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.
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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
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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
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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
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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
Activity Sub Activity Cost
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
Monthly power consumption = 45hp
Therefore,
Rs31,266/45hp = Rs694.8 per hp/ month
Power Consumption = 0.5hp
For 0.5hp = Rs694.8 x 0.5hp = Rs347.4
Electricity bill per month = Rs347.4
= Rs347.4/26days
=13.36/day
=13.36/800Covers
=Rs0.0167/Cover
Fuel oil & lubricants = Rs1,58,028 p.a
= Rs 158028/ 300days
= Rs 526.76/day
= Rs 526.76/25machines
=Rs21.07/machine
=21.07/800Covers
=0.026/Cover
Total Cost of circle cutting activity
Activity Sub Activity Cost
Circle cutting Man cover rate Rs0.1875/cover
24
Machine cover rate Rs0.0416/cover
Space occupied by the
machine
Rs0.0048/cover
electricity Rs0.0167/cover
Fuel oil & lubricants Rs0.026/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
=Rs800000 x 10% depreciation
=Rs80000 p.a
= Rs80000/300days
=Rs266.67/per day
=Rs266.67/800Covers
=Rs0.333/Cover
c) Space occupied by = 100Sq ft x Rs 2 per sq ft
the machine
= Rs200 p.m
= Rs200/26days
=Rs7.69/day
=Rs7.69/800Covers
=Rs0.0096/Cover
d) calculation of electricity
25
Monthly electricity bill = Rs31,266
Monthly power consumption = 45hp
Therefore,
Rs31,266/45hp = Rs694.8 per hp/ month
Power Consumption = 7hp
For 7hp = Rs694.8 x 7hp = Rs4863.6
Electricity bill per month = Rs4863.6
= Rs4863.6/26days
=187.06/day
=187.06/800Covers
=Rs0.233/Cover
Fuel oil & lubricants = Rs1,58,028 p.a
= Rs 158028/ 300days
= Rs 526.76/day
= Rs 526.76/25machines
=Rs21.07/machine
=21.07/800Covers
=0.026/Cover
Total Cost of deep drawing activity
Activity Sub Activity Cost
Deep Drawing Man cover rate Rs0.3562/cover
Machine cover rate Rs0.333/cover
Space occupied by the Rs0.0096/cover
26
machine
electricity Rs0.233/cover
Fuel oil & lubricants Rs0.026/cover
Total Rs 0.9578/cover
4. Trimming
a) Man hour rate =Wages/number of Covers
= Rs150/500Covers
=Rs0.3/Cover
b) Machine hour rate =Cost of machine x depreciation
=Rs300000 x 10% depreciation
=Rs30000 p.a
= Rs30000/300days
=Rs100/per day
=Rs100/500Covers
=Rs0.2/Cover
27
c) Space occupied by = 80Sq ft x Rs 2 per sq ft
the machine
= Rs160 p.m
= Rs160/26days
=Rs6.15/day
=Rs6.15/500Covers
=Rs 0.012/Cover
d) calculation of electricity
Monthly electricity bill = Rs31,266
Monthly power consumption = 45hp
Therefore,
Rs31,266/45hp = Rs694.8 per hp/ month
Power Consumption = 3hp
For 3hp = Rs694.8 x 3hp = Rs2084.4
Electricity bill per month = Rs2084.4
= Rs2084.4/26days
=80.16/day
=80.16/500Covers
=Rs0.16/Cover
Fuel oil & lubricants = Rs1,58,028 p.a
= Rs 158028/ 300days
= Rs 526.76/day
= Rs 526.76/25machines
=Rs21.07/machine
=21.07/500Covers
=0.042/Cover
Total Cost of trimming activity
Activity Sub Activity Cost
28
Trimming Man cover rate Rs0.3/cover
Machine cover rate Rs0.125/cover
Space occupied by the
machine
Rs0.012/cover
electricity Rs0.16/cover
Fuel oil & lubricants Rs0.042/cover
Total Rs 0.639/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
c) Space occupied by = 50Sq ft x Rs 2 per sq ft
the machine
= Rs100 p.m
= Rs100/26days
=Rs3.84/day
=Rs3.84/900Covers
29
=Rs 0.0042/Cover
d) calculation of electricity
Monthly electricity bill = Rs31,266
Monthly power consumption = 45hp
Therefore,
Rs31,266/45hp = Rs694.8 per hp/ month
Power Consumption = 3hp
For 3hp = Rs694.8 x 3hp = Rs2084.4
Electricity bill per month = Rs2084.4
= Rs2084.4/26days
=80.16/day
=80.16/900Covers
=Rs0.089/Cover
Fuel oil & lubricants = Rs1,58,028 p.a
= Rs 158028/ 300days
= Rs 526.76/day
= Rs 526.76/25machines
=Rs21.07/machine
=21.07/900Covers
=0.023/Cover
Total Cost of piercing activity
Activity Sub Activity Cost
Piercing Man cover rate Rs0.166/cover
Machine cover rate Rs0.148/cover
Space occupied by the
machine
Rs0.042/cover
electricity Rs0.089/cover
Fuel oil & lubricants Rs0.023/cover
Total Rs0.468/cover
30
Activity Sub Activity Cost
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
Activity Sub Activity Cost
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
Activity Sub Activity Cost
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
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Activity Sub Activity Cost
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
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4 PAINTING 19.90
5 DESPATCHING 18.00
GRAND TOTAL 136.68
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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.
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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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