FINANCIAL ACCOUNTING

REAL LIFE STUDY

ON
COST ACCOUNTING
OF
BHARAT AUTO MACHINE INSTRUMENTS -
ROHTAK

Submitted to:
Dr. G. L. Sharma

Date of Submission: 8th December, 2008

Submitted by: Group 2 (PGDM-Finance)

Abhay Verma(53/08)
Amit Saxena(28/08)
Aditi Khurana(19/08)
Ankit Katarya(04/08)
Varun Jain(52/08)
S S Gupta(77/08)
Tameesh Sud(75/08)
 LETTER OF TRANSMITTAL

To: Dr. G. L.Sharma

From: Group 2, Section-C Date: December 6, 2007

Subject: Project study on “REAL LIFE STUDY ON COST

ACCOUNTING OF BHARAT AUTO MACHINE INSTRUMENTS -
ROHTAK”

This is regarding the project done by our group for Cost Accounting And
Control. In this project study we have tried to go through and take
reference from various books, articles and websites.

The project study has been done to critically analyze cost accounting of
Bharat Auto Machine Instruments - Rohtak and also for the purpose
of evaluation of our group for internal assessment, by the authorization of
our faculty members Dr. G. L. Sharma. We are indebted to him for
helping us with our report preparation and in future also we will be
privileged to take assistance from him.

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 Acknowledgement

We would like to acknowledge the help and support of Dr.

G.L.Sharma without whose support this project would not have seen the
light of the day.
We are grateful to him for not only guiding us through this project
but also providing us unflinching support and endless resources in
making our endeavor a success.
We are also extremely thankful to all the members of the group for their
support to finish the project.

Table of Contents

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1. Company Profile
2. Management Accounting
– Objectives
– Advantages
– Limitations
3. Activity Based Cost Accounting
4. Bharat Auto Machine Instruments – Rohtak, Costing Procedure
5. Suggestions

COMPANY PROFILE

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 Bharat Auto Machine Instruments(BAMT) is a reputed Gear
manufacture & supplier in India. It is a specialist in printing & pouch
packing machine parts. They have a large number of valued
customers of printing and packaging machine manufacturer. They
manufacturer gears, shaft, roller, bracket, slides, sprocket, timing
pulley, worms, worm wheels, fabricated jobs etc. The Unit is situated
in the heart of Rohtak city and is easily accessible. The unit follows
a dynamic approach & continuous improvement upon its operation
through technology up-gradation, innovating approach through
TPM. In this global competitive market, BAMT has sustained
because of more customer focus and energy management for
reducing the operational & energy cost.

Core Values:
• Customer Satisfaction
• Concern for environment
• Commitment to quality and excellence
• Innovation

Strengths:
• Robust and differentiated product pipeline of state of the art two-
wheelers
• Rich insight into consumer and market behaviour
• R&D capability driving new product development
• Extensive vender supply chain
• In-house instrumenting and industrialisation capability.

MANAGEMENT ACCOUNTING

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Focusing on internal customers, measures and reports financial and
other information that assists managers in fulfilling goals of the
organization. Financial accounting focuses on external reporting
through financial statements to investors, govt., authorities and other
parties.

Cost accounting is management accounting plus a part of financial

accounting-to the extent that cost accounting provides information that
helps the requirements of external reporting. ‘The means by which cost
accounting information is reported is called a cost accounting system or
costing system’.
Cost accounting is a branch of accounting which deals with the
accumulation, classification, analysis, recording, allocation,
summarization, interpretation, reporting and control of current and
prospective cost. It also includes determination of forecasted future costs,
standard costs and historical costs of product, services, activities,
functions, responsibility, etc.
The term cost management has become widely used in recent years. We
use cost management to describe the actions by managers to satisfy
customers while continuously reducing and controlling cost. An
important component of cost management is the recognition that prior
management decisions often commit the organization to the subsequent
incurrence of costs.

OBJECTIVES OF COST ACCOUNTING:

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 The objectives of cost accounting are:
• To ascertain and analyze costs: the primary objective of cost accounting
is to ascertain and analyze costs incurred on the production of various
products, jobs and services, etc.
• To control costs: cost accounting has developed various techniques such
as standard costing and budgetary control for controlling costs.
• To fix the selling price: cost accounting provides reliable data on the basis
of which selling price can be fixed.
• To reduce costs: of late, the objectives of cost accounting have been
extended to reducing costs. Value analysis, time and motion study,
standardization, simplification, etc. are important techniques of cost
reduction.
• To prepare monthly or quarterly cost statements for periodic review of
operating results.
• To provide useful information for planning and control and for taking
various decisions regarding increase in production, installation or
replacement of machine, the making or buying of a component,
continuing or closing down of business, etc.

ADVANTAGES OF COST ACCOUNTING:

The following are the advantages of cost accounting:

• Cost accounting is very helpful in controlling expenditure and
economizing in the manufacture of products.
• Cost accounting relates various expenses to their functions and provides
an effective instrument for control over such expenses.
• Cost accounting provides useful data not only about product costs but
also about production efficiency and performance.

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• It helps the management to initiate action to rectify delays, inefficiencies
and wastage.
• Centralization of purchasing is facilitated by the use of cost accounting.
• Maintenance of time and jobs records for workers reveals losses incurred
due to idle time. Such records assist in taking steps to minimize these
losses.
• A cost accounting system provides information about availability of
materials, labor, and machine capacity. In the absence of such
information, proper production plans cannot be drawn up.
• Cost accounting entails identifying normal and abnormal losses and
gains. This task becomes simpler when standards are set up.
• Cost accounting lays the basis for the system of standard costing and
budgetary control. These two are instrumental in the control of
expenditure. Variance analyses and comparison of actual performance
with budgets pinpoint areas where economies can be affected.
• Cost accounting data are very useful for the management for planning
carious activities. A wise manager takes a decision only after he has
carefully studied the cost implications of carious alternatives.

LIMITATIONS OF COST ACCOUNTING:

In spite of so many advantages, some people feel that cost
accounting is an unnecessary luxury for business establishments. This is
not true. Perhaps they feel so because of a few limitations of cost
accounting such as:
Cost accounting is not an exact and foolproof science.
Classification of cost into its elements, pricing of material issues on the
basis of average or standard costs, etc., appointment and allocation of
joint costs and overheads to joint/by-products and cost centres, division

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of overheads into fixed and variable, division of costs into normal and
abnormaln, controllable and uncontrollable, etc., are based on
conventions, estimation and arbitrariness. The information provided by a
cost accountant, therefore, may not be necessarily being absolutely true.

It may be noted that such limitations are also found in any other system of
accounting. Principles and practice of cost accounting are based on sound
reasoning and keen common sense.

ACTIVITY BASED COSTING METHOD

Activity based costing is a costing method that first assigns cost to

activities and to the goods and services based on how much each good or
service used the activity.
Activity based costing is a commonly used approach to improve a
traditional costing system. ABC, is a costing method that first assigns cost
to activities and the to goods and services based on how much each good
or services used the activities. A activity is any discrete task that an
organisation undertakes to make or deliver a god or services. To reduce
the cost of goods and services, managers must modify the activities
required to produce the goods and services.
An increasing number of companies in the world are using ABC system.
ABC is used to establish product cost primarily for decision –making
purpose, such as whether to continue offering a product, not for inventory
valuation for external reporting.

FOUR STEPS ARE USED ARE USED TO DETERMINE THE COST OF

GOODS AND SERVICES USING ACTIVITY BASED COSTING

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 Step 1: Identify and classify the activity related to the company’s
products.

The first step for the organization is to identify the set of activities being
performed by its indirect and support resources. Activities are associated
with purchase items, inspect items, move material, respond to customer,
etc. The list of activities defines all the activities being performed in
production facility.

Four major categories of activities could be identified in ABC framework:

• Unit level activities are those performed each time unit is produced or
sold.
• Batch level activities are those that are performed when it makes a group
of units in a batch.
• Product sustaining activities arises because the company does particular
types of business or maintain a particular product or service.
• Facility or general operations sustaining activities relate to an entire plant,
office or company as a whole.

Step2: Estimate the cost of activities identified in step 1

ABC system maps from resources expenses to activities, using resource

cost drivers. The resource cost drivers links spending and expenses as
captured in the organizations financial or general ledger system to the
activities performed.

Step3: Calculate a cost driver rate for each activity.

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Activity cost drivers links activity cost to objects. An activity cost driver
is a quantitative measure of the output of an activity. Their cost driver
measure the average demand placed on each activity by the various
products. Then activity costs are assigned to products in promotion to
demand that the product place on average on the activities.

Step4: Assign activity cost to products.

After costs are measured, each cost is assigned to the individual product.
After completing these four steps, a company can calculate the cost to
provide existing goods and services, which can be used to better
understand the profitability of each. The activity-based costing data could
be used to estimate the cost of future product

Bharat Auto Machine Instruments - Rohtak Costing Procedure

The Bharat Auto Machine Instruments - Rohtak produces various

components of different machines. The costing procedure is as follows:-

Cost Volume Profit (CVP) Analysis

Profit planning is a function of the selling price of a unit of product,

the variable cost of making and selling the product, the volume of
product unit sold and in case of multi-product companies, sales mix
and finally the total fixed cost. The CVP analysis is a management

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accounting instrument to show the relationship between these
ingredients of profit planning. The entire gamut of profit planning is
associated with CVP interrelationship. A widely used technique to
study CVP relationship is break- even analysis.
Break-even analysis is concern with the study of revenues and cost
in relation to sales volume and particularly the determination of that
volume sales at which the firm’s revenues and total cost will be
exactly equal. Thus, the break-even point may be defined as a point
at which the firm’s total revenues are exactly equal to total cost
yielding zero income. No profit no loss point is a break even point or
a point at which losses ceases and profit begins.

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 ANALYSIS OF THE DATA

Raw Materials Required

As the company is in the production of metal sheets business, the
raw material required is SAE 1095 steel. Depending upon the
requirements they also take other steel SAE 1030, SAE 1020, SAE
1195.

As it has been previously mentioned that Suneel Auto component

private limited produces auto parts for Maruti.
We have done activity based accounting for 5 different parts namely
Gears, Brackets, Sprocket, Shaft and Timing pulley.
Production
Total Production= 29,00,000
Product Unit Produced
Gears 12,00,000
Bracket 4,00,000
Sprocket 6,00,000
Shaft 2,00,000
Timing pulley 5,00,000

Cycle Time

Product Cycle Time(in No of Units in One

seconds) Cycle
Gears 45 4
Bracket 50 3
Sprocket 55 4
Shaft 50 2
Timing pulley 55 4

TOTAL M/C TIME = 10,495 Hr

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AVERAGE INSTRUMENTING LIFE
Product Machine Hours
Gears 3750
Bracket 1850
Sprocket 2290
Shaft 695
Timing pulley 1910
Product AVERAGE INSTRUMENTING
LIFE(No of PIECES)
Gears 8000
Bracket 3000
Sprocket 4000
Shaft 1600
Timing pulley 4200

INSTRUMENTING
Product Instrumenting Unit Cost Total
Required (Rs) cost(Rs)
Gears 575 275 158125
Bracket 525 425 223125

Sprocket 575 300 172500

Shaft 500 600 300000

Timing pulley 500 240 120000

Total =Rs 9,73,750

PACKAGING AND CARRYING COST ARE CALCULATED ON THE BASIS

OF NO OF UNITS PRODUCED .
TOTAL PACKAGING COST=Rs 150000
Gears =(12,00,000/29,00,000)*150000=62070
Bracket =Rs 20,690
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Sprocket =Rs 31,035
Shaft =Rs 10,350
Timing pulley =Rs 25,860

INSPECTION COST: IT IS CALCULATED ON THE BASIS OF NO. OF

UNITS PRODUCED.
INSPECTION COST= Rs200000.
Gears= (1200000/2900000)*200000=Rs 82760
Bracket =Rs 27585
Sprocket =Rs 41,380
Shaft =Rs 13,795
Timing pulley =Rs 34,485

ELECTRICITY COST: IT IS CALCULATED ON THE BASIS OF NO OF

MACHINES HOURS TAKEN.
TOALAL ELECTRICITY COST = Rs 6,00,000
TOTAL MACHINE HOUR=Rs 10,495

Gears =(3750/10,495)*600000 = 214390

Bracket = Rs 105765
Sprocket =Rs 130920
Shaft =Rs 39735
Timing pulley =Rs 109195

SALARY: IT IS THE INDIRECT COST . IT IS CALCULATED ON THE

BASIS OF NUMBER OF UNITS PRODUCED

TOTAL=Rs8,00,000
Gears =RS 331035
Bracket =Rs110345
Sprocket =RS165515

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Shaft =Rs55175
Timing pulley =Rs137930

TOTAL = Rs800000

RENT : IT IS ALLOCATED ACCORDING TO NUMBER F UNITS

CONSUMED.
RENT =Rs1000000

Gears = (1200000/2900000)*1000000 = Rs 413795

Bracket =Rs 136550
Sprocket =Rs 206895
Shaft =Rs 68965
Timing pulley =Rs 172415

DEPRECIATION: DEPRECIATION IS ALLOCATED ON THE BASIS OF

MACHINE HOUR.
TOTAL MACHINE HOURS= 10495 Hr
DEPRECIATION CHARGD = Rs800000

Gears =(3750/10495)*800000 = Rs285850

Bracket =Rs 141020
Sprocket =Rs 174560
Shaft =Rs 52975
Timing pulley =Rs 145595

DIRECT MATERIAL: IT IS CALCULATED BY DIVIDING COST OF

METAL SHEET BY NO. OF PIECES PRODUCED FROM ONE SHEET
Gears =Rs 1.4
Bracket =Rs1.7

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Sprocket =Rs2.1
Shaft =Rs3.4
Timing pulley =Rs2.5

MAINTENANCE: IT IS CALCULATED FROM MACHINE HOUR .

TOTAL MAINTENANCE COST= Rs500000

Gears =(3750/10495)*500000 =Rs 178655

Bracket = Rs 88135
Sprocket =Rs 109100
Shaft =Rs 33110
Timing pulley =Rs 90995

OFFICE EXPENSE: THESE ARE CALCULATED FROM THE NO OF

PIECES PRODUCED.

TOTAL OFFICE EXPENCES: Rs 300000

Gears =Rs(1200000/2900000)*300000 =Rs 124140
Bracket =Rs 41380
Sprocket =Rs 62070
Shaft =Rs 20690
Timing pulley =Rs 51720

LABOUR
LABOUR RATE= Rs 25 /Hr
THIS CALCULATED BY MULTIPLYING MACHIE HOUR AND LABOUR
RATE. FOR ALL PRODUCTS EXCEPT PRODUCT D REQUIRES ONE
PERSON PER MACHINE . PRODUCT D REQUIRES TWO PERSONS
PER MACHINE

Gears =25*3750= Rs 93750

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Bracket =Rs 46250
Sprocket =Rs 57250
Shaft =Rs 17375
Timing pulley =Rs 47750

TOTAL LABOUR CHARGS Rs 262375

LABOUR CHARGES = LABOUR/ NO OF UNITS PRODUCED

Gears (93750/1200000) = 0.0781

Bracket =0.1156
Sprocket =0.0974
Shaft =0.0868
Timing pulley =0.0955

Sprocke Timing
PARTICULRS Gears Bracket t Shaft pulley TOTAL
12,00,00 4,00,00 6,00,00 2,00,00 5,00,00 29,00,00
UNITS SOLD 0 0 0 0 0 0
DIRECT 55,60,00
MATERIAL Rs1.4 Rs1.7 Rs2.1 Rs3.4 Rs2.5 0
DIRECT
LABOUR Rs 0.08 Rs. 0.12 Rs. 0.10 Rs. 0.09 Rs. 0.10 2,62,000

PRIME COST 1776000 728000 132000 698000 130000 5822000

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 0 0

OVERHEADS
INSTRUMENTIN
G COST 158125 223125 172500 300000 120000 973750

PACKAGING 62070 20690 31035 10350 25860 150000

INSPECTING 82760 27585 41380 13795 34485 200000

ELECTRICITY 214390 105765 130920 39375 109195 6,00,000

OFFICE

MAINTENANCE 178655 88135 109100 33110 90995 500000

DEPRECITION 285850 141020 174560 52975 145595 8,00,000

OFFICE
SALARY 331035 110345 165515 55175 137930 800000

OFFICE EXP. 124140 41380 62070 20690 51720 3,00,000

RENT 413795 136550 206895 68965 172415 1000000

109397
OVERHEADS 1850820 894595 5 594435 888195 5323750

TOTAL PRIME OVERHE

COST = COST + ADS

Timing
PARTICULARS Gears Bracket Sprocket Shaft pulley TOTAL
TOTAL COST 3626820 1622595 2413975 1292435 2188195 11145750
PERUNIT TOTAL
COST 3.02 4.056 4.023 6.46 4.38
SELLING PRICE 3.4 4.5 4.5 7 5
PROFIT 456000 177600 286200 108000 310000 1337800

CVP ANALYSIS

FIXED COST= RENT +DEPRECIATION+SALARY+OFFICE

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 EXPENSES+.7*MAINTENANCE+.3*ELECTRIC
ITY+
.25*INSTRUMENTING
= Rs 28,73,440

VARIABLE COST= DIRECT MATERIAL +DIRECT LABOUR+

.75*TOLING+PACKAGING+INSPECTION+
.03MAINTENANCE+.7*ELECTRICITY

Gears =
1.4+.08+(0.75*158125+62070+82760+214390*0.7+178655*0.3)
/1200000
=Rs1.87
Bracket =Rs2.6
Sprocket =Rs2.79
Shaft =Rs4.923
Timing pulley =Rs3.25

BEP:LET 2X UNITS OF Shaft ARE PRODUCED

Gears =12X
Bracket =4X
Sprocket =6X
Timing pulley =5X

FOR BEP
REVENUE-FC-VC=0
S.P*NO. OF UNITS PRODUCED-FC-NO. OF UNIS PRODUCED *VC=0
CONTN*NO.OF UNITS PRODUC-FC=0

.38*12X+.444*4X+.477*6X+0.62*2X+.54*5X-2873440=0

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4.56X + 1.776X + 2.862X + 1.24X + 2.7X – 2873440 = 0
13.138 X = 2873440
X = 218712 UNITS
TO BREAK EVEN FIRM IT HAS TO PRODUCE

Gears = 2624544 UNITS

Bracket = 874848 UNITS
Sprocket = 1312272 UNITS
Shaft = 437424 UNITS
Timing pulley = 1093560 UNITS

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 SUGGESTIONS

To implement more effective ways of handling inventory:

Currently the method for handling inventory is that the materials,
which come from the sub vendors are first checked qualitatively and
then quantitatively and then approved, this process take time and
thus wastage of resources is done. The process should be
streamlined and multiple quality check officers should be employed
to check the intake simultaneously.

To include fixed costs in the costing process:

As it being a “LALA” company the initial investment in the plant is
not considered while costing of finished products, this should be
done.

To reduce the distance between the machines and the

warehouse:
Currently it is very large thus are wastes important processing time.

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 LIMITATIONS

Being a “LALA” company most of the people were not aware of the
accounting system they are following. We had to guess it ourselves
only that which system of accounting they are following.

As the company is small and the accountants are not well qualified
so they were not aware of the ways of the activity based accounting
system. They were not able to carry the system very effectively

As they were very closed they were really hesitant of sharing any of
their accounting. Even after explaining our purpose and motive even
some of them tried to explain us the system they were following,
but it was really difficult to understand their complex system.

Being a small company they have a poor system of schedule and

time. We had to wait for long to know some of the relevant
information. About the accounting system.

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