Marketing Project

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 TRUST’S

SANJAY GHODAWAT GROUP OF INSTITUTION’S,

FACULTY OF MANAGEMENT, ATIGRE.

S.S.D.G., ATIGRE


2009-11

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 Director

Dr. Anil G. Suryavanshi Dr. V. V. Karjinni

PLACE:

DATE : / /

S.S.D.G., ATIGRE


GUIDE’S 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).

S.S.D.G., ATIGRE


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 Mr. Snehal Anandkumar Shirke

Date- / / MBA

S.S.D.G., ATIGRE


ACKNOWLEDGEMENT

I, Mr. Snehal Anandkumar Shirke, MBA Student in SOU SUSHILA

DANCHAND GHODAWAT CHARITABLE TRUST’S SANJAY

GHODAWAT GROUP OF INSTITUTION’S, FACULTY OF

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 CHARITABLE TRUST’S SANJAY

GHODAWAT GROUP OF INSTITUTION’S, FACULTY OF

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.

S.S.D.G., ATIGRE


Place: Kolhapur Mr. Snehal Anandkumar Shirke

Date: MBA

CHAPTER NO - I

INTRODUCTION

TO STUDY

1.1 INTRODUCTION:-

S.S.D.G., ATIGRE


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.

S.S.D.G., ATIGRE


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. Ascertainment of various cost components in the process of costing.

B. Studying role of Profit centre’s & Support centre’s in costing

C. 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.

S.S.D.G., ATIGRE


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 centre’s.

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.

S.S.D.G., ATIGRE


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

S.S.D.G., ATIGRE


CHAPTER NO - II

COMPANY

PROFILE

S.S.D.G., ATIGRE


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

company’s valued customers.

S.S.D.G., ATIGRE


2.2 BRIEF HISTORY OF THE ORGANIZATION

The history of Ghatge-Patil industries ltd., dates back to 1940’s 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 brother’s 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

company’s valued customers.

S.S.D.G., ATIGRE


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

S.S.D.G., ATIGRE


2004: Installation of press pour machine

2.4 ABOUT THE COMPANY:-

DATE OF INCORPORATION July 2, 1960

ANNUAL TURNOVER Rs. 160.00 crores (US $ 36.00 millions)

LOCATION Reg. Office & works at Kolhapur, on National

Highway No. 4 Place connected by air, rail, and

road From Mumbai.

PLANT Total area: 93384 sq.mts built up 32590sq. mts

MANPOWER 1250 no’s

WORKING HOURS Tuesday to Sunday, 8.30am TO 5.00pm

S.S.D.G., ATIGRE


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.

S.S.D.G., ATIGRE


2.7 ORGANIZATION CHART

S.S.D.G., ATIGRE

Board of Directors

Chairman

M.D

Finance and accounts

Marketing HRD MaterialsFoundry Division

Product division

V.P. foundry

V.P. product

AVP marketing

AVP HRD Sr. manager

V.P. Finance & Accounts

Deputy Manager Cost Accounts


MARINE POWER TAKE OFF

Figure 1 MARINE PTO C 107 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.

S.S.D.G., ATIGRE

PARTS OF MARINE PTO C107:-

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


CHAPTER NO – III

THEORETICAL

BACKGROUND

S.S.D.G., ATIGRE


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.

S.S.D.G., ATIGRE


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.

S.S.D.G., ATIGRE


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 :- Centre’s which have responsibility of generating and maximizing

profits.

S.S.D.G., ATIGRE


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.

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.

S.S.D.G., ATIGRE


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.

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

S.S.D.G., ATIGRE


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.

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

S.S.D.G., ATIGRE


(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

• 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

• Traveler’s 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:-

S.S.D.G., ATIGRE


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

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.

S.S.D.G., ATIGRE


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

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:-

S.S.D.G., ATIGRE


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

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

S.S.D.G., ATIGRE


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

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

S.S.D.G., ATIGRE


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:

(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:

S.S.D.G., ATIGRE


(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 one’s time is the earning which he would have earned from

his profession.

Opportunity cost is a relevant cost where alternatives are available. However, opportunity

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

S.S.D.G., ATIGRE


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.

CHAPTER NO –

IV

S.S.D.G., ATIGRE


DATA ANALYSIS

&

INTERPRETATION

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 Variabl

e

S.S.D.G., ATIGRE


Raw Material 3,846 - 3,846

Material OH 46.60 - 46.60

Labor Cost 541.17 - 541.17

Machine Variable 693.22 - 693.22

Machine Fixed 994.89 994.89 -

Subcontracting 369.90 - 369.90

Subcontracting

OH

13.34 - 13.34

WIP Int. ADM

OH

57.86 9.79 48.07

ICC Int. ADM OH 57.40 - 57.40

General ADM OH 236.04 236.04 -

Selling & Distr.

OH

Rejection Cost

85.34

117.07

85.34

19.87

-

97.20

7,058.85 1,345.93 5,712.92

PIE CHART SHOWING DISTRIBUTION OF COST

S.S.D.G., ATIGRE


55%

1%

8%

10%

14%

5%

0%1%3%

1% 2%

Raw Material

Material Overheads

Labour Cost

Machine Variable

Machine Fixed

Subcontracting

Subcontracting OH

WIP Administrative OH

Administrative OH

Sales & Distr. OH

Rejection Cost

PIE CHART SHOWING FUNCTIONAL DISTRIBUTION OF COST

S.S.D.G., ATIGRE

Cost Component Overall Cost (Rs.)

Raw Material

Material Overheads

Labor Cost

Machine Variable

Machine Fixed

Subcontracting

Subcontracting OH

WIP Administrative OH

Administrative OH

Sales & Distr. OH

Rejection Cost

3,846.02

46.60

541.17

693.22

994.89

369.90

13.34

57.86

236.04

85.34

117.07

Total Cost 7,058.85


20%

80%

Fixed CostVariable cost

PIE CHART SHOWING DISTRIBUTION OF ELEMENTS OF COST

55%

7%

38%

MATERIALLABOROVERHEADS

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

S.S.D.G., ATIGRE


2006-07 2007-08 2008-090

2

4

6

8

10

12

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.

CALCULATIONS

S.S.D.G., ATIGRE


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

S.S.D.G., ATIGRE


CHAPTER NO – V

FINDINGS

&

SUGGESTIONS

S.S.D.G., ATIGRE


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. Company got many awards and certificates and stands top.

iii. 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. Functioning of Cost Accounts department is excellent.

vi. All the management applications are properly followed in satisfactory manner.

S.S.D.G., ATIGRE


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 PTO’s 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.

S.S.D.G., ATIGRE


CHAPTER NO – VI

CONCLUSION

S.S.D.G., ATIGRE


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.

S.S.D.G., ATIGRE


CHAPTER NO – VII

BIBLOGRAPHY

&

ANNEXURE

S.S.D.G., ATIGRE


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

S.S.D.G., ATIGRE

http://www.wikipedia.com/


S.S.D.G., ATIGRE

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