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Activity Based Costing as a measure of improving the cost structure at Akash industries

INDEX
Sr.No. 1 2 3 4 5 6 7 8 10 11 12 13 14 CONTENTS Executive summary Industry Profile Organization profile History of Akash Industries Company at a glance Research Methodology Data Collection Conceptual Framework Analysis Findings Suggestions Conclusion Bibliography Page No.

1-2 3-5 6-8 9-12 13-18 19-21 22-23 24-33 34-57 58-59 60-61
62-63 64-65

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Activity Based Costing as a measure of improving the cost structure at Akash industries

EXECUTIVE SUMMARY

EXECUTIVE SUMMARY

A study report on ACTIVITY BASED COSTING AS A MEASURE OF IMPROVING THE COST STRUCTURE OF AKASH INDUSTRIES, a project undertaken at AKASH INDUSTRIES BELGAUM.

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Activity Based Costing as a measure of improving the cost structure at Akash industries 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 Akash 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. According to the study, Akash Industries follows traditional method for costing that assigns overheads directly to the product. Cost of the product UC Range series 4 end cover is found out by Activity Based costing and is compared with the traditional method followed by Akash Industries to arrive at the cost of the above product. The study states that the product is being over cost by the company. Akash 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.

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Activity Based Costing as a measure of improving the cost structure at Akash industries

INDUSTRY PROFILE

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.

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Activity Based Costing as a measure of improving the cost structure at Akash industries The manufacturing industry accounts for a significant share of the industrial sector in developed countries. The final products can either serve 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. Indias 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. Also needed are professionals well versed in the technological know how.

The Government has taken several initiatives to accelerate growth in this sector and improve competitiveness of Indian industry in general and manufacturing in particular. Technology up gradation schemes for various sectors such as small scale industries, textiles, food processing etc.; Industrial infrastructure up gradation programmes on cluster basis;

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Activity Based Costing as a measure of improving the cost structure at Akash industries Easier access to inputs at competitive prices and rationalization and reduction in rates. Encouragement to foreign technology collaborations and liberalization of FDI in manufacturing activities. duty

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Activity Based Costing as a measure of improving the cost structure at Akash industries

ORGANIZATION PROFILE

ORGANIZATIONAL PROFILE Akash 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.

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Activity Based Costing as a measure of improving the cost structure at Akash industries An ISO 9001-2000 Company with a good customer base in the domestic as well as the International market activities of Akash 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. Akash 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 carryout 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.

Akash Industry have 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. Babasabpatilfreeppt.com 8

Activity Based Costing as a measure of improving the cost structure at Akash industries IFB India

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Activity Based Costing as a measure of improving the cost structure at Akash industries

HISTORY OF AKASH INDUSTRIES

HISTORY OF AKASH INDUSTRIES Akash Industries M-15, Industrial Estate, Udyambag, Belgaum 590 008 Mr. Sadanand T Macha completed his DIPLOMA IN TOOL AND DIE MAKING from NETTUR TECHNICAL TRAINING FOUNDATION, DHARWAR (NTTF). Then he served at Hyderabad Tool Pvt. Ltd, Hyderabad, as a highly skilled Mechanic for a period of Babasabpatilfreeppt.com 10

Activity Based Costing as a measure of improving the cost structure at Akash industries one and half years. Because of the climatic conditions he left Hyderabad and came back to Belgaum and joined M/s. Pusalkar Engineers, Belgaum. He started working under Mr. V B Inamdar (Present Partner). It was here that he learnt i.e., from Purchases, Production, Inspection and Despatch, Etc for a period of one and half yeaRs. In M/s Pusalkar Engineers he came in contact with M/s Kirloskar Electric Co. Ltd. Bangalore & Hubli. Having gained the experience and he left M/s Pusalkar Engineers, Belgaum and was idle for 2 to 3 months. Meanwhile Shri V B Inamdar also left M/s Pusalkar Engineers and they both decided to start their own business. In the year 1977, they both started their own business in the name of M/s Akash Industries. They had neither place nor financial support. With a mere Rs. 3000/- they went on to purchase a wielding machine and started in their own garage at Angol C scheme. Initially it was only fabrication work that they used to carry out. But with this type of work it was impossible for both of them to meet their ends. By this time 6 months had passed. They really had a tough time and a tougher time to Mr. Inamdar who was married and had 3 childrens. Meanwhile, they felt that they should better join any service. Even to approach somebody for work, they didnt had the requisite finance. With the help of Mr. Inamdars, brother in law, who was working in West Coast Paper Mills Limited Dandeli, they could get an entry. Initially, they gave them maintenance jobs, which they used to get the things from their fellow industrialists and supply the same. Months passed by and they felt that how they can ever survive with this little earning. It was even difficult for them to go by bus and many a times they used to travel by truck to Dandeli, finish their work and again return back to Belgaum, by some means with hardly a few chips in their pockets. This continued for a year and half. It was at this time that Shri A G Tembe, of M/s Ohm Electricals, gave them shelter in his shed at Industrial estate. Here they prolonged their business for 2 years supplying maintenance jobs. Doing fabrication work and even if necessary they used to carry the wielding machine to customers place and carry out the work. Their major problem was finance and how to expand their engineering activities was a big question mark for them. But since they had no shed or own machinery they could not approach the engineering companies. However, in the year 1979, they got an Industrial Plot of 10 Guntas from KSSIDC LTD, through the help of Late Shri N A Hanamannavar, the then Chairman of the City

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Activity Based Costing as a measure of improving the cost structure at Akash industries Improvement Board. They approached State Bank Of India for financial assistance and it was at this juncture that they really helped them to construct their own shed and purchase of machinery. Their Working capital of Rs. 10,000 was also sanctioned. With the vast experience of Mr. V B Inamdar, I.e of more than 15 years and his previous contacts. They approached M/s KIRLOSKAR ELECTRIC COMPANY LIMITED. BANGALORE and M/s LARSEN & TOUBRO LTD. BANGALORE. Since, their line of activity was only Sheet Metal Components, they could get a good amount of workload. They proved themselves by quality and delivery. More and more work started coming in and somehow they had to meet their urgency with having only few machines. Having got confidence, they expanded their own shed and added few more machines of a higher capacity. They approached M/s CROMPTON GREAVES LTD. AHMEDNAGAR, AUTOMOBILE CORPORATION OF GOA LTD. KIRLOSKAR ELECTRIC CO. HBL PEENYA & PUNE. In a span of two to three years their business increased multifold. Capacity reached a saturated point and they were not in position to meet their high demands and they had to add some higher capacity of Hydraulic Presses converting the same into double acting and triple acting. This increased their supply position. In the year 1984, they started another partnership concern in the name of M/S KARNATAKA METAL PRESSING just near to their existing concern taking Mr. P A Bagewadi and Mr. S K Yatgeri as additional partners. Here their basic activity was only to manufacture Pole bricks of different capacities for alternators. At present their turnover stands at Rs 45 Lakh per month. In the year 1988, they got an order from M/s AMMUNITION FACTORY, PUNE for supplying of Aluminum Cartridge cases purely an import substitute. For this special purpose machines were acquired with the most accurate toolings and precious inspection equipments to meet their highest accuracy and quality. These cartridge cases are used to make Anti Riot Rubber Bullets, which are used by the Police Department during Anti Riots. This was their biggest achievement that they had in their last 29 years. AKASH INDUSTRIES major activities are manufacturing of Sheet Metal Pressed Components for Alternator, Motor, Automobile Parts and items required by customers to their required specifications.

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Activity Based Costing as a measure of improving the cost structure at Akash industries In the words of Mr. S T Macha This is all due to hard and sincere work and the backing of our fellow industrialists who have supported us in all our difficult times. Our aim is to do sincere and hard work giving more attention to quality and delivery. This is what every one wants in this world of competition.

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Activity Based Costing as a measure of improving the cost structure at Akash industries

COMPANY PROFILE

COMPANY PROFILE
Name of the Organization Type of Industry Address : Akash Industries : Manufacturing Industry. : Akash Industries M-15, Industrial Estate, Udyambag, Belgaum 590 008 Partners : S.T Macha V.B Inamdar M.V Inamdar Babasabpatilfreeppt.com 14

Activity Based Costing as a measure of improving the cost structure at Akash industries A.S Macha Established Size and nature of the company : 1977 :

Sales
FY08-09 Employees : Rs48,333,876.81 : 50

QUALITY POLICY AT AKASH 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.

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Activity Based Costing as a measure of improving the cost structure at Akash industries

ORGANIZATION CHART

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Activity Based Costing as a measure of improving the cost structure at Akash industries Managing partner 1 Managing partner 2

In charge QA/QC

Shop Incharge

Chief Accountant

Incharge Excise Management Representative

Incharge Sales Tax

Cashier

Deputy Management Representative

Plant Supervisor 1

Plant supervisor 2

In charge stores

Workers

PRODUCTS MANUFACTURED BY AKASH INDUSTRIES

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Activity Based Costing as a measure of improving the cost structure at Akash industries Components are manufactured as per the customer requirements. They are catering at present the industries like electrical, elevators & home appliances, specialization being deep drawn components using C.R. & H.R. as the raw material, with thickness of material varying from 1 mm CRCA to 8mm H.R.

LIST OF CUSTOMERS

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Activity Based Costing as a measure of improving the cost structure at Akash 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

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Activity Based Costing as a measure of improving the cost structure at Akash industries

RESEARCH METHODOLOGY

RESEARCH METHODOLOGY

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Activity Based Costing as a measure of improving the cost structure at Akash industries The Study: The present study is an attempt to understand and ascertain the costing method followed in Akash 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 Akash 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 Akash 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 AKASH 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.

DATA COLLECTION
Primary Data Babasabpatilfreeppt.com 21

Activity Based Costing as a measure of improving the cost structure at Akash industries Following are the sources of primary data collected. Much of the information was collected from the cost accountant of Akash Industries (Mr.Sunil Kundap) . Frequent discussions were made with other employees of the company. Met few senior level executive of the firm.

Secondary Data Secondary data was collected through last years balance sheet of Books on cost accounting were referred. Company website

Akash Industries.

Limitations of the study: The study is limited to AKASH INDUSTRIES only. In order to maintain confidentiality some information could not be disclosed by Akash Industries.

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Activity Based Costing as a measure of improving the cost structure at Akash industries

CONCEPTUAL FRAMEWORK

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 Babasabpatilfreeppt.com 23

Activity Based Costing as a measure of improving the cost structure at Akash industries organization without regard to the organizational structure. It is developed to provide moreaccurate 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.

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.

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Activity Based Costing as a measure of improving the cost structure at Akash industries

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 Babasabpatilfreeppt.com 25

Activity Based Costing as a measure of improving the cost structure at Akash industries Quantify the cost of non-value added activities such as errors and reworks Identify opportunities to reduce costs and/or increase efficiency Obtain actionable information to negotiate price increases for unprofitable clients Stratify overhead costs so they can be managed more effectively.

The ABC framework Activity based costing has been claimed as a method of arriving at more accurate costs, often in order to set selling prices. In a market economy, the idea of selling prices based on costs is dangerous, with serious consequences for a business competitive stance. With the variety of conventions and concepts used in cost determination, there are no absolutes in determining

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Activity Based Costing as a measure of improving the cost structure at Akash industries product costs, hence the objective of accurate costs is diluted. However, the technique of ABC is being seen more as a cost-distortion alarm; more as an attention directing tool; more as a cost management tool. Activity Based Costing is a methodology for understanding the activities, processes, services and products of a business; understanding what drives the cost of these activities and processes; and thus reducing the non-value-adding activities/processes. The Elements of ABC can be described in the following model: The ABC CROSS: COST ASSIGNMENT VIEW RESOURCES RESOURCE DRIVERS PERFORMANCE MEASURES

COST DRIVERS ACTIVITY DRIVERS

ACTIVITIES

OBJECTS OF WORK

Resource Drivers are the link between resources and activities assigning cost form the financial statements.

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Activity Based Costing as a measure of improving the cost structure at Akash industries Activity Driver is the factor used to assign cost from an activity to a object of work, for instance, if making a sales call is the activity then the frequency of sales calls to a specific customer/client would be the activity driver. Object of Work is the specific objective at the end of a process, for instance, a product, a satisfied customer/client. Cost Drivers are factors that cause changes in the performance of activities and create increased consumption of resource. Fundamentally there are two types of Cost Drivers. The Structural Cost Drivers are viz. Scale, Scope, Experience, Technology and Complexity. The Exceptional Cost Drivers are viz. Work Force Involvement, Total Quality Management, Capacity Utilization, Plant Layout, Electricity, Product Configuration and Exploiting Value Chain Linkages. Activities comprise of units or work or task. For example purchase of raw materials, activities involved in manufacturing etc.

ABC categorizes the activities into: Unit level activities:

Performed each time a unit is produced.

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Activity Based Costing as a measure of improving the cost structure at Akash industries

Consumed in direct proportion to the number of units produced. E.g. Direct materials, Energy costs, direct labour, etc.

Batch related activities:


Performed each time a batch of goods is produced. Consumed in direct proportion the number of batches produced. Fixed for all units within a batch. E.g. set up resources, purchasing resources.

Product sustaining activities:

Performed to support and sustain different products/services on the product life cycle. Consumption varies with the variety of products/services and the stage of the Product Life Cycle the products/services are in. E.g. designing the product.

Facility sustaining activities:

Performed for supporting the happening of the above three types of activities and providing the platform/infrastructure. These are generally fixed for a certain scale/scope of operations over a period of time. E.g. Administration, plant maintenance, accounting, etc. These costs are deducted lump sum from operating margins of all product lines.

ABC establishes inputs and outputs to and from each activity, Inputs to one activity may be outputs from another and there could also be interactive relationships among activities. Hierarchy of Activities and Activity based profitability analysis

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Activity Based Costing as a measure of improving the cost structure at Akash industries Sales Revenue Less: Unit-level products cost (Material, Power Costs, Other identifiable costs) = unit level contribution (Sets-ups, material movements, purchase orders, inspection) = batch level contribution (Process engineering, product specifications, order change notices) = = product line contribution customer level contribution (Plant management , rent , rates, and taxes, etc.,) = net profit Less: Consumer and market related costs Less: Facility sustaining cost Less: Product line costs Less: Batch related costs

Note: Unit level and batch contribution analysis facilitate short-term decision relating to products and complexity analysis. Product line contribution helps in product line decisions. Customer level contribution helps in customer and market related decisions. Facility sustaining cost are period cost are period which are fixed in nature.

STAGES OR STEPS INVOLVED IN ACTIVITY BASED COSTING.

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Activity Based Costing as a measure of improving the cost structure at Akash industries Step 1: Identify the various activities within the organization. Activities comprise of units of work or task. For example purchase of material is an activity consisting of series of task like purchase requisition, advertisement, inviting quotations, identification of suppliers, issuing purchase orders, follow up etc. Step 2: Relate the overheads to the activity using resource cost drivers a) Over heads will be related to support and primary activities. b) For this purpose, resource cost drivers will be used. c) All costs will be identified under the activities, thus creating activity cost pools. Step 3: Apportion the cost to support activities over the primary activities on suitable basis. a) This is very much like reapportionment of service department expenses to production departments. b) Cost of support activities are spread over to primary activities to collect costs only under them. c) The base is the cost driver which is the measure of how the support activities are used. Step 4: Determine the activity cost drivers for activity/cost pools. a) Activity cost drivers used to relate the overheads collected in the cost pools to cost objects should be determined. b) This is based on the factor that drives the consumption of the activity. c) For example, in production scheduling, the driver will be the number of batches ordered.

Step 5: Calculate Activity cost driver rate = Total cost of activity Activity cost driver

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Activity Based Costing as a measure of improving the cost structure at Akash industries a) Activity cost driver rates are computed for each activity. b) The rates will be multiplied by the different amounts of each activity that each product/other cost object consumes so as to ascertain its cost. c) This rate can be used to ascertain cost of the product (as in traditional absorption costing) and to ascertain cost of other cost objects such as customers/customer segments and distribution channels.

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Activity Based Costing as a measure of improving the cost structure at Akash industries

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.

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Activity Based Costing as a measure of improving the cost structure at Akash industries

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.

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Activity Based Costing as a measure of improving the cost structure at Akash industries

ANALYSIS

DETAILS OF THE PRODUCT


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Activity Based Costing as a measure of improving the cost structure at Akash industries 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 7) Gross Material cost per unit 8) Process Generated Scrap 9) Scrap rate = 30kg/21 =1.42kg = 1.42 x Rs55 = Rs78.1/Cover =0.65 kgs =Rs12/kg = Rs 6.5 11) Net material cost = 78.1 6.5 = Rs71.6

10) Revenue generated from scrap = 0.65 x 10

COSTING FOLLOWED BY THE COMPANY


Product: UC Range series 4 end cover Number of units produced = 300000 Covers p.a Babasabpatilfreeppt.com 36

Activity Based Costing as a measure of improving the cost structure at Akash industries

Particulars

Total cost(in Rs)

Cost/unit
(in Rs)

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Activity Based Costing as a measure of improving the cost structure at Akash industries DIRECT COST Direct Material (Raw Material Consumed) Direct Wages Direct Expenses Prime Cost FACTORY OVERHEADS fuel oil & lubricant Depreciation on machinery Repairs and maintenance Insurance Rates and Taxes Indirect material Factory cost ADMINISTRATIVE OVERHEADS Printing and stationary Postage and telegram Newspapers and magazines Professional charges Office furniture Leave with wages Telephone expenses Salary to partners Vehicle maintenance Sundry expenses Salary to staff Cost Of Goods Sold SELLING AND DISTRIBUTION Advertisement expenses Traveling expenses Sales Promotion expenses Packing charges Cost Of Sales PROFIT SALES 3,05,73,918 18,93,573 45,65,266 3,70,32,757
1,58,029 8,04,853 3,91,235 56,147 2,61,532 14,73,273

123.4

31,45,069
69,255 18,929 5,964 27,619 5,646 7,095 1,75,338 14,60,000 72,347 84,809 2,59,203

10.48

21,86,205
3,410 1,82,480 5,500 4,97,360

7.28

6,88,750 4,30,52,78 1 52,81,095 4,83,33,87 6

143.50 17.6 161.1

CALCULATION OF COST PER UNIT BY ACTIVITY BASED COSTING


1) Purchase of Raw material

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Activity Based Costing as a measure of improving the cost structure at Akash industries

a) Raw material transport charges : 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

Activity
Purchase

Sub Activity
Raw material transport Loading and unloading Storage Material cost

Cost Driver
Weight of product Weight of product Weight of product Weight of product

Therefore charges per unit Cost of per cover

= Rs600/5000kgs = Rs0.12/kg =1.42kg x Rs0.12 =Rs0.1704/cover

b) Loading and unloading Charges 5 Ton x Rs300 Therefore charges for per unit Cost per cover

= Rs300.00/ton = Rs1500.00 = Rs1500/5000kgs = Rs0.20/kg =1.42 x Rs0.20 =Rs0.284/cover

c) Storage charges Rent 20000/month Building area Storage Cost Storage cost per day

= space required 10 x 5ft = 10000sq ft =50sq ft x Rs2.00 =Rs100.00/- p.m =Rs100/26Days Babasabpatilfreeppt.com 39

Activity Based Costing as a measure of improving the cost structure at Akash industries =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 Purchase Sub Activity Raw material transport Loading and unloading Storage Material cost Total Cost Rs0.1704/cover Rs0.284/cover Rs0.00384/cover Rs 94.72/cover Rs95.17

2) Manufacturing cost

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Activity Based Costing as a measure of improving the cost structure at Akash industries

Process

labor Activity

Wages per day

Hours

Number Sub Activity of Shearing Covers Circleper 8 hrs cutting 8 1000 Deep drawing 8 800 Trimming 8 Piercing 800

Cost of

Hp per Space Activity Driver

Cost per sq ft Rs2 Rs 2

Manufacturing

Machine machine man and Combination of occupie machine hour d by the Combination of man and machine 500000 5 machine hour 100 sq ft Combination of man and machine hour 100000 0.5 50 sq ft Combination of man and machine hour Combination of man and 800000 7 machine hour 100sq ft 80sq ft 50 sq ft

Shearing Circle cutting Deep drawing Trimming Piercing

3 1

300/wor ker 150

150 &135

Rs 2

1 1

150 150

8 8

500 900

300000 400000

3 3

Rs 2 Rs 2

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 Babasabpatilfreeppt.com 41

Activity Based Costing as a measure of improving the cost structure at Akash industries =Rs166.6/1000Covers =Rs0.17/Cover c) Space occupied by the machine = Rs200 p.m = Rs200/26days =Rs7.69/day =Rs7.69/1000Covers =Rs 0.00769/Cover d) calculation of electricity Monthly electricity bill Therefore, Rs31,266/45hp = Rs694.8 per hp/ month = 31,266 Monthly power consumption = 45hp = 100 Sq ft x Rs 2 per sq ft

Power Consumption For 5hp = Rs694.8 x 5hp Electricity bill per month

= 5hp = Rs3,474 = 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

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Activity Based Costing as a measure of improving the cost structure at Akash industries =21.07/1000Covers =0.021/Cover

Total Cost of shearing activity Activity Shearing Sub Activity Man cover rate Machine cover rate Space occupied by the machine electricity Fuel oil & lubricants Total Cost Rs0.9/cover Rs0.17/cover Rs0.00769/cover Rs0.1336/cover Rs0.021/cover 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 the machine = Rs100 p.m Babasabpatilfreeppt.com 43 = 50Sq ft x Rs 2 per sq ft

Activity Based Costing as a measure of improving the cost structure at Akash industries = Rs100/26days =Rs3.84/day =Rs3.84/800Covers =Rs 0.0048/Cover e) calculation of electricity Monthly electricity bill Therefore, Rs31,266/45hp = Rs694.8 per hp/ month = Rs31,266 Monthly power consumption = 45hp

Power Consumption For 0.5hp = Rs694.8 x 0.5hp Electricity bill per month

= 0.5hp = Rs347.4 = 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

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Activity Based Costing as a measure of improving the cost structure at Akash industries Total Cost of circle cutting activity Activity Circle cutting Sub Activity Man cover rate Machine cover rate Space occupied by the machine electricity Fuel oil & lubricants Total Cost Rs0.1875/cover Rs0.0416/cover Rs0.0048/cover Rs0.0167/cover Rs0.026/cover 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 the machine = Rs200 p.m = Rs200/26days =Rs7.69/day =Rs7.69/800Covers Babasabpatilfreeppt.com 45 = 100Sq ft x Rs 2 per sq ft

Activity Based Costing as a measure of improving the cost structure at Akash industries =Rs0.0096/Cover d) calculation of electricity Monthly electricity bill Therefore, Rs31,266/45hp = Rs694.8 per hp/ month = Rs31,266 Monthly power consumption = 45hp

Power Consumption For 7hp = Rs694.8 x 7hp Electricity bill per month

= 7hp = Rs4863.6 = 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 Deep Drawing Sub Activity Man cover rate Babasabpatilfreeppt.com Cost Rs0.3562/cover 46

Activity Based Costing as a measure of improving the cost structure at Akash industries Machine cover rate Space occupied by the machine electricity Fuel oil & lubricants Total Rs0.333/cover Rs0.0096/cover Rs0.233/cover Rs0.026/cover 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 c) Space occupied by the machine = Rs160 p.m = Rs160/26days =Rs6.15/day =Rs6.15/500Covers =Rs 0.012/Cover d) calculation of electricity = 80Sq ft x Rs 2 per sq ft

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Activity Based Costing as a measure of improving the cost structure at Akash industries Monthly electricity bill Monthly power consumption Therefore, Rs31,266/45hp = Rs694.8 per hp/ month = Rs31,266 = 45hp

Power Consumption For 3hp = Rs694.8 x 3hp Electricity bill per month

= 3hp = Rs2084.4 = 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 Trimming Sub Activity Man cover rate Machine cover rate Space occupied by the machine electricity Cost Rs0.3/cover Rs0.125/cover Rs0.012/cover Rs0.16/cover

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Activity Based Costing as a measure of improving the cost structure at Akash industries Fuel oil & lubricants Total Rs0.042/cover 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 the machine = Rs100 p.m = Rs100/26days =Rs3.84/day =Rs3.84/900Covers =Rs 0.0042/Cover d) calculation of electricity Monthly electricity bill Therefore, Babasabpatilfreeppt.com 49 = Rs31,266 Monthly power consumption = 45hp = 50Sq ft x Rs 2 per sq ft

Activity Based Costing as a measure of improving the cost structure at Akash industries Rs31,266/45hp = Rs694.8 per hp/ month

Power Consumption For 3hp = Rs694.8 x 3hp Electricity bill per month

= 3hp = Rs2084.4 = 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 Piercing Sub Activity Man cover rate Machine cover rate Space occupied by the machine electricity Fuel oil & lubricants Total Cost Rs0.166/cover Rs0.148/cover Rs0.042/cover Rs0.089/cover Rs0.023/cover Rs0.468/cover

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Activity Based Costing as a measure of improving the cost structure at Akash industries

Activity
Manufacturing

Sub Activity
Shearing Circle cutting Deep drawing Trimming Piercing Total

Cost
Rs1.232/cover Rs0.2766/cover Rs 0.9578/cover Rs 0.639/cover Rs0.468/cover Rs3.5734/cover

Total Cost of the processes

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Activity Based Costing as a measure of improving the cost structure at Akash industries 3) Inspection Inspection rate 10% of number of units produced per day 1000Covers x 10% = 100Covers to be inspected 1) Salary of the inspector Time required to inspect Per day salary Per hour salary Wages to the inspector = Rs8000/month = 1 hour = Rs8000/26days =Rs307.69/day =Rs 307.69/8hRs = Rs 38.46/hr = 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 Per day charges Per hour charges = Rs8500/12months = Rs708.33/month = Rs708.33/26 days = Rs 27.24/day = Rs27.24/8hrs = Rs3.4/hr

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Activity Based Costing as a measure of improving the cost structure at Akash industries 3) Calibration charges per year Per month charges Per day charges Per hour charges = Rs900 = Rs900/12months = Rs75/month = Rs75/26days = Rs3/day = Rs3/8hr =Rs0.375/hr Total of inspection activity Activity Inspection Sub Activity Salary of the inspector instruments required to inspect Calibration Total Cost of Per Cover Cost Rs38.46/hr Rs3.4/hr Rs0.375/hr Rs42.23/hr Rs 0.0422/cover

4) Painting
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Activity Based Costing as a measure of improving the cost structure at Akash industries 1) Cost of paint and thinner Paint Rs250/ltr Thinner Rs150/ltr Divided in the ratio of 75:25 Cost of Paint Cost of Thinner Cost of mixture total = Rs250 x 75/100 =Rs 187.5 = Rs150 x 25/100 =Rs 37.5 = Rs187.5 + Rs37.5 = Rs225 Total Area of component covered by the mixture is 45 sq ft Area of the a component = 1.72 sq ft = 26Covers Cost of paint per cover =Rs225/ 26Covers = Rs8.6/Cover 2) Labour cost People required for painting Wages per day Covers painted in one day Cost per cover =2 = Rs 320 = 200 Covers = Rs320/200covers =Rs1.6/cover Covers that can be painted = 45sq ft/1.72sq ft

3) Paint booth operation cost Deprecation

= Rs300000

= 20% of the cost

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Activity Based Costing as a measure of improving the cost structure at Akash industries =Rs 300000 x 20% = Rs60000p.a Per month Per day Cost of per covers = Rs60000/12months =Rs5000p.m = Rs5000/26days = Rs192.3/day =Rs 192.3/200Covers =Rs0.961/Cover 4) Power charges Rs 5500/month Total Power consumption Therefore, Rs5500/20hp Power consumption For 5hp Per day charges Per cover charges =Rs275per hp/month =5hp =5hp x Rs275 = Rs1375/26days = Rs53/day =Rs53/200Covers =Rs0.265/Cover =20hp

Electricity bill per month for 5hp =Rs1375

5) Area of painting booth Rent Built area

= 60 x 20ft = 20000 p.m = 10000sq ft

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Activity Based Costing as a measure of improving the cost structure at Akash industries Rent per sq ft Cost of area Per day charges Per cover = Rs30000/10000sq ft = Rs3/sq ft/month = 1200sq ft x Rs3 = Rs 3600 =Rs3600/26 = Rs138.46/day =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 Activity Painting Sub Activity Cost of paint and thinner Labour cost Paint booth operation cost Power charges Area of painting booth Total Cost of Per Cover Cost Rs8.6 Rs1.6 Rs0.961 Rs0.265 Rs0.692 Rs12.11/sq ft 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 Babasabpatilfreeppt.com 56

Activity Based Costing as a measure of improving the cost structure at Akash industries 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 Wages per box Total Per Cover = Rs200 + Rs150 + Rs150 = Rs500/day = Rs500/5boxes = Rs100/box =Rs 3500 + Rs100 = Rs 3600 = Rs3600/200Cover =Rs18/Cover

Total of dispatching Activity Activity Despatching Sub Activity Packing charges labour Total Cost Per Cover COST PER UNIT OF THE PRODUCT Cost Rs3500 Rs100 Rs3600/box Rs18/Cover

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Activity Based Costing as a measure of improving the cost structure at Akash industries ACTIVITIES 1 2 PURCHASE OF RAW MATERIALS MANUFACTURING Shearing Circle cutting Deep drawing Trimming Piercing INSPECTION PAINTING DESPATCHING GRAND TOTAL Amount in Rs 1.232 0.2766 0.9578 0.639 0.468 Total COST/COVER Amt in Rs 95.017

3 4 5

3.5734 0.0422 19.90 18.00 136.68

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Activity Based Costing as a measure of improving the cost structure at Akash industries

FINDINGS

FINDINGS
1. Akash Industries are specialized in deep drawn components that cater the electrical, elevator, home appliances automobile industry and the defense. 2. Akash Industries follows traditional method of costing. 3. The product UC Range series 4 end cover is over costed.

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Activity Based Costing as a measure of improving the cost structure at Akash industries 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 Akash 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. Akash 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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Activity Based Costing as a measure of improving the cost structure at Akash industries

SUGGESTIONS

SUGGESTIONS
1. Akash 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.

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Activity Based Costing as a measure of improving the cost structure at Akash industries 5. Akash 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. Akash 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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Activity Based Costing as a measure of improving the cost structure at Akash industries

CONCLUSION

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.

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Activity Based Costing as a measure of improving the cost structure at Akash industries 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.

BIBLOGRAPHY
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Activity Based Costing as a measure of improving the cost structure at Akash industries

BIBLOGRAPHY

Books

1) COST ACCOUNTING for BUSINESS MANAGERS by Asish K Bhatacharyya. 2) COST ACCOUNTING by I M Pandey

Websites :

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