38459821 project report on capital budgeting

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PROJECT REPORT ON CAPITAL BUDGETING OF

HINDUSTAN AERONAUTICS LIMITED IN HELICOPTER

DIVISON

INTRODUCTION

Company Mission

“To become a globally competitive aerospace industry while working as

an instrument for achieving self-reliance in design, manufacture and

maintenance of aerospace defence equipment and diversifying to related

areas, managing the business on commercial lines in a climate of

growing professional competence ".

Hindustan Aeronautics Limited (HAL) came into existence on 1st October 1964. The

Company was formed by the merger of Hindustan Aircraft Limited with Aeronautics India

Limited and Aircraft Manufacturing Depot, Kanpur.

The Company traces its roots to the pioneering efforts of an industrialist with extraordinary

vision, the Late Seth Walchand Hirachand, who set up Hindustan Aircraft Limited at Bangalore

in association with the erstwhile princely State of Mysore in December 1940. The Government

of India became a shareholder in March 1941 and took over the Management in 1942.

The Aircraft manufacturing programmers were abandoned a year later in favour of

overhaul and repair of aircraft to support the IInd World War effort. The company was handed

over to US Air force in September 1942. HAL served as the principal overhaul base for the

South Asia Command of the Allied forces in the Second World War. About 1000 aircrafts and

piston engines were repaired and overhauled during 1942-1945.

Now, HAL is a leading public sector organization coming under the ministry of defence,

Government of India, with 16 Production Units and 9 Research and Design Centers in 7 locations in

India and is one of the largest aerospace complexes in Asia and fourth largest aircraft

manufacturer in the world. It is one of the few corporate giants in Asia whose capabilities span the

entire range of activity from product conception to after sale support. The Company has an

impressive product track record - 12 types of aircraft manufactured with in-house R & D and 14

types produced under license.



It is pride of honor for the HAL, as it was conferred with “NAVARATNA” status in

the year 2007. Last year, an US based popular magazine Defence News released the list of Top

100 Defence Companies in the World with HAL shining at 34 th rank, climbing 11 notches up as

compared to the last year. HAL has been assessed as an “Excellent” company under the MOUcriteria of the Govt. of India for the 8th year in succession. It has also been the recipient of the

“Top Exporters Shield” from EEPC (Engineering Export Promotion Council) for the Eighth

consecutive year.

HAL has made substantial progress in its current projects like:

• Dhruv, which is Advanced Light Helicopter (ALH)

•

Tejas- Light Combat Aircraft (LCA),• Intermediate Jet Trainer (IJT) and

• SUKHOI - 30

• Various military and civil upgrades.

• Light Combat Helicopter (LCH)

HAL divided into four parts

HINDUSTAN AERONAUTICS LIMITED has 4 complexes.

Accessories

Complex

Bangalore

Complex

HAL

Design

Complex

MIG & Sukhoi

Complex



• Design complex is complex is in Bangalore

• Accessories complex is in Lucknow, Korwa, Hyderabad and Kanpur

• Bangalore complex is in Bangalore

• MIG and Sukhoi complex is in Nasik and Koraput

Bangalore complex has six divisions and one service center that are:

• Aircraft Division

• Overhaul Division

• Aerospace Division

• Engine Division

• Foundry and Forging Division

• Industrial and Marine Gas Turbine Division

Design Complex has following divisions:

• Rotary Wing Research & Design Centre (RWRDC)

• Aircraft Research & Design Centre (ARDC)

• Composite Material Division (CMD)

• Helicopter Division

• In addition to above, Maintenance Repair & Overhaul (MRO) Division was established

to cater to the Repair and servicing needs of ALH helicopters already delivered to

various customers.



ABOUT HELICOPTER DIVISION

The beginning of the manufacture of Helicopters in HAL dates back to June 1962, when

the license agreement was signed with M/s. SNIAS (formerly M/s. SUD Aviation). The first

firm order for 60 Chetak Helicopters (Alouettee-III) was placed by IAF in January 1965 and

the first Chetak received in ‘Fly Away’ condition was delivered to IAF in December 1965. The

deliveries of Chetak Helicopters manufactured from raw materials commenced during 1969-

1970.

In the initial stages of Helicopter manufacturing except for assembly departments, all

other shops were common with the Aircraft Division. Consequent to the re-organization of

Bangalore Complex, a separate division for manufacture of Helicopters was established in July

1970.

Construction work for the establishment of a separate factory for Helicopter production

was commenced on 9th March 1972 at the new site. The physical shifting of the factory from

Aircraft Division to its new location planned and built to suit Helicopter



production was effected between May and July 1974. Formal inauguration of Helicopter

Division took place on 19th July 1974 by Shri V.V. Giri, President of India.

Helicopter division is broadly classified into following functional area, likemanufacturing shops, product quality assurance, integrated material management, sub contract

management services, personal and administration, computer, finance, accounts and marketing.

The division has sophisticated and advanced manufacturing facilities backed up by tool design,

quality control and product support departments.

Indian Air force, Indian Army, Indian Navy, Indian Coast Guard, civil operators like

ONGC are customers in our country. The division has also exported helicopters to countries

like the USSR, Nepal, Bangladesh, Seychelles, Mauritius, and Myanmar. The Chetak and

Cheetah helicopters are well-established helicopters in the Indian as well as export markets.

The division is engaged in series production of multi roles, multi mission, and medium weight

class helicopter named Advanced Light Helicopters (ALH).



ORGANISATION CHART – HELICOPTER DIVISION

FINANCE & ACCOUNTS DEPARTMENT

CHART NO. 4

Chief Manager

(Finance)

Senior Manager

(Finance)

Senior Manager

(Finance)

Manager

(Book

Keeping)

DY.Manag

er

(Finance &

DY.Manag

er(Payroll)

Manager

(Bills

Receivables

Officer

Manager

(Bills Payable

Manager (Bills

Payable

-Foreign)

DY.Manager(Material

Accounts)

DY.Manager

(Costing)

One Deputy Managers for each Section

One Finance Officer / Asst. Finance Officer for each Section

STAFF IN EACH SECTION OF FINANCE & ACCOUNTS DEPT.



FINANCE AND ACCOUNTS DEPATMENT

One of the very important Departments of Helicopter Division is a Finance and

Accounts Department. This department takes care of all the works to be done before and after

the production. Chief Manager (Finance) heads all the sections in this department; and he is

answerable to General Manager, Deputy General Manager and Executive Director.

CSD gets the project or orders from the customer, and then IMM department plans and

procures the materials as per the requirements of the orders/projects from various suppliers.

Production department performs the needed work to complete the order/project successfully.

All the monetary dealings with the suppliers to the ultimate customers are taken care by

the Finance and Accounts Department. This department is sub-divided in 8 sections. Each

section has its own role to play in controlling the money flow in a project from getting a project

to delivering the product to customer fulfilling his requirements. The sections of Finance and

Accounts departments are:

• Finance or Auditing.

• Bills payable – Local.

• Bills payable – Foreign.

• Bills receivable.

• Book-keeping.

• Material accounting.

• Costing.

• Payroll.

FINANCE OR AUDITING SECTION:

Audit section is like a check-post for all the transactions where the control over money

flow is needed, so that wastage of material etc can be controlled and the company can be saved

form losses. The auditing sections functions in such a way that they always consider the

following: Compliance with Companies Act: Relevant rules and regulations of the company:

General policy lay down by the board.



Senior manager heads this section. The main functions of this section are:

• Scrutiny of purchase proposals, as per the Delegation of Powers, to ensure that

the expenditure is incurred with due regard to general principles of financial property.

• To check the financial concurrence of proposals for capital and revenue

expenditure, purchase of materials, manpower requirements, incentives, waiver of dues

to the companies, write-off of losses, cases involving relaxation of rules etc.

• Fixation of rent and rates of recovery in respect of services/ supplies/disposals

by the company.

• Certification of availability of funds with reference to capital and performance

budgets, and appropriation of funds for procurement of required capital items /

equipments, undertaking capital works administrative approvals and procurement of

revenue items.

BILLS PAYABLE (LOCAL) SECTION:

This section deals with the aspects of bills payable for the services rendered by the

local or inland suppliers. Helicopter division procures 5% of its total materials indigenously

from the indigenous materials. Hence all the payments, as per the terms and conditions, pre-

determined and agreed by both of them (HAL and inland suppliers) is taken of by the bills

payable (Inland) section.

Senior manager heads this section. The Bills payable – inland deals with the aspects

like:

• Payments and accounting of advances to suppliers and other vendors

• Payment and accounting of final bills

• Reconciliation of all receipts and payments that are done through bank.

• Adjustment / recovery of advances

• Accounting / adjustment of earnest money and security deposits from the

suppliers.

• Maintenance of commitment registers of budgetary purpose.

All the payments are made as per the purchase orders, after considering checking the

relevant documents and after an approval from the auditing section.



The payment terms are: documents through banks, cheque against delivery, advance

payments, payments after receipts and acceptance.

BILLS PAYABLE (FOREIGN) SECTION:

The materials procured by HAL comprises of 80% - 95% imported material procured

from the foreign vendors all over the world. In view of the huge payments to foreign vendors,

helicopter division felt the need of a separate section to look after the transactions and

payments to foreign vendors, alone.

Senior manager heads this section. This section deals with the aspects of suppliers and

services rendered to the company, by foreign vendors like:

•Payment and accounting of contractual fees and advances to the suppliers and to

services obtained from collaborators and others.

• Payment and accounting of final bills

• Opening of letter of credit and dealings with banks for obtaining foreign

exchange release and payment thereof.

• Maintenance of deferred liabilities accounts and commitment registers for

budgetary purpose.

The mode of payment to the foreign supplier/contractors is in their respective

currencies through sight drafts, letter of credit, direct payment and demand draft. The payment

terms / conditions are: advance payments, payment after receipt and acceptance of goods,

payment after delivery and payment through bank.

BILLS RECEIVABLE SECTION:

HAL is a company, which services customers by manufacturing / overhauling /servicing / repairing the aircrafts and supply of spares. Hence has an income to be claimed or

received from the customers, to whom it services. This section deals with receiving of the

payments from the customers, for supplies and service rendered by HAL.

The main function of this section is:

• Scrutiny of sale orders including export sales.

•

Preparation of invoices for work done / to be done and service rendered• Review of closed work order for which invoices have not been prepared.



• Recording of invoices rendered

• Accounting for sale of equipment and services rendered.

• Compilation of sale tax returns and payments of sales tax.

• Pricing the services or supplies provided by HAL to the customers, as per FPQ

price list.

The final invoices raised against manufacturing /overhauling/ repair/ servicing of

notables or equipments are based on Form 530, at the approved fixed price quotation price; and

on Cost Plus basis. The supply of spares is based on price catalogue prices.

The payment term depends on the type of invoices raised i.e., the invoice is based on

cost plus or FPQ pricing.

BOOK KEEPING SECTION:

Booking keeping is the traditional way of writing down all the expenses and incomes

incurred by the division during a financial year. All the other sections are liable to book

keeping, to keep track of all the transactions and inflows of money.

Senior manager heads book keeping section. The main aspects of this section:

• Maintenance of journal and general ledger.

• Preparation of trial balances, profit and loss account and balance sheet.

• Maintenance of capital assets ledgers and location ledgers.

• Furnishing data for determining of income tax liability

• Disposal of surplus/condemned plant and machinery and other assets.

• Reconciliation of control accounts of other divisions/corporate office

• Liaison with audit authorities.

After finishing all these formalities of preparing P&L accounts and balance sheets,

helicopter division has to submit a divisional annual report to the corporate office, to prepare

the final HAL annual accounts report, after a thorough auditing.



MATERIALS ACCOUNTS SECTION:

The material accounts section maintains the material ledger and other relevant ledgers

for the material purchase occurred during a year. This section accounts the costs of materials

consumed from the stores and the costs of materials rejected and other materials relevant costs,

verifying various issue vouchers and material procurement documents/bills.

Senior manager heads the material accounts section. The main functions of this

section are:

• Maintenance of material ledger cards for all material held in stores, which

contains an account for every item of the stores and makes a record of the receipts,

issues and the balances both in quality and value.

• Accounting of the receipts of all the materials by various classes and issues of

all materials drawn on work orders and expenses account.

• Reconciliation of the balances with the general ledger.

• Quality reconciliation bin card balances with material ledger balances.

• Scrutiny of slow moving, non-moving, and redundant inventory

• Accounting of interdivisional transfers of material and its reconciliation.

• Raising debt advises against contractors and others for materials issue/sold or

accounting thereof.

• Maintenance of loan registers for materials issued on loan and follow up for return.

COSTING SECTION:

The helicopter division’s costing section mainly deals with the cost of materials of

ALH, cheetah and Chetak and with the cost of repairs and overhaul of cheetah and Chetak. Full

pledged cost accounting system is essential for effective cost monitoring and cost control.

Deputy Manager heads this section, which is directly under the chief manager of

finance department. The main function of the costing section is determined the cost incurred in

the production/servicing/ repairs etc., works done in the division. Costing section looks after

the pricing methods adopted by the helicopter division, for pricing the material and Labour

used for performing the projects.



The accounting procedure of this section is as such. Based on the work orders and time

dockets all the relevant information relating the costing are codified and entered into the

computer and the computer generated the Labour cost journal and material cost journal. This is

generated from the computer on monthly basis.

Based on the Labour cost journal and material cost journal cost ledgers are prepared

manually with the information like Labour hours, Labour cost, material cost, sundry direct

charges and the total cost.

PAYROLL SECTION:

By the name it is evident that this section looks after the payment of salaries,

wages, loans, medical activities etc. payroll section is responsible for all statutory dues

recovered from employees salaries/wages, employees attendance and leave particulars and thus

his pay for each month, recoveries like LTC, bonus etc, deductions and many other details

related to the employees.

Senior manager heads this section. All the below given information are entered in

computer. The main functions of this section are:

• Recording attendance of each employee with an intelligence data capturing

system

• Receipt of approved leave applications and maintenance of leave records and

feeding of attendance data to computer with reference to the documents received.

• Disbursement of salaries and wages.

• Payment and recovery of advances, loans etc.

• Recovery of dues from the employees

• Payment pf travel and LTC advances and adjustments there of

• Reimbursement of amounts recovered from the employees to various agencies.

• Accounting of all payroll transactions.

• Maintenance of employee rate cards.



INTRODUCTION TO BUDGETING SYSTEM IN HAL

BUDGET PERIOD

The budget period is the financial year commencing from April to March.

In HAL the budgetary exercise will commence in mid June at divisional /complex levels.

The Budget is projected in a two-year time covering the estimates for

• Current Year (RE)

• Budget Year (BE)

Current Year (RE)

Revised Estimates (R.E) represents Projections under current year. Estimates will be

revised considering the Budgeted projections approved in the previous year for the current year

and actual for the first five or six months of current year.

Budget Estimates (BE)

Budgeted Estimate represents Projections for succeeding year to the RE current year. In

the process of budgeting, it is essential that the concerned managers in charge of production

and support Departments are involved from the very beginning of the preparation of the

budgets to the point of finalization.

This type of root budgeting is essential so that all the managers who initiate and incur

expenditure in respect of activities included in the budget will be involved and they feel

responsible for achievement of the physical and monetary targets laid down for them in the

budgets and thus the process of monitoring and review will be facilitated.

Types of budgets

The Budget is classified into two types, based on the nature of the expenditure.

They are:

Capital Budget -- A plan for creation of facilities

Performance Budget -- For setting the targets for performance.



Budget committee

The budgeting, monitoring and review is a continuous process. It is therefore essential

that there is a specific group to supervise the preparation and submission of budgets at

appropriate times, monitoring and review of budgets at periodical intervals either monthly or

quarterly. For this purpose, a Budget committee is constituted in the Division.

Generally, Budget committee consists the representatives of the following groups under

the Head of General Manager.

Production Planning

Project Management

Product Assembly

Finance

Purchase

Personal & Administration

IT and Stores

CAPITAL BUDGETING IN HAL

Introduction

The company will have a long term perspective plan of not less than five years, spelling

out their production and allied resources for the on-going projects and for the possible new

lines. The Budget meant for this type of facilities is called as capital budget. In other words,

this budget is for planning of the commitments for the various capital facilities, i.e. Land and

Development, Road and Drains, Water Supply, Buildings, Plant and Machinery, Furniture and

Equipment, Transport Vehicles and other infrastructure services need to achieve the

performance objectives. All the above capital expenditure requirements are shown separately

for different projects under different activities. The capital budget will be prepared both for

customer funded project as well as company-funded projects.



Activities in capital budgeting

Following are the different types of activities in respect of which the capital budget will

be prepared

• New Projects

• Existing Projects

• Improvements/ Rationalization

• Replacement

• Welfare

• Design and Development

• IT Plan

Preparation of the Capital budget is the responsibility of the Finance Section of the

Accounts Department of the Division.

Capital budget projections

• They are projected for a time frame covering

• Revised Estimate: Projections for current year

• Budget Estimates: Projections for coming Year

Capital budget- coverage

Sanctions

In this head approvals for creation of facility will be projected on the basis of facilities.

It covers existing sanctions, addition/ deletions and fresh sanctions.

Commitments

In this head commitments made against facilities head will be projected.

Expenditure

It is a head in which incurrence of actual expenditure incurred against each facility headwill be projected.



Capital budget – selection criteria or techniques

• Capacity Utilization

• Cost Benefit Analysis

• Implication on Manpower-savings

• Return on Investment

• Discounted Cash Flow Techniques

Capital budget – funding

• Internal resources

• Term loans

• Funds from customer

Procedures in capital budget proposal & appraisal

• Preamble & general information of the capital budget, Reasons for preparing

the capital budget heads

• Budget Heads.

• Codification of budget heads and projects.

• Existing sanctions.

• Fresh sanctions.

• Savings and surrender.

• Justifications.

• Category of capital items.

• Commitment plans.

• Expenditure plans.



• Board approval.

• Monitoring of commitments and expenditures.

Preamble & General information of the capital budget, Reasons

for preparing the capital budget heads

• Capital budget is prepared every year.

• Organization structure & activities are considered while preparing Capital

Budget.

• Items required for timely execution of projects and smooth operation of the

company are considered.

• Reference of earlier approved items is considered while according fresh

sanctions.

• Capacity utilization of machines is taken in to account.

Budget Heads

• New projects

• Existing projects

• Improvements & rationalizations

• Replacements

• Welfare

• Information Technology

• Customer funded projects

Codification of budget heads and projects

• Codification of divisions/complexes/CO/HAL

• Group wise codification



• Category wise codification

• Project wise codification

Existing sanctions

• Closing sanction of last year will be the opening sanction of the

• Current year.

• Sanction for non project items will lapse after three years from

• the year of sanction.

•Items fully committed and expended could be deleted from the budget

• for non-project items.

Fresh sanctions

• New items added in the budget first time.

• Additional sanction required for existing items.

• PRC reference for all items projected under

• replacement head.

• Specific sanction accorded by the board.

• Regularization of emergency sanctions

• items Rs.2 crs. and above will not be projected

Savings and surrender

• No negative value should appear in the budget.

• Reasons of savings/surrender to be analyzed.



• Savings/surrender on existing items could be utilized for fresh items within the

overall project sanction or within same category code.

Justifications

• Basis of cost estimate

• Basis of working of the estimates

• Capacity utilization

• Firmness of the estimation

• Reasonableness of the factors of escalation

• Incidence of duties and taxes

• Mode of financing

• Recovery of the investment

• Items of revenue nature will not be projected

• Item wise detail justification of all fresh items and incremental sanctions

projected in the budget.

• Cost benefit analysis for plant & machinery items above Rs.1 cr each

• Total projections under IR, replacement, welfare, IT are within the overall

ceiling circulated by CO based on internal generation

•

Clear approval is required for customer funded items



Category of capital items

• Land & development

• Roads and drains

• Works & services

• Buildings

• Machinery & equipment

• Furniture

• Transport vehicles

Commitment plans

• Commitments plans are allowed only for RE and BE

• RE commitments are compared with actual

• Postponing of commitments will be taken up with the impact on project

schedule

• Certification of outstanding commitments by System Audit

Expenditure plans

• Capital expenditure plan is spread over RE and BE

• Planned expenditure is tide up with the capital expenditure plan approved in the

Performance budget

Board approval

• Preparation of board paper

• Information on internal generation



• Schedule of sanctions

• Schedule of savings/surrender

• Justifications

Monitoring of commitments and expenditures

• Monthly commitments and expenditure plan is prepared

• Monitoring is done with respect to plan vs. actual

• Reason for non commitments analyzed and reported

SUMMARY AND CONCLUSIONS

Importance of Budgeting to any organization was analyzed by scanning through the

important theoretical concepts relating to Budget.

It was firmly understood that Budget reflects not only the Plan of Action for different

levels of Management, but are also widely used as a target for monitoring the activities of the

Company and initiating midcourse corrective action.

It was understood from the above Report that budgeting is a comprehensive system of

planning and control, covering all segments of the Company. And that the budget should be

such that it makes it imperative for management to establish goals and objectives, define

policies, develop programs, and allocate resources, measure performance against the targets

and in the process, revise the objectives and policies, if found necessary.

Overview of HAL was briefly narrated in the Report.

Budgeting System in HAL was analyzed in the report in detail. Budget period in HAL,

Concepts of RE & BE are understood through this report.

Detailed Analysis of Capital Budget and Performance Budget have been analyzed in

detail covering the formats used in each case also.



The importance of Budget Committee in preparation of Budgets, the members in that

committee along with their activities etc are analyzed through the report.

On review of Budgetary Control System it was understood that the exercise of

budgetary control system mainly focuses with Production Budget and Projected Profit & Loss

A/c, Balance Sheet, Ways & Means Budget. And various MIS reports are prepared and

submitted to Top Management, which in turn ensures the effective budgetary control system

existing in HAL.

HAL being an organization having more than 33,000 persons being employed and

involved in all diversified areas of aerospace Industry from Designing of Aircraft/Helicopter to

MRO of Aircraft/Helicopter, Budgeting exercise can’t be taken lightly.

It is therefore essential that the budgets are prepared with attention and care and reflect

reasonably accurate program of activities. They should also be synchronized with the physical

activities and programmes and the accounts of the Company.

To conclude

•

HAL is having very good Budgeting system.

• As no separate section is available for this Budget, it is recommendable to have

a Budget wing allotted for effective budgetary control system.

38459821 project report on capital budgeting

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