

Indirect Materials - Indirect materials are those materials which do not normally form part of the finished products or which cannot be directly traced to the finished product. For e.g. Stores, oil, grease, cotton wool etc.

Labour Cost:

Direct Labour - Labour which can be attributed wholly to a particular product, process or job is called direct labour. It is the labour utilized in converting raw materials into finished products. For e.g. Labour employed in the crushing department of an oil mill.

Indirect Labour - Labour which cannot be identified with a particular product, process or job is called indirect labour. Indirect labour cost is apportioned to cost units or cost centres. For e.g. Maintenance workers.

Expenses:

Direct Expenses - Expenses incurred (except direct materials and direct labour) specifically for a product, process or job is known as direct expenses. They are also called "chargeable expenses". For e.g. Hiring charges for a machine specifically hired for a particular process, excise duty, royalty.

Indirect Expenses - Expenses incurred other than direct expenses are called indirect expenses. For e.g. Factory rent & insurance, power, general repairs.

Overheads:

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Overheads is the sum total of indirect materials, indirect labour and indirect expenses. Functionally overheads can be classified as..

i. Production / Works overheads

ii. Administrative overheads

iii. Selling overheads

COST CONTROL

Cost control can be defined as comparative analysis of actual costs with

appropriate standards or budgets to facilitate performance evaluation and

formulation of corrective measures. It aims at accomplishing conformity between

actual result and standards or budgets. Cost control is keeping expenditures

within prescribed limit. Cost control has following features:

Creation of responsibility centre with defined authority and responsibility

for cost incurrence.

Formulation of standards and budgets that incorporate objectives and goals to be

achieved.

Timely cost control reports (responsibility reporting) describing variance between

budgets and standards and actual performance.

Formulation of corrective measures to eliminate and reduce unfavorable

variances.

A systematic and fair plan of motivation to encourage workers to accomplish

budgetary goals.

Follow-up to ensure that corrective measures are being effectively applied.

Cost control does not necessarily mean reducing the cost but its aim is to have

the maximum utility of the cost incurred. Thus its main objective is the

performance of same job at a lower cost or better performance for the same cost.

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Cost control process involves:

a) Setting targets and standards.

b) Ascertaining actual performance.

c) Comparing actual performance with targets.

d) Investigating the variances.

e) Taking corrective action.

In cost control, costs are optimized before they are incurred.

For cost control we should:

1. Identify major cost centre – production, sales, financing, administration

and research and development.

2. Identify major type of include – staff cost, raw material and supplies, utility

bills for energy and water, capital expenditure etc.

3. Choose the cost to focus on first :

Costs that may offer easy savings.

Large costs that you may be able to change in short term.

Systematic Cost Control:

1. Start from the business objective.

2. Establish standard costs for achieving your objectives.

3. Establish realistic budgeted cost based on the actual experience. It should

be higher than the standard cost, sometimes it may be lower.

4. Record actual cost and compare them with the standard and budgeted

cost.

Costs that are higher than the budgeted cost indicate opportunities

to reduce cost in short term.

2. Periodically review.

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Easy Savings:

1. Checking supplier invoices may reveal overcharging (e.g. double billing,

missing discounts).

2. Eliminate unnecessary costs :

Get rid of overcapacity.

Cut out blatant waste.

Scrap useless processes.

2. Crack down excessive costs.

3. Root out inefficiency.

Opportunities:

1. Reduce your payroll cost :

Outsource non-core activities.

Use part-time employees instead of full time.

Redesign processes to cut out activities that waste time.

Make more use of technology.

2. Improve your purchasing :

Switch to cheaper supplier or negotiate for price reductions or

higher discount for early payments.

Agree long-term contracts or guarantee minimum annual purchase

volumes in return for lower prices.

Built personal relationship with supplier to encourage preferential

treatment.

Simplify purchasing procedure to reduce your cost and those of

your suppliers.

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Form strategic buying alliance in businesses in your area or trade

to buy large volume.

3. Find ways to make production more efficient :

Trim back product range and increase production runs.

Use standard components to lower design, purchasing and

manufacturing cost.

Change processes to minimize wastage of raw material and

energy.

Improve quality control to cut rejection rates and reworking costs.

4. Review the Finances :

Finance fixed requirements using loans, instead of overdrafts.

Cut back on working capital through JIT (Just in Time) purchasing

and better credit control to suppliers.

Effective Cost Control:

1. Low rejection – trained person, tooling and healthy environment.

2. Full utilization of efficiency.

3. Effective environment.

4. Stores situated in nearby area, to reduce excess time wasted in taken

tools from the stores.

5. Maintenance workers as well as supervisors should be available nearby.

6. CRI and quality control members must come to the shop to check and

encourage employees.

7. Extra facilities must be provided (e.g. medical, ATM, canteen etc.).

Methods of Cost Control:

Cost control involves control of material as well as labor overheads.

Material control Methods:

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Material management includes-

a.     Procedure for material procurement and use.

b.     Material costing methods.

c.      Cost of material in inventory at the end of a period.

d.     Costing procedure for scrap, spoiled goods and defective work.

FLOWCHART FOR PROCUREMENT OF MATERIAL

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Inventory planning and control method should have one goal that might be

expressed in two ways-

1.     To minimize total cost.

2.     To maximize profit within specified time and resource allocations.

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Material Requirement Planning:

To plan manufacturing requirements, every stock item or class of items should be

analyzed periodically to-

a.     Forecast demand for next month, quarter, or year.

b.     Determine acquisition lead time.

c.     Plan usage during the lead time.

d.     Establish quantity on hand.

e.     Place units on order.

f.     Determine reserve or safety stock requirements.

Material planning deals with two fundamental factors-

1.     The quantity to purchase.

2.     The time to purchase-or simply how much and when to buy.

                 Determination of how much and when to buy involves two

conflicting type of costs-

a.     The cost of holding or carrying.

b.     The cost of inadequate carrying.

Cost of holding or carrying Cost of inadequate carrying

Interest or investigation of working capital. Extra purchasing, handling and transportation costs.

Taxes and insurance. High price (small order quantity).

Warehousing and storage. Frequent stock outs causing disruption

Handling. of production schedule, overtime and

Deterioration and shrinkage of stocks. Extra setup time.

Obsolescence of stocks. Lost sales and loss of customer.

ECONOMIC ORDER QUANTITY

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Economic order quantity is the amount of inventory to be ordered in one time for

the purpose of minimizing annual inventory costs. If the company buys in large

quantity, the cost of holding or carrying the inventory is high because of high

investment. If purchases are made in small quantities, frequent orders with

correspondingly high ordering cost will result. Therefore we must balance

between two factors-

1.     The cost of possessing (carrying) material.

2.     The cost of acquiring (ordering) material.

Buying in larger quantities may decrease the unit cost of acquisition, but this

saving may be more than offset by the cost of carrying material in stock for

longer period of time.

How to compute Economic Order Quantity:

However there are tabular and graphic methods for determining economic order

quantity but they are very lengthy, hence companies use order-point calculations

to calculate economic order quantities. With information such as quantity

required, unit price, inventory carrying cost, and cost per order, differential

calculus makes it possible to compute economic order quantity using the

formula-

Economic order quantity = √ (2 × Annual required units × Cost per order) ⁄

(Cost per unit of material × carrying cost percentage)

DETERMINING TIME TO ORDER:

The economic order formula answers quite satisfactory the quantity problem of

inventory control. However, the time to order is also important.

The problem of when to order is controlled by three factors-

1.     Time needed for delivery.

2.     Rate of inventory usage.

3.     Safety stock.

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Determining order point would be relatively simple if lead time- the interval

between placing an order and having the material on the factory floor

ready for production – and the usage pattern for a given item were

definitely predictable. For most stock items there is a variation in either or

both of these factors. The theory behind this safety stock calculation is

that you will have just enough inventories in stock if two "catastrophic"

events happen simultaneously:

1.     Your supplier's lead time slips to the longest it's ever been with

that supplier; and

2.     On those days that your supplier is late, your company uses the

most inventories it has ever used.

The Safety Stock Level (SSL) can be calculated using following formula-

Maximum SSL = MHDU x (MHLT - ALT)

Whereas,

SSL=Safety Stock Level.

MHDU = Maximum historical daily usage.

MHLT = Maximum historical lead time.

ALT = Average lead time.

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STORES ORGANISATION

Efficient storing after efficient purchasing is another important step in material

control system. Factors involved in establishing stores organization are-

a.     Location of stores: Location of store should be carefully planned so

as to give maximum efficiency. Following factors are important in deciding

location of stores-

1.     Nature of material.

2.     Distance from user department.

3.     Size of unit.

4.     Spacing.

5.     Unit of material used.

6.     Security requirements.

 b.     Storage Layout: Storage layout should be carefully designed for

saving of costs. Material should be stored according to-

1.     Account number specifically given to different type of material.

2.     The frequency of their usage.

3.     The production area where item is used.

4.     Nature, size and shape of item.

Stores should maintain all documents like material requisition form, material

procurement form, stock ledger cards, bin cards etc.

LABOUR CONTROL

Effective control over labor is very important as it is very important part of total

cost. The following departments should contribute for labor control-

Personnel Department.

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Time keeping Department.

Payroll Department.

Cost Accounting Department.

The main function of personnel department is to provide efficient labor force.

Personnel manager is responsible to maintain sufficient manpower so that there

will be no surplus as well as deficit of efficient manpower. For this employees

record card is maintained which is known as punch card with every employee’s

PB (Permanent batch) number.

Time keeping department prepare record for time spent by each employee for

labor costing and control process. Various documents used by department

include clock card for attendance record, job ticket, job docket, job card etc.

Payroll department is an intermediate function between time keeping and cost

analysis department. It can control labor cost by maintaining sufficient wage

system.

Cost accounting department helps in implementing incentive wage plans,

efficiency plan, bonus plan, budgeted expenditure plans to control cost at all

overheads.

COST REDUCTION

Cost reduction embraces:

1. Unit cost reduction by expenditure reduction in respect of a given volume

of output ; and / or

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2. Unit cost reduction by the increase in productivity (i.e. an increase in

output, yield, or rate of output for a given expenditure).

In other words, cost reduction is the process whereby permanent savings are

made without any reduction in the quality and / or usefulness of the products.

Difference between cost reduction and cost control:

Cost Control Cost Reduction1. Concerned with adhering as

closely as possible to the set

standards.

2. Standards are taken to be the

desired state of efficiency.

3. Attempts to be guided by what is

the lowest cost for the conditions

which prevail.

4. Is generally effective only when

some form of standards can be

set.

1. Concerned with genuine cost

savings. Existing costs,

including standards, are

challenged in an effort to reduce

them.

2. Standards are regarded as

yardsticks which can be

improved upon. They are viewed

with suspicion.

3. Recognizes that the operations

of a company are dynamic in

nature. For this reason changes

in costs are expected.

4. Can be effective for all types of

conditions. It is not limited to

where standard costing can

apply.

IMPORTANCE OF COST REDUCTION

1. Without cost reduction a business is unlikely to survive. Once costs are

saved they should be controlled at the new level until some method of

reducing them still further is found.

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2. A business has to deal with two aspects – cost incurred and revenue

received. The difference between the two is profit out of which the

following must be satisfied :

Shareholder

Expansion of the business

2. In addition, there is the question of dealing with pay claims which increase

costs and reduce profits unless prices are increased. Finally, there is the

satisfaction of the consumer.

3. Competition from within the economy affects the price that can be

charged. If too high, products will not sell.

4. Cost reduction of a permanent nature, without any reduction in quality or

usefulness, is the only solution which is unlikely to have adverse effects.

In effect, cost reduction is profit earning: by reducing the cost side of the

cost / revenue equation it is possible to increase the profit.

AREAS OF COST REDUCTION

1. The real success of a business depends primarily on the efficient use of

those basic cost elements: by basic costs are meant the man-hours of

labor, kilowatt hours of electric energy, weights of raw material, etc., per

unit of production of goods and services.

2. The first basic cost reduction should be the elimination of waste all along

the line from source to ultimate consumption or use.

3. Not only are materials wasted, but countless man-hours are lost for a

variety of reasons. Among these are poor personnel relations and failure

to make the most of the individual employee’s talents, training and

inclination, inefficient management and dispute between labor and

management, accidents and illness, failure to plan and execute the job

properly the first time and bureaucracy and pressure groups.

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4. In addition to raw material and man-hour losses, excessive use of utilities

frequently occurs. In fact it is exceptional to find an industrial plant where a

reduction of utilities consumed per unit of production cannot be made.

5. There are many ways in which industrial engineering know-how and

procedures can be applied to basic cost reduction.

MATERIAL COST REDUCTION

In a manufacturing industry, material takes a major share (50 to 70%) of the cost.

Hence there is maximum scope for cost reduction in this area. For example:

1. In a rubber works, manufacturing caps for penicillin vials, the rejection for

various reasons was found to be as much as 38%. Hence the direct

material cost of this product for this factory is 60% higher than what it

ought to be.

2. A manufacturer of electronic equipment in Bombay found by investigation

that he could obtain an 18.8% saving in the component cost of unitized

Gamma Ray Spectrometer by eliminating a few of the components and

substituting cheaper ones for others without affecting the quality of the

instrument.

The above example show that the direct material cost is to a great extent

enhanced by:

i. Defective design of the product and its components.

ii. Wrong selection of raw material in terms of type or of quality.

iii. Poor manufacturing methods leading to excessive scrap and rejection.

LABOR COST REDUCTION

1. Even though material cost reduction was presented as the most potential

area for cost reduction due to being a major part of the cost in

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manufacturing industries, labor cost control has received more attention

due to its easiness to handle. Another reason for its receiving favorable

consideration from management and consultants is the extent to which

reduction is possible. While material cost could be reduced from 60% to

50% or even 40%, labor cost with mechanization can be almost brought

down to 5% to 10%.

2. Direct labor cost normally shown on the cost sheet includes true labor cost

(payment for the time booked) which cannot be reduced and a major

portion of costs added due to various factors, such as

i. Poor planning

ii. Poor manning

iii. Poor working methods

iv. Lack of motivation

3. The solution to a reduction of labor cost lies in the elimination of the

factors enumerated before as leading to poor utilization of manpower. To

summarize, labor productivity can be enhanced and labor cost

consequently reduced by:

i. Reducing the work content of jobs

ii. Providing adequate work

iii. Recognizing extra effort

iv. Worker working

OVERHEADS

1. Overhead cost in almost every industry is excessive. This may be

attributed to factors like poor planning, poor inventory policy leading to

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excessive stocks of raw material, finished goods, tools and spare parts,

lack of standardization and poor organization.

2. Poor planning adds up unnecessary overhead expenses also in addition

to direct material and labor costs. It is regrettably true that management’s

concern for efficiency in manufacture often appears to be continued to the

more obvious factors like production methods, factory layout and operator

efficiency, while other potential sources of considerable savings go

untapped.

3. The importance of stock control arises from the demand which investment

in stocks places upon the available liquid capital. It is of far greater

significance from the point of view of cost reduction by virtue of the fact

that stocks can give rise to the following sources of cost:

i. Storage cost

ii. Handling cost

iii. Stock-taking and other clerical expenses

iv. Deterioration and its prevention

v. Pilferage

vi. Insurance and stock room security

vii. Obsolescence

2. The effects upon costs and the general manufacturing efficiency of a wide

diversity of products, components, equipment and methods are sufficiently

important to warrant special consideration of this factor.

3. The wheels of industry turn to the orders of many persons having various

degrees of authority and the contribution that a properly defined chain of

responsibility and channels of communication can make towards a

reduction of costs is difficult to measure.

4. Finally, cost reduction and control is a continuous process, and a

programmed once commenced should be coordinated and controlled, lest

the benefits achieved by improved performance may easily be dissipated.

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Waste can be made in following forms:

1. Waste of material

2. Waste of supplies

3. Waste of machinery

4. Waste of manpower

5. Waste of money

6. Waste of space

7. Waste of customers

8. Waste of ideas

Planning overhead cost control: There are six basic steps through which

overhead cost can be controlled:

1. Establish company objectives and targets

2. Develop detailed programmers

3. Organize resources to meet the objectives

4. Establish department standards of performance to match programmers

5. Develop a system of budgets

6. Report on performance

In some organization a systematic approach is followed so that methods can be

improved in the department. It is a simple five step plan to:

a) Select the operation for improvement.

b) Get the facts by breaking down the operation into detailed steps.

c) Analyze the facts by questioning every step.

d) Develop a new and improved method.

e) Install the new met

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Below mentioned are the points essential in the organization of cost reduction:

1. One person has to be responsible. That person must think constantly in

terms of cost reduction, and seize every opportunity to bring the subject to

the attention of all employees.

2. Top management must have interest, cooperation, consideration and a

firm belief that cost reduction is worthwhile and necessary. At the same

time, they must have patience because ideas create more ideas, and

every idea does not produce the desired result. But the more ideas there

are, the more opportunity there is to get worthwhile results.

3. A cost reduction programmed must encompass all employees- each

person that is a part of the organization.

4. All possible means must be used to make all employees cost conscious

and cognizant of the need for cost awareness.

5. There is no single way to fulfill the needs of obtaining cost reduction. It has

to be a combination of many ways.

6. It has to be a continuous operation. It cannot be started and stopped at

will, but must be worked on constantly. There must be constant effort to

improve, and to think of new methods.

7. Cost reduction ideas must always be “glamorized” in order to make them

appear new and different, and to increase and create greater interest on

the part of the employees.

Tools and Techniques of Cost Reduction

1. VALUE ANALYSIS : Value analysis is a technique applied to analyze all

aspects of an existing product to determine the minimum cost necessary

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for specific functional requirement. It helps in improving quality of product.

In HAL various methods are implemented for value analysis. They are :

VOP (Value of production) = Total sales ± Changes in WIP / SIT

Value added = VOP – Raw material consumed

Capital employed = Working capital + Net block of fixed assets + Special

tools

Working capital = Current assets – Current liabilities

SIT = Opening balance + Dispatch – Fitment

2. WORK STUDY : Work study includes calculation of standard costs and

batch costs and then prepares FPQ (Fixed price quotation) for fixing

prices of every product.

3. PRODUCTION PLANNING : In HAL Lucknow, the main function is

production of accessories of aircrafts. For planning the production process

production budget is prepared in advance. This is done by planning

department. For this planning department meet with all divisions and ask

for their production targets. All divisions mutually agree to set their targets

and to fulfill them. After that they sign MAS (Mutually agreed schedule) for

all IDTO’s (Inter divisional transaction orders).

After this planning department send this to budget department for

production budget.

4. Organization and method study : In HAL method study is implemented

during production process. Various methods for production of job are

studied minutely and the method which is least time consuming and

having cost conciseness is accepted.

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5. Operations study : In HAL process layout is prepared to study various

operations included in completion of a job. For this every employee got a

job card, job docket and job ticket in which standard time for completion of

each and every operation is fixed and it is inspected periodically, so that

standard time should be maintained at relevant cost so that cost and time

should be controlled.

6. Quality control : Quality is the strength of HAL. The company aim at best

quality product. For this TQM is applied in whole organization. The

objectives of TQM are :

i. Zero defect

ii. Continuous improvement(Kaizen)

iii. Wastage removal(Lean management)

iv. Customer satisfaction

Zero defect: Organization found that there are three main factors which

cause defect in the production:

a) Don’t have full knowledge of job.

b) Don’t have required resources for the work.

c) Don’t concentrate on the work.

For zero defects all these factors are removed. The organization quality policy

is producing “1st Time Correct “.

Continuous Improvement: Every employee of the organization should

aim at maintaining the continuous improvement in their work. They should

aim to complete their production and services with low time and cost and

that too with good quality, and to make their products and services of

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international level. Every employee is aware of all possible improvements

in his work area, so he should give suggestions to the management for

this improvement.

Wastage Removal: Employee should aim to remove all those wastages

that cause cost increment like water, electricity, stationary etc. so as to

make the organization more economic.

Customer Satisfaction:   The basis of every organization is their

customers, whether internal or external. The organization should find their

customer's requirements and to fulfill them without any defect, at low cost

and to deliver them within time limit.

2. Standardization: In HAL standards are fixed for time consumption as well

as for cost incurred. For time standards the standard time is fixed for every

process of job and for cost standards standard cost and FPQ are defined

in advance to control time and cost.

3. Simplification: In HAL for this purpose lean management is applied for

all production processes.

"Lean is a term to describe a system that produces-

1.      What customer wants?

2.     When they want it? with minimum wastages.

The historic approach of the organization was- PRICE=COST + PROFIT

But in present scenario it changed to- PROFIT= PRICE – COST.

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Lean Tools:

Waste elimination.

Do the 5S.

Create flow.

Put in visual control.

Job standardization.

Reduction in set up time.

Continuous Improvement.

What Is 5S?1. Sort.

2. Simplify.

3. Shine

4. Standardize.

5. Self Discipline.

KAIZEN:

Achieving continuous improvement in performance by identification and

elimination of all wastage relentlessly. Present capacity includes value

work as well as wastes. Value work is that customer is willing to pay for,

and waste is adding cost but not the value.

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Continuous Improvement.

There are 8 wastes which the organization should keep in mind-

Over Production and Over Processing.

Waiting.

Transportation.

Inventory.

Motion.

Defects.

Untapped Resources.

Misused Resources.

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DEPARTMENTAL ANALYSIS

VARIOUS SECTIONS OF FINANCE AND ACCOUNTS DEPARTMENT IN HAL

BILLS   PAYABLE SECTION

Objectives: Meeting organizations liability is the task of this section. It is responsible  for 

payment  of  suppliers  and  service  providers  as  per  terms and conditions  of 

the  P.O. It also ensures timely payment to different parties so that the suppliers

and  services  to  the  division  are  ensured  uninterruptedly in  furthering  the 

organization's  objectives. It   also ensures proper accounting

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as per the requirements from the corporate office. This  section  also ensures

that the  statutory  deductions like TDS etc. are made from the bills of service

providers and  deposited  timely  with  the  appropriate  authority. This section

has three segregations, which perform their function independently. These   sub-

sections are as under:

Bills   Payable (Indigenous)

Bills Payable (Foreign)

Bills   Payable (Service and Civil works)

BILLS   PAYABLE   (INDIGENOUS)

Here  in  this  section , bills  related  to  the  Indian  suppliers  are  paid  off.

It is not concerned   with any kind of foreign remittance. The  job   of  this 

section  starts   after  receipts  of  information  of  any   type  from   commercial 

or  Purchase  or  Purchase  Department  .

It maintains the proper accounts in relation to the work performed by this section.

It also deals with the payment of miscellaneous advances. 

  Procedure:

P.O is sent by the Purchase Department after the approval.”

Material Procurement Committee '' (MPC) approves it. Then P.O is sent to bills  

section which shows the details of the material required. Vendor is consulted for

the purchase the details of the material required. Vendor is consulted for the

purchase of the material. The vendor sends their quotation for supply of the

material. Then the concerned authorities select the best quotation. There after

order is placed. Invoice is sent in case of payment through bank and these

invoices are matched with the P.O and then payment is made to the concerned

party.

Invoices  consist  of  the  name  of  consignee  ,  manufacturing  code 

number , Challan  number , Customer  number  , date  and  time  of  invoice, 

date  and  time  of  removal  of  goods  ,  product  code  ,  description 

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and  specification  of  goods  ,  type  ,  total  quantity  of  goods  ,  rate , unit,

assessable  value , packing  and  forwarding  charges  ( P&F) ,rate  of  duty, 

duty  paid , mode  of  transport , freight, insurance, tax  rate  ,  sales  rate  etc.  

Inland  vendors  for  suppliers / services  are  paid  by  one  of  the  following  

procedures:

a)      Document through bank

b)      Cheque against delivery

c)      Advance payment

d)     Open account

 BILLS   PAYABLE   (FOREIGN)

 Bills payable foreign deals with the payment of foreign suppliers as stipulated in

the purchase order. This sub-section performs its function separately from the

other sub-sections of this department.

Functions:

 1) Payment and accounting of:

Advance to suppliers as per the terms and conditions of purchase

order.

License fees, royalty etc as per the license agreement

with the foreign collaborator.

Custom duty, freight bills.

Final bills.

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2) Opening  of  Letters  of  Credit  on  the  advice  of  I.M.M  Department and

liaison with Banks for Foreign Exchange release and payment on maturity date.

3)   Maintenance of commitment registers for budgetary purpose.

4) Pricing of R.D.R (Receiving cum discrepancy report) with P.O.

(Purchase order)  rates  and  loading  of  custom  duty ,  freight  and  insurance 

charges.

5)  Priced  R.D.R  are  sent  to  materials  accounts  section/ E.D.P  for 

punching  in  batch mode  for  the  processing   of  materials  ledger.

  Flow   of   work:

All  P.O /  Contracts  received  are  entered  in  the  registers  before 

opening  of  separate  file  for  each  P.O.

All  the  L.C  opened  in  favor  of  Foreign  suppliers  as  per  the  terms 

of  P.O  are  entered  in  Registers  to  record  the  particulars  about  their 

extension,  revalidation  and  utilization .  On  maturity  of  the  L.C  the 

Bank  Adjustment  voucher  is  prepared  on  the  basis  of  bank  advice 

and  sent to the cash section for adjustment. Particular of payments are

noted in relevant P.O.  

Where  the  Purchase  terms  provide  for  " Documents  through  Bank" 

the  Bills  Payable  section  after  checking  the  documents  with  the  P.O 

passes  the  invoices  and  issues   Letter  of  Authority  to  the  Bank  for 

arranging  payment.

All  the  Contractual  payments  in  respect  of  Royalty ,  License  fee 

and  Technical  Assistance  fees  are  made  as  per  the  License / 

Collaboration  agreement.

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Bills  of  Entry  received  from  the  IMM  Department  are  entered  in  the 

register  to  record   value  of  the  goods   assessed ,  amount  of  duty 

paid  to  ensure  that  the  duty  levied  is  correct  and  the  amount  of 

duty  paid  is   loaded  to  the  inventory  accounts   correctly.

After  receipt   of  goods  the  stores  department  send  the  R.D.R   to

the  foreign  bills  for  pricing  and   making  necessary   accounting.

Pending  the  pricing  of the R.D.R  ,  the  payments  made  to  foreign 

vendors, through  letter of credit /  sight  draft  are  put  temporarily  in 

goods  in transit  account.

In  respect  of  material   dispatched  by  the  vendor  against   P.O  raised 

by  H.A.L  the   liability  is  provided  in  the company's  books  of 

accounts  if  payments  have  not  been  made  for  such   supplies.

Follow-up with IMM department is done for timely release of RDR so as 

to  clear  the  G.I.T .

Foreign  suppliers  are  paid  by  any  of  the  following  methods  as  

stipulated  in  the  P.O./License agreement/contracts -

a)      Letter of Credit

b)      Sight Draft.

c)      Advance Payment

d)     Direct Payment.

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Bills of entry

It is a document filled by custom officers for giving custom clearance to the

goods received from foreign countries. Bills of entry are received by the

agents before receiving of goods. It includes:

1. Total number of packages

2. Total amount of duty paid

3. Invoice value

4. Freight

5. Insurance

6. Exchange rate

7. Accessible value

RECEIVING CUM DISCREPANCY REPORT:

RDR (Receiving cum discrepancy report) is prepared at the time of receiving of

goods within organization. Pricing of RDR is done by two methods:

1. If the payment is done in advance and goods received later, then the RDR

is priced at the value of exchange rate of the last day of the previous

month.

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2. If payment is done on the same day then the RDR is priced at value at

which payment is done.

BILLS PAYABLE (SERVICES & CIVIL   WORKS)

 Bills payable section deal with the preparation of bills of services and civil works

in the company. This sub-section is mainly responsible for-

a. Service contracts.

b. Job contracts.

c. Medical payment.

d. Advance payment.

e. Payment regarding construction of building etc.

Accounting   related to all these are also done by the section.

Functions:

Payment and accounting of advances, running bills to contractors and final

bills.

Adjustment and recovery of advances.

Accounting and adjustment of earnest   money and security   deposits.

Capitalization of buildings.

Payment of all services bills e.g.  Telephone, electricity, water, canteen,

transportation, sanitation etc.

Payment to all consultants e.g.  Architects, Advocates,

Part time doctors etc.

Payment of miscellaneous advances, impress approved by competent

authority.

Payment to all casual employees recruited on "job-contract" basis.

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Flow   of   work:

In case of  running  bills  the   works  accounts  section  links  the  bill, 

submitted  by  Contractors  duly  certified  by  Engineers-In-Charge,  with 

the  contract / acceptance  letter ,work  order  etc  and  arranges 

payment  after  deducting  Income  tax, balance  security  deposit  and 

other  advances  if  any  and  retaining  the  prescribed  percentage  of 

the  bill  towards   retention  money  no  deduction  is  to  be  made  on 

this  account.

Final  bills  submitted  by  the  contractor  is  checked  with  the 

measurement book  and  the  gross  amount  payable  is  determined. 

The  amount  settled  against  running  bills , advances  if  any ,  penalty 

for  delay  in  completion  of  work , recovery  towards  consumption  of 

material , T.D.S etc  is  deducted  from the gross amount payable.

Advances  to  contractors  are  given  as  per  the  acceptance  letter 

given  to  the  contractor  which  are  recovered  with  interest by  way  of 

deduction  from  on  account  payment  bills  in  suitable  percentage  in 

relation  to  the  progress  of  work  so  as  to  recover  all sums  

advanced   by  the  time  80%  of  the  contracts   are  completed.

Material  advances  to   the  extent  of  75%  of  the  value  of  materials 

brought  by  contractors  and  lying  at  the  site  are  given  on 

certification  of  the  Engineer-in-charge  and  are  recovered  from 

running / final  bills.

Payments  of  bills   for  services  e.g  electricity,  water  etc  received 

from  plant  maintenance  department /  concerned  user  duly  verified  by 

them  and  approved  by  the   competent  authority  are  made. Payments 

in  respect  of  other  services  received  by  the  company  is  made  after 

it  is  duly  approved  by  the  competent  authority.

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In  case  of  job  contracts  payments  are  made   to  casual  employees  

of  the  company. Three  categories  are  made  and  rate  of  these 

categories  differ  from  each  other.

BILLS   RECEIVABLE

 This  section  is  responsible  mainly  for  the  preparation  and  submission  of invoices  etc.  HAL  regular  customer  is  IAF  ,  which  accounts  for  round  85%  share  in  total  sales  of  the  organization and  rest  are  mainly  Navy, Army, ADA  and others. This  section  ensures  that  dues  from  customers  in  respect  of   goods  supplied  and  services  rendered  are  recovered  timely  as  per  the  fixed  price  quotation / price  catalogue  proved  by  the  Ministry  of  Defense. It  has also  to  act  as  liaison  with  custom  department , Sales  tax  authority  and  others . Proper  accounting  is  done  as  per  the  instructions  provided  by  the  Corporate  Office.

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Objectives: 1)    To   ensure  that  the  dues  from  the  customers  in  respect  of  the  goods  supplied  and  service  rendered  are  recovered  timely  as  per  the  fixed  price  quotation / price  catalogue  approved  by  the  ministry  in  acceptance  with  the  government  issued  by  the  Ministry  of  Defense  dated  24th  August  1995. 2)       To  ensure  that  the  invoices  relating  to  the  advances  ,  stage  payment, final  delivery  are  raised  timely  in  order  to  have  smooth  cash  flow  position.

 3)   To  ensure  that  proper  accounting  is  done  as  per  the  statute   and  accounting  instructions  laid  down  by  the  Corporate  Office. 4)      To  ensure  that  all  statutory  payments  e.g  sales  tax, excise  duty , custom duty  is  recovered  from  the  customers  and  is  deposited  timely  with  appropriate  authority.

  Functions:  1)     Preparation  and  rendering  of  invoices  to  Indian  Air  Force (IAF)  in  respect  of  the  following  activities  with   the  guidelines  laid  down  in  the  government  letter  dated  30th  Sept, 1997.      a)    Manufacturing activity      b)    Repairs and   overhaul      c)    Supply of spares against RMSO      d)    Deferred revenue expenditure 

The  following  documents  shall  be  produced  in  support  of  the 

invoices                                                                                                                     

 a) Initial  advances  are  recovered  on  the  basis  of  customers  order.

Firms / forecast task given by the Air Force.

Chief  Resident  Inspector ( CRI) coordinated  Inter Divisional  Task 

Orders ( IDTO)  for  divisional  tasks.

Repairs Maintenance Supply Order.

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b) Subsequent  stages / final  payments  are  claimed  on  the  basis of dispatch 

advice,  Acknowledgement  received  Air  Force  in  Form Q423,  Inspection 

Note  certified  by  the  Chief  Resident  Inspector about  the  progress  of  the 

work  done.

In  respect  of  the  repairs  and overhaul  work  the  payment  is  strictly 

regulated  based  upon  the  nature  of  the  work   carried  out  e.g. 

Functional test, Defect investigation and Zero hours servicing, Repair and

overhaul.

1) To  prepare  and  render  invoices  to  Non- Indian  Air  Force 

customers  in  respect  of  the  following  activities.

Development sales for customer financed projects.

Suppliers and services rendered to civil customers.

Suppliers against Repair Maintenance Supply Orders

(RMSO).

2) To  raise  debit  on  other  divisions  on  Stock  in  Trade (SIT)   in 

respect  of  parts  / accessories  supplied  for  fitments  in  Engines /

Aircraft / Helicopters  manufactured  by  them  for   supply  to  customers.

3) To  claim  payment  from  Account  Officer  Defense  Accounts 

Department (AODAD)   on  the  basis  of  fitment  details  received  from 

those  divisions.

4) To  submit  invoices  for  reimbursement  of  royalty  from  Air  Force 

and  set  up  sales  for  these  claims  and  created  claims  receivable.

5) To  follow  up  with  AODAD  and  other  customers  for  collecting  the 

payments  against  the  invoices  raised.

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6) To  provide  details  to  budget  section  for  compilation  of  sales 

budget  on  the  basis  of  sales  order,  firm / forecast  task , IDTO  for 

budget  estimates, revised  estimates.

7) To  collect  Sales  Tax  from  the  customers  and  deposit  the  same.

8) To   compile  Sales  Tax  from  returns  and  submit  the  same  to

Integrated  Material  Management  ( IMM)   department  for  onwards 

submission  to  sales  tax  authorities  for  assessment.

ACCOUNTING PROCEDURE

Accounting for the sale of aircraft / engine / equipment etc. manufactured /

repaired and overhauled and for services rendered, is done through the following

accounting journals:

1. Sales Journal : Separate journals are maintained for the following

activities:

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a) Manufacture of aircraft / engine / equipment

b) Overhaul of aircraft / engine / equipment and overhaul of ratable.

c) Manufacture and supply of spares for overhaul against RMS

orders.

d) Miscellaneous

These journals are posted from the final invoices / Performa invoice raised

on dispatch or delivery. At the end of each month, these sales journals are

totaled and sales are set up by debiting to respective sundry debtors / advances

account.

2. Claims / Accounts receivable journal: All invoices raised in respect of

various services rendered / facilities provided are entered into this journal

and journal entries passed at the end of each month by debiting to claims

/ accounts receivable account and crediting to the respective income

account.

FINANCE SECTION

Objectives:

1. To ensure that the financial discipline is maintained in the division.

2. To ensure that all expenditure is incurred with due regard to principles of

financial propriety.

3. To ensure that financial proposals are routed to the competent authority

as per delegation / sub-delegation of powers so as to ensure compliance

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of the provisions of the Companies Act, the Memorandum and Articles of

Association of the company and the relevant rules and regulations of the

company and the guidelines issued by the company.

4. To ensure that the funds are available in the approved capital and

performance budget so as to cover the relevant proposals.

5. To submit MIS reports to corporate office monthly.

Functions:

1. To scrutinize and give financial concurrence as per delegation of power for

each proposal involving:

a. Capital expenditure

b. Revenue expenditure

c. Purchase of materials / stores / tools and other services

d. Manpower requirements

e. Waiver of dues / write off of losses

f. Cases involving relaxation of rules etc. as per delegation of powers

g. Sale, lease, alienation or disposal of company’s assets

h. Contracts entered into with suppliers / collaborators / sub

contractors.

i. Award of contract in respect of civil / electrical works / other works /

plant orders

j. Project reports

2. Certification for availability of funds with reference to capital and

performance budgets and appropriation of funds.

3. Fixation of rent and rates of recovery in respect of services / supplies /

disposals by the company.

PROCEDURE (FINANCIAL VETTING)

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Finance section plays a major role in accounts department. It can be termed as centre point of activities, because this section clears all the files for proceedings by the concerned authorities as per delegation of power.First of all material purchase requisition is sent by the purchase department, it is request for procurement of material which is sent to store and the store sends this file to finance section for further proceedings. These requisitions are broadly classified as under:

a. Non- Recurring itemsb. Recurring items.

Concerned authorities in the section approve the file. Committee members as

per the amount mentioned in the files, do approval of the files. Different

Committees have been formed for different approvals like different

committee approves the proposals which amounts up to Rs 5 lakhs, different

committee is authorized for the amount above then Rs 5 lakhs & so on.

Approval is done by CM (IMM) , Manager(Maintenance) , Senior Manager

(Maintenance) as the case may be . After the CM’S approval, it is sent

back to IMM & the IMM sends it back to the Finance section, including

specifications which shows that it is suitable or not. Finance Department

approves P.O FILES. Then further proceedings go on which includes rising of

inquiry for tenders. Sealed tenders are opened in front of concerned authority.

There are fixed days for opening sealed tenders-Friday and Tuesday.

Amongst the sealed tenders L1 is selected , which represents the lower

amount amongst all tenders. In spite of considering lowest amount other

factors are also taken into due consideration subject to the companies

policies. Thereafter further proceedings take place:

MATERIAL ACCOUNTS SECTION

Objectives:

1. To ensure that all the receipts and issues of materials from stores are

recorded and accounted properly.

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2. To ensure that all non-moving / slow moving materials are identified as

“surplus” by IMM and a suitable redundancy provision is made against

them and are disposed off.

3. To ensure that bin card balances are reconciled with the material ledger

balances in coordination with IMM and the balances of material ledgers

tallies with the general ledger.

Functions:

1. To send the priced RDR received from bills payable section to EDP for

punching in the batch mode and thus all the receipts are recorded and

control is exercised over all the purchases value-wise.

2. To generate exception list for missing RDR and getting it resolved with

bills payable section.

3. All the materials drawn excess when returned are credited to stores

through stores return voucher.

4. The EDP after processing of all MR / issue vouchers prints the material

issue analysis statement monthly indicating:

a) The cost of material drawn against various job orders, expense

accounts etc.

b) The cost of material issued to contractors and others.

c) The cost of tools issued to various tool cribs from main tool stores.

Based on the above statements accounting for issue of material is done by

debit to

WIP / expense / contractors account and credit to relevant inventory accounts.

2. On the basis of list of material / transfers reclassification indicating the

material code number / quantity and value, necessary journal entries are

passed by debit / credit to relevant inventory accounts.

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3. On the basis of stock verification sheets indicating stock verification note

number, material code number, shortages / overages, necessary journal

entries are passed after obtaining clarifications from stores department by

debit / credit to stock adjustment account credit / debit to relevant

inventory accounts after taking approval of CFA wherever required for

adjustments / write off of stores.

4. A list of material not moved for over 5 years is given by EDP which is

reviewed by stores / concerned programming department. Materials not

required for production or for other purposes are identified and suitable

action is taken by IMM for finding their usage in other divisions or is

auctioned.

5. Redundancy provision is made in the books of accounts at the rate of

100% for non moving inventory and for closed projects as special

provision on the basis of list given by EDP. Further a normal provision at

1.5% is made on the balance inventory.

Accounting Procedure

Accounting of the receipts of material by various classes and issues thereof to

various work order and expense accounts is done based on the following

‘output’ statements received from computer / data processing section:

1. Material issue analysis statement

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2. Stock transfer / stock re-classification statement

3. Stock verification statement

4. Surplus / condemned stores statement

Material issues analysis statement: The computer / data processing

section after processing all the material requisition/issue vouchers

pertaining to the month prints out the material issue analysis statements

monthly indicating:

a) The cost of materials (including material overhead expenditure) drawn

against various work orders and expense accounts.

b) The cost of material issued to contractors and others.

c) The cost of material transferred to other divisions.

d) The cost of tools issued to various tool cribs from main tool stores.

Based on the above statements, accounting for issue of material is done by

debit to WIP/Expenses/Division/Contractors accounts concerned and credit

to the relevant inventory accounts.

Stock verification statement: The computer / data processing section

makes available the print out lists of stock verification notes, indicating stock

verification note number, material code number, overages or shortages of

less than Rs 500/- and more than Rs 500/- based on which necessary journal

entries are issued after obtaining clarifications from stores department, by

debit / credit to stock adjustment / inventory adjustment account and credit /

debit to relevant inventory accounts.

Surplus / condemned stores statement: Non moving / slow moving

material are reviewed by stores / production engineering department from the

lists of non moving / slow moving items furnished by the computer / data

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processing section. Material not required for production or as “surplus” and

referred to the ‘surplus committee’ for review and declaring the same as

surplus. The surplus materials when so declared are transferred to the

salvage stores for disposal. Likewise materials held in stores and condemned

due to expiry shelf-life deterioration etc., are also transferred to salvage

stores for disposal. Based on the disposal orders received in the material

accounts section, duly approved by the competent authority, the value of the

material transferred to salvage is debited to the redundancy provision account

where available, otherwise charged off to profit and loss account by credit to

respective inventory accounts.

COST ACCOUNTS SECTION

Objectives:

1. To establish a costing system in line with the activities and the product

range of the division.

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2. To determine the price realizable from the customer for the products

manufactured / repaired / overhauled / serviced / supplied by the division.

Functions:

1. To determine the rate of absorption / recovery of labor and other

overheads for recovering labor cost on the different jobs undertaken i.e.

MHR computation.

2. To accumulate the labor and overheads content of each activity project-

wise based on evaluated LTB generated by EDP from work orders / time

dockets.

3. To keep track of different jobs completed and jobs lying incomplete in

different stages over a reasonable period of time and to coordinate with

concerned production controllers for justification for jobs lying unfinished

beyond a reasonable period of time and to ensure their early disposition.

4. To review work orders on which no material / labor cost has been

recorded and finding out the reasons for the same.

5. To get the WIP statement as on 31st March from EDP for all manufacturing

components, sub-assembly WIP, assembly WIP for physical verification

by the concerned production shops.

6. To ensure that the valuation of WIP has been done correctly keeping in

view the percentage of completion of the job.

7. To keep track of SIT transactions with different divisions.

8. To keep record of all IDTO received and issued.

9. To send debit advices to other divisions for items dispatched against IDTO

received from them.

10.To accept the debit raised by other divisions for items received by the

division in respect of requirements raised by us through IDTO.

COSTING SYSTEM

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In Hal Division the work carried out in following categories-

Manufacturing and Assembling Operations

Of aircrafts, aero-engines, avionics, ground radars, accessories

and instruments.

Of spares required for overhaul of aircrafts, engines, engines

etc. and DRDL for supply to IAF against RMS order, navy, army

etc.

Of other equipment like foreign and costing.

Repairs and Overhaul Activities

Aircraft, engines, avionics, ground radars, accessories and

instruments.

Other equipments.

Design and Development Activities of aircrafts, aero-engines, avionics,

ground radars, accessories and instruments.

Customer Finance.

Company Finance.

Though HAL manufacturing don't come in the range of products under cost audit

and cost. Accounting records rules formed by the GOI, a fully fledged cost

accounting system is essential for effective cost monitoring and cost control.

THE SYSTEM

The system of cost accounting followed in HAL is "Batch Costing" which is a

variation of job costing and is mainly designed to suit the work carried out in HAL.

Some divisions of HAL have also work order schemes suitable for component

costing.

a. Batch Costing

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1.       In the batch costing system, all the components, minor

assemblies, etc. required for a batch of aircraft /engines/equipments

are manufactured on batch order/mass fabrication orders. Though job

cards/job tickets are issued for manufacturing of individual

components, cost is not recorded separately. Labor and material costs

are booked on the batch work order/mass fabrication order only.

2.       The components after manufactured are carried out to

production store and drawn for assembling on the next assembly line

immediately .The items are held in quantitative inventory, the cost

being held in WIP. Individual work order are issued for assembly,

erection and testing. The cost of bought out items drawn at the stages

of assembly and erection is booked to these orders.

3.       In this system the cost of all components, minor assemblies, sub

assemblies, etc. relating to an aircraft/engines/equipments in the

complete batch is determined by dividing the total cost recorded on the

batch work order/mass fabrication work order by the number of units

produced in the batch. To this is added, the cost recorded on assembly

line, erection and testing work order(s) and sundry direct charges to

arrive at the total cost of the aircraft/engines/equipments.

b.      Job Costing

This system of costing is followed in the case of repairs and overhaul of

aircraft, engines, equipments etc. and for manufacture of spares against

RMSO spare for HAL held IAF store and miscellaneous jobs.

                In this system individual work is issued for overhaul of each

aircraft/engine/equipment and for manufacture of spare items .Labor and

material cost is collected on the individual work orders and the total cost of

each item is ascertained.

c.       Component   Costing

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In the component costing system, an individual work order/job ticket is

issued for each component against which labor and overheads expended

and cost of material drawn are recorded and the total cost is ascertained.

In this system the requirement of component for manufacturing of

component, overhaul and spares programs as a whole is determined and

work orders/ job cards/ job tickets are issued for manufacture of each of

component in the economical batch quantities. The batch quantities of

aircrafts/ engines etc. are not relevant but the batch quantity of each

component is important. The components after manufacture are credited

at cost to production stores and drawn for assembly when required. Thus

the items are held in priced inventory. The cost of minor assemblies, sub

assemblies, major assemblies can be built from the cost of components

issued to such assembly jobs.

d.      Standard Costing

Standard costing is a technique to control cost. Here costs should be first

extended to manufacturing projects including fabrication of detailed

components, sub assemblies, major assemblies and final assemblies.

                It can be extended for periodical overhaul of major products like

airframe, engines, avionics, wheel assembly and high value rotable, where

work schedule are available. Standards for labor and material should be

fixed for deriving variance under each category for control.

e.      Labor Standards

The present standard time for each component, equipment, assembly

allotted in time docket in the division is taken as parameter for fixing

standard labor hours. These labor hours will be valued by applying yearly

Man Hour Rate (MHR) applicable to the division

f. Material Standards

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The material requirements as per the bill of material shall be the basis of

determination of the standard for marginal cost. The costing of material

shall be done on the basis of weighted average rate of respective material

prevailing at the time of issue of work order. However in respect of USSR

material where itemized prices are not available, the price standards shall

be adopted based on technical estimates.

For the purpose of comparison and analysis of cost, monthly statements

should be prepared in regard to-

1. Standard Man Hours (allowed man hours where SMH are not

available) v/s actual hours booked against each work order.

2.       Labor costs as per the standard and as per actual.

3.       Material cost as per standard and as per actual.

g.       Marginal Costing

With a view to increase the utilization of the available facilities and

manpower and to obtain some contribution towards the company's fixed

overhead expenses, marginal costing techniques are adopted in the

pricing the supply and services.

Jobs may be undertaken at prices lower than the cost of sales at full man

hour rate, provided the price is not less than the prime cost of jobs. The

prime cost shall comprise of all expenditures directly incurred on the

execution of jobs and production process like direct material cost, cost of

tooling, labor cost (including wages to direct workers).

  PRICING POLICY FOLLOWED IN HAL

Prior to implementation of revised pricing policy i.e. 1995, payment to HAL was

regulated as per FCQ (Fixed Cost Quotation) of cost plus system. Under FCQ

system HAL has no incentive to bring efficiency in material usage or labor

utilization since the entire cost incurred was getting paid by IAF.

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                                In 1995, government implemented FPQ (Fixed Price

Quotation) system, in which the prices of products and services are fixed by

Directorate of Financial Planning, Air HQ at base year. The base year prices are

escalated at agreed escalation percentage and exchange rates given every year

by Air HQ for material and inflation indices for Man Hour Rate. The FPQ’s

approved for base year (1995-96) are escalated as per agreed parameters up to

8 years (2003-04) and thereafter fresh base year cost verification is done by Air

HQ by considering the actual usage of material for overhaul/repair items in the

last 3 years and accordingly material cost firmed up in 2004-05. Similarly labor

efficiency and yield factor of division are fixed at 79% and 76% respectively. The

FPQs for overhaul/repair and price catalogue for spares are approved by GOI.

Due to FPQ system HAL has find scope in bringing cost reduction in the

form of lesser usage of material or completing the work by putting lesser Man

Hours as standard man hours so that labor cost per unit should be decreased

which helps in improving the profitability of the division.

At present the FPQ is applicable for repair & overhaul and supply of

spares only and for payment of manufacturing programmed e. g. Su-30, Dornier,

LCA, IJT, Hawk etc are fixed as per contract price agreed between HAL and air

force and prices offered by HAL are negotiated by the customer.

MAN HOUR RATE:

Man hour rate is defined as the rate of total expenses that the factory bears

on direct labor during production process of 1 hour. It is used as a basis for

calculation of labor cost.

Man hour rate is calculated as follows-

[Divisional expenses on salaries and other payments made including cost of

facilities provided to staff plus all the overheads e.g. power, fuel, and other

expenses incurred by the division]   Divided by [the number of net available

hours of direct worker including over time hours].  

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Net available hours= (No of direct worker X 7.5 hrs per day X 25 days X 12

months) X (agreed yield percentage + OT hours).

Yield = Actual output in terms of SMH (Standard Man Hours) i.e. LTB hours

Percentage                                           Total input hours

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RESEARCH METHODOLOGY

92

RESEARCH METHODOLOGY

Proposed methodology for the project is as follows

Defining the objective

Selection of the Data Collection Method

Ds

Selection of the Method of Analysis

Data Collection

Data Analysis

Reporting

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RESEARCH METHODOLOGY:-

The purpose of methodology is to describe the process involved is the research

work. This includes the overall research design, the data collection method

sampling procedure, and the field survey method & analysis procedures.

Meaning of Research:-

According to Redman & Mory:

“Research as a systematized effort to gains new knowledge”.

According to Clifford woody:-

“Research comprises defining & redefining problems, formulating hypothesis or

suggested solution, collecting, organizing & evaluating data making deductions &

reaching conclusion to determine whether they fit the formulating hypothesis or

not”.

Objective of Research:-

The purpose of research is to discover answer to question through the

application of scientific procedure. The main aim of research is to find out the

truth which is hidden & which has not been discovered as yet. Though each

research study has its own specific purpose.

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Contact Methods:-

Once the sampling plan has been determined, the market researcher must

decide how the subject should be contacted.

I have carried out the direct survey method where I have contacted all post

offices and courier offices in several areas.

NATURE OF THE RESEARCH:-

The Research was exploratory in nature.

PLACE OF THE RESERCH:-

The research was conducted in Finance departments in HAL Accessories

Division Lucknow.

RESEARCH DESIGN:-

Research Design is a conceptual structure with research conducted.

There is no unique method, which can entirely eliminate the elements of under

taking. But Research methodology more than any other procedure can minimize

the degree of uncertainty, Thus it reduces the profit ability of making a wrong

choice amongst alternative causes of actions.

This is particularly significant in the light of increasing competitions &

growing size, which makes the task of choosing the best course of action difficult

for any business enterprise. It is imperative that any type of organization in the

95

present information coupled with tools of analysis for making sound decisions

which involved minimum risk.

Exploratory method of research was chosen for it helps the collecting

summarizing, analyzing interpreting & presenting data with new ideas & in

effective manner.

The goal of exploratory research to gather primary data & to study the

nature of problem & to suggest possible solution for problem/come up with new

ideas.

For this a structured questionnaire is the research instrument used for

research works.

DATA COLLECTION:-

The collection of data is done both from primary & secondary sources.

Primary Data:-

The primary data has been collected through questionnaire, personal

interview and departmental analysis.

Secondary Data:-

Website of HAL.

Company monthly journals.

Training manual on cost reduction provided by HAL.

Accounting manual and Budget manual provided by HAL.

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Pricing policy of HAL.

TOOLS AND TECHNIQUES OF DATA ANALYSIS

DATA ANALYSIS

1. The introduction of an online website for any company of today’s world is

a boon. Cause growth and expansion will be a promising factor as the

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internet makes the world a smaller place to do business. This was

introduced in the year in the year 2000 by HAL.

Table showing the improvement of the division on introduction of a website:

Feedback Percentage

Management level Yes 97%

Labor level No 3%

Bar graph showing the improvement of the division on introduction of the

website:

ANALYSIS: 97% of the workers / employees are aware that the website has

helped the division to improve in its company’s dealings and has helped the

company to progress in the new economy of today’s world.

INFERENCES: The remaining 3% are those workers who are at the lowest cadre

of work who do not have sufficient knowledge about the website of the

organization.

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2. The knowledge about the website should be fair among the people who

work in the organization to conclude that the workers are aware as to

where the company is heading to in the 21st century. HAL being a premier

defense industry in the field of aviation has to always keep up with the

other nations and therefore adopt new technology.

Table showing the awareness level of the web by the workers in the organization:

Response / Levels Management level Labor level

Aware / Yes 98% 87%

Not aware / No 2% 13%

ANALYSIS: Most of the workers in the organization are aware about the website

at both levels and know how it has improved the division, as the customers get to

know more about the division’s products and services worldwide which improves

the profitability and also helps the division to understand its customer’s

background to enhance the business.

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INFERENCES: Only around 2% at management level and 13% at labor level are

not aware of the website as they have poor knowledge and belong to the lowest

cadre.

3. Website of the company helps the customers to keep in touch with the

company through the e-mail provided by the websites for various

divisions. This helps the customers, clients and vendors to have a

continuous touch with the company.

Table representing the customers who respond to the website:

Customers Percentage

Defense customers 85%

Foreign customers 45%

Corporate customers 6%

Civil customers 5%

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ANALYSIS: The major customers of HAL are the defense customers such as the

Indian Air force, Indian Army, Indian Navy, Coast Guard and Boarder Security

who often contact with the company over the net.

INFERENCES: A very small percentage of the remaining customers such as the

corporate customers and civil customers including international customers

contact with the company through net.

4. The main intension of putting up a website by any company is to get

prospective customers and induce them to make contract with the

company. It is the same for HAL accessories division too, so that the

customers can have a continuous touch with the company.

Table representing the number of customers who respond voluntarily to the website:

Options Response in percentage

Most of them 30%

All 40%

Few 90%

Very few 70%

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ANALYSIS: From the above graph we can see that only few of the customers

respond to the website voluntarily. As most of the customers contact the

company through other means.

INFERENCES: We see that almost all customers somehow come into contact

with the company for some enquiry, doubt or clarification but since HAL is

defense oriented, so mostly the customers are from defense.

5. The main objective of any company is to get enough customers to place

an order or contract with the company, although few of the customers

come into contact with the company through the net not all might be willing

to place an order or make contract with the company. The table below

shows the number of customers who placed order with the company:

Table showing customers who placed order through net:

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Customers who contact Percentage

Defense customers 70%

State government 20%

Corporate customers 7%

Civil customers 3%

ANALYSIS: From the above data we can conclude that most of the customers

who placed order with the company through net are the defense customers in

comparison to others.

INFERENCES: The customers belonging to the other group such as the civil

and corporate customers are very limited, therefore the company focus more on

the defense customers such as Indian Air Force, Indian Navy, and Indian Army

etc.

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6. In today’s economy we see that not only multinational companies are

trying to globalize but public sectors are also trying to globalize. And the

best way to achieve this is by obtaining many international customers. The

table below shows the number of international customers the division is

able to get through the net:

Table representing international customers over the web:

Customers In percentage

Many 10%

Few 20%

Very few 5%

ANALYSIS: Few international customers are interested in making contact with the company. From this we can conclude that HAL has opportunities of expansion in international market.

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INFERENCES: When international customers and corporate come into contact, the company gets help in improving the technology for production.

7. Today’s business have made the “Customer the King” and have decided to give the customers what they want through customization and customerization. The table below shows the number of customers who seek such benefits:

Table representing importance of customization to customers:

Feedback Response

Very important 90%

Important 80%

To some extent 50%

Not important 5%

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ANALYSIS: Since engines are one of the most advanced machines that help in

the flying of air vehicles and customers always seek sophistication in their

engines. Therefore most of them seek customization.

INFERENCES: Mostly the defense customers have an in-depth knowledge and

thus seek sophistication in the aircrafts. As the world is getting more advanced

thus customization becomes more important but it is not much in the case of civil

or corporate customers.

8. Sales are a very important aspect for any company and to achieve

maximum sales is a goal of all companies. HAL is one of the leading

manufacturers of engines and its accessories. The table below shows how

HAL is able to get a sufficient amount of sales after the internet came into

existence:

Table showing the sales of the division for the past 4 years:

Years Sales (in crores)

2001-2002 338.14

2002-2003 328.5

2003-2004 415.14

2004-2005 424.15

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ANALYSIS: From the above graph we can see that the sales of the company

have been increasing moderately in the past two years which is mainly because

of the use of web.

INFERENCES: Since the web was introduced in the division only in the year

2000 and the division have taken time to make complete use of it in the recent

years. Therefore we can expect sales to increase in the future.

9. Profit of any company determines its growth, expansion and development

in all directions. Therefore it is an important factor for public sector also

such as HAL which is a nonprofit organization. The table below shows the

profit of HAL in past years:

Table showing the profits of the division for last 4 years:

Years Profit (in crores)

2001-2002 46.5

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2002-2003 65.9

2003-2004 62.55

2004-2005 51.66

ANALYSIS: As HAL is a nonprofit organization, so we can see that profits in

each year are fluctuating. Therefore we cannot interpret whether internet will help

the company in making more profits or not.

INFERENCES: As mentioned earlier most of its customers are defense

customers and international customers who contact through net and a very few

of them are civil and corporate customers.

10. In order to grow it is necessary for every company that it must be able to

find new customers through new means and mode. As technology has

grown to such an extent that the world is no longer a huge place to trade.

With the use of internet it is possible for all companies to find new

prospective customers.

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Table showing new prospective customers over net:

Customers Percentage

Civil customers 10%

Corporate customers 15%

State government 20%

Defense customers 100%

ANALYSIS: From the above diagram we can conclude that the new customers

made by the company in each segment are very less. As it is basically a defense

oriented company, so almost all the defense customers have dealings with the

company.

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INFERENCES: Although the company has limited range of new customers but it

has scope to get customers at international level also.

11.Customer relation is very important today. It is more effective only through

the World Wide Web and although it has so many plus points but there are

certain drawbacks in it. The table below shows the drawbacks in CRM

over the web:

Table showing reasons for drawbacks in CRM over web:

Reasons for drawbacks Percentage of effect

Delay in reply 20%

Negligence 30%

Failure of system 40%

Other means 10%

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ANALYSIS: Most of the reasons for the drawback of CRM are due to system

failure and it can be taken care of by providing for backup systems and better

management in replying to customers.

INFERENCES: CRM is gaining its importance in the current scenario and if more

importance is given it will prove more successful for the organization.

FINDINGS, SUGGESTIONS and conclusion

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FINDINGS

In HAL cost reduction and cost control is done in following ways:

In finance section, L1 i.e. lowest price is considered so that total cost of

production would be reduced and controlled.

Quality is the strength of HAL. The company aims at best quality

product at lowest price. For this TQM is applied in whole organization

so that cost would be controlled.

In HAL standards are fixed for time consumption and also for cost

incurred. For time standards, the standard time is fixed for every

process of job and for cost standards, standard cost and fixed price

quotation (FPQ) are defined in advance to control time and cost.

It also implements the technique of classification and codification for

cost reduction and control. Under this technique, all the jobs are

classified into different categories and are codified, due to which we

can identify that the job belongs to which batch.

Process layout is used for the study of various operations included in

completion of job. Due to which standard time for completion of

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operation is fixed and inspected periodically, so that cost and time can

be reduced and controlled.

Method study is implemented during production process and the

method which is less time consuming and having less cost is accepted.

In costing section, component costing is used for calculating the cost of

each component. By applying this method the total cost can be

reduced and controlled.

As the rate of machine hour rate (MHR) is very high in HAL so the

work is done on contract basis i.e. outsourcing is done so that cost can

be reduced and controlled.

Minimum inventory is kept in stores, so that there would be no wastage

and cost can be reduced.

Efficiency of employees is approximately 100% due to which there is

no wastage and cost is reduced.

It is also implementing methods of 5S to control and maintain cost

effectiveness.

It has also implemented lean management and various tools like

KAIZEN for wastage removal so as to reduce the extra cost incurred.

It also aim at producing all accessories as first time correct and with

Zero error so that the cost incurred in rejection and rework processes

can be controlled.

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SUGGESTIONS

There should be facility of intranet so fax and such other things must

be done through it that can reduce time and money.

For attendance finger print system should be adopted so that actual

person’s attendance can be mentioned.

The time delay between rising of purchase order and preparation of

RDR should be reduced.

Wages to direct workers should be given through piece rate system.

Efficiency of indirect workers should be measured so that slackness

can be sorted out.

Employees should be included in brainstorming and also should be

given liberty and non-monetary incentives as appreciation.

Officers should be promoted only on the basis of performance and not

on the basis of number of years worked.

Workers who have talent and compatible with office grade but

restricted to work only at non-supervisory position, the policy should be

such so that grade promotion could be possible.

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Profit calculation by project cell for project evaluation is different from

costing section. In this way project evaluation is not proper. So it must

frame its cost-benefit evaluation and focus on only licensing fee and

other DRE and framing of analysis should be done as per actual

recoverable profit percentage.

The company should give some stipend to Industry guide for summer

training due to which they will take more interest in providing guidance.

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CONCLUSION

HAL is one of the largest PSU under the department of defense production, GOI

and is a “NAVRATNA” company ranked 34th in the list of world’s top 100 defense

companies. HAL with its wide spectrum of expertise in design, development and

manufacture of aircrafts, helicopters, engines, accessories and avionics has

emerged as major aeronautical complex in Asia.

As herein, the projects and items need huge investments than any other

organization and confidential factor is also there too much extent but as much

information is extracted shows that cost control is being performed quite good

that’s why it is in so much profit.

In the organization, cost of inventory as well as labor is controlled very well by

implementing ABC analysis but there is also some scope for cost reduction by

reducing number of casuals to reduce labor cost and by implementing EOQ

(Economic Order Quantity) technique to control material cost.

Although for the organization’s betterment its executives are working hard and

trying to serve in the best possible manner with their colleagues and they all are

very qualified and experienced so organization must extract optimum from them.

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ANNEXURE

Questionnaire:

Name:

Designation:

Section / Department:

1. Describe the major activities being carried out at the accessories division?

2. Batch costing and job costing is carried out for which of these activities?

3. Is there a component costing system in existence?

4. On what basis is the production work undertaken?

5. What is your comment on the present budgeting system?

6. Describe the procedure of processing the cost ledger?

7. Describe the current practice followed in calculating the cost for various

departments?

8. Describe the steps taken to improve the international relationship with

foreign companies like Turbomeca and Rolls-Royce?

9. Is the current computer system capable of tracing the work flow?

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10.Describe the work order structure?

11.How are the work order issued?

BIBLIOGRAPHY

During the preparation of project I took the help of various sources which are as

follows:

Books:

Jawaharlal – Cost accounting

Journals:

Accounting manual

Budget manual

Training manual on cost reduction

Company monthly journals

Internet:

www.hal-india.com

www.wikipedia.org

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