Gis on vikash industry

ACTIVITY BASED COSTING AS A MEASURE OF IMPROVING THE COST STRUCTURE OF VIKASH INDUSTRIES

GUIDED INDEPENDENT STUDY REPORT

Submitted ByName: Saurabh Kumar

Roll No: 03Course: Strategic Cost ManagementCourse Mentor: Pfof. F M A Khan

Delhi

1

Acknowledgement

I ‘sincerely thank and pay my gratitude to my faculty mentor ‘Professor FMA Khan’ for his

valuable guidance and support on completion of this project.

Name of Student

Saurabh Kumar

2

Executive Summary

Activity-Based Costing (ABC) represents an alternative paradigm to traditional cost

accounting system and it often provides more accurate cost information for decision making

such as product pricing, product mix, and make-or buy decisions. ABC models the causal

relationships between products and the resources used in their production and traces the cost

of products according to the activities through the use of appropriate cost drivers.

In this project, the costing system followed by Vikash Industries is compared with ABC in

terms of the effects on the product costs that are carried out to highlight the difference

between two costing methodologies. By using this methodology, a valuable insight into the

factors that cause the cost is provided, helping to better manage the activities of the company.

Vikash Industries should go for Activity Based costing as it understands true profitability of

the customers, products, or services and also helps in identifying areas where the cost can be

reduced or efficiencies can be increased.

3

Table of Contents

S.No Chapter No. Contents Page No.

From - To

1. …………………… Title Page I

5. …………………… Acknowledgement II

6. …………………… Executive Summary III

7. …………………… Table of Contents / List of Illustrations

8. Chapter-1 Introduction to the Sector/ Company

05-08

9. Chapter-2 Review of Literature 09-12

10 Chapter-3 Research Methodology 13-14

11 Chapter-4 Data Analysis & Interpretation / Description of the Work Performed

15-37

12 Chapter-5 Findings 38 13 Chapter-6 Suggestions 39

14 Chapter-7 Conclusions 40

4

INDUSTRY PROFILE

Manufacturing Industry

Manufacturing industry refers to those industries which involve in the manufacturing and

processing of items and indulge in either creation of new commodities or in value addition.

The manufacturing industry accounts for a significant share of the industrial sector in

developed countries. The final products can either serves as a finished good for sale to

customers or as intermediate goods used in the production process.

Manufacturing industries are the chief wealth producing sectors of an economy. These

industries use various technologies and methods widely known as manufacturing process

management. Manufacturing industries are broadly categorized into engineering industries,

construction industries, electronics industries, chemical industries, energy industries, textile

industries, food and beverage industries, metalworking industries, plastic industries, etc.

Manufacturing industries are important for an economy as they employ a huge share of the

labor force and produce materials required by sectors of strategic importance such as national

infrastructure and defense. However, not all manufacturing industries are beneficial to the

nation as some of them generate negative externalities with huge social costs. The cost of

letting such industries flourish may even exceed the benefits generated by them.

India’s manufacturing base, which is the fourth-largest among emerging economies, is among

the fastest growing and has seen more investments as a proportion of gross domestic product

than any country except China. Employment opportunities in the manufacturing industry

have declined comparatively. Manufacturing industry analysis also suggests that in some

countries like China, technological know how has to be developed. Despite the fact that

China is ranked fourth in the manufacturing productivity, due to technological lacunae, it is

not being able to compete in the world market

5

ORGANIZATIONAL PROFILE

VIkash Industries, a pioneer in the manufacture of sheet metal pressed components was

established in the year 1977. Ever since, it has grown into a big organization with a focus in

quality in everything.

An ISO 9001-2000 Company with a good customer base in the domestic as well as the

International market activities of Vikash Industries include tool design also with a highly

skilled & professional work force, tools is designed for the components as per the customer

requirements. Their specialty being the deep drawn components, they cater the electrical,

elevator, home appliances automobile industry and the defense.

Vikash Industries are in it for a long haul with a focus on continual improvement. They

are having mechanical presses ranging from 10T to 80T capacity & hydraulic presses ranging

from 10T to 250T capacity, out of which 50T, 80T, 160T & 250T hydraulic presses are

double acting presses to carry out deep drawing operations. They also use triple acting

arrangement for some of these machines to carry out more precision items & to make

multiple operations at a time.

Apart from this, shearing machine of capacity 3.0mm x 2500mm & 10mm x 2000mm

both hydraulically operated are installed for better cutting accuracy. The other relevant

machineries such as welding transformers, spot welding, grinding, and circle cutting

machines are installed to support our manufacturing activity with maximum productivity. The

two material handling equipments for loading & unloading of tools are in place to make

setting faster and easier. The separate tool maintenance area to carry out maintenance of tool

is provided with surface grinding & drilling machines to attend immediate rectification, such

as sharpening of punches & dies. They are equipped with 62 KVA generators to overcome

power failure. The painting facility with 7 tank process of components before painting is

available. The painting booth & drier for quick drying is also installed to give our customers

a complete satisfaction by supplying ready for fitment components.

6

Vikash Industry has the pride to have clients from various industries many of them are well -

known in the global industrial community. Some of our esteemed clients are as under:-

Cummins Generator Technologies

OTIS Elevator (I) Ltd.

Trident Power craft Pvt. Ltd.

Crompton Greaves Ltd

Kaytee Switch Gears Ltd.

IFB India

QUALITY POLICY AT VIKASH INDUSTRIES

1. To meet customers requirement and strive to exceed customer expectations.

2. Manage all activities and related resources as a process.

3. Create and maintain an environment in which personnel are fully involved in

achieving organization objectives so as to ensure continual improvement and growth.

4. Take decisions and implement necessary actions based upon analysis of data and

information.

5. Involve all our suppliers in quality improvement process as to ensure mutually

beneficial and long time relationship.

7

List of Customers of Vikash Industries:

Cummins Generator Technologies, India

Motorsense, U.K

Cummins Generator Technologies, Mexico

Fasco Motors, USA

ABB Ltd, Bangalore

OITS Elevator company, India

Trident Power craft Pvt.Ltd, Hubli

Kirloskar Electric co. Hubli

Mallik Engineering , Bangalore

Telco Construction Equipment, Dharwad

8

Review of Literature:

ACTIVITY BASED COSTING

Activity Based Costing (ABC) is an accounting technique that allows an organization to

determine the actual cost associated with each product and service produced by the

organization without regard to the organizational structure. It is developed to provide more-

accurate ways of assigning the costs of indirect and support resources to activities, business

processes, products, services, and customers. ABC systems recognize that many

organizational resources are required not for physical production of units of product but to

provide a broad array of support activities that enable a variety of products and services to be

produced for a diverse group of customers. The goal of ABC is not to allocate common costs

to products. The goal is to measure and then price out all the resources used for activities that

support the production and delivery of products and services to customers.

Concept of Activity-Based-Costing:

An organization performs activities to do its business. These activities define the kind of

business you are in: a ship owner has an activity to unpack boats; an accounting firm prepares

tax returns; a manufacturer produces products; a council delivers services; a university

teaches students. All activities consume resources. It is the consumption of these resources

that adds to overhead costs.

The basis of Activity Based Costing is look at the activities required to produce the cost of

the product or service. The activities consume resources and the cost of these can be

calculated. The amount of activity required for each product and service is determined, hence

the real cost can be determined.

9

What's what in ABC?

The activity is the work that is done.

The resource is what the activity uses to do the work e.g. people, equipment, and

services. Resources cost money.

The cost of the activity depends on the quantity of resources used to accomplish the

activity.

The cost driver for an activity is the factor that influences the amount of the resources

that will be consumed by this activity.

Example: the activity is delivering goods. The costs of this activity include the truck

drivers' wages, fuel, depreciation of the truck, insurance, etc. The quantities of the

resources that will be consumed by this activity are influenced by the number of

deliveries made per year. Hence the cost driver could be the number of deliveries. A

cost driver is designed to allocate the delivery activity cost pool to the cost objects.

The activity driver measures how much of the activity is used by the cost object.

Example: Product A is delivered once a month, whereas product B is delivered once a

week. Products A and B require a different number of deliveries, hence the cost of the

delivery activity should be assigned to each product on the basis of the number of

deliveries each uses.

The cost object is whatever it is you wish to cost. It could be a product, service,

process, job or customer.

While traditional costing arbitrarily allocates overhead costs, ABC traces overhead costs by

looking at the activities that each product and service calls upon. With ABC the products

consume the activities. It is the activities that cost money.

Why use Activity-Based-Costing?

Activity-Based-Costing is necessary for the following reasons.

Understand true profitability of your customers, products, or services

Quantify the cost of non-value added activities such as errors and reworks

Identify opportunities to reduce costs and/or increase efficiency

10

Obtain actionable information to negotiate price increases for unprofitable

clients

Stratify overhead costs so they can be managed more effectively.

ACTIVITY BASED COSTING ADVANTAGES

More accurate costing of products/services, customers, distribution channels.

Better understanding overheads.

Easier to understand for everyone.

Utilizes unit cost rather than just total cost.

Integrates well with Six Sigma and other continuous improvement programs.

Makes visible waste and non-value added.

Enables costing of processes, supply chains, and value streams

Activity Based Costing mirrors way work is done

Facilitates benchmarking.

ACTIVITY BASED COSTING DISADVANTAGES

More time consuming to collect data.

Cost of buying, implementing and maintaining activity based system.

Makes waste visible which some executives and managers don't want their boss to

see.

11

How does Activity Based Costing differ from traditional cost accounting

systems?

Most traditional costing systems utilize a single basis, (e.g. direct labor) to distribute the

indirect costs to all products and services. This method of allocating indirect costs commonly

results in erroneous cost data. Often products which have high volume (and high labor cost)

are over costed. Likewise, the cost of lower volume products are often understated, and many

of the indirect costs of these products are overlooked.

Rather than relying on a single basis to distribute costs, ABC assigns costs to activities and

products based on how the costs (resources) are actually consumed by the process or product.

By moving away from traditional cost allocation methods and using improved ABC methods

of tracing and assignment, ABC provides managers with a clearer picture of cost of processes

and the profitability of customers and products.

12

Research Methodology

The present study is an attempt to understand and ascertain the costing method followed in

Vikash Industries and to compare it with the costing method Activity Based Costing.

Objectives of the study:

To study the functions and operations of the organization

To know and understand the existing costing method followed by Vikash Industries.

To identify activities involved in manufacturing of UC Range series 4 end cover.

To identify cost of the activities involved in manufacturing the product UC Range

series 4 end cover.

To allocate the cost for the activities.

To find the cost per unit of the product UC Range series 4 end cover.

To compare existing costing method followed by vikash Industries with Activity

Based Costing.

Scope of the study:

The scope of this study is to know and understanding the various processes and activities

involved in manufacturing Industries especially in VIKASH INDUSTRIES. It involves

finding out the cost per unit of the product UC Range series 4 end cover by following

Activity based Costing.

Need for the study:

The theoretical aspects of ACTIVITY BASED COSTING provide the framework of the

study. A conceptual and the practical approach is the need of the hour. Hence the field study

becomes as essential part of the curriculum. Thus this project study conducted to integrate

theoretical and practical aspects of Activity based costing in the organization.

13

Data Collection

Secondary data was collected through last year’s balance sheet of Vikash

Industries.

Books on cost accounting were referred.

Company website

14

ANALYSIS

15

DETAILS OF THE PRODUCT

Product name: UC Range series 4 end cover

Raw Material Requirements for the product

1) Metal sheet of length 1250*2500*1.2mm

2) Weight of the sheet is 30kg

3) 21 Covers can be prepared from one metal sheet.

4) Sheets required to prepare 1000 units is 48sheets.

5) Cost of sheet metal per kg 37Rs.

6) Weight of a Cover = 30kg/21

=1.42kg

7) Gross Material cost per unit = 1.42 x Rs55

= Rs78.1/Cover

8) Process Generated Scrap =0.65 kgs

9) Scrap rate =Rs12/kg

10) Revenue generated from scrap = 0.65 x 10

= Rs 6.5

11) Net material cost = 78.1– 6.5

= Rs71.6

COSTING FOLLOWED BY THE COMPANY

16

Product: UC Range series 4 end coverNumber of units produced = 300000 Covers p.a

Particulars Total cost(in Rs)

Cost/unit(in Rs)

DIRECT COSTDirect Material (Raw Material Consumed) 3,05,73,918Direct Wages 18,93,573Direct Expenses 45,65,266Prime Cost 3,70,32,757 123.4FACTORY OVERHEADSfuel oil & lubricant 1,58,029Depreciation on machinery 8,04,853Repairs and maintenance 3,91,235Insurance 56,147Rates and Taxes 2,61,532Indirect material 14,73,273Factory cost 31,45,069 10.48ADMINISTRATIVE OVERHEADSPrinting and stationary 69,255Postage and telegram 18,929Newspapers and magazines 5,964Professional charges 27,619Office furniture 5,646Leave with wages 7,095Telephone expenses 1,75,338Salary to partners 14,60,000Vehicle maintenance 72,347Sundry expenses 84,809Salary to staff 2,59,203Cost Of Goods Sold 21,86,205 7.28SELLING AND DISTRIBUTIONAdvertisement expenses 3,410Traveling expenses 1,82,480Sales Promotion expenses 5,500Packing charges 4,97,360 6,88,750Cost Of Sales 4,30,52,781 143.50PROFIT 52,81,095 17.6

SALES 4,83,33,876 161.1

CALCULATION OF COST PER UNIT BY ACTIVITY BASED COSTING

17

1) Purchase of Raw material

Activity Sub Activity Cost DriverPurchase Raw material transport Weight of product

Loading and unloading Weight of product

Storage Weight of product

Material cost Weight of product

Raw Material Charge

Weight of the goods 5000kgs (for the specified component) of sheet metal

Delivered from R.C Nagar Belgaum to Akash industries Belgaum = Rs.600.00

Therefore charges per unit = Rs600/5000kgs

= Rs0.12/kg

Cost of per cover =1.42kg x Rs0.12

=Rs0.1704/cover

a) Loading and unloading Charges = Rs300.00/ton

5 Ton x Rs300 = Rs1500.00

Therefore charges for per unit = Rs1500/5000kgs

= Rs0.20/kg

Cost per cover =1.42 x Rs0.20

=Rs0.284/cover

18

c) Storage charges = space required 10 x 5ft

Rent 20000/month

Building area = 10000sq ft

Storage Cost =50sq ft x Rs2.00

=Rs100.00/- p.m

Storage cost per day =Rs100/26Days

=Rs3.84/day

Storage cost per Cover =Rs3.84/1000Covers

=Rs0.00384/cover

d) Material cost = 5000kgs x Rs 71.28 (exclusive of

transport and loading and unloading

charges)

= Rs3,56,400

=5000kgs/1.42wt per kg

=3521 Covers

=Rs3,56,400/3521 Covers

=Rs101.22 – scrap

=Rs101.22– Rs6.5

=Rs94.72/cover

Total cost incurred for purchase of raw material

Activity Sub Activity Cost

Purchase Raw material transport Rs0.1704/cover

Loading and unloading Rs0.284/cover

Storage Rs0.00384/cover

Material cost Rs 94.72/cover

Total Rs95.17

19

2) Manufacturing cost

Activity Sub Activity Activity Driver

Manufacturing ShearingCombination of man and

machine hour

Circle cuttingCombination of man and

machine hour

Deep drawing Combination of man and machine hour

Trimming Combination of man and machine hour

Piercing Combination of man and machine hour

20

COST OF EACH PROCESS

1) Shearing

a) Man cover rate: = wages/number of Covers

= Rs900/1000Covers

= 0.9/Cover rate

b) Machine cover rate =cost of machine x depreciation

=Rs500000 x 10% depreciation

=Rs50000 p.a

=Rs50000/300days

= Rs166.6per day

21

Process laborWages

per dayHours

Number

of

Covers

per 8 hrs

Cost of

Machine

Hp per

machine

Space

occupie

d by the

machine

Cost

per sq

ft

Shearing 3300/

worker8 1000 500000 5

100 sq ft Rs2

Circle

cutting1 150 8 800 100000 0.5

50 sq ft Rs 2

Deep

drawing2

150

&1358 800 800000 7

100sq ft Rs 2

Trimming 1 150 8 500 300000 3 80sq ft Rs 2

Piercing 1 150 8 900 400000 3 50 sq ft Rs 2

=Rs166.6/1000Covers

=Rs0.17/Cover

c) Space occupied by = 100 Sq ft x Rs 2 per sq ft

the machine

= Rs200 p.m

= Rs200/26days

=Rs7.69/day

=Rs7.69/1000Covers

=Rs 0.00769/Cover

d) calculation of electricity

Monthly electricity bill = 31,266

Monthly power consumption = 45hp

Therefore,

Rs31,266/45hp = Rs694.8 per hp/ month

Power Consumption = 5hp

For 5hp = Rs694.8 x 5hp = Rs3,474

Electricity bill per month = Rs3474.00

= Rs3474/26days

=133.61/day

=133.61/1000

=Rs0.1336/Cover

Fuel oil & lubricants = Rs1,58,028 p.a

= Rs 158028/ 300days

= Rs 526.76/day

= Rs 526.76/25machines

=Rs21.07/machine

=21.07/1000Covers

22

=0.021/Cover

Total Cost of shearing activity


Shearing Man cover rate Rs0.9/cover

Machine cover rate Rs0.17/cover

Space occupied by the

machine

Rs0.00769/cover

electricity Rs0.1336/cover

Fuel oil & lubricants Rs0.021/cover

Total Rs 1.232/cover

2. Circle cutting

a) Man cover rate =wages/number of Covers

= Rs150/800Covers

=Rs0.1875/Cover

b) Machine cover rate =Rs100000 x 10% depreciation

=Rs10000 p.a

=Rs 10000/300days

=Rs33.33/per day

=Rs33.33/800Covers

=Rs0.0416/Cover

c) Space occupied by = 50Sq ft x Rs 2 per sq ft

the machine

23

= Rs100 p.m

= Rs100/26days

=Rs3.84/day

=Rs3.84/800Covers

=Rs 0.0048/Cover

e) calculation of electricity

Monthly electricity bill = Rs31,266


Therefore,


Power Consumption = 0.5hp

For 0.5hp = Rs694.8 x 0.5hp = Rs347.4


= Rs347.4/26days

=13.36/day

=13.36/800Covers

=Rs0.0167/Cover


= Rs 158028/ 300days

= Rs 526.76/day


=Rs21.07/machine

=21.07/800Covers

=0.026/Cover

Total Cost of circle cutting activity


Circle cutting Man cover rate Rs0.1875/cover

24



machine

Rs0.0048/cover



Total Rs0.2766/cover

3. Deep drawing

a) Man hour rate =wages/number of Covers

= Rs285/800Covers

=Rs0.3562/Cover

b) Machine hour rate =Cost of machine x Depreciation


=Rs80000 p.a

= Rs80000/300days

=Rs266.67/per day

=Rs266.67/800Covers

=Rs0.333/Cover


the machine

= Rs200 p.m

= Rs200/26days

=Rs7.69/day

=Rs7.69/800Covers

=Rs0.0096/Cover


25



Therefore,



For 7hp = Rs694.8 x 7hp = Rs4863.6


= Rs4863.6/26days

=187.06/day

=187.06/800Covers

=Rs0.233/Cover


= Rs 158028/ 300days

= Rs 526.76/day


=Rs21.07/machine

=21.07/800Covers

=0.026/Cover

Total Cost of deep drawing activity


Deep Drawing Man cover rate Rs0.3562/cover


Space occupied by the Rs0.0096/cover

26

machine




4. Trimming

a) Man hour rate =Wages/number of Covers

= Rs150/500Covers

=Rs0.3/Cover

b) Machine hour rate =Cost of machine x depreciation


=Rs30000 p.a

= Rs30000/300days

=Rs100/per day

=Rs100/500Covers

=Rs0.2/Cover

27


the machine

= Rs160 p.m

= Rs160/26days

=Rs6.15/day

=Rs6.15/500Covers

=Rs 0.012/Cover




Therefore,



For 3hp = Rs694.8 x 3hp = Rs2084.4


= Rs2084.4/26days

=80.16/day

=80.16/500Covers

=Rs0.16/Cover


= Rs 158028/ 300days

= Rs 526.76/day


=Rs21.07/machine

=21.07/500Covers

=0.042/Cover

Total Cost of trimming activity


28

Trimming Man cover rate Rs0.3/cover



machine

Rs0.012/cover




5. Piercing

a) Man hour rate

=Rs 150/900Covers

=0.166/Cover

b) Machine hour rate =400000 x 10% depreciation

=40000 p.a

= 40000/300days

=133.33/per day

=133.33/900Covers

=0.148/Cover


the machine

= Rs100 p.m

= Rs100/26days

=Rs3.84/day

=Rs3.84/900Covers

29

=Rs 0.0042/Cover




Therefore,



For 3hp = Rs694.8 x 3hp = Rs2084.4


= Rs2084.4/26days

=80.16/day

=80.16/900Covers

=Rs0.089/Cover


= Rs 158028/ 300days

= Rs 526.76/day


=Rs21.07/machine

=21.07/900Covers

=0.023/Cover

Total Cost of piercing activity


Piercing Man cover rate Rs0.166/cover



machine

Rs0.042/cover



Total Rs0.468/cover

30


Manufacturing Shearing Rs1.232/cover

Circle cutting Rs0.2766/cover

Deep drawing Rs 0.9578/cover

Trimming Rs 0.639/cover

Piercing Rs0.468/cover

Total Rs3.5734/cover

Total Cost of the processes

3) Inspection

Inspection rate 10% of number of units produced per day

1000Covers x 10% = 100Covers to be inspected

1) Salary of the inspector = Rs8000/month

Time required to inspect = 1 hour

Per day salary = Rs8000/26days

=Rs307.69/day

Per hour salary =Rs 307.69/8hRs

= Rs 38.46/hr

31

Wages to the inspector = 1hr x Rs38.46

= Rs38.46/hr

2) Cost of instruments required to inspect = Rs 8500

Expected life of instrument is one year

Instruments charges per month = Rs8500/12months

= Rs708.33/month

Per day charges = Rs708.33/26 days

= Rs 27.24/day

Per hour charges = Rs27.24/8hrs

= Rs3.4/hr

3) Calibration charges per year = Rs900

Per month charges = Rs900/12months

= Rs75/month

Per day charges = Rs75/26days

= Rs3/day

Per hour charges = Rs3/8hr

=Rs0.375/hr

Total of inspection activity


32

Inspection Salary of the inspector Rs38.46/hr

instruments required to

inspectRs3.4/hr

Calibration Rs0.375/hr

Total Rs42.23/hr

Cost of Per Cover Rs 0.0422/cover

4) Painting.

1) Cost of paint and thinner

Paint Rs250/ltr

Thinner Rs150/ltr

Divided in the ratio of 75:25

Cost of Paint = Rs250 x 75/100

=Rs 187.5

Cost of Thinner = Rs150 x 25/100

=Rs 37.5

Cost of mixture total = Rs187.5 + Rs37.5

33

= Rs225

Total Area of component covered by the mixture is 45 sq ft

Area of the a component = 1.72 sq ft

Covers that can be painted = 45sq ft/1.72sq ft

= 26Covers

Cost of paint per cover =Rs225/ 26Covers

= Rs8.6/Cover

2) Labour cost

People required for painting = 2

Wages per day = Rs 320

Covers painted in one day = 200 Covers

Cost per cover = Rs320/200covers

=Rs1.6/cover

3) Paint booth operation cost = Rs300000

Deprecation = 20% of the cost

=Rs 300000 x 20%

= Rs60000p.a

Per month = Rs60000/12months

=Rs5000p.m

Per day = Rs5000/26days

= Rs192.3/day

Cost of per covers =Rs 192.3/200Covers

=Rs0.961/Cover

4) Power charges Rs 5500/month

34

Total Power consumption =20hp

Therefore,

Rs5500/20hp =Rs275per hp/month

Power consumption =5hp

For 5hp =5hp x Rs275

Electricity bill per month for 5hp =Rs1375

Per day charges = Rs1375/26days

= Rs53/day

Per cover charges =Rs53/200Covers

=Rs0.265/Cover

5) Area of painting booth = 60 x 20ft

Rent = 20000 p.m

Built area = 10000sq ft

Rent per sq ft = Rs30000/10000sq ft

= Rs3/sq ft/month

Cost of area = 1200sq ft x Rs3

= Rs 3600

Per day charges =Rs3600/26

= Rs138.46/day

Per cover =Rs138.46/200Covers

= Rs0.692/Cover

Area of the Cover = 1.72sq ft

Cost of per cover = Rs12.11 x 1.72sq ft

= Rs20.82/cover

Total cost of painting activity

35


Painting Cost of paint and thinner Rs8.6

Labour cost Rs1.6

Paint booth operation cost Rs0.961

Power charges Rs0.265

Area of painting booth Rs0.692

Total Rs12.11/sq ft

Cost of Per Cover Rs20.82/cover

5) Dispatching

1) Packing charges :

Packing material required: ---

Cost of wooden box = Rs 3000 (inclusive transportation cost, taxes)

Cost of plastic wire = Re 1.50/Cover

Cost of paper = Re1.00/Cover

Number of Covers packed per box = 200 covers

Rs3000 + (Re1.50 x 200) + (Re1.00 x 200) = Rs3500

2) labour

People required = 3

5 boxes packed per day

Wages = Rs200 + Rs150 + Rs150

= Rs500/day

Wages per box = Rs500/5boxes

= Rs100/box

Total =Rs 3500 + Rs100

= Rs 3600

Per Cover = Rs3600/200Cover

=Rs18/Cover

Total of dispatching Activity

36


Despatching Packing charges Rs3500

labour Rs100

Total

Cost Per Cover

Rs3600/box

Rs18/Cover

COST PER UNIT OF THE PRODUCT

ACTIVITIESAmount

in Rs

COST/COVER

Amt in Rs

1 PURCHASE OF RAW MATERIALS 95.017

2 MANUFACTURING

Shearing 1.232

Circle cutting 0.2766

Deep drawing 0.9578

Trimming 0.639

Piercing 0.468

Total 3.5734

3 INSPECTION 0.0422

37

4 PAINTING 19.90

5 DESPATCHING 18.00

GRAND TOTAL 136.68

38

FINDINGS1. Vikash Industries are specialized in deep drawn components that cater the electrical,

elevator, home appliances automobile industry and the defense.

2. Vikash Industries follows traditional method of costing.

3. The product UC Range series 4 end cover is over costed.

4. According to traditional costing the cost of the cover is Rs.143.50

5. According to Activity Based costing the cost of the cover is Rs136.68

6. According to costing followed by Vikash Industries they first identify the cost then

they go for producing the product rather than identifying the activities first.

7. Appropriate variable overheads are identified to individual products through ABC.

8. All levels of activities in the manufacturing cost hierarchy viz unit level, batch level,

product level and facility level have been identified.

9. Cost drivers for the activities have been identified.

10. Vikash Industries relates overheads to cost centers which are not realistic to the

behavior of costs.

11. To get a realistic analysis of cost behavior, the overheads have been properly related

to cost drivers.

39

SUGGESTIONS1. Vikash Industries should adopt Activity Based costing in their organization.

2. As ABC integrates well with Six Sigma and continuous improvement programs the

company can achieve minimum rejection rate.

3. To arrive at the actual cost of the product, overheads should not be directly assigned

to the cost center which is basically done in traditional costing.

4. Instead of focusing more on cost reduction they should focus more on cost control.

5. Vikash Industries can adopt cost control strategy where in the company can begin by

evaluating non-labor expenses which can be controlled.

6. Labor and employment costs are a source of considerable expense and should be

constantly monitored.

7. If it is possible to amalgamate two jobs into one, make some jobs part time, use

temporary contract labor, outsourcing to specialists, consider if some other choice of

labor cost saving is available.

8. Vikash Industries should follow an open style with clear and concise objective for the

successful implementation of ABC.

9. Organization-wide awareness should be extended to convince the participants to

change, as well as effecting the change.

10. Overheads are part of running a business but can be controlled. Everything from

cleaning materials to the cost of vehicle operation, machine maintenance, consumable

materials and staff employment costs can, and must be kept as low as possible.

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CONCLUSION

ABC utilizes the activity concept and by using the activities, ABC can successfully link the

product costs to production knowledge. How a product is produced, how much time is needed

to perform an activity and finally how much money is absorbed by performing this task are

answered by the help of ABC studies. This method is a dynamic tool for continuous

improvement. With ABC to its benefit, any enterprise will have a built in competitive cost

advantage and can continuously add value to both its stakeholders and customers.

Therefore, Activity-Based Costing measures the costs and profits of an organization based on

the activities performed within that organization. By focusing on processes that contribute to

revenues and business operations, ABC can accurately determine how each process relates

back to specific products, customers, or services. This can make a big difference after

considering warehouse, sales, customer service, administration and other costs that are often

applied at a standard rate, if at all. With ABC you can drill into profitability and performance

by almost any factor you can think of.

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Business

Gis on vikash industry