SHIVAJI UNIVERSITY, KOLHAPUR A PROJECT REPORT On A study of Unit Product Costing With special reference to Ghatge Patil Industries

Ltd., Uchagaon

SUBMITTED TO SHIVAJI UNIVERSITY, KOLHAPUR. In partial fulfillment of the award of the degree of MASTER OF BUSINESS ADMINISTRATION

SUBMITTED BY Mr. Snehal Anandkumar Shirke

UNDER THE GUIDANCE OF Mr. Arjun N. Patil Through The Director

SOU SUSHILA DANCHAND GHODAWAT CHARITABLE TRUSTS SANJAY GHODAWAT GROUP OF INSTITUTIONS, FACULTY OF MANAGEMENT, ATIGRE.
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RECOMMENDATION

To, The Registrar, Shivaji University, Kolhapur.

SUBJECT: M.B.A. Project Report Respected Sir, I am recommending the project report entitled A study of Unit Product Costing With special reference to Ghatge Patil Industries Ltd., Uchagaon is prepared by Mr. Snehal Anandkumar Shirke as partial fulfillment of University requirements for award of Master of Business Administration (MBA) degree of Shivaji University, Kolhapur. The matter presented in the project report has not been submitted earlier.

Co-coordinator Dr. Anil G. Suryavanshi PLACE: DATE : / /

Director Dr. V. V. Karjinni

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GUIDES CERTIFICATE

This is to certify that Mr. Snehal Anandkumar Shirke has worked under my guidance and satisfactorily completed the project report in partial fulfillment of M.B.A. course. This work is based on original observations and efforts being submitted under the title of A study of Unit Product Costing With special reference to Ghatge Patil Industries Ltd., Uchagaon.

His conclusions and recommendations are based on the information collected by him during his project work. This has not formed a basis for the award of any Degree or Diploma by this University or any other university.

Place: - Kolhapur.

Project Guide

Date: -

/ / .

(Mr. Arjun N. Patil)

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DECLARATION

I undersigned hereby declare that this report entitled A study of Unit Product Costing With special reference to Ghatge Patil Industries Ltd., Uchagaon is a genuine & bonafied work prepared by me under the guidance of Prof. Arjun Patil & is my original work. The empirical findings in the report are based on the data collected by myself. The matter presented in the project report is not copied from any way the University authority deems to be fit. This work has not been submitted for the award of any diploma or degree either in Shivaji University or any other. This work is humbly submitted to Shivaji University for the award of degree of Master of Business Administration.

Place: Kolhapur Date- / /

Mr. Snehal Anandkumar Shirke MBA

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ACKNOWLEDGEMENT
I, Mr. Snehal Anandkumar Shirke, MBA Student in SOU SUSHILA DANCHAND GHODAWAT GHODAWAT GROUP OF CHARITABLE TRUSTS SANJAY OF INSTITUTIONS, FACULTY

MANAGEMENT, ATIGRE is highly grateful to all those who guided me in completing this project. First of all, I would like to pay my heartiest thanks especially to Mr. Ghanashyam Kulkarni (Dy. Manager, Cost Accounts department) who provided me such a wonderful opportunity to do Summer Training and my heartfelt thanks to Mr. Bajirao Patil (Officer, Cost Accounts Department) for provided his valuable suggestions and kind co-operation in understanding the work of Research Project. Last but not the least, I would like to thanks all faculties of SOU SUSHILA DANCHAND GHODAWAT GHODAWAT GROUP OF CHARITABLE TRUSTS SANJAY OF INSTITUTIONS, FACULTY

MANAGEMENT, ATIGRE & all my lovable friends who gave me the useful tips and suggestions regarding project. I would like to thanks my project Guide, Prof. Arjun Patil for imparting his valuable guidance to me time to time. Words can never express the deep sense of gratitude, I feel for our MBA Coordinator, Dr. Anil G. Suryavanshi, Director, Dr. V.V. Karjinni who has been a constant source of inspiration and encouragement for me.

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Place: Kolhapur Date:

Mr. Snehal Anandkumar Shirke MBA

CHAPTER NO - I

INTRODUCTION

TO STUDY
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1.1 INTRODUCTION:As a part of M.B.A program, the researcher has to undergo an in plant training for limited days in an organization. Through that program they get practical knowledge in functional areas like production, marketing, finance, HR etc. The main aim of the research is the orientation of researcher to industrial environment in which he will be working after completion of M.B.A course. Product costing is the process of tracking and studying all the various expenses that are accrued in the production and sale of a product, from raw materials purchases to expenses associated with transporting the final product to retail establishments. It is widely regarded as an extremely important component in evaluating and planning overall business strategies. As John A. Lessner indicated in the Journal of Accountancy, "In today's hotly competitive business environment, accurate product costing has become critically important to a business's survival." In the 1940s, cost estimates normally included nothing more than total manufacturing costs. In the late '50s direct costing was implemented to separate variable [cost of materials, cost of transportation] and fixed [interest payments on equipment and facilities, rent, property taxes, executive salaries] costs." fifty years ago, when manufacturing was far less automated than it is today, the costs of materials, labor and overhead were just about evenly divided. Now, production of a product's various components is often so synchronized on highly automated production lines that there is little or no need to maintain component inventories; thus, the old costing formulas, still used by many industries, are no longer applicable. Further complicating the costing equation is the trend in manufacturing to focus more attention on quality, flexibility and responsiveness, to meet customer needs. This makes production-line cost analysis more difficult because each line requires small, but significant, changes in production techniques." As a result, today's managers and business owners have found that the limited information available through older job costing methods is inadequate for making informed decisions in the contemporary business environment.

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1.2 STATEMENT OF THE STUDY:Study of unit product costing of Marine Power Take off (PTO) with special reference to Ghatge Patil Industries, Uchgaon.

1.3 OBJECTIVE OF THE STUDY:The research work is conducted by researcher for the following objectives To study the product costing in Ghatge Patil Industries. A. B. C. Ascertainment of various cost components in the process of costing. Studying role of Profit centres & Support centres in costing Study the SAP (System application, products in data processing) system

Functioning of cost accounting department in Ghatge Patil Industries.

1.4 IMPORTANCE OF STUDY:The research has following importance to the researcher The study helps to understand how the final selling price of the product is decided by the industry. The study helps to understand direct and indirect costs included in the final cost of the product. The study helps to understand the budgeting in the industry. The study helps to understand various production department functions of the industry. The study helps to understand functioning of the Cost Accounts department of industry.
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1.5 SCOPE OF THE STUDY:The study of product costing has tremendous scope for the researcher, who will become the part of Cost Accounts department in the future. The study has following scope for the researcher in the future.
The study helps the researcher for the process of Quotations.

1. The study helps to understand role of profit centres. 2. The study helps to do product costing in manufacturing industries.

1.6 LIMITATION OF THE STUDY:The study which is conducted by researcher has following limitations: Due to the company policy current year (2010-11) data is not available for research work. As the product is produced according to demand, some production processes are not observed.

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1.7 RESEARCH METHODOLOGY

The researcher has done the research by using two types of data i.e. primary data and secondary data. Mostly secondary data is used for the study; in some cases the authorities of the company have provided their original record. Sometimes informal discussions are also carried out for collecting the required information.

Data collection
Data collection means the systematic collection of facts, figures or information. The statistical information collected and presented may also be included in the data, which play a vital role in the research. Both primary and secondary data may be used for the purpose of analysis, they are as follows: A] Primary data: The first hand information bearing any research which has been collected by the researcher may be called as primary data. The primary data are collected fresh and first time and thus happen to be original in character. This data is collected by discussion with the Authorized employees in the industry. B] Secondary data: The data which has already been collected, compiled and presented earlier by any agency for the purpose of investigation, such data is called as secondary data The secondary data can be done from the companies past record, annual records and other relevant documents. The companies data have been obtained from the following record. 1] Company cost sheet for year 2008-09 2] Company manuals 3] Customer order file
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CHAPTER NO - II

COMPANY

PROFILE

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2.1 INTRODUCTION TO THE ORGANIZATION

The company Ghatge-Patil Industries Ltd. Uchgaon, Kolhapur was established in 1960 by Mr. J.B. Patil and V.M Ghatge on the basis of previous experience of transport business, this was started in partnership. Ghatge-Patil introduced in 1960 as on engineering industry with a modesty beginning first, it started with a small industry(foundry only) and a machine shop to cater for the needs of casting for automobile industry including tractor and the part needed for the agriculture equipment, marine transmission units etc. Mr.S.L. Kirloskar and Mr.Gujar supported GPI for development. They got plot of 25acres at Uchgaon near Kolhapur. That time the only customer was Kirloskar group who purchased Gray iron castings. Components for their industry named as Kirloskar brother Ltd. for the production of pumps and tools making annual turnover rs.160.00 crores (us $ 36.00 millions) Over a long period of time i.e. nearly 46 year company has grown into one of the biggest company in automobile sector, with the added feature of fully automobile and well-equipped produced manufacturing unit with precision and highly sophisticated machine. A pool of professional drawn from various parts of the country has been groomed with necessary technical and managerial skill high qualified standards have been appreciated by companys valued customers.

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2.2 BRIEF HISTORY OF THE ORGANIZATION

The history of Ghatge-Patil industries ltd., dates back to 1940s when Mr.J.B Patil and Mr. J.M Ghatge came together to start a small scale business. The business which started in 1944, has grown and diversified into many areas. At present the company exports to developed countries. Ghatge-Patil industries Ltd. was incorporated in1960 as an engineering industry with a modest beginning. It started with a small foundry and a machine shop to cater for the needs of casting for automobile and tractor industry and products for the needs of agriculture equipments, marine transmission units etc. GPI got good assistance from Mr.Kirloskar and Mr.Gujar. They got a plot of 25 acres at Uchgaon at Kolhapur. The only customer of the company was Kirloskar group. The company supplied grey iron components to Kirloskar brothers ltd, for the production of pumps and tools. Over the past three decades company has grown into one of the largest industries in Kolhapur with fully automated foundry and well equipped product manufacturing unit with the precision and sophisticated machines. A pool of talented professionals drawn from various parts of the country has been groomed with necessary technical and managerial skills. High quality standards have been appreciated by companys valued customers.

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2.3 HERE IS HOW IT ALL BEGAN AT GHATGE PATIL INDUSTRIES:

1960: Started as a partnership firm with a machine shop for jobbing work 1962: A small foundry unit was established 1966: Started manufacturing clutches and power takeoffs in technical collaboration with Twin Disc USA 1967: Manufacture of Marine Gear Boxes in collaboration with Parsons UK 1971: Manufacture of Automotive power take offs in collaboration with Dana Corporation USA 1978: Developed earth moving assemblies of Komatsu, Japan
USA licensed for manufacture by Bharat Earth movers Ltd for Torque Converters, steering clutches, Main clutches, brake assemblies etc. Pneumatic clutches and brakes in collaboration with Bradfield, Italy Electromagnetic clutches and brakes in collaboration with ZF, Germany Export of Grey Iron and S.G. Iron castings like Brake Drums, Pulleys, and Brake Discs etc to USA, UK, Germany and Australia.

1979: S.G. Iron converter installed in collaboration with George Fisher, Switzerland. 1980: Modernization of foundry with installation of fully automatic high pressure moldings line by
Kunkel Wegner.

1992: Manufacture of Gate and Globe valves. API 6A accreditation received from Gate Valves 1996: Received ISO 9001 and 9002 accreditation from BVQI. 1998: Medium Frequency induction furnace replaces main frequency furnaces. 2000: Shot blasting furnace installed to boost capacity. API 6D accreditation received. 2001: Cold box core making machine introduced 2002: Installation of HMC4, VMC1 and VTL1 2003: Installation of belec spectrometer with 25 elements.
Installation of horizontal 75 liters cold core box machines Installation of second horizontal 80 liter cold core box machines

2004: Installation of press pour machine

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2.4 ABOUT THE COMPANY:-

DATE OF INCORPORATION ANNUAL TURNOVER LOCATION

July 2, 1960 Rs. 160.00 crores (US $ 36.00 millions) Reg. Office & works at Kolhapur, on National Highway No. 4 Place connected by air, rail, and road From Mumbai.

PLANT MANPOWER WORKING HOURS

Total area: 93384 sq.mts built up 32590sq. mts 1250 nos Tuesday to Sunday, 8.30am TO 5.00pm

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2.5 Subsidiaries Associates of the company:1. Ghatge-Patil Industries Ltd. 2. J.B.Patil and sons 3. Chinar Industries 4. Preci Engineering works 5. Ghatge-Patil Automobiles Ltd 6. J.P.Logistics 7. Hemkiran diess 8. Sharu Exports 9. Shobha A. Kirloskar & Associates

2.6 FURTURE PROSPECTS:India is country with increasing market potential for automobiles, tractors, Earth moving equipments, Marine Engines & various other products. Kolhapur is considered as one of the largest ancillary centre in Western Maharashtra & Ghatge-Patil Industries Ltd. Is one of the largest Engineering units in Kolhapur. Considering the growing market demand the company has planned to enhance its cape city foundry and product division to cater for the increasing qualitative as well as quantitative demand of the market. With dedicated and talented team of personnel, company foresees rapid progress and growth on all fronts of its activities.

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2.7 ORGANIZATION CHART

Board of Directors

Chairman

M.D

Foundry Division

Product division

Finance and accounts

Marketing

HRD

Materials

V.P. foundry

V.P. product

V.P. Finance & Accounts

AVP marketing

AVP HRD

Sr. manager

Deputy Manager Cost Accounts

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MARINE POWER TAKE OFF

PARTS OF MARINE PTO C107:

Figure 1 MARINE PTO C 107

Casing Housing Clutch Shaft Tier coupling Hand Lever H.B. Plate Floating Plate Sliding Sleeve Adjusting Yoke Toggle Lever Driving Plate

Application of Marine Power Take off:When Fishermen went into the sea for fishing the Power Take off has been installed in the boat. The fish which they caught weight more than 1-2 tones, so it is impossible for them to lift such a huge load. Marine Power Take off plays a crucial role here and with the help of it an individual Fisherman a lift a load of 2 ton easily into the boat. Due to such use Power Take off becomes one of the most useful tool to the fishermen.

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CHAPTER NO III

THEORETICAL

BACKGROUND

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3.1 PRODUCT COSTING :Costing is defined as Technique & process of ascertaining costs.

Product Costing in Multi-Product Environments:Some manufacturers distort true product costing results by evenly distributing costs for a certain aspect of production across all product lines, even though costs might vary with each specific product. In some instances, this practice might have little or no impact on a business's well being; a company that is enjoying record growth and profits on all three of its product lines, for instance, is unlikely to be seriously harmed by accounting practices that evenly divide transportation costs three ways, even though one of the product lines may account for, say, half of the firm's transportation expenses. Huge profits mask such inequities fairly well. But relatively few companies are in such a luxurious position. Most companies and especially most small businesses, which typically have less margin for error than their larger cousins , need to work hard to arrive at true product costing figures. "As national and global competition increase, even tiny costing disparities can have an over-whelming impact on whether a product or an entire company, for that matter survives. Over the long term, product profitability analyses that use these distorted costs cause management to erroneously assume custom products generate better margins than they actually do," and top performing goods end up subsidizing other, less profitable, product lines.

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Product Costing in Nonmanufacturing Firms:-

Although product costing is primarily associated with manufacturing businesses, it also has applications in non-manufacturing industries. "Merchandising companies include the costs of buying and transporting merchandise in their product costs," observed Ronald W. Hilton in Managerial Accounting. "Producers of inventorial goods, such as mining products, petroleum, and agricultural products, also record the costs of producing their goods. The role of product costs in these companies is identical to that in manufacturing firms." Business experts also note that while service-oriented companies (both service businesses and non-profit organizations) do not offer products that can be stored and sold in the manner of manufactured items, they nonetheless need to track the varied costs that they accrue in offering their services. After all, the services that they offer are in essence, their "product" line. "Banks, insurance companies, restaurants, airlines, law firms, hospitals, and city governments all record the costs of producing various services for the purposes of planning, cost control, and decision making," wrote Hilton.

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3.2 COST CONCEPTS & TERMS:

Cost:- The amount of expenditure incurred on or attributable to a specified article, product or activity. Cost Object:- Anything for which a separate measurement of cost is desired. Direct Cost:- Costs that are related to the cost object and can be traced in an economically feasible way. Indirect Cost:- Costs that are related to the cost object but cannot be traced in an economically feasible way. Predetermined Cost:- A cost which is computed in advance before production or operations start, on the basis of specifications of all the factors affecting cost. Standard Cost:- A pre-determined cost, which is calculated from managements expected standard of efficient operations and the relevant necessary expenditure. Marginal Cost:- The amount at any given volume of output by which aggregate costs are changed if the volume of output is increased or decreased by one unit. Total Cost:- The sum of all the costs attributed to the cost object under consideration. Cost Centre:- It is defined as person, location or an item of equipment for which costs may be ascertained and used for purpose of cost control. Responsibility Centre:- It is defined as an activity centre of a business organization entrusted with a special task. Profit Centre:- Centres which have profits. Investment Centre:- Those centers which are concerned with earning an adequate return on Investment. Cost Allocation:- Assignment of the indirect costs to the chosen cost object. Product Cost:- These are the costs which are associated with the purchase and sale of goods. Opportunity Cost:- This cost refers to the value of sacrifice made or benefit of opportunity foregone in accepting an alternative course of action. responsibility of generating and maximizing

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3.3 ELEMENTS OF COST:Raw materials are converted into finished products by a manufacturing concern with the help of labor, plants etc. The elements that constitute the cost of manufacturing are known as elements of cost. The elements of cost include the following:

Material Labor Expenses

Each of these elements is again subdivided into direct and indirect material. Direct material, direct labor and direct expenses are those which can be traced in relationship with a particular process, job, operation or product. Indirect material, indirect labor and indirect expenses are those which are of general nature and cannot be traced in relationship with a particular process, operation, job or product.

DIRECT MATERIAL :It refers to the material out of which a product is manufactured. For example, leather shoes are produced out of leather, butter is produced out of milk, steel utensils are produced out of stainless steel and so on. Thus, leather, milk and stainless steel are the direct materials for the manufacture of shoes, butter and steel utensils respectively. Like direct material, another kind of material may be required for manufacturing but not directly. For example, machines used for production require lubricants, jute and cotton wastes etc. which are indirect materials. Direct material is a component of prime cost and indirect material is a component of factory overhead. Direct material directly varies with the output whereas indirect material does not so.

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DIRECT WAGES :-

Direct wages are the wages which can be conveniently identified with or allocated to cost centers and cost units. It refers to the wages paid to the workers who actually produce goods. In case of manual work, it is not difficult to locate direct worker because he is the one who produces goods. In case of the work done by a machine, the person who collects input and output and in whose account the output is credited for the purpose of payment of wages is direct worker. There are several other workers in a factory who help direct workers in connection with their work with regard to supply of materials, power etc. and in respect of supervision and maintenance. These are indirect workers and wages of indirect workers at different stages of production are indirect wages. Direct wage is a component of prime cost whereas indirect wage is a component of factory overhead. The former directly varies with the output whereas the latter may not vary so.

DIRECT EXPENSES
Besides direct material and direct labor, certain expenses may be wholly and exclusively necessary for a particular production. This expense is referred as direct expense and it can be easily identified with or allocated to cost centers or cost units. For example, if an order is received, a manufacturer will have to prepare a mould exclusively for this purpose. The cost of the mould may be regarded as direct expense of the production. Similarly, the charge for hiring a special plant for production is also direct expense and it can be easily identified with and allocated to cost centers or cost units. The cost of preparing blue print for a production is another example of direct expense.

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OVERHEAD :Overhead is an indirect expense incurred at various levels of activities of an enterprise. These expenses cannot be conveniently identified with or allocated to cost centers or cost units. According to functions, classification of overhead expenses may be done as follows:

1. Factory or Works Overhead 2. Administration Overhead 3. Selling Overhead 4. Distribution Overhead

(i) Factory or Works Overhead :Factory or works overhead refers to all indirect expenses of a factory. It includes Wages of all factory staff excluding those of direct workers Indirect material Rent Rates Taxes of factory Depreciation of factory assets Canteen expenses Labor welfare expenses

(ii) Administration Overhead :It refers to all the expenses incurred in connection with general administration. In Administrative building, following things is included: Salary of administrative staff Rates Taxes of administrative accommodation Postage

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SHIVAJI UNIVERSITY, KOLHAPUR Telegram and telephone Stationery Lighting of administrative building Depreciation of office appliances

Depreciation of office appliances etc. is included in administration overhead.

(iii) Selling Overhead:Selling overhead refers to all expenses incurred in connection with sales. In Selling overhead, following things are included: Salary of sales staff Travelers commission Advertisement Rent Rates Taxes of sales office Depreciation of sales office appliances Cost of participation in industrial fares and exhibitions Cost of free gifts Cost of free after sales service Normal bad debt

(iv) Distribution Overhead:Distribution overhead refers to all the expenses incurred in connection with the delivery of a product after the sale is affected. In distribution overhead, following things are included: Delivery van expenses Fright and insurance Packing for delivery loading and unloading Salary of the deliverymen Customs duty

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3.4 CLASSIFICATION OF COSTS:

a. On the basis of Time period:

1. Historical Costs: Costs relating to the past period, which has already been incurred. 2. Current Costs: Costs relating to the present period. 3. Pre-determined Costs: Costs relating to the future period; Cost, which is computed in advance, on the basis of specification of all factors affecting it.

b. On the basis of Behaviour / Nature / Variability:

1. Variable Costs: These are costs which tend to vary or change in relation to volume of production or level of activity. These costs increase as production increases and vice versa e.g. cost of raw material, direct wages etc. However, variable costs per unit are generally constant for every unit of the additional output. 2. Fixed Costs: The cost which remain fixed irrespective of the change in the level of activity / output. These costs are not affected by volume of production e.g. Factory Rent, Insurance etc. Fixed Costs per unit vary inversely with volume of production i.e. if production increases, fixed costs per unit decreases and vice-versa. Sometimes, these are also known as Capacity Costs or Period Cost. 3. Semi-variable Costs: These are those costs which are party fixed and partly variable. These are fixed up to a particular volume of production and become variable thereafter for the next level of production. Hence, they are also called Step Costs. Some examples are Repairs and Maintenance, Electricity, Telephone etc.

c. On the basis of Elements:

1. Materials Cost of tangible, physical input used in relation to output/production, for
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SHIVAJI UNIVERSITY, KOLHAPUR example, cost of materials, consumable stores, maintenance items etc. 2. Labor Cost incurred in relation to human resources of the enterprise, for example, wages to workers, Salary to Office Staff, Training Expenses etc. 3. Expenses Cost of operating and running the enterprise, other than materials and labor, it is the residual category of cost. For example, Factory Rent, Office Maintenance, Salesmen Salary etc.

d. On the basis of Relationship:

1. Direct Costs: Costs which are directly related to / identified with / attributable to a Cost Centre or a Cost unit. Example: Cost of basic raw material used in the finished product, wages paid to site labor in a contract etc. 2. Indirect Costs: Costs that are not directly identified with a cost centre or a cost unit. Such costs are apportioned over different cost centers using appropriate basis. Examples: Factory Rent incurred over various departments; Salary of supervisor engaged in overseeing various construction contracts etc. Note: All indirect costs are collectively called as Overheads, since they are generally incurred over various products (cost units), various departments (cost centers) and over various heads of expenditure accounts.

e. On the basis of Controllability:1. Controllable Costs Costs, which can be influenced and controlled by managerial action. However, Controllability is a relative term and is subject to the following restrictions. (a) Time Certain costs are controllable in the long run and not in the short run. (b) Location Certain costs are not influenced and decided at a particular location / cost centre. If lease agreements of factory premises are executed centrally at the Head Office, factory managers cannot control the incurrence of cost. (c) Product / Output Certain cost are controllable by reference to one product or market
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SHIVAJI UNIVERSITY, KOLHAPUR segment and not by reference to the other, for example, cost of common raw material input for exports is lower than that of domestically sold goods since excise duty concessions / duty drawback is available for export sales. 2. Uncontrollable Costs These are the costs that cannot be influenced and controlled by a specific member of the organization. The line of difference between controllable and non-controllable costs is thin. Note: No cost is uncontrollable. Controllability is subject to the restrictions laid down above.

f. On the basis of Normality:

1. Normal Cost: Cost, which can be reasonably expected to be incurred under normal, routine and regular operating conditions. 2. Abnormal Cost: Costs over and above normal costs; Costs which is not incurred under normal operating conditions e.g. fines and penalties.

g. On the basis of Functions or operations:

1. Production Cost: The cost of the set of operations commencing with supply of materials, labor and services and ends with the primary packing of product. Thus it is equal to the total of Direct Materials, Direct Labor, Direct Expenses and Production /factory Overheads. 2. Administration Cost: The cost of formulating the policy, directing the organization and controlling the operations of the undertaking, which is not directly related to production, selling, distribution, research or development activity or function. E.g. Office Rent, Accounts Department Expenses, Audit and Legal Expenses, Directors Remuneration etc. 3. Selling Cost: The cost of seeking to create and stimulate demand and of securing orders. These are sometimes called marketing costs e.g. Advertisement, remuneration
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SHIVAJI UNIVERSITY, KOLHAPUR to Salesmen, Show-room Expenses, Cost of samples. 4. Distribution Cost: The cost of the sequence of operations which begins with making the packed product available for dispatch and ends with making the reconditioned returned empty package, if any, available for re-use. E.g. Distribution packing (secondary packing), Carriage outwards maintenance of delivery vans, expenditure incurred in transporting Articles to central or local storage, expenditure incurred in moving articles to and from Prospective customers (as in Sale or Return) etc. 5. Research Cost: The cost of researching for new or improved products, new applications of materials or improved methods. 6. Development Cost: The cost of the process which begins with the implementation of the decision to produce a new or improved product, or to employ a new or improved method and ends with commencement of formal production of that product or by that method. 7. Pre-production Cost: The part of development cost incurred in making a trial production run prior to formal production. 8. Conversion Cost: The sum of direct wages, direct expenses and overhead cost of converting raw materials to the finished stage or converting a material from one stage of production to the other.

h. On the basis of Attributability to the product:

1. Period Cost: These are the costs, which are not assigned to the products but are charged as expenses against the revenue of the period in which they are incurred. Nonmanufacturing costs e.g. Selling and Distribution Costs are generally recognized as period costs. These costs are not included in inventory valuation. 2. Product Cost: These are the costs, which are assigned to the product and are included in inventory valuation. These are also called as Inventorial costs. Under absorption costing, total manufacturing costs are regarded as product costs while under marginal costing, only variable manufacturing costs are considered. The purposes of computing product costs are as under:
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SHIVAJI UNIVERSITY, KOLHAPUR (a) Preparation of Financial Statements with focus on inventory valuation. (b) Product pricing focus on costs assigned and incurred on the product till it is made available to the customer / user. (c) Cost-plus-Contracts with Government Agencies where the focus is on reimbursement of costs specifically assigned to the particular job/contract.

i. On the basis of Decision Making:-

A. Relevant Costs: The costs, which are relevant and useful for decision-making purposes. 1. Marginal Cost Marginal cost is the total variable cost i.e. prime cost plus variable overheads. It is assumed that variable cost varies directly with production whereas fixed cost remains fixed irrespective of volume of production. Marginal cost is a relevant cost for decision taking, as this cost will be incurred in future for additional units of production. 2. Differential Cost It is the change in costs due to change in the level of activity or pattern or method of production. Where the change results in increase in cost it is called incremental cost, whereas if costs are reduced due to increase of output, the difference is called decremented costs. The differential costs are relevant costs. 3. Opportunity Cost This cost refers to the value of sacrifice made or benefit of opportunity foregone in accepting an alternative course of action. For example: (1) a firm financing its expansion plans by withdrawing money from its bank deposits. In such a case the loss of interest on the bank deposit is the opportunity cost for carrying out the expansion plan. (2) The opportunity cost of using a machine to produce a particular product is the earning forgone that would have been possible if the machine was used to produce other products. (3) The opportunity cost of ones time is the earning which he would have earned from his profession. Opportunity cost is a relevant cost where alternatives are available. However, opportunity
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SHIVAJI UNIVERSITY, KOLHAPUR cost does not find any place in formal accounts and is computed only for comparison purposes. 4. Discretionary costs These are escapable or avoidable costs. In other words these are costs, which are not essential for the accomplishment of a managerial objective.

5. Replacement Cost It is the cost at which there could be purchase of an asset or material identical to that which is being replaced or devalued. It is the cost of replacement at current market price and is relevant for decision-making. 6. Imputed Costs These are notional costs appearing in the cost accounts only e.g. notional rent charges, interest on capital for which no interest has been paid. These are relevant costs for decision-making. Where alternative capital investment projects are being evaluated, it is necessary to consider the Imputed interest on capital before a decision is arrived at as to which is the most profitable project. 7. Out-of pocket cost These are the costs, which entail current or near future cash outlays for the decision at hand as opposed to cost, which do not require any cash outlay (e.g. depreciation). Such costs are relevant for decision-making, as these will occur in near future. This cost concept is a short-run concept and is used in decisions relating to fixation of selling price in recession, make or buy, etc. Out-of-pocket costs can be avoided or saved if a particular proposal under consideration is not accepted. B. Irrelevant Costs: The costs, which are not relevant or useful for decision-making. 1. Sunk Cost It is the cost, which has already been incurred or sunk in the past. It is not relevant for decision-making and is caused by complete abandonment as against temporary shutdown. Thus if a firm has obsolete stock of materials amounting to Rs.50,000 which can be sold as scrap for Rs.5,000 or can be utilised in a special job, the value of opening stock of Rs.50,000 is a sunk cost and is not relevant for decisionmaking. 2. Committed Cost A cost, which has been committed by the management, is not relevant for decision making. This should be contrasted with discretionary costs, which are avoidable costs. 3. Absorbed Fixed Cost Fixed costs which do not change due to increase or decrease in activity is irrelevant for decision-making.
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SHIVAJI UNIVERSITY, KOLHAPUR

CHAPTER NO IV

DATA ANALYSIS & INTERPRETATION

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SHIVAJI UNIVERSITY, KOLHAPUR

COST COMPONENTS FOR MARINE POWER TAKE OFF

MATERIAL NO.:- 91470370 COSTING DATE:- 16/10/2009

COST OF GOODS SOLD:- (Amount in Rupees)

Cost Component

Overall

Fixed

Variable

Raw Material Material OH Labor Cost Machine Variable Machine Fixed Subcontracting Subcontracting OH WIP Int. ADM OH ICC Int. ADM OH General ADM OH Selling & Distr. OH Rejection Cost

3,846 46.60 541.17 693.22 994.89 369.90 13.34 57.86 57.40 236.04 85.34 117.07

994.89 9.79 236.04 85.34 19.87

3,846 46.60 541.17 693.22 369.90 13.34 48.07 57.40 97.20

7,058.85

1,345.93

5,712.92

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PIE CHART SHOWING DISTRIBUTION OF COST

1% 2% Raw Material 3% 5% Material Overheads Labour Cost Machine Variable 14% Machine Fixed Subcontracting 55% 10% Subcontracting OH WIP Administrative OH Administrative OH 8% 1% Sales & Distr. OH Rejection Cost

0% 1%

Cost Component Raw Material Material Overheads Labor Cost Machine Variable Machine Fixed Subcontracting Subcontracting OH WIP Administrative OH Administrative OH Sales & Distr. OH Rejection Cost Total Cost

Overall Cost (Rs.) 3,846.02 46.60 541.17 693.22 994.89 369.90 13.34 57.86 236.04 85.34 117.07 7,058.85

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PIE CHART SHOWING FUNCTIONAL DISTRIBUTION OF COST

20%

Fixed Cost Variable cost

80%

PIE CHART SHOWING DISTRIBUTION OF ELEMENTS OF COST

38% MATERIAL LABOR 55% OVERHEADS

7%

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GRAPH SHOWING PRICE OF MARINE PTO IN LAST 3 YEARS (Rs.)

7,100

7,000

6,900

6,800

6,700

6,600

6,500 2006-07 2007-08 2008-09

INTERPRETATION:The price of Marine PTO was approximately increased by 10% each year. There are following reasons due to which the rise in price of PTO is observed. The major cost component of the product is Raw material (=55%) and Due to inflation rates increasing the prices of raw material increased day by day. The rate of both skilled and unskilled labor is approximately increase by 5-8 % per year. Sub-contracting is one of the major components of cost and rates for sub-contracting is always increasing.

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CALCULATIONS

A.

TOTAL FIXED COST OF PRODUCT =

SUM OF ( FIX MACHINING COST + FIX MATERIAL COST + WIP INTEREST COST + GENERAL ADMINISTRATIVE OVERHEADS + REJECTION COST) = ( 994.89 + 9.79 + 236.04 + 85.34 + 19.87 ) = Rs. 1,345.93

B.

TOTAL VARIABLE COST OF PRDUCT =

SUM OF ( FINISH BOUGHT OUT MATERIAL + VARIABLE MATERIAL COST OF MANUFACTURING ITEMS + VARIABLE MACHINING COST + VARIABLE MATERIAL OVERHEADS + SUB CONTRACT COST + VARIABLE REJECTION COST ) = ( 3,846.02 + 46.60 + 541.17 + 693.22 + 369.90 + 13.34 + 48.07 + 57.40 + 97.20 ) = RS. 5,712.92

C.

TOTAL COST OF PRODUCT =

TOTAL FIXED COST (A) + TOTAL VARIABLE COST (B) = 1,345.93 + 5,712.92 = RS. 7,058.85

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CHAPTER NO V

FINDINGS & SUGGESTIONS

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5.1 FINDINGS:-

i.

Ghatge Patil industries are project oriented large scale company with customers all over the world; the management gives preference to both time and customer satisfaction.

ii. iii.

Company got many awards and certificates and stands top. Company implements SAP (System application, products in data processing) system due to which all the processing becomes centralized and accurate.

iv.

All the departments are connected to each other through SAP system due to which the possibility of error is minimized.

v. vi.

Functioning of Cost Accounts department is excellent. All the management applications are properly followed in satisfactory manner.

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5.2 SUGGESTIONS:-

The researcher after conducting the research in Ghatge Patil industries wants to suggest following things to the management through the research conducted:1) Casing is one of the major cost component of the product. So by efficiently designing the casing dimensions the overall cost of PTO can be minimized. 2) The current width of the shaft of PTO is 45-50mm. So if the width of the shaft can be minimized to 40mm then the cost can be reduced. 3) By adding the jig fixtures in the production process the quality of the output can be increased and due to which the productivity will increased. 4) Many processes are manual in the production of the PTO, so by introducing atomization the rejection can be controlled which directly minimize the rework. 5) By intruding new cutting tools the accuracy can be maximized and rejection and rework can be minimized. 6) Currently the PTOs are produced according to the demand of the customers so by implementing stabilized production plan accurate sales can be forecasted, due to which company can provide more timely deliveries. 7) By proper utilization of the man, machine & material the efficiency of production can be increased.

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CHAPTER NO VI

CONCLUSION

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CONCLUSION:-

Following conclusion is drawn after completing the research work in the Ghatge Patil industries about the Product Costing: Costing is one of the major component behind the success of any organization and in Ghatge Patil industries Costing is done with the help of SAP is an Ideal example for other industries. Profit Centers plays a vital role in the success of industry with the help of support centers. SAP system connects all the departments due to which the possibility of error is minimized which helps to control rejection and rework cost. Product costing is done in Ghatge Patil industries in excellent way and management always taking care to provide best product to the customers with highest quality, timely delivery and at minimum rate.

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CHAPTER NO VII

BIBLOGRAPHY & ANNEXURE

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SHIVAJI UNIVERSITY, KOLHAPUR

Reference Books:Advanced Cost Accounting By S.P.Jain & K.L.Narang Project Management By Prasanna Chandra

Websites:www.productcosting.com www.wikipedia.com www.accountingtools.com

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