A STUDY ON VARIOUS ACCOUNTING PRACTICES FOLLOWED AT LAXMIPATI SAREES A Project Report Submitted for the partial fulfillment of the

Bachelor of Business Administration 2011-2014/15

SEMESTER IV

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In the subject of
MANAGERIAL ACCOUNTING

Submitted by Karishma Chandak Nishit Deora Chinmay Jariwala Sameer Iyer Submitted to
Mrs. Meghna Dangi

AURO UNIVERSITY

TABLE OF CONTENTS
Acknowledgment .......................................................................................................................................... 3 1 2 3 4 5 6 Introduction:.......................................................................................................................................... 4 Company profile ................................................................................................................................... 6 Production and Operations carried out at Laxmipati Sarees: ................................................................ 8 Answers to the Questions:..................................................................................................................... 9 Recommendations: .............................................................................................................................. 14 Conclusion .......................................................................................................................................... 15

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ACKNOWLEDGMENT
The success of any project depends largely on the encouragement and guidelines of many others. We take this opportunity to express our gratitude to the people who have really been helpful in making this project. Our greatest appreciation to our faculty Mrs. Meghna Dangi for valuable guidance and advice. Her willingness to motivate us contributed greatly to our project. All her lectures that we attended helped us in completing the project. Great thanks to Mr. Ankur Murarka who gave his valuable time to answer our questions. And also to all the colleagues who contributed the information with them and also co-operated during the submission of the project. The guidance and material from all the members of the group was extremely helpful in completion of the project. I am grateful to all the persons who constantly helped and supported to complete this project.

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1 INTRODUCTION:
Managerial accounting is very necessary tool that is concerned with providing information to managers-that is, people inside an organization who direct and control its operation. In contrast, financial accounting is concerned with providing information to stockholders, creditors, and others who are outside an organization. Managerial accounting provides the essential data with which the organizations are actually run. Managerial accounting is also termed as management accounting or cost accounting. Financial accounting provides the scorecard by which a company's overall past performance is judged by outsiders. Managerial accountants prepare a variety of reports. Some reports focus on how well managers or business units have performed-comparing actual results to plans and to benchmarks. This accounting process has now become one of the very essential component to todays business practices. Following are the few management accounting practices in brief: Process cost: - Process costing can be defined by averaging all the production cost over large product units. These cost are used by firms who produce large number of homogenous products. Laxmi Pati sarees uses this costing method. The company produces a large number of sarees which are identical to each other, only the finishing process or commonly called the Value Addition is different. The price of the products are related to each other because of the homogenous products. Product Cost: - Product cost is closely related to inventorial cost. These are basically the cost which are assigned to the products in the production process which constitute of the firms output. For example the firm uses more of financial accounting with respect to managerial accounting. The accountants here deal with the inventory value with the help of product cost. The cost of inventory becomes a cost for the firm. Variable cost: - Variable cost can be defined as a cost which changes with respect to the level of activity. For example Laxmi Pati sarees deals with a value addition service called stone work. Depending on the order for the product material such as oil and glue will be needed for the execution of the task. This is a very easy example of costing used by the firm. Fixed cost: - Fixed cost can be defined by the cost incurred which does not change with the activity. Cost such as insurance for its employees, salaries paid to its employees, loan payments, auditors fees, etc. These cost have to be paid without any relation with the production. Activity based costing: - Activity based costing is a two stage procedure which is used to assign cost to the products produced. The first stage relates to the machine, set up, purchasing raw materials, handling, shipping, etc. The stage two consists of assigning such cost pools to the production process. For example shipping cost will be related to the amount of shipment ordered. Each cost will be a cost driver for the production process.

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Cost estimate: - The process of determining cost behavior often focuses on historical data. For example the cost such as raw material, manufacturing a batch will be an estimated cost by the accountants because they know the historical data of the cost. Knowing this data the managers can assume the cost of the process which will be easy for them to set a benchmark for their costing where they should not exceed nor fall below the costing line. CVP: - It is a study of the relationship between sales, expenses, revenue and profit. For example what will the relation be if the cost of electricity rises during the current year? Will this effect profit? This relation is taken up by the firm in order to establish a relation between profit and expense. Budget: - The simplified explanation of the budget is how the managers use and allocate resources with a limited amount of capital. The type of budget which is used here is called the master budget. The budget for the company will be the how it uses the. Volume based Costing: - Volume based costing is a product costing system in which cost are assigned on the basis of a single activity. For example the company will do a volume based costing on the machine hours which is used for the embroidery process, or the direct labor hours which is used for dyeing process.

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2 COMPANY PROFILE
Company Twenty six years ago, with the support of three workers Shri Govindji Sarawagi took a store on lease in Surat Fabric Market and began his desire textile organization. For two years Shri Sarawagi himself extended the organization. Following the Native Indian custom Shri Sanjay Sarawagi, the oldest son of Shri Govindji began adding to the perform of his dad in 1986. Before getting into this area, Shri Sanjay obtained complete encounter in weaving area. Thereby with his interest and encounter the organization began advancing. This improvement innovative by extreme measures. At the same time during 1991, Shri Govindji and Shri Sanjay Sarawagi bought their first store in the well-known J. J Market of the town. After all, own is own. After beginning organization here; it ongoing improving forward. Now it was dual the organization of 1986. Visualizing the improving perform. Second son Shri Manoj Sarawagi also made the decision to neck the genetic liability. Before becoming a member of the organization Shri Manoj gained vast encounter in the marketplace area. This encounter of Shri Manoj improved the selling of Laxmipati Sarees three times. There is a saying, Unity is Power. Therefore with the oneness and best collaboration of both kids, Shri Govind Sarawagi provided a product name to Laxmipati Sarees. Here also came in use the wide encounter of Shri Manoj. Before the entry of Shri Manoj in the market, a set of six sarees were being marketed to the investors in Surat Fabric Market. But, depending on his own encounter Shri Manoj began custom of promoting set of four sarees, which was extremely popularized. In textile market this modify was liked very much. This has modified the working design of whole textile market. There will not be any overstatement about them, if it is said;What cant be done, if man works hard. What cant be solved, if he works hard. Vision statement To deliver innovation and quality to our customers by following a progressive and purist approach; and further the cause of a sustainable future by promoting an eco-friendly approach in all over operations

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Customers Their network is spread amongst different major cities in India 1. Jammu & Kashmir 2. Himachal Pradesh

3. Uttaranchal 4. Haryana 5. Rajasthan 6. Uttar Pradesh 7. Madhya Pradesh 8. Bihar 9. West Bengal 10. Assam 11. Gujarat 12. Maharashtra 13. Karnataka 14. Andhra Pradesh 15. Arunnachal Pradesh 16. Meghalaya 17. Tamil Nadu 18. Orissa 19. Jharkhand 20. Nagaland

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The organization started its trade actions in 2002, under the cost of Shri Rakesh Sarawagi, the newest son of Shri Govindji. Today, Laxmipati Sarees product is not only popular in India, but also in Dubai , Malaysia , London, UK , Pakistan , Bangladesh and Singapore Attempts are being made to trade and offer under the product Laxmipati. To handle the international business, Shri Rakesh Sarawagi remains in international nations for highest possible months in a year. Competitors The following are the competitors of Laxmipati Sarees that exists in the market. But after speaking to the CA Mr. Ankur Murarka , it doesnt really seems that Laxmipati Sarees considers any competitors in the market. So, the possible competitors of Laxmipati sarees could be following: 1. 2. 3. 4. 5. 6. 7. Ganga Sarees Shagun Saresss & Dresses Man Mohak Fashion Asopan sarees Shree Laxmi Group Pvt. Ltd. Sahiba Group Vivaah Sarees

3 PRODUCTION AND OPERATIONS CARRIED OUT AT LAXMIPATI SAREES:

Surat is the country`s largest textile hub exporting its products locally and internationally. A simple saree consist of a multitude of processes in order to make one. LaxmiPati sarees meets the demands of the customer after a long and taxing process of formulating a saree. LaxmiPati sarees manufactures its products in the following steps. 1) The company does not manufacture the yarn or the so called grey cloth, it purchases it from the local vendors. 2) On receiving the cloth, the cloth is washed depending on the quality and thickness. a) Thin cloth is machine washed, and later if required jet washed. b) Thicker cloth is stone washed, and later if required jet washed. 3) On completing the washing process the cloth is dried and later segregated according to the customers demand. 4) The cloth is then sent to the border setting machine in order to align the borders. 5) After this process the cloth is sent for washing to complete the further processes. 6) The next step is a complicated process. The thick cloth is made into a finer material by the CWR machine in order for it to be dyed easily. 7) After this the cloth is dyed as per the order of the customer. This is the final process in the production department but not the last in order to receive the finish product. The cloth is finally sent to the Value Addition department 8) In this department the following process are completed. a) Printing: - The Company has 5 printing machines which are used to design the saree and add the fine details to it. The plates used for printing are changed after the completion of 700 m of the saree. b) Stone work: - This process is used to stick stones on the cloth to make it more fashionable. The stones are stuck to the cloth with the help of glue gun which is computerized. c) Smog:- The adhesive is applied to the cloth and then the cloth is put into a heating chamber in order to make the adhesive more thinner, after this the cloth is stamped with the foil and hence the foil gets stuck to the cloth. d) Dew drops: - head ahead, binders attached heating canvas. The dew drop machine is a fully automated machine wherein there are heads attached to each splinter. The binders are attached to the heating canvas and later stuck onto the cloth leaving the impression of dew drops. e) Embroidery: - This machine is a computerized machine, where the person puts in the design of the embroidery and the machine stamps the design into the cloth. The machine uses a simple technique of yarn and needles.

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4 ANSWERS TO THE QUESTIONS:

1. What are various kinds of revenue expenses in the company? Which of them are fixed and which ones are variable? What types of costs are included in overhead? How large is overhead compared to direct material and direct labour costs? Revenue expense is expense concerned with the costs of doing business on a day to day basis. When companies make a revenue expenses, the expense provides immediate benefits, rather than long term ones. It is sometimes said that businesses have to spend money to make money. Businesses use their revenues both to amass capital which can be used in the long term, and to cover immediate expenses. Revenue expenditures in general include things like maintenance, wages and salaries, and costs for utilities. The revenue expenditure consists of expenses which must be covered immediately to keep the business running and which provide immediate benefits. By analyzing the financial statements of Laxmipati Sarees we can say that the various revenue expenditures are value addition expenses, power and fuel, repair and maintenance, factory expenses and many more. Following is the table classifying fixed and variable expenses:

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Fixed Revenue Expenditure

Employee Benefits expenses Finance Costs Depreciation and amortization expenses Commission and Sales incentives Conveyance and Travelling Expenses Legal and Professional expenses Auditors Remuneration Insurance Advertising Rent

Variable Revenue Expenditure

Cost of Materials Consumed Purchases Value Addition expenses Power and Fuel Consumables and other expenses Repair and maintenance Freight and packing expenses Factory Expenses Office Expenses Telephone and Mobile Expenses Vehicle Expenses

Manufacturing Overhead: Also known as production or factory overhead, manufacturing overhead involves the costs that are incurred as part of the actual manufacturing process. Typically, this form of overhead costs does not include costs such as direct labor or the materials that are actually used in the production process. This means that manufacturing overhead cost is concerned with those expenses that are considered indirect, but still related to production. Laxmipati Sarees treats all the value added expenses and factory expenses under manufacturing overhead. And it has been observed that there manufacturing overhead cost is greater than direct material and labour costs.

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Manufacturing Overhead

Direct Material and Labour Cost

2. What types of overhead cost pools exist? Are there different pools by department? By activity? By cost-allocation base? By fixed or variable? Be prepared to explain what you mean by these terms because terminology varies widely. Under Activity-based costing, the steps or activities that must be followed to manufacture a product are what determine the overhead costs incurred. Each overhead cost, whether variable or fixed, is assigned to a category of costs. These cost categories are called activity cost pools. After visiting the factory and analyzing the processes being carried out we could understand that in what way the company assigns its manufacturing overhead. Several Overhead Cost pools and also the cost drivers are listed in this table:

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Overhead Cost pools

Cost drivers

Materials handling Washing Department Dyeing and Printing Department Personnel Prpocessing Value added Services

Number of materials requistion Number of Machine Hours Number of machine hours Number of employees hired and laid off Number of machine hours

The company didnt figure out as such that how they are allocating the cost pools. But, with our understanding we can classify these cost pools on the basis of both departmental and activity base. As materials handling, washing, printing, dyeing, value added are considered under activity based cost pools whereas personnel processing is considered under departmental based cost pool. The company has not set any standards to allocate these cost pools as of now. In addition to it, the company also follows batch level production process under few departments such as printing.

3. How is an overhead applied to final product or services? What cost-allocation bases are used?
Right from the raw material (grey cloth) to the final product that is ready for sale undergoes many processes. At Laxmipati Sarees in order to apply overhead to the final product or service a bill is issued after every single stage of production. For example, Raw materials when are passed through the first stage of washing carries a bill with them and at the end of the washing process a bill is attached to the washed material that contains number of machine hours worked and charges applied during that process and then this washed material is passed to the next level of dyeing. Similarly, at every stage a separate bill is issued that encompasses all the necessary details regarding how much cloth is being processed in how much time (number of machine hours) and what all are the charges applied(other charges). This also gives them the clear layout as to how much cost is incurred at what level and by which department. At last, these bills are computed together in order to determine the cost of final product. In this way it includes all its overhead also.

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4. Does the company consider the contribution and break-even point while deciding upon their forecasted sales? Or else if the company sales are much more than the break-even, do they consider the Margin of safety in their decision making process? What other techniques do they use in their Cost-Volume-Profit analysis? Sensitivity Analysis etc.? The contribution margin measures the amount of overall profit that is added by each sale. This is the difference the sale makes; it is also possible that the change it makes is to reduce losses rather than increase profits. And the break-even point is the one where your expenses and revenues are equal. The company has relatively poor managerial accounting practices. It does not follow any of the standard practices in written or in documented form in order to forecast sales. It is just by the experience of their owners and the board members that the decision is taken. The company doesnt follow any of the techniques as of now. And also out of the data given it is difficult to formulate contribution margin or break-even point by oneself. 5. What is type of the budgeting process they use in the organization? Top to bottom or Bottom to Top? Budgeted time period? What kind of budgets cash, production, sales, master etc.? Frequency? Variance Analysis? 6. Do they have some benchmarked costs? Does the company consider the standard costs of the products they use in their manufacturing process against the industry norms and work upon the variance analysis? Does the concept of responsibility accounting exists or is used in the company? Are the incentives of the production managers linked to the favorable variance they bring about in the company? The company doesnt follow any of the managerial accounting process asked in fifth and sixth question. These processes has been carried out by the board members and the directors by mutual agreement and discussion.

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5 RECOMMENDATIONS:
After visiting the factory and having conversation with the senior CA, Mr. Ankur Muraraka we felt that the factory might increase its efficiency and profitability as well by focusing upon few segments. Following are certain recommendations regarding the same: 1. The layout of the factory is not in flow, there are disturbances in the process and it can be arranged in more effective manner so as to reduce the cost and optimally utilize the existing resources 2. The company do not consider any competitors in the market and hence only considers the growth and opportunities of its own and do not analyze the market much. Even though the brand name has its own value in the market regarding best quality sarees but still this doesnt eradicate the fact of having competitors 3. They do not follow any of the managerial accounting processes. And sales, forecasting, analysis, CVP, variance analysis, etc. all the key managerial accounting processes that unveils several smaller units that contribute in making long run and short run decisions. Following these managerial concepts will be helpful in making better decisions and also for the growth and profitability of the company.

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6 CONCLUSION

Theoretical knowledge can clear the concepts but it is not effective until we apply them. Doing this report gave us hands on experience as to how production and operations are carried out in a manufacturing firm and how managerial accounting processes are adopted. Laxmipati Sarees are existing in market since last 6 years and has shown relative growth every year. It has a huge manufacturing unit in Pandesra and has carried the process really well. Over the years it has established its brand name and is known for good quality sarees. While talking to Senior CA Mr. Ankur Murarka, we realized that the company doesnt follow any of managerial accounting practices in order to determine sales or analyze the market. But slowly and gradually they are adopting these measures. And Mr. Murarka also said that in coming years they will have all the detailing of CVP analysis, Variance analysis, Break-even point, etc. And the company is also planning to prepare its Annual Report and Auditors and Debtors Report. After all the analysis, Industrial Visit and conversation with the members of the firm we could make out that Laxmipati Sarees have a great potential and is doing a great job in the market. And in coming years it can show a remarkable growth.

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