“activity based costing ' a project report @doms

Activity Based Costing

INDEX

Sr.No. CONTENTS Page No.1 Executive summary 1-22 Industry Profile 3-53 Organization profile 6-84 History of Akash Industries 9-125 Company at a glance 13-186 Research Methodology 19-217 Data Collection 22-238 Conceptual Framework 24-3310 Analysis 34-5711 Findings 58-5912 Suggestions 60-6113 Conclusion 62-6314 Bibliography 64-65

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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 (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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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.

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

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customers or as intermediate goods used in the production process.

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

industries use various technologies and methods widely known as manufacturing process

management. Manufacturing industries are broadly categorized into engineering industries,

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

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

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

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

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

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

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

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

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

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

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

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

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

it is not being able to compete in the world market. 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;

• Easier access to inputs at competitive prices and rationalization and reduction in duty

rates.

• Encouragement to foreign technology collaborations and liberalization of FDI in

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manufacturing activities.

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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.

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.

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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.

• IFB India

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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

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

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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 didn’t had the requisite finance. With the help of Mr. Inamdar’s,

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

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

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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.

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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COMPANY PROFILE1


COMPANY PROFILE

Name of the Organization : Akash Industries

Type of Industry : Manufacturing Industry.

Address : Akash Industries

M-15, Industrial Estate,

Udyambag, Belgaum – 590 008

Partners : S.T Macha

V.B Inamdar

M.V Inamdar

A.S Macha

Established : 1977

Size and nature of the company :

Sales

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FY08-09 : Rs48,333,876.81

Employees : 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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ORGANIZATION CHART

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Shop Incharge

Chief Accountant

Incharge Excise

Incharge Sales Tax

Managing partner 1 Managing partner 2

In charge QA/QC

CashierManagement

Representative

Deputy Management

Representative

Plant Supervisor 1


PRODUCTS MANUFACTURED BY 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.

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Plant supervisor 2

In charge stores

Workers


LIST OF CUSTOMERS

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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RESEARCH METHODOLOGY

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RESEARCH METHODOLOGY

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

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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

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 year’s balance sheet of Akash

Industries.

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¬ Books on cost accounting were referred.

¬ Company website

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.

CONCEPTUAL FRAMEWORK

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ACTIVITY BASED COSTING

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

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

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

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

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

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

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

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

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

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

Concept of Activity-Based-Costing:

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

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

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

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

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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.

• 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

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deliveries each uses.

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

process, job or customer.

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

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

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

Why use Activity-Based-Costing?

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

¬ Understand true profitability of your customers, products, or services

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

¬ Identify opportunities to reduce costs and/or increase efficiency

¬ Obtain actionable information to negotiate price increases for unprofitable

clients

¬ Stratify overhead costs so they can be managed more effectively.

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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

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

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VIEW

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

financial statements.

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.

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COST DRIVERS

ACTIVITIES PERFORMANCEMEASURES

RESOURCES

OBJECTSOF WORK

ACTIVITYDRIVERS

RESOURCEDRIVERS


ABC categorizes the activities into:

Unit level activities:

θ Performed each time a unit is produced.

θ Consumed in direct proportion to the number of units produced.

θ E.g. Direct materials, Energy costs, direct labour, etc.

Batch related activities:

θ Performed each time a batch of goods is produced.

θ Consumed in direct proportion the number of batches produced.

θ Fixed for all units within a batch.

θ E.g. set up resources, purchasing resources.

Product sustaining activities:

θ Performed to support and sustain different products/services on the product life

cycle.

θ Consumption varies with the variety of products/services and the stage of the Product

Life Cycle the products/services are in.

θ E.g. designing the product.

Facility sustaining activities:

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θ Performed for supporting the happening of the above three types of activities and

providing the platform/infrastructure.

θ These are generally fixed for a certain scale/scope of operations over a period of

time.

θ E.g. Administration, plant maintenance, accounting, etc.

θ 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

Sales Revenue

Less: Unit-level products cost

(Material, Power Costs, Other identifiable costs)

= unit level contribution

Less: Batch related costs

(Sets-ups, material movements, purchase orders, inspection)

= batch – level contribution

Less: Product line costs

(Process engineering, product specifications, order change notices)

= product line contribution

Less: Consumer and market related costs

= customer level contribution

Less: Facility sustaining cost

(Plant management , rent , rates, and taxes, etc.,)

= net profit

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.

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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.

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.

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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

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 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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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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ANALYSIS

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DETAILS OF THE PRODUCT

Product name: UC Range series 4 end cover

Raw Material Requirements for the product

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

2) Weight of the sheet is 30kg

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

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

5) Cost of sheet metal per kg 37Rs.

6) Weight of a Cover = 30kg/21

=1.42kg

7) Gross Material cost per unit = 1.42 x Rs55

= Rs78.1/Cover

8) Process Generated Scrap =0.65 kgs

9) Scrap rate =Rs12/kg

10) Revenue generated from scrap = 0.65 x 10

= Rs 6.5

11) Net material cost = 78.1– 6.5

= Rs71.6

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COSTING FOLLOWED BY THE COMPANYProduct: UC Range series 4 end cover

Number of units produced = 300000 Covers p.a

Particulars Total cost(in Rs)

Cost/unit(in Rs)

DIRECT COSTDirect Material (Raw Material Consumed) 3,05,73,918Direct Wages 18,93,573Direct Expenses 45,65,266Prime Cost 3,70,32,757 123.4FACTORY OVERHEADSfuel oil & lubricant 1,58,029Depreciation on machinery 8,04,853

Repairs and maintenance 3,91,235

Insurance 56,147

Rates and Taxes 2,61,532

Indirect material 14,73,273

Factory cost 31,45,069 10.48ADMINISTRATIVE OVERHEADSPrinting and stationary 69,255Postage and telegram 18,929Newspapers and magazines 5,964Professional charges 27,619Office furniture 5,646Leave with wages 7,095Telephone expenses 1,75,338Salary to partners 14,60,000Vehicle maintenance 72,347Sundry expenses 84,809Salary to staff 2,59,203Cost Of Goods Sold 21,86,205 7.28SELLING AND DISTRIBUTIONAdvertisement expenses 3,410Traveling expenses 1,82,480Sales Promotion expenses 5,500Packing charges 4,97,360 6,88,750

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Cost Of Sales 4,30,52,781 143.50PROFIT 52,81,095 17.6

SALES 4,83,33,876 161.1

CALCULATION OF COST PER UNIT BY ACTIVITY BASED COSTING

1) Purchase of Raw material

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

Therefore charges per unit = Rs600/5000kgs

= Rs0.12/kg

Cost of per cover =1.42kg x Rs0.12

=Rs0.1704/cover

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

5 Ton x Rs300 = Rs1500.00

Therefore charges for per unit = Rs1500/5000kgs

= Rs0.20/kg

Cost per cover =1.42 x Rs0.20

=Rs0.284/cover

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Activity Sub Activity Cost DriverPurchase Raw material transport Weight of product

Loading and unloading Weight of productStorage Weight of productMaterial cost Weight of product


c) Storage charges = space required 10 x 5ft

Rent 20000/month

Building area = 10000sq ft

Storage Cost =50sq ft x Rs2.00

=Rs100.00/- p.m

Storage cost per day =Rs100/26Days

=Rs3.84/day

Storage cost per Cover =Rs3.84/1000Covers

=Rs0.00384/cover

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

transport and loading and unloading

charges)

= Rs3,56,400

=5000kgs/1.42wt per kg

=3521 Covers

=Rs3,56,400/3521 Covers

=Rs101.22 – scrap

=Rs101.22– Rs6.5

=Rs94.72/cover

Total cost incurred for purchase of raw material

Activity Sub Activity CostPurchase Raw material transport Rs0.1704/cover

Loading and unloading Rs0.284/coverStorage Rs0.00384/cover

Material cost Rs 94.72/cover Total Rs95.17

2) Manufacturing cost

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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

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Activity Sub Activity Activity DriverManufacturing Shearing Combination of man and

machine hourCircle cutting Combination of man and

machine hourDeep drawing Combination of man and

machine hourTrimming Combination of man and

machine hourPiercing Combination of man and

machine hour

Process labor Wages

per day

Hours Number

of

Covers

per 8 hrs

Cost of

Machine

Hp per

machine

Space

occupie

d by the

machine

Cost

per sq

ft

Shearing 3 300/wor

ker

8 1000 500000 5 100 sq ft Rs2

Circle

cutting

1 150 8 800 100000 0.5 50 sq ft Rs 2

Deep

drawing

2 150

&135

8 800 800000 7 100sq ft Rs 2

Trimming 1 150 8 500 300000 380sq ft Rs 2

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


=Rs166.6/1000Covers

=Rs0.17/Cover

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

the machine

= Rs200 p.m

= Rs200/26days

=Rs7.69/day

=Rs7.69/1000Covers

=Rs 0.00769/Cover

d) calculation of electricity

Monthly electricity bill = 31,266

Monthly power consumption = 45hp

Therefore,

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

Power Consumption = 5hp

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

Electricity bill per month = Rs3474.00

= Rs3474/26days

=133.61/day

=133.61/1000

=Rs0.1336/Cover

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

= Rs 158028/ 300days

= Rs 526.76/day

= Rs 526.76/25machines

=Rs21.07/machine

=21.07/1000Covers

1


=0.021/Cover

Total Cost of shearing activity

Activity Sub Activity CostShearing Man cover rate Rs0.9/cover

Machine cover rate Rs0.17/coverSpace occupied by the

machine

Rs0.00769/cover

electricity Rs0.1336/coverFuel oil & lubricants Rs0.021/cover

Total Rs 1.232/cover

2. Circle cutting

a) Man cover rate =wages/number of Covers

= Rs150/800Covers

=Rs0.1875/Cover

b) Machine cover rate =Rs100000 x 10% depreciation

=Rs10000 p.a

=Rs 10000/300days

=Rs33.33/per day

=Rs33.33/800Covers

=Rs0.0416/Cover

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

the machine

= Rs100 p.m

= Rs100/26days

1


=Rs3.84/day

=Rs3.84/800Covers

=Rs 0.0048/Cover

e) calculation of electricity

Monthly electricity bill = Rs31,266


Therefore,


Power Consumption = 0.5hp

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


= Rs347.4/26days

=13.36/day

=13.36/800Covers

=Rs0.0167/Cover


= Rs 158028/ 300days

= Rs 526.76/day


=Rs21.07/machine

=21.07/800Covers

=0.026/Cover

Total Cost of circle cutting activity

1


Activity Sub Activity CostCircle cutting Man cover rate Rs0.1875/cover


machine

Rs0.0048/cover


Total Rs0.2766/cover

3. Deep drawing

a) Man hour rate =wages/number of Covers

= Rs285/800Covers

=Rs0.3562/Cover

b) Machine hour rate =Cost of machine x Depreciation


=Rs80000 p.a

= Rs80000/300days

=Rs266.67/per day

=Rs266.67/800Covers

=Rs0.333/Cover


the machine

= Rs200 p.m

= Rs200/26days

=Rs7.69/day

=Rs7.69/800Covers

=Rs0.0096/Cover

1





Therefore,



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


= Rs4863.6/26days

=187.06/day

=187.06/800Covers

=Rs0.233/Cover


= Rs 158028/ 300days

= Rs 526.76/day


=Rs21.07/machine

=21.07/800Covers

=0.026/Cover

Total Cost of deep drawing activity

Activity Sub Activity CostDeep Drawing Man cover rate Rs0.3562/cover

Machine cover rate Rs0.333/coverSpace occupied by the Rs0.0096/cover

1


machineelectricity Rs0.233/cover

Fuel oil & lubricants Rs0.026/cover Total Rs 0.9578/cover

4. Trimming

a) Man hour rate =Wages/number of Covers

= Rs150/500Covers

=Rs0.3/Cover

b) Machine hour rate =Cost of machine x depreciation


=Rs30000 p.a

= Rs30000/300days

=Rs100/per day

=Rs100/500Covers

=Rs0.2/Cover


the machine

= Rs160 p.m

= Rs160/26days

=Rs6.15/day

=Rs6.15/500Covers

=Rs 0.012/Cover




Therefore,

1




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


= Rs2084.4/26days

=80.16/day

=80.16/500Covers

=Rs0.16/Cover


= Rs 158028/ 300days

= Rs 526.76/day


=Rs21.07/machine

=21.07/500Covers

=0.042/Cover

Total Cost of trimming activity

Activity Sub Activity CostTrimming Man cover rate Rs0.3/cover


machine

Rs0.012/cover


Total Rs 0.639/cover

1


5. Piercing

a) Man hour rate

=Rs 150/900Covers

=0.166/Cover

b) Machine hour rate =400000 x 10% depreciation

=40000 p.a

= 40000/300days

=133.33/per day

=133.33/900Covers

=0.148/Cover


the machine

= Rs100 p.m

= Rs100/26days

=Rs3.84/day

=Rs3.84/900Covers

=Rs 0.0042/Cover




Therefore,


1



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


= Rs2084.4/26days

=80.16/day

=80.16/900Covers

=Rs0.089/Cover


= Rs 158028/ 300days

= Rs 526.76/day


=Rs21.07/machine

=21.07/900Covers

=0.023/Cover

Total Cost of piercing activity

Activity Sub Activity CostPiercing Man cover rate Rs0.166/cover


machine

Rs0.042/cover


Total Rs0.468/cover

1


Total Cost of the processes

3) Inspection

Inspection rate 10% of number of units produced per day

1000Covers x 10% = 100Covers to be inspected

1

Activity Sub Activity Cost

Manufacturing Shearing Rs1.232/coverCircle cutting Rs0.2766/coverDeep drawing Rs 0.9578/cover

Trimming Rs 0.639/coverPiercing Rs0.468/cover

Total Rs3.5734/cover


1) Salary of the inspector = Rs8000/month

Time required to inspect = 1 hour

Per day salary = Rs8000/26days

=Rs307.69/day

Per hour salary =Rs 307.69/8hRs

= Rs 38.46/hr

Wages to the inspector = 1hr x Rs38.46

= Rs38.46/hr

2) Cost of instruments required to inspect = Rs 8500

Expected life of instrument is one year

Instruments charges per month = Rs8500/12months

= Rs708.33/month

Per day charges = Rs708.33/26 days

= Rs 27.24/day

Per hour charges = Rs27.24/8hrs

= Rs3.4/hr

3) Calibration charges per year = Rs900

Per month charges = Rs900/12months

= Rs75/month

Per day charges = Rs75/26days

1


= Rs3/day

Per hour charges = Rs3/8hr

=Rs0.375/hr

Total of inspection activity

Activity Sub Activity CostInspection Salary of the inspector Rs38.46/hr

instruments required to

inspectRs3.4/hr

Calibration Rs0.375/hr Total Rs42.23/hr Cost of Per Cover Rs 0.0422/cover

4) Painting

.

1) Cost of paint and thinner

Paint Rs250/ltr

Thinner Rs150/ltr

Divided in the ratio of 75:25

Cost of Paint = Rs250 x 75/100

1


=Rs 187.5

Cost of Thinner = Rs150 x 25/100

=Rs 37.5

Cost of mixture total = 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

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

= 26Covers

Cost of paint per cover =Rs225/ 26Covers

= Rs8.6/Cover

2) Labour cost

People required for painting = 2

Wages per day = Rs 320

Covers painted in one day = 200 Covers

Cost per cover = Rs320/200covers

=Rs1.6/cover

3) Paint booth operation cost = Rs300000

Deprecation = 20% of the cost

=Rs 300000 x 20%

= Rs60000p.a

Per month = Rs60000/12months

=Rs5000p.m

Per day = Rs5000/26days

= Rs192.3/day

1


Cost of per covers =Rs 192.3/200Covers

=Rs0.961/Cover

4) Power charges Rs 5500/month

Total Power consumption =20hp

Therefore,

Rs5500/20hp =Rs275per hp/month

Power consumption =5hp

For 5hp =5hp x Rs275

Electricity bill per month for 5hp =Rs1375

Per day charges = Rs1375/26days

= Rs53/day

Per cover charges =Rs53/200Covers

=Rs0.265/Cover

5) Area of painting booth = 60 x 20ft

Rent = 20000 p.m

Built area = 10000sq ft

Rent per sq ft = Rs30000/10000sq ft

= Rs3/sq ft/month

Cost of area = 1200sq ft x Rs3

= Rs 3600

Per day charges =Rs3600/26

= Rs138.46/day

Per cover =Rs138.46/200Covers

1


= 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 Sub Activity CostPainting Cost of paint and thinner Rs8.6

Labour cost Rs1.6 Paint booth operation cost Rs0.961

Power charges Rs0.265Area of painting booth Rs0.692

Total Rs12.11/sq ft Cost of Per Cover Rs20.82/cover

5) Dispatching

1) Packing charges :

Packing material required: ---

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

Cost of plastic wire = Re 1.50/Cover

Cost of paper = Re1.00/Cover

Number of Covers packed per box = 200 covers

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

2) labour

People required = 3

5 boxes packed per day

Wages = Rs200 + Rs150 + Rs150

1


= Rs500/day

Wages per box = Rs500/5boxes

= Rs100/box

Total =Rs 3500 + Rs100

= Rs 3600

Per Cover = Rs3600/200Cover

=Rs18/Cover

Total of dispatching Activity

Activity Sub Activity CostDespatching Packing charges Rs3500

labour Rs100 Total

Cost Per Cover

Rs3600/boxRs18/Cover

COST PER UNIT OF THE PRODUCT

1

ACTIVITIESAmount

in Rs

COST/COVER

Amt in Rs1 PURCHASE OF RAW MATERIALS 95.0172 MANUFACTURING

Shearing 1.232Circle cutting 0.2766Deep drawing 0.9578Trimming 0.639Piercing 0.468

Total 3.57343 INSPECTION 0.04224 PAINTING 19.905 DESPATCHING 18.00

GRAND TOTAL 136.68


FINDINGS

1


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.

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.

1


SUGGESTIONS

1


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.

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

1


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.

CONCLUSION

1


CONCLUSION

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

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

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

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

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

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

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

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

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

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

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

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

by almost any factor you can think of.

1


BIBLOGRAPHY

1


BIBLOGRAPHY

¬ Books : 1) COST ACCOUNTING for BUSINESS MANAGERS by Asish K Bhatacharyya.

2) COST ACCOUNTING by I M Pandey

1