SUMMER TRAINING REPORT ON

FINANCIAL MANAGEMENT IN HAL

WITH SPECIAL EMPHASIS ON

COSTING AND COST CONTROL

UNDER THE GUIDANCE OF

MR. ARUN NARULA

IN PARTIAL FULFILMENT OF MBA 2005-06 FROM

KAUTILYA INSTITUTE OF TECHNOLOGY AND ENGINEERING UNIVERSITY OF RAJASTHAN JAIPUR

BY

MANOJ KUMAR MANGAL

ACKNOWLEDGEMENT
I would like to express my thanks to M/s Hindustan Aeronautics Ltd, Accessories Division, Lucknow Division, who gave me an opportunity to study in such a large organisation. I am grateful to Mr. A.K.Srivastava, Chief Manager (Fin), Mr. D.R. Nahak, Sr. Manager (Fin), Mr Santosh Bhatnagar, Sr. Manager (Training) and I wish to express my deep sense of gratitude to Mr. Arun Narula, Dy. Manager (Budget & Audit), Mr. S.Z.A.Rizvi, Manager (Costing), who inspired, guided and gave their valuable suggestions. I would like to affirm my gratitude to Mr. K.K.Lalwani, Manager (Bookkeeping) Mr. A.P.Thakur, Manager (B/R), Mr. S.K. Singh, Mr. Santosh Sethi, Mr. P.K. Ghosh, Smt. Saroj Negi for their necessary help and encouragement intended in this project. I convey my thanks to all those whose name do not appear but who contributed significantly. Their valuable suggestions considerably helped me in the final drafting of this report. They helped me at every stage of project work. Their contribution, lesson of wisdom have therefore been affectionately appropriate rather then grateful acknowledged. Many thanks to all of them, for their patience and support to help me on this project work. Because of all their help only my effort base fruits and made me able to present this report. Manoj Kumar Mangal MBA (2nd year) University of Rajasthan

SANTOSH BHATNAGAR Sr.Manager(Training)

ARUN NARULA Dy.Manager(Budget)

PREFACE
With respect to the allotted period, I had the privilege of having a formal relationship with the organization as trainee but informally it is a sacred place for me as it is my first practical exposure to an organisation to know and get aware to an organizational real practical stressful environment. It was a great opportunity extended to me to work with such a large organization. Since the duration of my summer training was short, in comparison to the monolithic level of functioning in the organisation, so it became difficult to cover each and every aspect in detail but I have tried my best to see all the important points related to my study. This study gave me a practical exposure of the functioning of Accounts and Finance department. The information so gathered for the presentation of this report is collected by the personal contact with the concerned person of different departments. The project report is the mere constitution of varied functions, which are handled by the Accounts Department. In the due course of my study I became aware of the concepts, which are used in HAL, with respect to the pricing and costing function. The system of accounting, which prevails in HAL, is known as Integrated Accounting System and is unique to the organization. The whole study is bifurcated in four major parts as different sections of Finance Department, Budget Section, Costing section and Capital Budgeting system. Although these sections are separate and perform their separate operations but these are interrelated with each other.

INDEX
S.NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 PARTICULARS Introduction of HAL History and Growth of HAL HAL Mission & Value Board of directors, Corporate Organisation HAL Custmers, Present set up of organisation HAL Lucknow Division HAL a Financial Perspective Finance Section Payroll Section Bills Receivable Section Bills Payable Indigenous Bills Payable Foreign Bills Payable Services Cash Section Time Office Book Keeping Section Budget Section Material Accounts Section Cost Accounts Section Method of Costing in HAL Budgetary Controls Inventory and Material Management Provident Fund Section Abbreviations PAGE NO. 1 2-5 6 7-8 9-12 13-17 18 19-23 24-26 27-30 31-33 34-36 37-38 39-40 41-44 45-49 50-54 55-58 59-70 71-85 86-88 89-92 93-95 96

INTRODUCTION
Hindustan Aeronautics Limited is the only organisation of kind engaged in the development, production, maintenance and overhauling of Aircraft & Helicopters. MiG-21, MiG-27, Mirage-200, Dornier-228, Jaguar, Cheetah, Chetak, Light Combat Aircraft (LCA), SU-30MKI, IJT, Advanced Light Helicopters (ALH) are some of the major Aircraft / Helicopters, which are manufactured/overhauled by HAL. Organisation is also involved in the manufacture and assembly of system for Indias space program. It has got a rare distinction of holding the capability spanning from the entire range of design conceptualization to production and after sale product support.

HISTORY AND GROWTH OF HAL

Hindustan Aeronautics Limited was formed on 1st October 1964 with the merger of Hindustan Aircraft Limited and Aeronautics India Limited. Hindustan Aircraft Limited was promoted by Late Sri Walchand Hirachand in December 1940 in association with the government of Mysore as a Private Limited Company with its registered at Bangalore and the interest of the Company and took over its management. Sri Walchand Hirachand had the vision to start this Company for the manufacture of aircraft for the first time in India. The Harlow Trainer and Curtis Hawk fighter aircraft were the first two aircraft produced by Hindustan Aircraft Limited and they were successfully test flown in 1942. However, soon after the aircraft manufacturing programs were abandoned in favour of overhaul and repair of aircraft to support the war effort during World War II. In August 1962 government of India entered into a collaboration agreement with Soviet Union for the manufacture of MiG-21 FL aircraft including its engines and Avionics India Limited was formed to undertake manufacture of MiG-21 aircraft and factories were set up at Nasik in Maharashtra for the airframes and Koraput in Orrisa for the MiG aircraft. Hindustan Aeronautics Limited. Today, HAL has 16 Production 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 3550 aircraft (which includes 11 types designed indigenously), 3600 engines and overhauled over 8150 aircraft and 27300 engines. Hindustan Aircraft Limited and Aeronautics India Limited were merged in October 1964 to form the present

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 Stationary Launch Vehicle) IRS (Indian Remote Satellite) INSAT (Indian National Satellite)

There are three joint venture companies with HAL:

BAeHAL Software Limited Indo-Russian Aviation Limited (IRAL) Snecma HAL Aerospace Pvt Ltd

Apart from these three, 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 a 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.

M/s Global Rating, UK in conjunction with the International Information and Marketing Centre (IIMC), awarded the INTERNATIONAL GOLD MEDAL AWARD HAL for Corporate Achievement in Quality and Efficiency at the International Summit (Global Rating Leaders 2003), London,UK.

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).

Evolution and Expansion:

HAL Mission & Values

HAL MISSION: 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 ". HAL VALUES:

CUSTOMER SATISFACTION COMMITMENT TO TOTAL QUALITY COST AND TIME CONSCIOUSNESS

INNOVATION AND CREATIVITY TRUST AND TEAM SPIRIT RESPECT FOR THE INDIVIDUAL INTEGRITY

HAL Customers:
International Customers: Airbus Industry, France APPH Bolton, UK

 BAE Systems, UK Chelton, 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 Mistubishi 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 Smiths Industries, UK Snecma, France Strongfield Technologies, UK The Boeing Aircraft Company, USA Transworld Aviation, UAE Vietnam Air Force, Vietnam Domestic Customers: Air India Air Sahara Airports Authority of India Bharat Electronics

 Border Security Force Coal India Defence 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 Airforce 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

HAL FINANCIAL HIGHLIGHTS:

Hindustan Aeronautics Limited (HAL) has crossed past the Rs.10,000crore mark for the first time with a sales turnover of Rs.13061 crores during the Financial Year 2010-11, The Value of Production has also gone up by 17.28% at Rs. 15821 crores, while the Profit of the Company (Profit Before Tax) is Rs.2718 crores, which is an increase of 1.12% over last year's performance. The highlights are given below:

Rupees in Crores Particulars Sales Profit before tax Profit after tax 2009-10 2010-11 11457 2688 1967 13061 2718 1973 Growth 14.00% 1.12% 0.31%

PRESENT SET UP OF THE ORGANISATION

Hindustan Aeronautics Limited has three production complexes Bangalore, MIG and Accessories and one Design Complex each headed by a Managing Director, reporting to Chairman, HAL. HAL has spread its wings to cover various activities in the area of Design, Development, Manufacturing and Maintenance. Today HAL has 16 production divisions / units, 7 at Bangalore and 1 each at Nasik, Koraput, Lucknow, Kanpur, Korwa, Hyderabad and Barrackpore. These divisions / units are fully backed by nine Design Centers, these Centers are engaged in the design and development of the Combat aircraft, Helicopters, Aero engines, Engine test beds, Aircraft communication and Navigation Systems Accessories of Mechanical and Fuel system and instruments. Major products of Accessories Complex :

Lucknow Division Korwa Division Hyderabad Division Kanpur Division

Landing Gear, Wheels, Brakes, Hydraulic & Fuel accessories & aircraft instruments GSE & GHE, ECS. INS, HUDWAC, NAV attack LRMTS, FDR, Auto Stab System Surveillance Radar, Precision Approach INCOM, RAM, IFF, VHF / UHF (5). DO-228, HPT-32 and Civil aircraft Radar,

HAL LUCKNOW DIVISION

Accessories Division of HAL was established in 1970 with the primary objective of manufacturing systems and accessories for various aircraft and engines and attains self sufficiency in this area. Its facilities are spread over 94,000 sqm of built area set in sylvan surroundings. At present it is turning out over 1100 different types of accessories. The Division started with manufacturing various Systems and Accessories viz, Hydraulics, Engine Fuel System, Air-conditioning and Pressurization, Gyro & Barometric Instruments, Electrical System items, Undercarriages, Electronic items all under one roof to meet the requirements of the aircraft, helicopters and engines being produced by HAL. This was followed up with manufacturing the same range of accessories for MiG series of aircraft, International Jaguar and repair / overhaul of Mirage-2000 & Sea-Harrier accessories. In addition the Division manufactures systems for Civil Aircraft i.e. Avro, Dornier and AN-32 & cheetah, chetak & Advanced Light Helicopters.

The Division, right from the beginning, laid a lot of emphasis on developing indigenous capability for Design and Development of various System and Accessories. This capability has culminated in indigenous design and development of a variety of systems and accessories for the Light Combat Aircraft (LCA) and Advanced Light Helicopter (all versions i.e. Army, Airforce, Navy & Civil) - two prestigious aircraft programs in the country and IJT (Intermediate Jet Trainer). The Division has also developed and has made successful strides into the area of Microprocessor based control systems for the LCA Engine as well as other systems. The Division diversified not only in other Defence applications like tanks and armored vehicles for Army; it looks commercial applications of hydraulic items. Gyroscopic Equipment, Special Purpose Test Equipment & Group Support Equipment and successfully supplied in the market. The Division has been in the forefront of accessories development and supply not only to Indian Force but to Army, Navy and various Defence Laboratories as well as for Space applications. The Division today has a prime name in the Aviation market and various international companies are interested to join hands with it for future projects. The Division has also made steady progress in the area of Export.

LUCKNOW DIVISION REPAIRS, MAJOR SERVICING AND SUPPLY OF SPARES The Division carries out Repair and Overhaul of Accessories, with minimum turnaround-time. Site Repair facilities are offered by the Division by deputing team of expert Engineers / Technicians. Services provided for: Military Aircraft MiG Series Jaguar Mirage-2000 Sea - Harrier AN-32 Kiran MK- I / MK- II HPT - 32 SU-30 MKI Civil Aircraft Dornier-228 AVRO HS-748 Helicopters Chetak (Alouette) Cheetah (Lama) ALH (IAF / NAVY / COAST GUARD / CIVIL)

The Division has comprehensive manufacturing capabilities for various Hi-tech components, Equipment and Systems to customer's specifications and ensures high quality, reliability and cost effectiveness. The Division has over 25 years of experience in producing aeronautical accessories making it an ideal partner for the International Aero Engineering Industry.

The Division also manufactures and supplies complete range of components of Cheetah (Lama) & Chetak (Alouette) Helicopters, Jaguar and MiG series Aircraft to Domestic and International Customers to support their fleet. FACILITES: Process Heat Treatment facilities for all types of steels, Aluminum alloys, Copper, Nickel & Titanium alloys. Protective Treatment Treatment facilities of all types like Plating, Publishing etc, SPECIAL types of Surface protection & Painting facility, i.e. RILSAN Coating PTFE Coating, MOLY DAG Coating. Welding Division has Electro Beam, Argon arc, Spot & Seam welding equipment to facilitate intricate welding on thin metal bellows, capsules, stator Packs, Brushes etc. Our welders are fully approved & certified by Civil Aviation Authority. Rubber, Plastic, Foundry These facilities are in - house to cater for the needs of various production / servicing requirements.

Assembly and Test

8000 sq.mtrs of Clean/Air-conditioned room (class 10,000 with laminar flow cabinets) where assembly & test activities for instruments, Hydraulics and Fuel factories take place.

Attached facilities to Assembly Shops are:

Dedicated Test Equipment, Environmental Testing facilities to meet the aeronautical acceptance standards.

Environmental Laboratory Facilities for all types of Environmental testing as per requirements of BS, MIL & JSS, available to meet regular requirements of type testing of all types of units designed/developed in the in-house R &D centre. In addition the Lab also caters for the need of special type of testing for Wheels, Hydraulic item etc. in dedicated test rigs/beds. Design Computer Centre with Unigraphic, CAD & Analytical Software Packages. AWARDS: The Accessories Division Certification is: The ISO 9001 Certification for entire range of products and services. ISO 14001 Certification for Environmental Management System The Accessories Division Approvals are:

Approval from DGCA, Govt. of India for design and development, manufacturing and repair.

Approval for Research & Design Centre by Department of Science and Technology, Govt. of India. Approval of Director General Aeronautical Quality Assurance for Military Aviation products and services

Products in Current Manufacturing Range:

INSTRUMENTS, SENSORS, GYROS ELECTRICAL POWER GENERATION AND CONTROL LAND NAVIGATION SYSTEM MICROPROCESSOR CONTROLLER UNDERCARRIAGE, WHEELS AND BRAKES

HYDRAULIC SYSTEM AND POWER CONTROL ENVIRONMENTAL CONTROL SYSTEM EJECTION SYSTEM ENGINE FUEL CONTROL SYSTEM GROUND SUPPORT EQUIPMENT AND TEST RIGS Supply of Retable and Spares of Jaguar International and Cheetah (Lama) / Chetak (Alouette) Helicopters Repair / Overhaul of aircraft accessories of MiG series Aircraft, Jaguar International Aircraft, Cheetah (Lama) / Chetak (Alouette) Helicopters and Dornier Multi-role Aircraft

Export Products

Supply of Ground Support Equipment for Aircraft such as MiG-23 / 27 / 29, Mirage-2000, Jaguar, Light Combat Aircraft (LCA) Su-30 MKI, Sea Harrier, Dornier DO-228, Avro HS-748 (Specific Version), Cheetah (Lama) / Chetak (Alouette lll), Ml - 17, Advanced Light Helicopter (ALH).

Outsourcing: Division has embarked upon selecting and creating a strong base of suppliers for outsourcing precision components, tooling and test equipment. This is required to handle higher loads of existing and new projects being undertaken in the division. Vendors are selected as per the corporate guidelines, pursuing a vendor approval process. Applicant Organization with established facilities & capabilities, willingness to learn and excel in producing aeronautical level of quality product and with financial strength and preferably with DGAQA approval stand a good chance in becoming part of
the aeronautical industrial expanse.

HAL A FINANCIAL PERSPECTIVE

Hindustan Aeronautics Limited is a large manufacturing organization and its main customers is Indian Air Force which gives HAL various orders for manufacturing, repairs and overhaul, design and development etc. and provides 90 % amount of ordering in advance and rest 10 % after receiving the complete order,

so in this way HAL realizes 90% ordering amount before the supply of the items and only 10% of the amount blocks. Therefore, the need of working capital in case of HAL is not much high with respect to other manufacturing organizations. HAL has civil customers and it also takes contracts from Navy and Coast Guard, Aeronautical Development Agency (ADA) etc. The projects undertaken by HAL are either company financed or customer financed. It takes money from customers in advance for the functioning of the projects. Company also finances some of the projects and in these cases funds are provided by the government. Company does not suffers from losses because there is no risk in the investment of projects because investment is made on the basis of orders and some percentage of total amount of the project is provided to the company in advance to start the project. The organization has its Corporate Office in Bangalore, all the financial activities are controlled from the Corporate Office. Since it is a major manufacturing company of the government therefore no investment policy is being followed by it at Accessories Division, Lucknow. Capital structure theories are not applied by this organization because being a Public Sector Unit, its main power is in the hands of government. Decisions taken by government of India in relation to companies are followed by it. The Head Office controls all the financial policies of different Divisions.

ORGANISATION STRUCTURE OF ACCOUNTS DEPARTMENT OF HAL LUCKNOW DIVISION

DGM (FINANCE)

SR. MGR. (FIN)

SR.MGR. (FIN)

SR.MGR.(FIN)

MGR(B/R) DM(B/R)

MGR(F-D) DM(Cost/MA)

MGR (BP-I) DM (BK) DM (BUD)

MGR (FIN) DM (F/B) DM (PF) DM (CASH) DM(F) DM(F)

DY.MGR.(SEV) (P/R)

AO (P/R)

A.A.O.(TO) AO

FUNCTIONS AND RESPONSIBILITIES

The Accounts and Finance Department of HAL performs these functions and responsibilities: 1. 2. 3. To ensure financial discipline as per guidelines of the company. To advice management for all matters having financial implications including financial co-ordination before commitments are made. Regulation of payments for supply and services including salaries, wages and other payments required for furthering legitimate objectives of the company. 4. 5. 6. 7. 8. 9. 10. Compilation of accounts and getting the same audited by Statutory and Government Auditors. Compilation and co-ordination of fixed price quotations (FPQ) for sale of companys product and services as per the norms of the company. Collecting dues on behalf of the company from the customers as well as other agencies. Financial appraisal of the projects. To prepare budget and to exercise budgetary control for the utilization of available resources in the best possible manner. Interaction with various operating levels in the division. To have an effective MIS for prompt reporting to the higher management for decision making. In order to fulfill these responsibilities, the Finance and Accounts Department has been divided into different sections as per convenience and for smooth flow of activities in discharging the above responsibilities.

DIFFERENT SECTIONS IN THE DEPARTMENT

The Accounts Department of HAL has been divided into eleven different sections for the smooth functioning. These sections are as under : 1. Bills Payable (Payable to Suppliers) Inland bills Foreign bills Service & Civil works Finance (Clearing Purchase Order files) Payroll (Payment of salaries) Bills Receivable (Collection of amount from customers) Cash Office (Cash disbursement to employees) Cost Accounts (Costing and pricing of products) Material Accounts (Details of materials) Book Keeping (Annual Profit & Loss Account and Balance Sheet) Budget and MIS (Annual Budget) Time Office (Attendance records) Provident Fund (Record of PF savings of employees)

2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

FINANCE SECTION
The Finance Section has the responsibility of carrying out the scrutinizing function which has a major role to play in capital and revenue expenditure decisions in regard to purchase of materials/ stores / tools and other services. It also ensures that all expenditure is made in accordance to the principle of financial propriety. Finance Department ensures that the funds are in proportion to meet out the approved budgeted amount. It also ensures that the financial proposals are routed to competent authority as per delegation of power (DOP) so as to ensure the compliance of the provisions of companys 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. Functions : To scrutinize and give financial concurrence as per delegation of power for each proposal involving 1. Capital expenditure 2. Revenue expenditure 3. Purchase of material store/ Tools and other services 4. Manpower requirement 5. Waiver of dues / write off of losses 6. Cases involving relaxation of rules etc. as per the delegation of powers 7. Sale, lease, alienation or disposal of companys assets 8. Contracts entered into with suppliers / collaborations / sub-contractors 9. Award of Contract in respect of civil works/ electrical works/ other works. 10. Project Reports etc. Certification for availability of funds with reference to capital and performance budget and appropriation of funds.

Procedure (Financial Vetting) : Finance section plays a major role in Accounts Department. It can be termed as center 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 then store sends this file to Finance Section for further proceedings. These requisitions are broadly classified as under : 1. 2. Non-Recurring items 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 upto Rs.5 lakh, different committee is authorized for the amount above Rs.5 lakh and so on. Approval is done by CM (IMM), Manager (Maintenance), Senior Manager (Maintenance) as the case may be. After the CMs approval, it is sent back to Commercial Department and the Commercial Department sends it back to Finance Section, including specifications which shows that it is suitable or not. Finance Department approves Purchase Order 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 these 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.
MPRR Comprises of : Full descrip. of material required Recurring/ Nonrecurring Job Order No. Source of supply

Code No.

Qty. reqd

Approx. Cost

Date reqd

Reasons for requirement

Remarks

Material purchase request consists of description and specification of item, Part no., Code No. Quantity required, Carton specification, estimated cost, MPR, Purchase Order, quantity of order, Min., Max, re-order, monthly consumption, reference of old supply, delivery date, department requisitioning etc. In the same manner for foreign purchase request PRS (Procurement Review Sheet) is prepared. Procedure for clearance of foreign material request is same as followed in indigenous case.

PAY ROLL SECTION

As the name suggests, this section is concerned with Salary, Wages, incentives and correspondence with Time Office. It takes into consideration subsidies granted and providing motivational benefits. Functions : On the basis of appointment / transfer notification from Personnel Department, individual files are opened in the Pay roll section to record the particular of the employees. Such as grade, date of appointment / transfer / department code, permanent batch number, scale of pay, quarter details etc. The Pay roll record is updated from time to time entering therein increment drawn, promotion, transfer etc. The master data in regard to all officers / employees are sent to EDP (Electronic Data Processing) Section in respect of Basic Pay, DA, HRA, CCA etc. and this data is updated every month depending upon the charges. The deductions to be made are forwarded by EDP section by means of deduction statement in the form of checklist by 25 th of every month. Pay roll section corrects the same with reference to the various documents and recovery registers and sent it back to the EDP Section for final adoption by 26th /27th of the month. The EDP Section prints the Pay roll in duplicate in which one copy is maintained in the Pay roll section for record purpose and the original copy is distributed to the employee concerned. Disbursement of Salaries & Wages : Payment of salary to the officers & employees is made through the bank based on the payroll received from the EDP Section. Remittance of Recoveries: Various recoveries made from the employees in respect of LIC premium. HDFC loan, income tax etc. are remitted to various agencies within the stipulated date by means of cheque. Payment of Advances : Various types of advances such as Car/Scooter advance, Contingency advance, TA/DA etc. are paid / adjusted as per the rules of the company. Also reimbursement of expenses like medical, school fees, conveyance etc. is made as per the rules followed by the company. Accounting Procedure : Monthly Pay roll journal entries are made both for Supervisory and Non-Supervisory personnel and sent to Book Keeping Section for adoption. For payments made to person from other divisions,

proper accounting is done to ensure that necessary advice is raised to the concerned division. To make payments to ex-employees towards the final settlement of their dues. To monitor the controllable expenditures like Medical expenditure, Conveyance expenditure etc. on monthly basis and to ensure it does not exceed the budget provided for it. Advance payments as well as on time payments are made by Pay roll Section. Advances : Advances are refundable in nature. Their recovery is made from the salary of the employee. These advances are paid according to the rules of the company like Scooter Advance of Rs 27000/- is paid only to the employees and suitable amount per month is being deducted. Contingency Advance is paid as per the rules of the company. Amount for this advance is Rs.4000/- for employees and Rs.5000/- for executives and its recovery should be made within 10 months. Salary advance is also paid to the employees subject to maximum twice in a year. Employees can also draw advance from prescribed Banks. In that case, HAL will pay monthly subsidy upto a certain limit. Salary Payment : On the basis of attendance report received by the Pay roll section, salaries are made. Salary includes Basic pay + DA + HRA +CCA + Conveyance Allowance + Canteen Subsidy + Incentives + Washing Allowance + Magazine Allowance etc. Medical Reimbursement: HAL provides for the benefit of medical reimbursement for its employees subject to government rules. Medical bills of prescribed hospitals by the HAL are only reimbursed. Medical bills of all dependents of the employees as mentioned in the records are reimbursed. TA/DA : Those employees who are sent outside the company for any official job are paid TA/DA by the company. There are found elements under it Fare : Amount of ticket of Air / Bus / Train are paid to the employees Dearness Allowance : It is paid as per the companys rules Hotel charges : Guest house charges are paid, In case of non-availability of Guest House, hotel charges are paid depending on limit prescribed by Company. Amount of Local Conveyance to attend his duty at his temporary duty place is also paid. Conveyance Reimbursement : It is paid to those employees who are sent outside the office for official duty within the city.

Leave Travel Concession : This concession is available once in a block of four years. The employee and the dependent members of his family are entitled to visit home town twice (once in each block of two years) or visit his hometown once in one block of two years and visit any place in India in the other block of two years or visit his hometown once in one block of two years and encash the visit to any place in India. Now Company has started Leave Travel Assistance scheme. In this system, company pays a certain amount yearly basis in lieu of LTC. Employees can opt either LTC or LTA scheme. Retirement Element : On the retirement of the employee gratuity (15 days salary of each completed year of employment is paid to him. Encashment of other due balances of the employee is made. Amount of gratuity is maximum Rs.3.5 lakh (as per rules of the company). In case of voluntary retirement employees gets the amount subject to Rs.3 lakh.

BILLS RECEIVABLE
This Section is responsible mainly for the preparation and submission of invoices etc. HALs regular customer is IAF, which accounts for around 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 approved by the Ministry of Defence. It has also to act as liaison with Custom Deptt. , Sales tax authority and others. Proper accounting is done as per the instructions provided by the Corporate Office. OBJECTIVES : To ensure that the dues from the customers in respect of the goods supplied and services rendered are recovered timely as per the Fixed Price Quotation / Price Catalogue approved by the Ministry in acceptance with the Government letter issued by Ministry of Defence dated 24th August 1995. To ensure that the invoices relating to the advances, stage payment, final delivery are raised timely in order to have smooth cash flow position. To ensure that proper accounting is done as per the statutes and accounting instructions laid down by the Corporate Office. To ensure that all statutory payments e.g. Sales tax, Excise duty, Customs duty is recovered from the customers and is deposited timely with appropriate authority. FUNCTIONS : The following are the functions of the Bills Receivable Section: 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 rendered. a) Initial advances are recovered on the basis of customers order. i) Firm / Forecast task given by the Air Force ii) Chief Resident Inspector (CRI) coordinated Inter Divisional Task Orders (IDTO) for divisional tasks. iii) Repairs Maintenance Supply Order Subsequent stages / Final payments are claimed on the basis of dispatch Advices, Acknowledgement received Air Force in Form Q423, Inspection Note certified by the Chief Resident Inspector (CRI) about the progress of the work done.

b)

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. To prepare and render invoices to Non-Indian Air Force customers in respect of the following activities: i) ii) iii) Development Sales for customer financed projects. Supplies and services rendered to Civil customers Supplies against Repair Maintenance Supply Orders (RMSO)

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. To claim payment from Account Officer Defence Accounts Department (AO (DAD) on the basis of fitment details received from those divisions. To submit invoices for reimbursement of royalty from Air Force and set up Sales for these claims and created claims receivable. To follow up with AO (DAD) and other customers for collecting the payments against the invoices raised. 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, Forecast. To collect Sales Tax from the customers and deposit the same. To compile Sales Tax returns and submit the same to Integrated Material Management (IMM) Department for onwards submission to Sales Tax authorities for assessment.

WORKING: All the Sales are controlled from Bills Receivable Section. There are three types of sales, which are as under : MANUFACTURING REPAIR AND OVERHAUL SPARES The following procedure is adopted in creation of sales : Production Control Memo: The production department issues a memo called Production Control memo, which is issued to intimate the dispatch section of the readiness of the items to be dispatched to the party (customer) concerned. Despatch Advice : When the item is received in physical form from the workshop, a dispatch advice is prepared which contains the details as to the date when the order was placed, details of the items to be dispatched, mode of transportation etc. Form Q423 : The Quality Department then issues a Quality check form called Form Q423 after being satisfied of the quality of the items manufactured. Form Q423 is submitted to the CRI who is placed in the Office of DGAQA. Then Form Q423 alongwith the items is handed over to the customers representatives : Air Force Liaison Cell (In case of Air Force) Army Liaison Cell (In case of Army) After the acknowledgement is received from the above said parties, Form Q423 alongwith the dispatch advice is sent to the Bills Receivable Section, which then makes a bill on AO (DAD) who then releases the payment. Procedure for Billing :

For the purpose of billing, the cost of work is arrived at for different kinds of Sales in different manners, which are as follows : o Fixed Price Quotation (FPQ): In case of repairs, the cost of sales is arrived at with the help of a fixed price quotation memo, which is prepared in the Bills Receivable Section. o Price Catalogue: For the issue of fresh items, the cost of sales is arrived with the help of a price catalogue. Revenue is said to be recognized only on the receipt of certification from the CRI.

BILLS PAYABLE SECTION

Meeting organisations liability timely is the task of this section. It is responsible for payment of suppliers and service providers as per terms and conditions of the purchase orders. It also ensures timely payment to different parties so that the supplies and services to the division are ensured uninterruptedly in furthering the organisations objectives. It also ensures proper accounting as per the requirements of status / standing instructions 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. Bills Payable Section has three segregations, which perform their functions independently, these sub-sections are as under : 1) 2) 3) Bills Payable (Indigenous) Bills Payable (Foreign) Bills Payable (Services 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 receipt of information of any type from commercial 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: Purchase Order is sent by the Purchase Department after the approval. Material Procurement Committee (MPC) approves it. Then Purchase order is sent to Bills Section, which shows the details of the material required. Vendors are consulted for the purchase of the material. The vendors send their quotation for supply the material. Then the concerned authorities select the best quotation. Thereafter order is placed. Invoices are sent in case of payment through bank and these invoices are matched with the purchase order and then payment is made to the concerned party. Invoices consist of the name of consignee, manufacturing code no., Challan No. Customer No., date and time of invoice and date and time of removal of goods, product code, description 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 supplies / services are paid by one of the following procedure : Document through bank Cheque against delivery Advance payment Open account Document thorough bank In respect of purchase order where payments are stipulated as through bank, the bank intimation is sent to Bills Payable Section alongwith the copies of invoices. These are entered in the documents received from one bank. Bills payment section after checking the documents with the purchase order passes the invoices and sends the remittance voucher to the cash section for arranging the payments and collection of the documents from the bank by the Purchase Department. Cheque against delivery : In respect of local purchases made on cheque against delivery basis, the Purchase Department furnishes to the Bills Payable Section details of the material ordered and to be collected and amount of payment due. The Performa invoice received from the supplier is enclosed with the intimation sent to the Bills Payable Section. The Bills Payable Section on checking the invoices against the relevant purchase orders, authorized payment and forward remittance vouchers to the cash section for arranging the payment. Advance Payment : The Purchase Department forwards the Performa invoice received from the suppliers to the Bills Payable Section. The Bills Payable Section after checking them with the remittance vouchers to the cash section for arranging payment. In case where bank guarantees are provided against advances, such bank guarantees received are entered in the bank register and the guarantees are sent to the cash office for safe custody. Open Account : The suppliers invoices are received from the Purchase Department duly linked with the relevant purchase vouchers and intimations regarding recovery of liquidated damage (LD) for delayed deliveries along with competent authoritys approval and the same are entered in the bills register. The relevant details are checked with purchase order e.g. unit price, extension total etc. and passes the invoices for payment already made, deduction of dues etc. Cash / remittance vouchers are prepared based on the passed invoices and forwarded to the Cash Section for arranging payment through cash / cheque. Copies of remittance vouchers are endorsed to the Purchase Department and the supplier. The details of

deduction, if any made from the invoices are furnished in the remittance voucher itself separately and also forwarded to the supplier. REGISTERS AND DOCUMENTS : (i) Advance journal (ii) Cheque against delivery register (iii) Indigenous purchase journal (iv) Agency commission register (v) Insurance claim register

BILLS PAYABLE (FOREIGN)

Bills payable foreign deals with the payment to foreign suppliers as stipulated in the Purchase order. This sub-section performs its function separately from the other sub-sections of this department. FUNCTIONS : Payment and accounting of : i) Advance to the suppliers as per the terms and conditions of Purchase Order ii) License fees, royalty etc. as per the licence agreement with the foreign collaborator. iii) Custom duty, freight bills iv) Final bills Opening of Letter of Credit on advice of IMM Department and liaison with bank for foreign exchange release and payment on maturity date. Maintenance of commitment registers for budgetary purpose. Pricing of RDR (Receiving cum Discrepancy Report) with Purchase Order rates and loading of customs duty, freight and insurance charges. Priced RDR are sent to material accounts section / EDP for punching in batch mode for the processing of materials ledger. PROCEDURE : All Purchase Orders / Contracts received are entered into the registers before opening the separate file for each Purchase order. All the LC opened in favour of foreign suppliers as per the terms of purchase orders and entered in registers to record the particulars about their extension, revalidation and utilization on maturity of the LC the bank adjustment voucher is prepared on the basis of bank advice and sent to Cash Section for adjustment. Particulars of payment are also noted in the relevant Purchase Order. All the Contractual payments in respect of royalty, license fee and technical assistance fees are made as per the license / collaboration agreement. Bills of entry received from the IMM department are entered in register to record the value of the goods accessed, 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 sends the RDR to the foreign bills section for making necessary accounting. Pending the pricing of the RDR, the payments made to foreign vendors through LC / Sight drafts are put temporarily in goods in

transit account. In respect of the material dispatched by the vendors against P.O. raised by HAL, the liability is provided in the companys books of account, if payments have not been made against such suppliers. Follow up with IMM Department is done for the timely release of RDR so as to clear the GIT. Foreign suppliers are paid by any one of the following methods as stipulated in the purchase Order / License agreements / contracts : 1. 2. 3. 4. 1. Letter of Credit Sight Draft Advance Payment Direct Payment

LETTER OF CREDIT : Letter of credit is the fastest mode of payment. Documents negotiated by the suppliers against the LC opened by the company are paid directly by the bank by debit in the companys account maintained with the bank and send the debit advice, invoices, bills of lading etc. The bank advices for payment against letter of credit are noted in the LC register and relevant Purchase Order files. A bank adjustment voucher / remittance voucher is then prepared in respect of each such bank advise and sent to Cash Section for accounting in the Cash / Bank book. A request is sent by the department of Inventory and Material Management (IMM) to open LC. On the basis of this LC request is prepared for the bank, which is enclosed with all necessary details. Minimum period for the opening of LC is three months. It can be extended according to the requirement. but they prefer to open LC within three months. The negotiation period for the suppliers is 21 days but within validity of credit. SBI, PNB banks play an important role in this process, they take the guarantee of payment to the foreign vendors on behalf of HAL and the amount is debited to HALs cash/credit account. In this procedure Form A1 is maintained, which ensures RBI permit in relation to export-import policy. Swift procedure is also maintained by HAL for mailing documents in this process. LC form included the date and place of expiry, purchase order no. P.O. date, RBI permit, amount of LC, applicant bank name etc.

2.

SIGHT DRAFT This mode of payment takes more time as compared to LC where Purchase Order stipulates payment terms as document through banks, the seller draws a sight draft on the company and send it through bank accompanied

by documents like invoices, airways bills etc. The bank advice for the payments of the documents are collected by the Purchase Department from the bank and sends the same to the Bills Payable Section alongwith copies of invoices etc. These are entered into sight draft register in the order of receipt. In this procedure bank intimation is sent by PNB to this section for the authorization of the payment. In bank intimation airway bill no., date etc. are mentioned as document proof, after the authorization of the documents payment is made to the supplier. 3. DIRECT PAYMENT : Where the terms of the payment in the Purchase Order stipulates payment after delivery or in the similar circumstances and the foreign supplier sends the shipping documents etc. directly payments are arranged by the Bill Payable section on receipt of relevant invoices and receiving reports etc. with due recommendations from the Purchase Department by means of letter of authority cheque. Based on debit advices received from bank payment particulars are noted in the sundry creditors register and a remittance voucher is prepared and sent to the Cash Section for entering into the cash book / bank book. 4. ADVANCE PAYMENT : The Bills Payable Section on receipt of the Performa invoice checks the same with the relevant purchase order and authorizes the bank by means of letter of authority / cheque to arrange payment to the foreign supplier after obtaining the relevant approval of the RBI which is required for the payment of advances. Normally such advance payments are made after obtaining the bank guarantee. The bank after arranging the payment sends a debit advice to the Bills Payable Section giving details of the amount debited to HALs account. On the basis of bank debit advice, payment particulars are noted in the advance of suppliers register and a remittance voucher is prepared and sent to Cash Section for entering into the Cash book / Bank book.

BILLS PAYABLE (SERVICES & CIVIL WORKS)

Bills Payable Section deals with the preparation of bills of services and civil works in the company. This sub-section is mainly responsible for service contracts, job contracts, medical payments, advance payments, payments regarding construction of buildings etc. Accounting related to all these are done by this section. FUNCTIONS : Payment and accounting of advances, running bills to contractors and final bills. Adjustments and recovery of advances Accounting and adjustment of earnest money and security deposits. Capitalisation of buildings. Payment of all services like telephone, electricity, water, canteen, transportation, sanitation etc. Payments to all consultants like architects, advocate, part time doctors etc. Payment to miscellaneous advances, imprest approved by the competent financial authority and their adjustments. Payment to all casual employees who are recruited on job contract PROCEDURE : In case of the running bills the works Account section links the bills submitted by contractor duty certified by engineers in charge with the contract, acceptance letter, work order etc. arranges payment after deducting income tax, balance security deposits and other advances if any and training the prescribed percentage of the bill towards retention money no deduction is made on this account. Similarly the final bills are submitted by the contractor are checked and gross amount payable is determined. The amount settled in the running bills, advances if any and penalty in delay in completion of work, recovery toward consumption of material, TDS etc. are 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 the account payment bills win suitable percentage in relation to the progress of work so as to recover all advances by the time 80% of the contract is completed.

Material advances to the extent of 75% of the value of the materials brought by the contractor and lying at the site are given on certification from the engineer in charge and are recovered from the running / final bills. Payment of bills for services like electricity, water, telephone 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 are made after the competent authority duly approves it. In case of job contracts payments is made to casual employees other than the regular employees of the company. Three categories are made and rate of these categories differ from each other. Category Skilled Semi skilled Unskilled Rate (Rs.)/ day 261.80 240.05 218.30

In case of service contracts like transport, AMC (Annual Maintenance Contract) of Computer, photocopier etc. are not received in time LD charges are deducted from the amount which lies between 1/2-5% per month as per rules of the company.

CASH SECTION
Cash is life blood for an organization. It is the thing around which, by which, through which, and for which all tasks are done and efforts are employed. So in this respect Cash Sections responsibility also increases. Cash section deals with the receipts and payment of cash and cheques. Accounting of all cash or bank transactions is done as per the guidelines provided by the corporate office. This section ensures timely withdrawal of cash from the banks to cater to the daily needs of payments of cash vouchers. FUNCTIONS : The following are the functions of the Cash Section : All amounts collected by different sections either from employees or from external agencies are sent to the Cash Office through cash credit vouchers. Cash received in excess of requirement, cheque, bank drafts, postal orders are deposited into the companys bank account the same day for realization. Payment to employees such as medical reimbursement, TA/DA advances etc. are made through payment vouchers, which are punched into the computer through online system. The cash office in turn, after proper identification, makes the payment through cash teller. For payments to outside parties cheques are made on the basis of remittance vouchers sent by different sections. These cheques are being sent to the Purchase Department for taking necessary action. Entries are made everyday on the basis of cash credit vouchers and remittance vouchers and cash balance are arrived at, which is certified by the incharge of cash office. Based on the analysis of payments and receipts transactions, computerized monthly journal vouchers are prepared and sent to Book Keeping section for adoption. Preparation of monthly bank reconciliation statement and liaison with the bank authorities to check any discrepancy.

 Periodical physical verification of the cash is done by the Local System Audit representatives and the internal auditors on the last day of the financial year. WORKING : All amounts received are recorded in a receipt register by respective Sections and sent to the Cash office accompanied by the Cash credit vouchers. Likewise cash credit vouchers for cash remittance made by the employees towards repayment of advances, bus/train passes, canteen receipts etc. are sent by the respective sections of the Accounts Department. After receipt of cash / cheque etc. cashier initials in the receipts register in acknowledgement and issue officials receipts for cash / cheque received. In respect of outstation cheques etc. where collection charges are levied by the bank, adjustment vouchers are prepared and accounted in respect of such charges based on the bank advice. Payment to employees and others in cash is made on the basis of cash vouchers issued by the various accounting sections after proper identification. Entries in the cash book are made every day on the basis of these paid cash vouchers. Remittance vouchers are made by the various accounting sections for payment to suppliers, contractors and others and sent to cash office for writing cheques. The cheques are written / typed by the cash office and the officer authorized to sign the cheques sign the same. The cheques are then sent to Purchase Department for collection of the documents or dispatched directly to the parties. Entries in the cash / bank book are made daily on the basis of the remittance vouchers in respect of which cheque is issued.

TIME OFFICE SECTION

The Time Office department is primarily concerned with recording of each workers time IN and OUT of the factory, maintaining leave record and feeding of attendance record to Computer Department. It maintains the receipts of approved leave applications and also provides data for the vacation leave provision to be made in the books of accounts. FUNCTIONS To issue leave cards for the calendar year to all the employees / officers of the division. To maintain leave ledge P.B.No. (Permanent Batch Number) wise for all the personnel. Credit is given to each account according to his entitlement as per laid down by the Corporate Office and the posting is done simultaneously from the attendance reports received from the concerned department. To verify the application for Vacation Leave (V/L) encashment and advice according to Pay Roll section. To make calculations for payment of attendance bonus to Group-A to Group-F employees. To make calculations for provision for Vacation Leave to be accounted for Final Accounts. To verify applications for advance Vacation Leave approved through concerned department and making adjustments thereof in subsequent time period. To maintain night duty roaster of officers deputed on night duty and to ensure that time off claimed in lieu of such duty is not availed beyond 90 days. To verify time off claims in lieu of extra work done on Sunday duty / sports duty, scouts duty etc. To advice Pay Roll Section for payment of single wages in lieu of work done on general holidays and double wages in lieu of work done on national holidays. To provide data to Pay Roll Section for deduction of time loss on the basis of late arrival report received from Security Department.

EMPLOYEE ATTENDANCE RECORD

DEPARTMENT NAME AND COSE NO. S. N 1 2 3 4. 5. 6. 7. 8. 9. 10 11 12 P.B.No. 1003 1458 2234 Name P.K. Dey DK Singh A. Khare Punch Date 20.5.06 20.5.06 20.5.06 S F T G A B Time IN 8.30 am 6.30 am 2.30 pm Time OUT 4.30 pm 2.30 pm 10.30 pm Late coming Early going Rmks Sport Cat. Ro ute Bus Sft. Late Att. Days Dept. Rmks -

TYPES OF LEAVES : VACATION LEAVE Employees who are borne on regular rolls of the company are eligible for vacation leave at the rate of 2.5 days for every 30 days of service. Vacation Leave can be accumulated upto 300 days. There is a provision of encashment of earned leave. The minimum encashable vacation leave is 10 days. The maximum no. of days for encashable leave will be one half of the V/L at credit of the employees on date of encashment. Leave encashment will be allowed only once during a calendar year. The encashment will be at the rate of Basic Pay (including Service weightage pay in respect of workmen and special pay and personally pay. If any, which are counted as pay for all purposes) + Dearness Allowance drawn at the time of encashment. Rate of Encashment (per day) CASUAL LEAVE Employees who are borne on regular rolls of the company are eligible for 12 days of Casual Leave in a calendar year. Casual leave can be availed upto a maximum of 8 working days at a stretch, subject to the same being sanctioned. Casual Leave can be availed for half a day also. MATERNITY LEAVE It would be available to regular married female employees for 12 weeks inclusive Sundays and holidays. SICK LEAVE Entitlement of sick leave is 15 days in a calendar year. PROLONGED LEAVE It is an ex-gratia payment. It is being provided to employees for long illness e.g. T.B., Cancer like diseases. During first six months of leave employee is paid 50% of his monthly basic salary. For next six months employee is not paid any amount. Total duration of the prolonged leave is one year. = Basic Pay (monthly) + DA 26 days

Other provisions also exist like Vacation leave in advance Leave salary / salary advance Extension of leave Encashment of Vacation leave on termination of service Leave without payment Increment postponement Special leave / compensation for employment injury Carry forward of leave by management trainees / executive trainees / technician trainees Carry forward / encashment of vacation leave / half pay / sick leave in respect of absorbed deputation / employees joining the company on fresh appointment from central / state government and other public sector undertakings. SPECIAL CASUAL LEAVE It is being paid to sportsman, ex-serviceman for replacement / treatment of artificial limbs, to office bearers of recognized Unions for attending conciliation proceedings etc.

BOOK KEEPING SECTION

After the completion of a task or in its due course there is a need to maintain an accounting record, which is duly fulfilled by passing on a journal entry in almost every finance and accounting section with some exception. After its proper journalisation, a bunch of journal vouchers are forwarded to Book Keeping Section for consolidation. Therefore, this section is responsible for proper maintenance of accounts of the company as per the requirements of the status. FUNCTIONS Journal entries originated by the various sections of finance and accounts department are sent to Book-Keeping section. These entries are serially numbered and punched into the computer and thereby posted to the general ledger. Preparation of Trial Balance, Profit and Loss Account and Balance sheet. Since the maintenance of accounts is computerized, the accounts can be prepared at any time, though they are prepared for every quarter as on 30 th June, 30th September, 31st December and final Accounts as on 31st March. Maintenance of fixed assets register and depreciation schedule : i) For capital items purchases, RDR are furnished by the Bills Payable section, likewise details of assets like works section to the Book Keeping section. The maintenance of asset ledger is computerized in which the details like date of purchase, nature of item, purchase order no., location of assets is fed. Depreciation on capital asset is calculated as per the policy of the company and is accounted by the means of the journal entries both in respect of opening balance as well as addition.

ii)

Inter divisional transactions are accounted through control account adjustment advice which are reconciled twice in a year at the clearing. Physical verification of fixed assets is done as per the guidelines of the Corporate Office in co-ordination with the book keeping section. PROCEDURE Maintenance of journal and general ledger :

Journal entries originated by the various accounting sections and their approval by the Competent authority are sent to Book Keeping section. This journal voucher after scrutiny is serially numbered month wise and entered in the main journal. From the journal, posting are made to the general ledger. After ensuring that all the entries for the month have been received and posted in the general ledger, the accounts in the general ledger are totaled. Performa of journal voucher Section Serial No.: Nomenclature Account No. Book Keeping Serial No: Debit Credit

These entries are passed in ledger including account no., nomenclature, section no. and book keeping no., debit and credit amount. Preparation of Trial Balance, P&L A/c & Balance Sheet The net debit or credit balance against each account in the general ledger are listed in the Trial Balance and totaled. The computerized journal ledger and Trail balances can be obtained within the book keeping section. The profit and loss arrived at as above is reconciled with the P/L as per the costing records. The Profit or loss incurred by the division is transferred to Head Office Control account. From the Trial balance grouping schedules are prepared account wise. The Balance sheet and schedule forming part of the Accounts and as prescribed by the Corporate Office, are prepared from these grouping schedules.

BALANCE SHEET
DATE : JV NO. Particulars Schedule Projected this year (31st Mar10) Actual projected last year (31st Mar09)

Sources of Fund : Shareholders Fund Capital Res. & surplus Loan Funds Secured loans Unsecured loans Deferred liabilities 1 2 3 4 . . . . . . ____________
________________

.. . . . . . ____________
_______________

Application of Funds : Gross block Less: Depreciation Capital WIP Tools & equipment Investment Inventories Sundry debtors Cash & Bank debtors Loans & advances Liabilities & provisions Misc. Expenditure 5 6 7 8 9 10 11 12 13 14 15 _____________
_________________

_____________
_________________

PROFIT & LOSS A/C

For the financial year ended .. Particulars Income : Sales Transfer to inter-divisional Unit Change in WIP/SIT /Scrap Other income Charge received on inter-divisional transfer Transfer from R&D reserve 16 16A 26 a/b 17 17A 2 . . . . . . ____________
________________

Schedule

31st Mar10

31st Mar09

. .. . . . . ____________
_______________

Expenditure : Consumption on raw matl. 18 Direct expenses 19 Salary & wages 20 Other expenses 21 Charges received on inter- 21A -divisional transfer Interest Depreciation 6 Provisions 22A Deduct: Expenditure relating to capital A/c & Other Net expenditure 22 _____________
_________________

_____________
_________________

Profit for the year Provision for tax _____________

_________________

_____________
_________________

Profit after tax : Balance b/f from last year Profit available for appropriation ____________
_________________

_____________
_________________

Appropriations Debenture redemption reserve R&D reserve Proposed dividend Tax on distributed profit General reserve Balance carried to balance sheet Total of appropriations

_____________
_________________

_____________
_________________

BUDGET AND MIS SECTION

For its effective operation, management must know what are its resources, what is are to be achieved, whether operations are going in accordance to the plans set and such other things, which are to be considered. So for this purpose it also required that the plans must be laid down into verifiable terms i.e. quantitative terms and for that necessary guidelines with target period for achievement are to be set. This format structure is called Budget. In his manner a Budget can be defined as : It is a financial statement of facts laid down prior to the period of its implementation during which it has to be followed based on managements policy and prepared for specified objectives achievement. In this way, a budget serves as a guiding path for the prosperity of an organisation. The movement must be accordingly done so that the optimum result can be obtained with less effort. The following are the guidelines for the Budget Section : The period of the Budget is April to March. The Budget is prepared in three parts: 1. Current Year Revised Estimates 2. Budget Year Budgeted Estimates 3. Forecast Year Forecasted Estimates To ensure that the capital facility must be made available in time to suit the production requirement. The proposal under each sub-head is classified under three categories Plant & Machinery, Civil works and others. Sales budget and cash flow after approval of the board are broken into monthly budgets. There are many types of Budget prepared but it has been bifurcated under two major heads as under : CAPITAL BUDGET PERFORMANCE BUDGET A Capital expenditure is that which helps to increase the production whereas revenue expenditure is that which helps as consumption in production process.

CAPITAL BUDGET It is the most important budget that involves huge funds and is prepared for long-term investment. This budget is related to the capital items, which are to be used for long period for the betterment of the organization for many task accomplishments such as plants and machinery, building, roads, vehicles etc. In this way it is a long-term budget. It is a base for all activities. It involves huge capital outlays projects and long-term commitments. It affects decisions over a period of a year. It involves large risks and uncertainties. Thus, its preparation is handed over to senior and experienced executives. It serves following purposes : Helps to evaluate capital expenditure proposals. Helps to formulate other organisational budget Helps to consider best proposals according to which priority can be fixed Helps to control capital expenditure i.e. Utilisation in effective manner Helps in systematic procedure for appraising profitability performance of the company. Generally top executives of the Corporate and operational level take initiation of proposals of capital expenditure as per requirements. It is generally concerned department and project in charge that feel its need. Here in capital budget is laid down under following heads :

New projects Existing Projects Improvement and Rationalisation Replacement Welfare Design & Development Information & Technology

The requirement and allocation of capital expenditure is raised for above stated purposes. It has been further explained in Capital Budgeting head.

PERFORMANCE BUDGET This budget is also termed as Revenue Budget but due to misconceptions, which might be taken by other it, is named as Performance Budget. This budget can be recognized as the type of budget related to different fields, which directly or indirectly affect profitability. Its benefits are realized in short period of time but some exceptional cases are there e.g. Sales budget, DRE, Manpower budget etc. This type of budget contains different types of budgets, which are explained below : Order status : This budget is related to the sales orders pending for execution. It shows how many orders are pending for supply as well as orders likely to be received during Budget period. Purchase Budget This budget is prepared to calculate expected purchases to be made and also payments due. These types of budgets are prepared after the information / data submitted by Bills Payable, Purchase Department and Finance Department. Sales Budget This budget is prepared after the information supplied by the Customer Service Department and Bills Receivable Section, which are ultimately responsible for receipt of sales order and raising work order and communicating Bills receivable for raising invoices respectively. So in this way expected sales is prepared. Actually these both budgets i.e. Purchase and sales are interrelated as one affects automatically others need. Generally it is calculated on the basis of sales order. Production Budget As we can understand what this budget stands for. It takes into consideration the production to be done in budget period. For its preparation mainly production department on the basis of work order received and furnish the data to the Budget Section. It is also concerned with keeping sufficient inventory requirement. Production Budget is generally calculated as :

Budgeted sales + likely closing inventory of finished goods Opening inventory of finished goods. So in this way, it is totally based on sales budget and desired inventory levels. It also shows unit wise cost. By keeping balance between sales budget and production budget, idle capacity can be avoided. It is a basis for preparation of material, Labour and factory overhead budget. It also takes into consideration the cost of carrying out production plans and programmes. Herein, scientific management has to play a significant role. Manpower Budget This budget is prepared out of the requirement for direct and indirect workforce, to carry out budget plans. Human Resource Department with the help of other departments judges its position. It takes into consideration new appointments, their forecasted grade/ scale retirement. As contingency exists too much under this budget due to deaths, accidents and sudden resignation so every time there is excess in expenditure from the budgeted figure, so in these cases adjustments are made from time to time. It also calculates recruitment and selection expenditure. Foreign Exchange Budget Basically it is a part of Purchase Budget but it specifically takes into consideration the foreign purchases i.e. imports. In this way, it has to calculate according to the foreign currency payment. As its rate is not fixed so in this way, every time there is plus minus. Mainly two types of imports are mentioned i.e. Russian and Western (UK, France, etc.) Training Budget As we all can understand that such an organization needs to be aware of new technological improvements, its implementation and operation so that it can maintain its position. Thus, different kinds of seminars, group discussions, tests are held. For this, personnels are also sent abroad for better learning. This information according to need is collected from different departments and consolidation in well framed manner and submitted to Budget Section. Welfare Budget There are various facilities which are provided to employees of HAL as well as to their families such as medical, canteen, transport, education,

maintenance of clubs and grounds, etc. So in this way, there are two items under it : a) Capital item, which is dealt in Capital budget b) Revenue item, which is dealt in this budget There are some facilities that are availed by only employees so accordingly classification is done. Ways and Means budget This budget defines the way to spend funds and means to procure funds. It means where from the finance can be generated and where there is a need to spend that collected fund. It is generally defined in broad heads as public debts, loans, government grants, payments from customer (mainly IAF) and others. It is also to be taken into consideration that wherein we need to spend. It is mainly in capital items, revenue expenditure, communication facility etc. In this way, it studies deeply into the matter. DRE budget Deferred Revenue Expenditure are those which are not fully realized as per their expenditure in the same year itself but a certain proposition is written off every year and as per charged to the respective head. Under its head there are various types of expenditures such as royalties technical fees, foreign tours regarding seminars, licensing, documentation charges etc. different departments requirements and corporate offices judgement plays an important role in it. Projected Balance Sheet: On the basis of all these budgets about income and expenditure, when they are consolidated it takes the form of balance sheet, which shows the whole thing at a glance and its results as per profit and loss. In this way, we can conclude and reach to a decision easily. However, as per this basis there are chances of much more contingencies that can totally distract organisation from its path and this type of Balance sheets effectiveness becomes negligible. SIGNIFICANCE FOR ORGANISATION It is tool in the hands of management to establish goals, objectives and targets of the organization and to measure performance against the stated targets. It sets out a path to walk over to achieve goals accordingly by taking care against the probable hurdles. As this section is related almost to whole organisation so its responsibilities increases as for performing policies.

MATERIAL ACCOUNTS SECTION

OBJECTIVES : To ensure that all receipts and issues of materials from Stores are recorded and accounted properly. 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. To ensure that the Bin Card balances are reconciled with the Material Ledger balances in co-ordination with Integrated Materials Management (IMM) and the balances of Material ledgers tallies with the General Ledger. FUNCTIONS : To send the priced RDR received from Bills Payable department 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. To generate exception list for missing RDR and getting it resolved with Bills Payable sections. All the materials drawn excess when returned is credited to stores through Stores Return voucher. EDP after processing of all MR/issue vouchers prints the Material issue Analysis Statements monthly indicating : The cost of materials drawn against various Job Orders, Expense accounts. The cost of material issued to Contractors and others The cost of tools issued to various tool cribs from main Tool Stores ; Based on the above statements accounting for issue of materials is done. by debit to Work-in progress / Expense / Contractors account and credit to relevant inventory accounts. On the basis of the list of Materials / transfers reclassifications indicating the material Code No. / Quantity and value, necessary Journal entries are passed by debit / credit to relevant inventory account. On the basis of Stock Verification Sheets indicating Stock Verification Note No., Material Code No., Shortages / Overages, necessary Journal entries are passed after obtaining clarifications from the Stores Department by debit/ credit to Stock adjustment accounts and credit / debit to relevant

inventory accounts after taking approval of CFA wherever required for adjustments / write-off of stores. A list of materials not moved for over 5 years is given by EDP which is reviewed by the Stores / concerned Programming Department. Materials not required for production or for other purposes are identified and suitable action is taken by the IMM for finding their usage in other divisions or is auctioned. Redundancy provision is made in the books of accounts at the rate of 100% for Non-moving inventory and for closed projects as a special provision on the basis of list given by the EDP. Further a normal provision at 1.5% is made on the balance inventory. WORKING : INTRODUCTION : Material management deals with all aspects of material supply and utilization as well as costs. It is concerned with the functions, which affect the flow conservation, utilization, quality and costs. Some terms used for material management are Supply management and Logistics management. It has been found that approximately 64% of the Sales value account for material value (i.e. 64 paise per rupee is material value). This is one of the reasons why material management is growing in importance. MATERIAL MANAGEMENT AND DEPARTMENT VESTED INTERESTS Material management covers a wide range of departments such as manufacturing, sales, purchase, transport etc. Each of these has their own interests. Manufacturing: Sales : Customers : Management : Purchase : Transport : Wants long-term runs to minimize change covers. Wants high stocks to minimize customers delay so that orders could be shipped the day they are received. Want their inventories to be carried by the company Wants low inventory investment Wants more lead time to shop for the best buys. Looks for the cheapest mode of delivery

However the best for any area is often not attractive for the overall business.

INVENTORY CONTROL : Inventory Control is the process of deciding what and how much of various items to be procured. The basic idea of inventory control is to reduce investment in inventory and insuring that the production process does not suffers at the same time. Inventories are the stocks, which can be classified as :1) Raw Material and purchased parts 2) Stores and spares for maintenance 3) Work in progress 4) Finished goods. Inventory costs money for:1) Acquiring 2) Carrying Inventories are kept to : 1) Gain economic purchasing power 2) Maintain service stocks 3) Level out production cycles and irregularities 4) To carry reserve stocks to prevent stock costs. Opportunity Cost: It costs money to have inventories. 1) Return on investment interest 2) Storage and handling labour and administration 3) Insurance 4) Detoriation and shelf life 5) Obsolescence

INVENTORY CONTROL QUANTITATIVE TECHNIQUE : There are a number of inventory control techniques, one of the most important is ABC analysis, which is known as selective inventory control. In this system all the terms are considered under three categories A, B and C. ITEM CATEGORY A B C % OF THE TOTAL % OF THE TOTAL VALUE COST 10% 70% 20% 20% 70% 10%

In practice a graph cannot be drawn but a segregation system is used. A-Value items: The quantities are comparatively less but the costs are high. For these kinds of items a frequent ordering and follow up system is maintained. Also plans and schedules are to be kept up. B-Value items: These items fall in the middle category. Ordering quantities and re-ordering levels can be worked out on a half yearly basis as an average. C-Value items: These items are of low cost and high quantity. Liberal quantities can be purchased, two-bin system can be adopted and no records are needed. INVENTORY PARADOX : Not too much Not too less But enough at lowest cost for highest profits.

COST ACCOUNT SECTION

The cost accounts section is responsible to establish a Costing system in line with the activities and the product range of the division. It is responsible for maintaining records associated with the accounting for material, labour and overhead. It analyses all cost of manufacturing, selling and distribution for use of management in planning and control. Accounts related to costing and pricing of items are prepared in this section. This section acts as a central hub of accounts department. This section is also responsible for determination of the Price realisable from the customer for the Products manufactured / Repaired / Overhauled / Serviced/ supplied by the Division. FUNCTIONS : To determine the rate of absorption / recovery of labour and other overheads for recovering the labour cost on the different jobs undertaken that is Man-hour rate computation. To accumulating the labour and overhead content of each activity project wise based on evaluated Labour Time booking (LTB) generated by EDP section from work order / time dockets. To keep track of different jobs computed and jobs lying incomplete in different stages over a reasonable period of time and to co-ordinate with concerned production controllers for justification for jobs lying unfinished beyond a reasonable period of time and to ensure their early disposition. To review work order on which no material / labour cost has been recorded and finding out the reasons for the same. To get the WIP statement as on 31st March from the EDP from all manufacturing components, sub-assemblies, WIP assembly, WIP for the physical components verification by the concerned production shops. To ensure that the valuation of WIP has been done correctly keeping in view the percentage of completion of the job. To keep track of SIT Transactions with different divisions.

 To keep record of all IDTO received from different divisions. To accept the debit raised by the different divisions for items received by the division in respect of requirements raised by the division through IDTO. To evaluate PC memo for SIT issues, Russian consumption for overhaul and amortisation of DRE. To work out the cost of sales and to reconcile the same with the design department for various customers financed projects. To work out the royalty payable to different licensors as per the license agreement. To liaise with AO (DAD) for verification of claims in respect of labour booking on production and DRE items and other issues like wage, arrears, idle hours etc. To prepare fixed price quotation (FPQ), price catalogue for the different items manufactured / repaired / overhauled / serviced/ supplied by the division and to get the same approved by the AHQ. To submit quotations in respect of enquiries received from Non-IAF and civil customers. INTRODUCTION OF COST : In general cost means the benefits given up to acquire goods or services. Accordingly the benefits given in terms of money may be called cost. Shilling law defines the term cost Cost represents the resources that have been or must be sacrificed to attain a particular objective . Thus the resources sacrificed whether tangible or intangible, measured in terms of money, go by the name cost. The official terminology of management accounting published by the chartered institute of management accountant, London 1991, defines the term cost as the amount of expenditure (actual or notional) incurred on, or attributable to a specified thing or activity, Interpretation of cost depends upon A) The nature of the business, or industry & B) The context in which it is used

COSTING SYSTEM : Costing is the technique consisting of principles and rules that govern the procedure of ascertaining cost of products and services. Costing and Cost accounting are two different terms. The latter shows the way of charging, incurred cost to units produced which the former shows principles and rules governing method of calculating that costs of products and services. Costing can be carried out by means of memorandum record or by methods of integrated accounts because it is emphasized under principles and rules. Generally costing has following main elements when subsequently arranged, generate different types of costs at different stage. These cost ultimately lead to actual cost of producing / repairing of the component. On the basis of which corrective measures can be taken for reducing cost and getting good percentage of profit. ELEMENTS OF COST : There are three broad elements of cost 1) 2) 3) MATERIAL The substance from which the product is made is known as material. It may be in a raw or manufactured state. It can be direct as well as indirect. Direct Material: All material, which becomes an integral part of the finished product and which can be conveniently assigned to specific physical units is termed as Direct material. Following are some of the examples of direct material i) ii) iii) All materials or components specifically purchased, produced or requisitioned from Stores. Primary packing material (e.g. carton, wrapping, cardboard boxes etc.) Purchased or partly produced components. Material Labour Expenses

Direct material is also described as process material; prime cost material, production material, stores material, constructional material etc. Indirect Material : All material, which cannot be conveniently assigned to specific physical units is termed as Indirect material. Consumable stores, oil and waste, printing and stationary material etc. are a few examples of indirect material . Indirect material may be used in the factory, office or the selling and distribution divisions. LABOUR : For conversion of materials into finished goods, human effort is needed; such human effort is known as labour. Labour can be direct as well as indirect. Direct Labour : Labour who takes an active and direct part in the production of a particular commodity is called direct labour. Direct labour costs are, therefore, specifically and conveniently traceable to specific products. Direct labour is also described as process labour, operating labour etc. Indirect Labour : Labour employed for the purpose of carrying out tasks incidental to the goods and services provided, is indirect labour. Such labour doesnt alter the construction, composition or condition of the product. It cannot be specifically be traced to specific units of output. Wages of storekeepers, foreman, timekeepers, directors fees, salaries of salesman etc. are all examples of indirect labour costs . Indirect labour may relate to factory, the office or the selling and distribution divisions. EXPENSES : Expenses may be direct or indirect. Direct Expenses: These are expenses, which can be directly, conveniently and wholly allocated to specific cost centers or cost units. Examples of such expenses are : hire of some special machinery required for a particular contract, cost of defective work incurred in connection with a particular job or contract etc. direct expenses are sometimes also described as chargeable expenses

Indirect Expenses: These are the expenses which cannot be directly, conveniently and wholly allocated to cost centers or cost units. It is to be noted that the term overheads has a wider meaning then the term indirect expenses. Overheads include the cost of indirect material, indirect labour besides indirect expenses. Indirect expenses may be classified as the following three categories : a) Manufacturing (works, factory or production) expenses : Such indirect expenses, which are incurred in the factory and are concerned with the running of the factory or plant, are known as manufacturing expenses. Expenses relating to production management and administration are included therein. Following are few points of such expenses rent, rates and insurance of factory premises, power used in factory, depreciation of factory building, plant and machinery etc. b) Office and administrative expenses : These expenses are not related to factory but they pertain to the management and administration of the business. Such expenses are incurred on the direction and control of an undertaking. Examples are Office rent, light and heat, postages and telegram, telephone and other charges, depreciation of the office building, furniture and equipment, bank charges, audit fee etc. c) Selling and distribution expenses : Expenses incurred for the marketing of a commodity, for securing orders for the article, despatching goods sold and to make efforts to find and retain customers are called selling and distribution expenses. Examples are advertising expenses, cost of preparing tenders, traveling expenses, bad debts, collection charges etc. warehouse charges, packaging and loading charges, carriage outwards etc.

CLASSIFICATION OF COST:
HAL follows an Integrated Accounting System. This system provides for accounting of income / expenses and assets and liabilities in part A, which is referred to as the financial books. The accounting under Part A (financial books) is in line with that followed by any other commercial organization. HAL has a system of absorption costing wherein the income/ expenses of financial books (Part A) are absorbed separately in the costing books (Part B). In other words the income / expenses of Part A and Part B are to match. The cost general ledger is designed to be self-balancing itself. As a result for every debit / credit in the financial ledger there should be a corresponding debit / credit in the cost book of the same ledger. The structure for codification of cost accounts is in line with that of the financial accounts. In financial books : Apart from ensuring accounting of income and expenditure in line with the provision of companies act 1956, the recording of income and expenses in financial books and its classification is as under : Schedule No. 17 18 19 20 21 22 23 26 28 Nature of items Other income Raw material, stores & spare parts consumed Amortisation of direct Exp. Salaries, wages & Allowance Other Expenses Interest Expenses Provisions Depreciation Inter services / common Service Cost classification Labour cost Material cost Sundry direct cost Labour cost Labour cost Labour cost Labour cost Labour cost Labour cost

It may be noted that schedule no.23, relating to expenses relating to capital works and schedule no.25, relating to Work in Progress (WIP)/ Stock in Trade (SIT) are only enabling sections and do not form part of cost.

In cost books : The various items of income and expenditure recorded in the financial books are collected in the costing books under the following broad heads : a) b) c) Labour cost Material cost Deferred Revenue Expenditure

Labour Cost : The Labour cost comprises of direct labour cost and overheads and takes into account the financial items of income and expenditure accounted in the schedules 17, 20, 21, 22, 23, 26 & 28 Material cost : This represents the value of material drawn from the holding stores on material requisition / issue vouchers indicating the work order number. This represents the net total value of the materials reflected in schedule 18 of the financial accounts. Sundry direct charges : This expenditure refers to the amortisation of special tools and miscellaneous expenditure and comprises of all expenditure indicated in schedule 19 of the financial books. DEFINITION OF COST : Labour cost : The labour cost in HAL is further broadly classified into these under mentioned four heads : i) ii) iii) iv) Production overhead cost POH Production overhead cost (others) POH others Non-production overheads NPOH Inter Service rendered / received on works orders

Production Overhead Cost (POH) Cost of Conversion : The cost of conversion of inventories include cost directly attributed to units of production such as direct labour and also include a rational allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. Fixed production overheads are those indirect cost of production that remain relatively constant regardless of the volumes of production such as depreciation, maintenance of factory building and the cost of factory management and administration, variable production overheads are those indirect costs of production that vary directly or nearly directive with the volume of production. Production Overhead Cost : Others (POH others) : In context of HAL there are some items of expenditure which are production overheads in nature but not considered for Man Hour Rate (MHR) / valuation of inventories. These items are like exchange rate variations (deferred liabilities), license fee, documentation charges, blue printing expenses, foreign technician fees, R&D expenses, selling agents commission, idle time, wage revision, arrears etc. which are initially accounted under relevant account head. These items of expenditure are treated as POH while accounting in cost books. Non-Production Overheads (NPOH) : Non-production overhead items are essentially those items of expenses which are treated as period cost in the year of incurrence and those which are not reckoned for the purpose of valuation of work in progress (WIP ), interest expenditure, common service received from Corporate Office are treated as NPOH expenses. Inter service rendered / received on works orders : The transaction accounted under this head of account relate mainly to Bangalore Complex. Divisions, do not have facilities for executing a particular job often, get it done at other divisions on their won orders. In these cases cost incurred (direct labour overhead multiplied with man-hour rate of division executing the job) is recorded in WIP of the division, which has sent the item for doing the job. The cost so recorded is treated as inter service rendered on work orders in the books of the divisions, which is executing the work and as inter service received on work orders in the division in which this expenditure is recorded. Material Cost : This represents the value of material drawn on work orders for carrying out production including those relating to sales and tooling. The material are drawn

from the holding stores against a material requisition voucher indicating the work order number against which the materials are drawn, whereas common materials are drawn against the single work order on a rational basis. Deferred Revenue Expenditure : Deferred revenue expenditure is treated as one of the elements of cost in HAL. DRE expenditure will included the expenses related to following items :

Specialists salaries and expenses Foreign technician fees License fees Foreign training charges Documentation Blue printing Collaboration charges Pre-production expenses Royalty Static / long term expenses Project Management expenses.

Expenditure not forming part of cash Books; There are certain items of income and expenditure, which are partly financial in nature and are accounted for in cost book of accounts. Being purely financial expenses these do not form part of the costing expenses, incomes are to be reckoned only for purpose of reconciling the costing and financial profits. Illustrative lists of such income/ expenses, which are purely of financial nature, are listed below :

Profit on sales of fixed assets Provision no longer required Expenses on VRS All write offs including write off of tooling, Fixed assets, stores, bad and doubtful debts, Surplus stores, shortage and rejections and Other write offs. Liquidated damages, penalties Charges paid on IFD jobs Provision for replacement and future chargesProvision for bad debts Provision for claims -

(Schedule 17) (Schedule 17) (Schedule 20) (Schedule 21)

(Schedule 21) (Schedule 21A) (Schedule 22) (Schedule 22) (Schedule 22)

Provision for WIP & SIT

(Schedule 22)

Computation of Cost Direct Material + Direct Labour + Direct Expenses = Prime Cost Works overheads Factory Cost Office cost

Indirect Material + Indirect Labour + Other Indirect Cost= Prime Cost + Works Overheads Factory Cost + Office & Administrative Overheads Office Cost + Selling & Distribution Overheads = = =

Total Cost or Cost of Sales

ANALYSIS OF TOTAL COST

Direct Material Indirect Material includes * Factory supplies * Lubricants + + Direct Labour Indirect Labour = Prime Cost Factory Overheads

Other Indirect costs includes * Rent * Insurance * Taxes * Depreciation * Maintenance & repair * Power * Light * Heat * Factory overheads

includes * Supervision * Superintendence * Inspection * Salaries of factory Clarks * Defective work * Experimental work

____________ Factory Cost + = Commercial Expenses

Selling & Distribution Expenses includes * Rent * Telephone * Postage * Telegraph * Travel expenses

General & Administrative Expenses

includes * Administrative & Office salaries * Stationary & Printing * Telephone & Telegraph = * Postage * Auditing Expenses

* Stationary & Printing * Freight & Cartage out ____________ * Miscellaneous expenses

* Miscellaneous Administrative expenses * Legal expenses Total Cost

COSTING AND ITS METHODS : Costing is the technique and process of ascertaining the cost of activities, processes, products or services. The technique consists of a body of principles and rules, which govern the procedures of ascertaining costs. Method of Costing : The principle in every type of costing is same but the methods of analyzing and presenting the cost differ with the nature of business. There are two basic methods of costing. They are : A) B) A) Specific Order costing Operation costing

Specific Order Costing : Under this method each contract, job or batch is identified as a cost unit and the formal mechanism to ascertain the cost of unit is suitably designed. 1. Job Costing : In this method each job being quite different from the other is treated as an independent cost unit. A specific number is given to each job to distinguish it from the other and the cost are ascertained in respect of each job represented as a job order, production order or work order. 2. Batch Costing : Where orders or jobs are arranged in different batches after taking into account the convenience of producing articles, batch costing is employed. Thus in this methods, the cost of a group of product is ascertained. The unit of cost is a batch or a group of identical product instead of a single job order or contract. 3. Contract Costing :

Contract Costing does not in principle differs from job costing. A contract is a big job while a job is a small contract. The term is usually applied where at different sites large-scale contracts are carried out. B) Operation Costing : Operation costing includes costing method of varying complexities such as output costing, process costing by-product costing, joint product costing etc. 1. Process Costing : If a product passes through different stages, each distinct and well defined, it is desired to know the cost of production at each stage. In order to ascertain the same, process costing is employed under which separate account is opened for each process. 2. Output Costing: This method of costing is used by the concerns producing a single article or a few articles, which are identical and capable of being expressed in simple quantitative units. The cost unit depends upon the unit of measurement. The cost per unit is arrived at by dividing the total cost during a given period by the total number of units produced. 3. Service Costing : Service costing is that form of operation costing which is applied where standardized services are provided either by an undertaking of a service cost center within an undertaking. The method is applicable to undertakings, which provide service rather than manufacture goods. 4. Composite Costing : The cost of the different sections of production is combined after finding out the cost of each and every part manufactured. The system of ascertaining cost this way is applicable where a product comprises of many assembled parts. There are other methods of costing which are : Absorption Costing Uniform Costing

Marginal Costing Output Costing Direct Costing Departmental Costing Component Costing etc.

METHOD OF COSTING IN HAL :

The method of costing followed in HAL is Batch Costing, Job Costing and Process Costing. Batch costing, which is a variation of job costing, is mainly designed to suit the work, which is being carried out in HAL. In batch costing method all the components, minor assemblies required for the aircraft equipment are manufactured on batch order. Jobs are carried out in batches. The cost of labour and material are booked on batch work only. In batch costing method, cost of aircraft engine and its equipments, sub-assemblies related to an aircraft engine, its equipment in a completed batch is determined by dividing the total cost recorded on the batch work order by the number of units produced in the batch. In case of job costing the cost of each job, which has been carried out, is determined. Different job orders are assigned for different jobs. Job order is an integral part of accounting in HAL. It also plays an important role in production shop. Job order can be for manufacturing a product, its repair or overhaul, for the testing of component in assembly or sub-assembly or any other service, which has been rendered. A comprehensive job order scheme is followed in HAL. Here a job order number consists of 11 digits and for each digit different codification is given. Digit-1 Digit-2 Digit-2& 3 Digit-4, 5 & 6 Digit-7 Digit-8 Digit-9, 10 & 11 shows that any new item is manufactured. represents manufacturing of tools. . is for specified projects. are assembly codes. is the specification of components as assembly or subassembly or manufactured. codifies the batch number for a component. shows the specification of programming department, registration number.

A job order is issued for each development activity. In case of batch job order number as well as individual job order the actual work in the shop is carried out on the shop orders, which are issued for various operations to be carried on

against each job. Each job order is closed on computation of all the components taken up against various job orders and created thereof to stores, assembly and overhaul. Job orders are closed as on completion report of the task. For each and every job which passes through several operations during its processing for the conversion of raw material into finished goods, process costing is done. It is been recorded that the job contains how many operations and cost is determined for each process on that job. Time dockets are prepared for all direct workers to record time spent by them on various job during their stay in the factory. In the case of indirect jobs handled by direct workers and in respect of idle time due to any reason, necessary indications are made on the time dockets quoting relevant standing order number. Time dockets are base documents for determining the labour cost of any job. Time dockets are prepared separately for each worker. For group of workers group dockets are prepared. These time dockets are daily filled for each direct worker. Inputs are recorded from time docket and job tickets are used to record output, which helps in calculating efficiency of worker. Time dockets are into bunches, date wise, shop wise and are sent for processing on the computer after reconciliation is made with the attendance bills.
TIME DOCKET Name ______________________ W.C. No.___________ Serial No._______ Section _________

P.B.No.__________ Date ____________ From:_______________ Open no. work order no. standing order no.

Shift:_________________ To:__________________

From To Actual Hrs Min Hrs Min Hrs Min

Total Actual time

A Job order is assigned to each job, which come for processing on the machine. A job code can be comprising of a number of job orders. For each job order hours are specified. This specification is based on the standards set by HAL. The value can be determined by multiplying specified hours with man-hour rate for labour time booking (LTB) which is Rs.518 for year 2005-06. Performa of Labour Time Booking
Code Job Order Hours Value (Rs.)*

010100 10095631045 765.00 396270.00 010100 10095487521 400.00 207200.00 010100 10045873165 22.00 11396.00 010100 10048754841 45.50 23569.00 010100 10054692581 15.00 7770.00 010100 10047695825 7.50 3885.00 010100 10069747122 20.00 10360.00 010100 10024514273 10.00 5180.00 Total: 1285.00 665630.00 _______________________________________________________________

Value is calculated by multiplying hours with Man Hour Rate (518.00) for LTB.

COST SYSTEMS Determination of cost is a basic objective of cost accounting. After the cost unit has been selected the question arises as to how to accumulate these costs. A system of cost accounting implies that there is a planned and coordinated arrangement of all maters relating to costing. The two systems of cost accounting which are referred to very frequently in the cost accounting literature are : 1. 2. Historical Cost system Standard Cost system

A decision must be made as to whether to compile and allocate cost to actual cost of production or to assign cost on a standard cost basis. If the latter method is chosen variance account will set off the difference between the actual cost and the standard cost. Historical cost the actual cost of acquiring assets, goods and services. An actual or historical cost system collects the cost as they occur but it must delay the presentation of results until manufacturing operations have been performed or service rendered. While the department or job is charged the actual quantities and costs of material used and expanded, the factory overhead or the burden is often allocated based on certain pre-determined rate. Thus actual cost system often does not rely entirely on actual costs. Standard cost on the other hand is the technique of setting up of definite standards or targets of performance in advance of costing period, even before the production begins and the expression of these standards in monetary terms. In a standard cost system all costs are predetermined in advance of production. Production operations and processes are costed using standard for quantities and amount. Accounts are designed to collect actual cost. Difference between actual and standard cost is determined as variance.

COSTING SYSTEM IN HAL :

Costing system that prevails in HAL is standard costing. The system of actual costing is also followed here, which helps in determining the variance between actual and standards set. The standards followed in HAL are labour standard and material standard, which are used for various purposes. Management service department (MSD) maintains these standards. Material Standards : The direct material cost is found out by multiplying the quantity of material to be purchased with the rate of price at which they are available and hence the standards are to be set. Generally the material requirements are drawn from the Bills of Material and variance in the material could be determined comparing standards required and actually drawn. Bills of Material (BOM) are the basis for determination of standard for material cost. In HAL material element is classified as : M - Component B - Component M components are those components, which are manufactured by the Company or the division indigenously whereas B components are bought out components. The company does not manufacture these components. Labour standards : In HAL standards for labour are determined by calculating :

Standard Minimum Hours (SMH) Man Hour Rate (MHR) Efficiency Net Available hours In HAL Management Service Department (MSD) determines these standards. For the calculation of standard time, time to be consumed by labours for a particular operation is measured. Standard time for each component / subassembly / assembly is set by the division for different purposes i.e. determination of standard rates of the products, calculation of efficiency of direct workers, to find out the variance, for incentive payments, for proper utilization of resources etc.

Calculation of MHR: The MHR is computed by taking into account the total budgeted expenditure and estimated production hours. It is computed by dividing the total expenditure of the division by the total direct labour hors of all direct departments. It is also calculated by adding non-production overheads in gross divisional expenses. The MHR at this division is calculated by dividing the gross divisional expenditure by total labour hours. Annual divisional MHR is worked out in advance applicable for the year based on the expenditure approved in the performance budget. M.H.R. = Gross Divisional Expenditure Total Hours for MHR

For the estimation escalation formula is used to derive at budgeted figure, which is calculated on the basis of actual figure. Escalation is based on the indices of the government. It takes into account the Consumer Price Index (CPI), Power Index. Wholesale Price Index (WPI). Escalation formulae for calculating DA = Amount for Amount this year Efficiency : Percentage of the efficiency of the direct workers is calculated by dividing S.M.H. by actual hours consumed by the worker. In HAL efficiency of direct labour is 76% presently. Earlier, it used to be 66%. Then also efficiency of HAL workers as compared to other public sector units is better. Efficiency = S.M.H. Actual Hrs. taken x 100% x Indices Current year - Amount for + Actual previous year this year

Standard labour cost is determined by calculating : Standard Labour cost = S.M.H. x M.H.R. % Efficiency

Standard Minimum Hours : Standard Minimum Hours are calculated to determine the minimum hours required to complete a particular job. This is calculated by time, motion and fatigue studies. Works and methods analysis can be adopted and operation time every activity noted down. The total time required is further adjusted for wastage and contingencies, so as to determine the standard time. The standard of work, standardization of products, efficient plant and equipment, efficient tools to handle, efficiency and skill of the worker, quantity to be manufactured etc. are certain factors which influence time to be taken for performing certain task. SMH includes manufacturing hours and assembly and testing hours for setting standard time. Man-hour should be consumed in standard conditions. S.M.H. = S.M.H. for Manufacturing Man Hour Rate : Man-hour rate acts as a means of recovering expenditure. It helps in determining the cost of a product, thereby helps in determining the price of a product. In HAL MHR plays a very important role in allocating expenditure on various job orders. Exchange rate is calculated by conversion of foreign currency into rupees. Escalation clause, which is applied in HAL, follows the ratio of [35:65], in which value at the rate of 35% on the last year and 65% on the same year is escalated. Escalation Rate : 3.5% increase in western items 4% increase in Russian items. + S.M.H. for assembly & testing

HINDUSTAN AERONAUTICS LIMITED- ACCESSORIES DIVISION, LUCKNOW

CALCULATION OF MAN HOUR RATE (MHR) FOR THE YEAR 04-05 Particulars Basic Pay D.A. Other Sal. & Wages Sub total: (Salaries & Wages) Power & Fuel Other Experience Sub total: (Others) Depreciation Provision for Redundancy Less : Miscellaneous income Sub total: Gross divisional expenditure Total hrs of MHR MHR MD(A)s Office expenditure Corporate Office expenditure Total hrs for MHR MHR Actual 03-04 . . . ------------------. . ------------------. . . ------------------------------------. ------------------.. . ----------------------------. . Formula for Escalation . . . Amount for 04-05 . . . ---------------------------- ---------------------------- -------------------------------------------------------- -----------------------------

CALCULATION OF MHR FOR IAF :

Particulars Salaries & Wages Other expenses Total expenses (a) Less : D.R.E Training Foreign technician fee Others (b) Balance (a-b) (c) Less : Exchange rate variance Grand risk insurance Others Net Divisional expenses (d) Add : Depreciation Provision for contingencies Inter divisional expenses (Debit-Credit for transfer other than production jobs) Gross divisional expenses Less : Miscellaneous income Other income Net divisional expense Add: MD(A)s Office expenses Corporate Office expenses Net Conversion Cost (e) Net available hours (f) 20.72 Man Hour Rate for IAF (e/f =g) Interest on W.C. Interest on fixed capital Net conversion cost Man Hour Rate (h/f =i)

Amount (in lakhs) 3500.00 3312.50 6812.50 21.10 12.09 7.00 40.19 6772.31 34.00 11.00 7.54 6719.77 304.16 315.00 523.64 8275.33 17.35 6.39 8251.59 39.72 225.87 8517.18 411.06 3.01 1.19 4.20+(e)=h 411.26

COMPUTATION OF NET AVAILABLE HOURS S.N. 1. 1.1 1.2 1.3 1.4 1.5 Particulars Direct labour strength Strength as on 1st April Strength as on 1st Mar. Average strength Less : direct labour sent to Other division Add: direct labour sent From other division Net average strength Total average available hrs Hrs. spent on indirect works/ Lost time hours Indirect department Short shift Absenteeism Standing orders a) Avoidable b) Unavoidable c) Working standing orders D&D and others Total: Training & Welfare Net available hours Unit Submitted For 04-05 . . Submitted for 05-06 . . . . .

No. No. No. No. No. No. Hrs.

2. 3. 3.1 3.2 3.3 3.4

Hrs. Hrs. Hrs. Hrs. Hrs. Hrs

. . .

3.5 4. 5 6. 6.1 6.2 6.3 6.4

Hrs. Hrs.

________ ________ . . . . _________ _________

... ____________ ____________ ____________ ____________

Add Extra hrs.from Hrs. other divisions Total available hours Hrs. Break up of total available hrs. Manufacture Hrs. R&D Hrs. Out station Job Hrs. Idle hours Hrs. Total: Hrs

CALCULATION OF INCREMENT %

Grade 1 2 3 4 5 6 7 8 9 10 Grade 1-scale 1 2-Group A 3-Scale-3 4-Group B 5-Scale 5 6-Group C 7-Group D 8-Group E 9-Group F 10-Scale 10 Total

No. of officers As on 1-4-05 .. .. . .. .. . .. .. . .. No. of employee As on 1-4-05 .. .. . .. .. . .. .. . .. ___________ ___________ ___________ ___________

Increment rate Increment Rate ____________ ____________

Product Product __________ __________ __________ __________

Grand total:

PRICING Price is the amount of money charged for the product or service. Various methods of pricing are used in different industries as follows : 1. Cost Based Pricing a) Mark up pricing b) Absorption cost pricing c) Marginal cost pricing Demand based pricing a) Skimming pricing b) Penetration pricing c) What the traffic can bear pricing Competition oriented pricing a) Premium pricing b) Discount pricing c) Parity pricing Product line oriented pricing Tender pricing Affordability based pricing

2.

3.

4. 5. 6.

Pricing Policy in HAL: The pricing policy in HAL differs from other industries. Earlier the pricing policy used to be cost plus pricing but no longer now. It was applicable at the beginning of HAL. Thereafter HAL adopted pricing on the basis of fixed price quotation in 1980s. Between 1988-94, HAL adopted the price based on fixed price or cost plus price which ever is less. 1995 onwards the system of price, which is adopted by the company, is totally based on fixed price quotation. It is not based on competition because the prices, which are charged by the customers, are based on fixed price quotation. HAL has no competition with others. It has monopoly over the market. There is no other firm in the market who can supply aircraft and accessories to Indian Air Force or Space center so that the customer will pay whatever the HAL demands. This is the main reason why HAL is running in profit in spite of decrease in productivity and increase in idleness of machine and workers. It is certain that HAL will never run in loss until it holds monopoly over the market because management knows that they will sell all that

every they will produce. It is the fact that what they produce is on the demand of the customers only and for this they charges money in advance for required functionality of the production. They have not to set up an effective costing system in the organisation and are not interested in reducing the cost of production and finally not implemented a effective cost control tools and techniques with the help of which the HAL will get the cost advantage and increase its profitability. The price, which is charged, is decided on the basis of the man-hour rate of the year. Prices, which are charged from Air Force and other civil customers differ from each other, because the man-hour rate is so calculated for IAF and others differs. First of all total cost of sales is calculated and 10% of profit, this total profit is charged from the customers. Price catalogue and FPQ registers are maintained for the determination of price. Small items are enclosed in the price catalogue, which amounts upto Rs.25 lakh and items costs more than Rs.25 lakhs are kept in Fixed Price Quotation (FPQ).

PRICE CATALOGUE FOR AIRCRAFT SPARES

S.N. Part No. Descrp. Material Material Total Cost Cost Mat. Import Indign Cost .. .. .. .. .. . . . . . . . . . . Hrs LOH Break up cost Cost NPOH Other 395.05 5.05 MC + POH . . . . . . . . . . Total Break up of Profit Cost 5.5% on 10% on NPOH MC + POH . . . . . . . . . . Total Unit Profit Price

. . . . .

. . . . .

Total Material Cost = Material Cost Import + Material Cost Indigenous Hours are determined on the basis of percentage efficiency of the direct labours. LOH Cost = S.M.H. x. M.H.R. / Efficiency % Total Cost = Total Material Cost + L.O.H. Cost

COST CONTROL TECHNIQUES Data relating to cost are vital for management to implement cost control measures. Control can be conceptualized as the process of ensuring that action conforms to plans. In other words, control as a function of management means that once a course of action has been decided, operational decision and activities of the management should coincide the plans. The cost control techniques are used to maintain cost efficiency. The cost control techniques, which are widely used, are as follows : 1. 2. 3. 4. 5. 6. Standard costing Variance analysis a) Cost variance b) Revenue variance Budgetary control Cost audit Responsibility accounting Marginal costing and break-even analysis

In HAL all above mentioned cost control techniques are not adopted. The techniques, which are adopted by HAL are standard costing, variance analysis and budgetary control. In standard costing the cost standards are predetermined like Man-hour rate (M.H.R.), Standard Minimum Hours (S.M.H.), Efficiency of direct worker. Price standards are also maintained in Fixed Price Quotations (FPQ), Price Catalogue. The profit so charged on standard cost is predetermined. It is fixed percentage of total cost of sales. Variance analysis is done on the basis of totality. Variance as a control device are calculated to assign / fix responsibility for deviation from the standard cost and thus to control the cost. It is the difference between standard cost and actual cost or historical cost. It is calculated annually on the basis of sales. Budgetary control involves preparation of budgets and their application for control purposes. Accordingly, there cannot be budgetary control without budgets and mere budgets do not achieve the objectives of control unless the actual results are compared with the targets laid down.

BUDGETARY CONTROL As per the definition, budgetary control is said to be the establishment of budgets relating to the responsibilities of the executives to the requirement of a policy an continuous comparison of actual budgeted results, either to secure by individual action the objectives of the policy or to provide the basis for revision. Preparation of budgets or budgeting is a planning function and their application or implementation is a control function. The activity involved in both the functions accomplishes budgetary control. In HAL capital and performance budgets are prepared. Capital budgets are prepared for those items, which given profit in long run like budget related to new projects, running projects, replacement and welfare. Control measures are adopted while preparing these budgets. Revised estimates (R.E.), Budget estimates (B.E.), Forecast (F.C.) is prepared. It is then compared with actual budget and the deviation between it is noticed and if adverse results are found it is tried to check the deviations and take corrective measures. In the same manner control measures are adopted for preparation of performance budget which includes Production budget, sales budget, purchase budget, manpower budget, training budget, salary and wage budget, welfare budget, design and development budget etc. Estimates regarding all these are prepared in advance and after their occurrence the real amount or actual amount is compared with the estimations. If the variation between actual and estimation is negative then corrective measures are taken. In the case of HAL it is been observed that in most of the cases actual amount is more than estimations made. For budgetary control to effective, it is necessary to develop a prompt and timely communication and reporting system. A periodical comparison of actual performance with the budgeted performance may reveal variances. These variances should be reported by those responsible for execution to their superiors and in run get instructions for correction of the deviations communicated to them. In HAL budget committee exists which deals with the controlling of budget. Budget is prepared by responsible executives. It is able to fulfill the basic objectives like planning, coordination and control.

VARIANCE ANALYSIS : Variance represents the difference between the actual and standards. If actual cost is less than standard cost, this is a sign of efficiency and the difference is termed as favorable variance. If the actual cost is more than standard cost this is a sign of inefficiency and the difference is designated as unfavorable variance. When actual performance are recorded and compared with standards set, some deviations are observed. These deviations are popularly termed as variances. It is the difference between the standard amount and the actual amount during a given period. In HAL variance analysis is done in totality for a financial year. The following represents the difference variances _ 1. 2. Cost variance Price variance a) Direct material price variance b) Direct wage rate variance c) Variable overhead price variance Usage variance a) Direct material usage variance b) Direct labour efficiency variance

3.

The above-mentioned variances are only relevant in HAL. Comparison and analysis of cost is prepared in relation to: 1. 2. 3. Standard Minimum Hours vs. Actual Hours Material quantity and material cost as per the standard and as per the actual. Labour cost as per the standard and as per the actual.

Price variance is not generally further analyzed but the usage variance is further analyzed according to the causes of charge of consumption of hours of; material.

Variation of Price : The price of each spare part shall be adjusted in accordance with the following escalation formulae :
P1 Where P0 P1 A0 A1 Price variance Usage variance Material variance = = = = = = = Price for the deliveries in the given year Adjusted price for the year of delivery Actual amount Average of indices for the year prior to delivery Actual Quantity x {Standard Price Actual Price} Standard Price x {Standard Qty. Actual Qty.} Standard price x {Standard Qty.- Actual Qty.} {Standard cost Actual cost} x Actual Qty. sold { Actual cost Std. Cost} x Actual Qty. sold = P0 * (A1 / A0 )

Material Cost variance = (Favourable) Material Cost variance = (Unfavourable)

In HAL the variances, which are calculated and analysis done regarding it is computed on total sales. It is calculated once in a financial year. Separate variances are not calculated as such. Large variances are analysed and reported for investigation. Variance is effective tool for cost control, cost reduction. In the budget Man Hour rate and actual Man Hour Rate, which is calculated at the end of the year and adjusted as under, absorbed cost.

INVENTORY AND MATERIAL MANAGEMENT Inventory is items of store or material kept in stock to meet future demands for production, repair, maintenance, overhaul etc. Department of Inventory and Material Management (IMM) of HAL plays an important role in the overall functioning of the company as well as finance and accounts department. It maintains the stocks of accessories and releases it as and when required. ABC analysis is used as sensitivity analysis of inventory. Lead-time for material is very high. HAL stores the material one-year in advance. Fundamental of working capital : HAL follows that the fundamental of working capital is based on five Rs, these five Rs represent Right Material Right Place Right Price Right Quantity Right Time

Right quantity of the right priced material should be reached at the right place at the right time. Three main components of the inventory : The three main components observed in HAL are as follows 1. 2. 3. Stock in Trade (S.I.T.) Goods in Transit (G.I.T.) Work in Progress (W.I.P)

Stock in trade includes those items, which are ready for sale. Goods in transit may be in the form of raw material, finished goods and semi-finished goods. Raw material is the major input, which gets converted to output. The items are critical in nature, as any breakdown in supply will results in production stoppage. Usage value is also quite high. Tightest inventory control is

called for so as to ensure uninterrupted supply with lowest possible inventory. Work in progress is materials in intermediate stage of production and remains in inventory. WIP inventory is inventory of material, which may be processed, semi-processed, or fully processed form. They usually lie in the work places. They remain in this classification till they become finished goods. If finished goods could be sold as fast as they are produced or if they could be produced as and when customers needs them, there need be no finished goods inventory.

Material Procurement Procedure in HAL

Material procurement procedure follows these steps : Issue of Material Requisition Note Inquiry floatation Receiving of Quotations Opening of Tenders / Quotations Preparing Comparative Analysis Sheet Selection of Best Quotation Placing of Purchase Order Receiving the Material from Transit Preparation of R.D.R. Payment through Finance Department

First of all it is decided that the product to be produced and quantity of orders in hand is analysed. These requirements are notices on the basis of Bills of Materials. Net storage is calculated by deducting the SIT and orders in hand from total material requirement. Procurement review sheet is prepared. Thereafter concerned authorities review these requirements of materials. Then quotations/ tenders are called and comparative price sheet (CPS) is prepared in order to compare the prices of tenders. L1 tender is selected amongst all which shows less price than others. Proposal of order is given to vendor, when he approves the order; thereafter order is placed to him. This order is accepted according to terms and conditions implied by HAL insurance, port of destination etc. After the follow up of order material is dispatched and intimation is given by suppliers regarding it. Receipt of material is provided which when passed for acceptance then only RDR is prepared by the department. Thereafter payment is made. Accounting procedures for material procurement and use involve forms and record necessary for general ledger. Financial accounting as well as those necessary for costing a job, process or department and for maintaining perpetual inventories and other statistical summaries. The purchase requisition, P.O., RDR,

Material Requisition, Bills of Material etc. used are some of the forms used for material control under a cost system. Purchase requisition includes quantity, item no., item description, unit price and amount etc. of required material. Purchase order is written authorized to a vendor to supply specific quantity of described goods at agreed terms and at a designated time and place. It is prepared by Purchase Department. As a matter of record and for accounting control purchase order should issue for every purchase of material, supplies. The P.O. given the vendor a complete description of the goods desired, the terms, price and shipping instructions. Receiving report will show P.O. No., account no., name of vendor, details regarding transportation, quantity and type of goods received, receiving department keeps record of this report. Material requisition journal are prepared by the material accounts department. Bills of material are a kind of material requisition in form that lists all the material parts.

PROVIDENT FUND SECTION

This section ensures the timely collection of provident fund money from members every month. The money so collected from employees is invested in approved securities. Employee provident fund came into existence in year 1952. Provident Fund trust deals all the functioning of this department. Trust holds its rules and regulations for the proper functioning. FUNCTIONS : The P.F. subscription of members is deducted monthly from their salary. The amount so deducted, which is 12% of the pay along with the companys contribution, is collected from the pay roll section and credited to the funds account. Payment of loans (refundable and non-refundable) to members as per the rules of the company subject to the availability of the funds. The investment of provident fund money is made in the approved securities and the board of trustees approves a detail of investment. To watch timely recovery of interest and keep watch on securities. Interest is credited in the account of each member at such rate as may be determined by the board of trustees, taking into account the income of trust during each financial year. To maintain family pension account of each member and remittance to RPFC at the stipulated dates and file monthly and yearly returns. To remit the amount of PF deduction for contractual/ casual workers by cheque to R [FC and file the return in respect of the same. To distribute annual statement of PF to all the members in the format prescribed by RPFC To make final payment of PF due to a member on his retirement/ resignation or due to a nominee in the case of the death of a member as per the rules. To maintain accounts of provident fund transactions and get it audited by the statutory auditor of the company and approved by the board of trustees. To file the monthly returns in the prescribed format and submit to RPFC by 25th of each month in respect of provident fund and family pension fund. To forward insurance claim to LIC Bangalore in respect of deceased members.

Board of Trustees : Subject to provision hereafter contained the fund shall vest in and be administered by a Board of Trustees consisting of ten members. These members are called Board Members. Five representatives of the member of fund are elected by a recognized union and rest five are elected by the management by itself, in these five members one shall be chairman, one shall be secretary, acting jointly on behalf of the board of trustees operate on account of the fund with the banks and discharge, received or otherwise dispose or, as may be necessary, government promissory notes, interests, warrants etc. relating to board and shall on behalf of the board reassign to members in accordance to rules. Timely meetings are held in which the members of the fund deal. This trust deals with all the functioning of this department. Contributions : Employers share : 12% of the pay (Basic pay + DA + family planning increment + non practicing allowances + service weightage pay as the case may be). 8.33% out of the employers share of contribution to the PF account (the pay for this purpose being limited to Rs. 6,500/-pm) is paid into the employees pension fund for the purpose of employees pension scheme. Employees share : Employees share of contribution is equal to the contribution payable by the employer (12%). An employee however can contribute at any rate higher than the statutory rate, at his option. Interest : Interest shall be credited to the account of each member at the rate decided by the concerned PF Trust. Loans and Advances :

Loans and advances (refundable as well as non-refundable) can be taken from the provident fund account for specified purposes. Recovery period for refundable loans is maximum 48 months, along with interest, which includes 1.5% service charges. The employees pension scheme introduced by the government of India for provident fund subscribers is in operation in the company. 8.33% of the employers share of contribution to the PF account (pay for this purpose limited to Rs, 6,000/- pm) is diverted to the pension scheme. There is no separate contribution from the employees. Legal reports are passed to the regional provident fund commission because of certain legal bindings. Trust record audit is been done by RPFC & CAs time to time. Timely reports are sent to the office of RPFC and the timely visit of inspectors is been done by RPFC for checking the proper functioning of the department. Under pension scheme 1995 approximate Rs.542/month is sent to RPFC In cases like retirement cases are referred to RPFC and RPFC evaluate the cases and decides the amount to be paid to the employees as the pension. These funds that are collected by the department are invested in the government securities. (RBI and state government securities) and government bonds (IDBI, ICICI etc.). Interest that is gained by this process is equally distributed amongst the employees of HAL.

ABBREVIATIONS
R.D.R. G.I.T. S.I.T. L/C F.P.Q. P.C. I.D.T.O. I.F.D. D.R.E E.D.P. M.S.D. L.T.B. A.H.Q. M.R. B.O.M. I.M.M. A.O. (DAD) S.M.H. L.O.H. P.O.H. N.P.O.H. I.A.F. A.D.A. Receiving cum Discrepancy Report Goods in Transit Stock in Trade Letter of Credit Fixed Price Quotation Price Catalogue Inter Division Transfer Order Inter Factory Demand Deferred Revenue Expenditure Electronic Data Processing Management Services Department Labour Time Booking Air Head Quarter Material Requisition Bills of Material Integrated Material Management Accounts Officer (Defence A/c Department) Standard Minimum Hours Labour Overhead Production Overhead Non-Production Overhead Indian Air Force Aeronautical Development Agency