A project report on activity based costing as a measure of improving the cost structure

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

INDEX
Sr.No. CONTENTS Page No.
1 Executive summary 1-2
2 Industry Profile 3-5
3 Organization profile 6-8
4 History of Akash Industries 9-12
5 Company at a glance 13-18
6 Research Methodology 19-21
7 Data Collection 22-23
8 Conceptual Framework 24-33
10 Analysis 34-57
11 Findings 58-59
12 Suggestions 60-61
13 Conclusion 62-63
14 Bibliography 64-65

Babasabpatilfreeppt.com 1

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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.


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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.

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;


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• Easier access to inputs at competitive prices and rationalization and reduction in duty
rates.
• Encouragement to foreign technology collaborations and liberalization of FDI in
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.


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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


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• 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


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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
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.


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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
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.


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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 PROFILE

COMPANY PROFILE

Name of the Organization : Akash Industries
Type of Industry : Manufacturing Industry.
Address : Akash Industries
M-15, Industrial Estate,
Udyambag, Belgaum – 590 008


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Partners : S.T Macha
V.B Inamdar
M.V Inamdar
A.S Macha

Established : 1977

Size and nature of the company :

Sales
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.


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5. Involve all our suppliers in quality improvement process as to ensure mutually
beneficial and long time relationship.

ORGANIZATION CHART


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Managing partner 1 Managing partner 2

In charge Shop Chief
QA/QC Incharge Accountant

Incharge Incharge
Excise Sales Tax
Cashier
Management
Representative

Deputy
Management
Representative

Plant
Plant supervisor 2
Supervisor 1

In charge Workers
stores

PRODUCTS MANUFACTURED BY AKASH INDUSTRIES


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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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 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

RESEARCH METHODOLOGY


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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


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• 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.
 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.


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CONCEPTUAL FRAMEWORK

ACTIVITY BASED COSTING


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Activity Based Costing (ABC) is an accounting technique that allows an organization to
determine the actual cost associated with each product and service produced by the
organization without regard to the organizational structure. It is developed to provide more-
accurate ways of assigning the costs of indirect and support resources to activities, business
processes, products, services, and customers. ABC systems recognize that many
organizational resources are required not for physical production of units of product but to
provide a broad array of support activities that enable a variety of products and services to be
produced for a diverse group of customers. The goal of ABC is not to allocate common costs
to products. The goal is to measure and then price out all the resources used for activities
that support the production and delivery of products and services to customers.

Concept of Activity-Based-Costing:

An organization performs activities to do its business. These activities define the kind of
business you are in: a ship owner has an activity to unpack boats; an accounting firm
prepares tax returns; a manufacturer produces products; a council delivers services; a
university teaches students. All activities consume resources. It is the consumption of these
resources that adds to overhead costs.

The basis of Activity Based Costing is look at the activities required to produce the cost of
the product or service. The activities consume resources and the cost of these can be
calculated. The amount of activity required for each product and service is determined,
hence the real cost can be determined.

What's what in ABC?

• The activity is the work that is done.


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• The resource is what the activity uses to do the work e.g. people, equipment, and
services. Resources cost money.
• The cost of the activity depends on the quantity of resources used to accomplish the
activity.
• The cost driver for an activity is the factor that influences the amount of the resources
that will be consumed by this activity.

Example: the activity is delivering goods. The costs of this activity include the truck
drivers' wages, fuel, depreciation of the truck, insurance, etc. The quantities of the
resources that will be consumed by this activity are influenced by the number of
deliveries made per year. Hence the cost driver could be the number of deliveries. A
cost driver is designed to allocate the delivery activity cost pool to the cost objects.

• The activity driver measures how much of the activity is used by the cost object.
Example: Product A is delivered once a month, whereas product B is delivered once
a week. Products A and B require a different number of deliveries, hence the cost of
the delivery activity should be assigned to each product on the basis of the number of
deliveries each uses.
• The cost object is whatever it is you wish to cost. It could be a product, service,
process, job or customer.

While traditional costing arbitrarily allocates overhead costs, ABC traces overhead costs by
looking at the activities that each product and service calls upon. With ABC the products
consume the activities. It is the activities that cost money.

Why use Activity-Based-Costing?


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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.

The ABC framework


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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
VIEW

RESOURCES RESOURCE
DRIVERS

COST ACTIVITIES PERFORMANCE
DRIVERS MEASURES

ACTIVITY OBJECTS
DRIVERS OF WORK


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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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ABC categorizes the activities into:
Unit level activities:
 Performed each time a unit is produced.
 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.


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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.
Customer level contribution helps in customer and market related decisions. Facility
sustaining cost are period cost are period which are fixed in nature.


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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.
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.


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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

DETAILS OF THE PRODUCT


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Product name: UC Range series 4 end cover

Raw Material Requirements for the product

1) Metal sheet of length 1250*2500*1.2mm
2) Weight of the sheet is 30kg
3) 21 Covers can be prepared from one metal sheet.
4) Sheets required to prepare 1000 units is 48sheets.
5) Cost of sheet metal per kg 37Rs.
6) Weight of a Cover = 30kg/21
=1.42kg
7) Gross Material cost per unit = 1.42 x Rs55
= Rs78.1/Cover
8) Process Generated Scrap =0.65 kgs
9) Scrap rate =Rs12/kg
10) Revenue generated from scrap = 0.65 x 10
= Rs 6.5
11) Net material cost = 78.1– 6.5
= Rs71.6

COSTING FOLLOWED BY THE COMPANY
Product: UC Range series 4 end cover
Number of units produced = 300000 Covers p.a


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Particulars Total Cost/unit
cost(in Rs) (in Rs)


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DIRECT COST
Direct Material (Raw Material Consumed) 3,05,73,918
Direct Wages 18,93,573
Direct Expenses 45,65,266
Prime Cost 3,70,32,757 123.4
FACTORY OVERHEADS
fuel oil & lubricant 1,58,029
Depreciation 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 10.48
ADMINISTRATIVE OVERHEADS
Printing and stationary 69,255
Postage and telegram 18,929
Newspapers and magazines 5,964
Professional charges 27,619
Office furniture 5,646
Leave with wages 7,095
Telephone expenses 1,75,338
Salary to partners 14,60,000
Vehicle maintenance 72,347
Sundry expenses 84,809
Salary to staff 2,59,203
Cost Of Goods Sold 21,86,205 7.28
SELLING AND DISTRIBUTION
Advertisement expenses 3,410
Traveling expenses 1,82,480
Sales Promotion expenses 5,500
Packing charges 4,97,360 6,88,750
Cost Of Sales 4,30,52,78 143.50
1
PROFIT 52,81,095 17.6

SALES 4,83,33,87 161.1
6

CALCULATION OF COST PER UNIT BY ACTIVITY BASED
COSTING
1) Purchase of Raw material


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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 Sub Activity Cost Driver
Purchase Raw material transport Weight of product
Loading and unloading Weight of product
Storage Weight of product
Material cost Weight of product

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

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


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=Rs3.84/day
Storage cost per Cover =Rs3.84/1000Covers
=Rs0.00384/cover

d) Material cost = 5000kgs x Rs 71.28 (exclusive of
transport and loading and unloading
charges)
= Rs3,56,400
=5000kgs/1.42wt per kg
=3521 Covers
=Rs3,56,400/3521 Covers
=Rs101.22 – scrap
=Rs101.22– Rs6.5
=Rs94.72/cover

Total cost incurred for purchase of raw material

Activity Sub Activity Cost
Purchase Raw material transport Rs0.1704/cover
Loading and unloading Rs0.284/cover
Storage Rs0.00384/cover
Material cost Rs 94.72/cover
Total Rs95.17

2) Manufacturing cost


industries”

Process labor Wages Hours Number Cost of Hp per Space Cost
Activity Sub Activity Activity Driver
per day of Machine machine man and
Combination of occupie per sq
Manufacturing Shearing
Covers machine hour d by the ft
Combination of man and
Circleper 8 hrs
cutting machine
Shearing 3 300/wor 8 1000 500000
machine hour 100 sq ft
5 Rs2
ker Deep drawing
machine hour
Circle 1 150 8 800 100000 0.5 50 sq ft Rs 2
Trimming
cutting machine hour
Deep 2 150 8 Piercing
800 800000
machine hour 100sq ft
7 Rs 2
drawing &135
80sq ft Rs 2
Trimming 1 150 8 500 300000 3

Piercing 1 150 8 900 400000 3 50 sq ft 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


industries”
=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


industries”
=21.07/1000Covers
=0.021/Cover

Total Cost of shearing activity

Shearing Man cover rate Rs0.9/cover
Machine cover rate Rs0.17/cover
Space occupied by the Rs0.00769/cover
machine
electricity Rs0.1336/cover
Fuel oil & lubricants Rs0.021/cover
Total Rs 1.232/cover

2. Circle cutting

a) Man cover rate =wages/number of Covers
= Rs150/800Covers
=Rs0.1875/Cover

b) Machine cover rate =Rs100000 x 10% depreciation
=Rs10000 p.a
=Rs 10000/300days
=Rs33.33/per day
=Rs33.33/800Covers
=Rs0.0416/Cover

c) Space occupied by = 50Sq ft x Rs 2 per sq ft
the machine
= Rs100 p.m


industries”
= Rs100/26days
=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


industries”

Total Cost of circle cutting activity

Circle cutting Man cover rate Rs0.1875/cover
machine
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


industries”
=Rs0.0096/Cover

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

Deep Drawing Man cover rate Rs0.3562/cover


industries”
machine

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



industries”
Therefore,

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

Trimming Man cover rate Rs0.3/cover
machine


industries”


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,


industries”

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

Piercing Man cover rate Rs0.166/cover
machine
Total Rs0.468/cover


industries”


Manufacturing Shearing Rs1.232/cover
Circle cutting Rs0.2766/cover
Deep drawing Rs 0.9578/cover
Trimming Rs 0.639/cover
Piercing Rs0.468/cover
Total Rs3.5734/cover

Total Cost of the processes


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 = 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


industries”

3) Calibration charges per year = Rs900
Per month charges = Rs900/12months
= Rs75/month
Per day charges = Rs75/26days
= Rs3/day
Per hour charges = Rs3/8hr
=Rs0.375/hr

Total of inspection activity

Inspection Salary of the inspector Rs38.46/hr
instruments required to
Rs3.4/hr
inspect
Calibration Rs0.375/hr
Total Rs42.23/hr
Cost of Per Cover Rs 0.0422/cover

4) Painting
.


industries”
1) Cost of paint and thinner
Paint Rs250/ltr
Thinner Rs150/ltr
Divided in the ratio of 75:25
Cost of Paint = Rs250 x 75/100
=Rs 187.5
Cost of Thinner = Rs150 x 25/100
=Rs 37.5
Cost of mixture total = Rs187.5 + Rs37.5
= 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


industries”
=Rs 300000 x 20%
= Rs60000p.a
Per month = Rs60000/12months
=Rs5000p.m
Per day = Rs5000/26days
= Rs192.3/day
Cost of per covers =Rs 192.3/200Covers
=Rs0.961/Cover

4) Power charges Rs 5500/month
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


industries”
Rent per sq ft = Rs30000/10000sq ft
= Rs3/sq ft/month
Cost of area = 1200sq ft x Rs3
= Rs 3600
Per day charges =Rs3600/26
= Rs138.46/day
Per cover =Rs138.46/200Covers
= Rs0.692/Cover

Area of the Cover = 1.72sq ft
Cost of per cover = Rs12.11 x 1.72sq ft
= Rs20.82/cover

Total cost of painting activity

Painting Cost of paint and thinner Rs8.6
Labour cost Rs1.6
Paint booth operation cost Rs0.961
Power charges Rs0.265
Area of painting booth Rs0.692
Total Rs12.11/sq ft
Cost of Per Cover Rs20.82/cover

5) Dispatching

1) Packing charges :
Packing material required: ---
Cost of wooden box = Rs 3000 (inclusive transportation cost, taxes)
Cost of plastic wire = Re 1.50/Cover
Cost of paper = Re1.00/Cover


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 = Rs200 + Rs150 + Rs150
= Rs500/day
Wages per box = Rs500/5boxes
= Rs100/box
Total =Rs 3500 + Rs100
= Rs 3600
Per Cover = Rs3600/200Cover
=Rs18/Cover

Total of dispatching Activity

Despatching Packing charges Rs3500
labour Rs100
Total Rs3600/box
Rs18/Cover
Cost Per Cover

COST PER UNIT OF THE PRODUCT


industries”

Amount COST/COVER
ACTIVITIES
in Rs Amt in Rs
1 PURCHASE OF RAW MATERIALS 95.017
2 MANUFACTURING
Shearing 1.232
Circle cutting 0.2766
Deep drawing 0.9578
Trimming 0.639
Piercing 0.468
Total 3.5734
3 INSPECTION 0.0422
4 PAINTING 19.90
5 DESPATCHING 18.00
GRAND TOTAL 136.68


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.


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.


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.


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.


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.


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

industries”

BIBLOGRAPHY

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

2) COST ACCOUNTING by I M Pandey

 Websites : babasabpatilfreeppt.com


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