INTRODUCTION Cost Accounting is a branch of accounting and as been developed due to limitations of financial accounting. Financial accounting is primarily concerned with record keeping and preparation of P & L account and balance sheet because of some serious limitations such as fore casting and planning, decision-making and control the cost accounting has developed as a branch. Costing The technique and process of ascertaining costs. Cost Accounting The process of accounting for cost which begins with recording of income and expenditure and ends with periodical statements and reports ascertaining and controlling costs. Cost accountancy The application of costing and cost accounting principles, methods and techniques to the science, Art & Practice of cost control and ascertainment of profitability. Objectives of cost accounting Ascertainment of cost 1
Transcript
INTRODUCTION
Cost Accounting is a branch of accounting and as been developed due to
limitations of financial accounting. Financial accounting is primarily concerned with
record keeping and preparation of P & L account and balance sheet because of some
serious limitations such as fore casting and planning, decision-making and control the
cost accounting has developed as a branch.
Costing
The technique and process of ascertaining costs.
Cost Accounting
The process of accounting for cost which begins with recording of income and
expenditure and ends with periodical statements and reports ascertaining and controlling
costs.
Cost accountancy
The application of costing and cost accounting principles, methods and techniques
to the science, Art & Practice of cost control and ascertainment of profitability.
Objectives of cost accounting
Ascertainment of cost
Determination of selling price
Cost control and cost reduction
Ascertaining profit at each stage / activity
Assistance in decision making.
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Elements of cost
A diagram as given below shows the elements of cost described as under.
ELEMENTS OF COST:
MATERIALS COST LABOUR COST OTHER EXPENSES
DIRECT INDIRECT DIRECT NDIRECT DIRECT INDIRECT
MATERIAL MATERIAL LABOUR LABOUR EXPENSES EXPENSES
OVERHEADS
PRODUCTION/ WORKS ADMINISTRATION SELLING DISTRIBUTION
OVERHEADS OVERHEADS OVERHEADS OVERHEADS
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Direct materials
Materials which are present in the finished product or can be identified in the
product are called direct materials. For example, cloth in dress making, materials
purchased for a specific job etc.
Note: However in some cases a materials may be direct but it is treated as indirect,
because it is used in small quantities or due to any other suitable reason.
Direct Labour
Labour which can be identified or attributed wholly to a particular job, product
and process or expanded in converting raw materials into finished products is called
Direct Labour. For example, labour engaged on the actual production of the product or in
carrying out the necessary operations for converting the raw materials into finished
product.
Direct Expenses
It includes all expenses other than direct materials or direct labour which are
specially incurred for particular product or process. Examples of direct expenses include
– excises duty; royalty; surveyor’s fees etc.
Indirect Materials
Materials which do not normally form part of the finished product are known as
Indirect Materials. These are --- stores used for maintaining machines & buildings
(Lubricants, cotton, waste etc) --- stores use by service departments like powerhouse,
boiler - house, canteen etc.
Indirect Labour
Labour costs which cannot be allocated but can be apportioned to or absorbed by
cost units or cost centers is known as Indirect Labour. Examples of indirect labour
includes- charge hands, supervisors, maintenance workers; etc.
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Indirect Expenses
Expenses other than direct expenses are known as indirect expenses. Factory rent
and rates, insurance of plant & machinery, power, light, heating, repairing, telephone etc
are some examples of indirect expenses.
Overheads
It is aggregate of indirect material cost indirect labour costs, and indirect
expenses.
The main groups into which overheads may be subdivided are the following.
Production or works overhead
Administration overhead
Selling overhead
Distribution overhead
Cost Management
The techniques and process of ascertaining cost involve three steps, viz.
Collection of expenditure or cost date,
Classification of expenditure as per cost elements, function, etc. and Allocation &
apportionment of expenditure to the cost centric & cost units. The system accumulates
and classifies expenditure according to the elements of costs, and then, the accumulated
expenditure is allocated and apportioned to cost object i.e. cost centers and cost units. We
should therefore, know what are cost elements, cost centers & cost units.
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Calculation of cost of sales:
Direct Materials Cost X
Direct wages X
Direct Expenses X
_____________
Prime Cost X
Factory Overhead X
_____________
Factory Cost X
Administration Overhead X
_____________
Cost of Production X
Selling and Distribution Overhead X
_____________
Cost of Sales X
_____________
The cost of sales has increase during the period 2006-2009. In tandem with sales
but higher sales prices in the material because of high demand in south India. As A.P
government has taken up infortracture and irrigation project the demand may further
increase. Which will ultimately increase the profit.
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REVIEW OF LITERATURE
MEANING OF COST CONTROL:
The institute of cost and Management Accountants, London defines Cost Control
as, the guidance and regulation by executive action of the cost of operating an
undertaking.
The word guidance indicates a goal or target to be guided, “regulation” indicates
taking action where there is a deviation from what is laid down, executive action denotes
action to “regulate” must be initiated by executives i.e., persons responsible for carrying
our the job or the operation, and all this is to be exercised through modern methods of
costing in respect of expenses incurred in operating an undertaking.
To exercise cost control, broadly speaking the following steps should be
observed.
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OBJECTIVE OF THE STUDY:
A. The primary objective of the study is to examine the various cost control and reduction
techniques at TECUMSEH PRODUCTS INDIA LIMITED.
B. In addition to the above, the study also conducts a critical examination and enquiry
about the various elements like fuel cost, consumption cost, inventories turn over etc. for
the purpose of reducing the cost.
SCOPE OF THE STUDY:
The material industry is a capital-intensive industry. The cost of a new material
plant is equivalent to around 3 years' turnover, which ranks the material industry among
the most capital-intensive industries. The Profitability of the material industry is around
14% as a proportion of turnover (on the basis of pre-tax profits before interest
repayments).
The study will analyze the current cost structures, sales and profits realized at
ICL. The study will not evaluate the adequacy of current funding. Rather, it will
investigate modifications and alternatives that might improve the profit realizations.
The study lays more emphasis on the understanding of current cost accounting
procedures rather than taking an analytic view of the same.
Analysis has been done to understand the way the sales and profit realization
trends have been and recommendations made in order to reduce the costs in this highly
capital-intensive industry.
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METHODOLOGY OF THE STUDY:
To achieve the above said objectives the study is collecting the data from
secondary sources, as a major portion of the study is in descriptive manner, collection by
this form is suitable one. The required data for the study was collected from annual
reports of the company, cost records and other records maintained in the cost accounts
department at ICL.
Primary source:-Interaction with finance manager and cost Accountant of ICL.
(Financial Manager:- PONNUNAMB)
(Charted Accountant: - A.V. Raju)
Secondary source: - Secondary data was gathered through the Purchase Records, sales
data,
Time office Records, annual reports of the company and going through various subject
books and journals.
LIMITATIONS OF THE STUDY:
The following are the major limitations identified for the study
As the study is based on cost accounting records extraction of data from the
various sources is time-consuming process and the data for the study is taken for period
of four years. Within limited time duration of only two months, making it more
exhaustive.
Another important limitation of the study is the adjustments made for the unit
prices/quantity prices for the purpose of rounding off. As a result, a few variations were
encountered at the time of analysis of data.
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TECUMSEH
Company Profile:
Mr. Ray Herrick, a former employee of Ford motor company started the company
in 1930. In 1937 the company went into public with an offering of 25000 shares. Mr. Ray
Herrick has passed away in 1973, but vision lived through his son Ken, the current
chairman of the board and his grandson Mr. Todd W Herrick, who has been president and
CEO since 1984. Tecumseh India is a preferred supplier to world’s who’s of the AC & R
industry in India and in Middle East SAARC countries.
Tecumseh Products Company is a US $ 2 Billion cooling giant having a global
presence and a global vision with 24 manufacturing locations in 4 continents a cross 100
countries, employing over 20,000 people. It is the world’s largest independent
compressors manufacturing company with 10% market share of the global 150 million
units a year compressors market.
Tecumseh Products Company products are grouped into 3 principal industry
segments:
(a) Compressors Products
(b) Engine and Power
(c) Pump Products
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ORIGIN OF COMPANY
The company was originally established and registered in 1963 under the name of
USHA Refrigeration Industries Limited (URIL). Thisunit manufacturing compressors for
water cooler, air conditions and water coolers. Lala Sharat Ramji who was from
renowned industrial family of DCM and Coromondal group of companies started URIL.
In 1970 the URIL was changed to Shri Ram Refrigeration Limited, and the business was
divers towards manufacturing of diesel engines and water coolers. Shri Ram Industries
played a great role in the field and capture more than 50% of market share in India. Shri
Ram Industries also kept its hands in Mr. Siddharth C.Shriram became the chairman
cum Managing Director (M.D). The product saw sea change in the industrial policy,
which resulted in a great change in the industrial sector. In the process for survival, Shri
Ram went into technical collaboration with Wastling House US and was named as Siel
Compressors.
Siel Compressors were the first Indian Compressors. Later Wastling House stopped
Manufacturing Compressors and Siel went into technological collaboration with
Tecumseh Products Company USA in 1988. TECUMSEH mean CROUNCHING
PANTHER derived from chief of the SHAWNEE tribe.(1768-1813).It started operation
to offer new state of art AW series to Indian customers .subsequently Tecumseh products
company took over siel group in 1997 and siel group became 100% subsidiary company
of Tecumseh products company. As soon as Tecumseh took over the company stopped
manufacturing water coolness and restricted its production to CFC/hermetically sealed
compressor.
TPIPL is an ISO 140001 and 9001 certified American based company.
Tecumseh India is a 100% subsidiary 10 Tecumseh products company USA, which is
world’s only full line, Independent manufacturing locations is 4 continents across 100
countries employing over 19000 people. In India it has 20 sales offices and an extensive
network of over 200 dealers and move than 600 registered small scales industries. TPIPL
has gained core expertise in R&D, AW assembly and AW machine shops such that it
acquired a lion’s share in India compressors marked by gaining a 50% share.
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Hyderabad Plant:
The Hyderabad plant is on a 54 acres land at the Balanagar Industrial belt 15km away
from Hyderabad city on highway line going towards HMT Limited Narsapur road at
Hyderabad
plant. TPIPL manufacture air conditioner from 1200 BTU to 6lakhs BTU (British
Thermal Unit) and compressors for deep freezer, bottle coolers and water coolers which
are considered to be world’s no 1 in 150 million compressor market a year. The plant has
the manufacture capacity of 3000 units per day. This plant has a technology development
center with full R&D facility. The plant is also supported by two service centers AW
service center and MC Service center Hyderabad plant has six regional offices among
which four offices are metro cities. The remaining two are at Ahemadabad and
Secunderbad. Besides there are branch officers and depots located in prime cities across
the country. This plant also has network of about 177 dealers across the nation and his
preferred suppliers to key original equipment manufacturers like LG, VOLTAS,
BLUESTAR, GODREJ, VIDEOCON, FEDDERS, AMTRIX, HITACHI, etc. TPIPL
Hyderabad plant was successful in getting the ISO 9001 certification for maintaining
quality of compressor in 1994 and for eco friendly environment maintenance the
company has ISO 14001 certification. TPIPL Hyderabad has a total of 829 permanent
employees.
In 1997 Tecumseh fully acquired SRI, Hyderabad
In 1998 the turnover for the year was Rs.111.28 Crores with on
operational profit of Rs.14.14 Crores and a PBT of Rs.10.50Crores.
Company not only meets its target but also increase its market share and company think
about amalgamates.
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Employees for the current year are:
Permanent Worker 402
Staff 185
Officers 156
RSO 45
Total To-Dated 2010 Employees is: 788
*Company have 1000 0f contact Worker. It is divided as Badali or Special Badali.
AC Compressors Business:
The Capacity is 3,00,000(expanding)
The Plant is certified company with ISO 9001-2000 version, ISO 14001.
Models AC applications-AW
Certification VDE,
Products:
Air-conditioning(12,000-29,500 BTU per/hr)
Compressors manufactured at Hyderabad:
AW, series- AW, AWQ, AWA, etc.
Rotaries(to be introduced in 2003)
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The management has started development activities in the following areas.
(a) Effluent Treatment Plant
(b) Tree Plantation
(c) Biological Treatment Plant
(d) Rain water harvesting is to increase the group water level and TPIPL has
the distinctions of being the first organization in this regard.
(e) Vermi culture is the process of utilizing canteen food wastage for
converting in to natural manual .
A new project under the name of VIBHAV ROTARY PROJECT is under
construction this completes by the month of july 2005 on completion of this
project, the production starts from January of 2006, with a production of 10,000
units perday with this project, the market share of production of compressors of
Tecumseh increases to 15%
BALLABGARH PLANT:
At Faridabad, in North India, they have a capacity of about a million
compressors. This plant is being relocated to an integrated unit at Ballabgarh with an
investment of Rs.200 crores (approximately). This state of the art plant for manufacturing
of non-CFC compressors will be one of the best compressors facilities in Asia. This is
located on a 21 acre land on the Delhi-Mathura National highway.
Mr. Vipin Sondhi, Managing Director, head Tecumseh India, which employs
about 2500 people.
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Tecumseh India, a 100% subsidiary of Tecumseh Product Company USA will
continue its mission of offering the latest compressors to the discerning India customers.
Tecumseh India is the manufacturing of compressors in the country catering to
segments of segments air-conditioners; domestic and commercial refigiration and is a
leading player with growing Indian market for compressors in all the three segments.
The company was incorporated on Jan30, 1997 & operational commenced
since 14th July 1997, after take over of compressor division of Whirlpool of
India Limited.
The company acquired the compressor business from WOIL by taking
over the plant & equipment of the compressors division at Fardabad and the
entire facilities of Ballabgarh excluding the plastic division of WOIL.
The acquisition was funded by equity, but since taken over, the company
supplies to WOIL its requirement of compressor.
The company recorded a turnover of Rs. 26 Crores since taken over till
31st Dec 1997, since purchase by WOIL did not materialized the turnover has
been less which led to net loss Rs. 4.93 Crores.
The company is in process of implementing a major expansion
diversification programme at Ballabgarh to enable the manufacture of
Compressor, once the project implemented by 1998 the company would be the
pioneer in India in manufacturing environment.
In 1998 the company recorded a turnover of 99.98 crores against turnover
of Rs.26.12 crores for the period July 1997 to Dec 1997.
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The net loss recorded was Rs.6.87 crores against Rs.4.92 crores during
1997.
Refrigeration +Commercial Business:
Plant is certified ISO 9001, R-134 a certified Plant, and Own
Limitation, Wire drawing facilities.
With capacity of 1,500,000
Models MLA, TIE
Products:
Domestic Refrigeration (330-1200 BTU per hr) and
Commercial (700-3000 BTU per hr)
Compressors manufactured at Ballabgarh:
TIE Models
MLA Models
MLA-CRA Models
TPIPL’S VISION:
“We are not going to simply provide Compressors are going to provide customer
solution”.
It is our goal to be the global leader in all of the markets in which we choose to
participate we will pursue disruptive technologies to redefine our products.
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TPIPL’S MISSION:
We will leverage our global expertise in mechanical, electrical, fluid handling,
related components and services to provide comprehensive solution for our customers
needs compressors, engines, electric motors, pumps, electronics and controls.
We will be best in class and the most effective cost producer by utilizing
the principles of TQM, 6 SIGMA and LEAN.
Our organization will modify itself in response to changes in environment
at a pace and
amount of change that can be made without eliminating or impeding our on going
effectiveness.
Incisive, continuous strategic thinking will be well communicated and
shared by the organization.
Our Mission Statement:
“Be the global supplier of choice for refrigeration and for air conditioning
components”
Our Commitments:
KEY BUSINESS ACTIVITIES:
1. Set the World industry standard of excellence for customer satisfaction.
achieve total quality.
2. To attain and surpass global quality and reliability standards for our
products.
3. Maintain clear technology leadership.
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4. Market share leadership with focus on customer needs.
5. Meet business and financial commitments.
IMAGE:
To build up a high degree of customers confidence by sustaining International markets in
regard to supply of spare parts and after sale service. The HRD policy of Tecumseh is
manifested in the code of conduct of TPIPL listed below.
Respect and mutual trust
Integrity and fairness in all matters
Team work
Best customer service
TPIPL QUALITY POLICY:
Committed to total customer satisfaction by meeting their needs,
expectation
And aspiration stated, implied or Latent
Striving to provide products and service of global quality standard and to
reach a position of leadership in the field of operations, setting new values.
Continuous improvement across the organization and up gradation of
product, technology and process supportive environment, at least cost to society
share be the means to achieve the goals.
The approach will be through proper system and procedures and total
involvement of employee’s vendors and other business associates.
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TPIPL ENVIRONMENT POLICY: The vision of Tecumseh India is to be a
serene green and eco friendly co-operation carrying out all its operation contributing to
preservation of environment and natural resources for benefit at large.
Among others this can be achieved through allocation of company wide
priority for sustainable development with total involvement and commitment.
Evaluation and up gradation of current technologies products and raw
materials for minimization handling and disposal of solid, liquid and gaseous
waster.
Realization of tangible objectives and targets set for continual
improvement to control and prevent pollution and conserve resources.
Variable earning- sharing of value addition.
Agreement process- Organization needs.
Non Conformance reporting audits.
Open house/Communication meeting.
Team assessment and feed back.
Changing life styles.
SAFETY POLICY
We, at Tecumseh India, firmly believe that protecting Health & Safety compliance of all
statutory requirement is of Para meal importance and are committed to the continuous
improvement of Safety & Health of employees and all others who are directly associated.
We shall achieve this through:-
1. Education and training.
2. Creating a safe working environment.
3. Providing adequate and required personal protective equipment.
4. Updating safety rules and procedures.
5. Continuous improvement through safety audits, Risk Assessment Audits.
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The Employees and all other share:-
Follow safety rules and procedures.
Use all the required personal protective equipment.
Adopt safe working methods
Take a proactive interest in maintaining safety standards
TPIPL’S SEVEN DEADLY SINS:
a) Inconsistent product quality.
b) Slow response to market place.
c) Lack of innovate & competitive product.
d) Un competitive cost structure.
e) Inadequate employee involvement.
f) Unresponsive customer service.
g) Ineffective resource allocation.
STRATEGIES & PROCESSES AT TPIPL:
Work place improvement.
Creativity club.
KRA’S (improvement/suggestions)
The management has started development activities in the following areas
Efficient treatment plant.
Tree plantation.
Rain water harvesting is to increase the ground water level and TPIPL has
distinction of being the first organization in this regard.
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Semi culture is the process of utilizing canteen food wastage for
converting into natural manure.
5-S PHILOSOPHIES:
Tecumseh encourages its employees to follow philosophies which are the Japanese way
of working:
1. SIERI (sorting out)
Look around yours work area &ask yourself “If it really necessary for all
items to be there”.
Separate items “OK” rework able and rejected items.
Rework the rework able items & dispose off the rejected items.
2. SELTON (systematic arrangement)
Items must be placed in prefixed locations so that they are accessible &
can be easily used.
Bites should be clearly identified by labeling the properly.
3. SELSO (spic & span)
Clean the workplace yourself
Clean all the equipment including table etc, yourself.
4. SELKETSU (Serene Atmosphere)
A clean work place properly selected and with proper arrangement will soon
become dirty if SEIRI, SELTON and SELSO are not practiced regularly.
To achieve serene atmosphere the three steps should be continuously repeated.
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We should keep our area of work neat and clean including your own attire.
5. SHITSHUKE (Stick to Self Discipline)
5.1 Follow rules & regulations strictly.
5.2 Adhere to timing & respect time.
5.3 Conform to standards while working.
5.4 Following the prescribed operational standards.
The company pay an incentives of Rs. 75/- per month to its employees for following
there 5S philosophies.
ADVANTAGES OF 5-S
By through enforcing 5-S in each work area
1) Operation can be performed without error, proceeding in a well –
regulated fashion, resulting in fewer defective items thereby increasing the
overall quality of product.
2) Operations can be performed safely and comfortably, reducing the chances
of accidents.
3) Machinery and equipment can be carefully maintained, reducing the
number of breakdown.
4) Operation can be performed efficiently eliminating waste thereby
increasing the efficiency & productivity.
HOW TO ACHIEVE 5-S
5’S can be achieved very easily by every employee by having a close look
at his work place. He is to ensure that.
No rejected/unwanted items are lying at his workplace.
All items are kept in proper locations/order.
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Everybody should cooperate in keeping his & other’s area and the
machines clear.
Follow the rules & regulations & maintain required standards.
PLEASE CHECK
Do you have any un useful thing around you?
Are all the required things kept at their allocated places?
Are you following the operating standards?
Are you following the timing?
Let us all review 5-S
Let us improve if we have any bad practices. Let us have a new in which we have a
more comfort able atmosphere and we manufacture a better quality product.
QUALITY IMPROVEMENT MEASURES:
Your Company’s Hyderabad & Ballinger plant are ISO 9001 (Version 2000)
certification. Your company is constantly meeting the quality requirement of Domestic &
International customers.
Environmental Protection & Conservation of Natural resources:
During the year , ISO 14001 First Annual Assessment after Re-
Certification Audit carried out by the corporate Director of Environment Control
Hyderabad unit had scored 95 points and reveal any , non conformities.
During Annual Compliance Assurance review carried out by the corporate
Director of Environmental control Hyderabad unit had scored 95 points and
Ballabgarh unit had scored 89 points out of 115 points for 2004.
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The Following Conservation measures were undertaken by your company.
Usage of De – mineralized water in place of Municipal/Bore Water in
process.
I MECO BULLOWS Components cleaning equipment have been
introduced in EOU for effective cleaning of components to minimize water &
chemicals.
Export oriented unit is Completely R-134 a compatible plant.
Energy efficient lighting in Machinery shop and canteen.
Main factory canteen renovation & new kitchen equipment installation.
Construction of new septic tank for effective treatment of sewage water.
Mezzanine floor fabrication & erection to install Dehydration Oven.
LPG Yard renovation to Accommodate 5 ton LPG bullet to cater pre
treatment plant requirements.
RESEARCH AND DEVELOPMENT:
1) Specific areas in which R & D carried out by the company:
Designed and developed high out by the energy efficient compressors of
the existing and higher cooling capacity.
Improvement in product quality
Introduced new AEV models for R-12, AEVY models for R-134a and
AEG models for R-22 gas applications.
Introduced AW 1000Q compressor for small size air-conditioners.
2) Benefits derived as a result of above R & D:
Development of new products.
Improvement in product quality.
Optimization of processing parameters.
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Improved customer satisfaction and developed new customers.
Lower power expense for the customer, thus reducing his recurring
expense.
3) Future plan of action:
Design improvements
High efficiency, low noise compressors.
Enhanced range of compressors.
Product ionization of newly developed refrigerator compressor.
1) Efforts:
Technology absorption and innovation Company has focused on innovation
and is working on a refrigeration compressor, which would be equivalent or better
than the best available in the global market. It has upgraded its test lab facilities and
reduced its dependence on foreign test labs. This gives indigenous capability to
develop, test and launch new products.
2) Benefits:
Derived as a result of the above efforts is product improvement, cost
reduction, product development, import substitution etc.
Departments of TPIPL:
Rotary Project (New)
Human Resource Development
IT
Welfare Department
FCD
CTS & S----
TDC
Attendance and Pay Office (A & PO)
Electronic Data Processing (EDP)
Provident Fund and Credit Cooperative Society (PF & CCS)
Maintenance and Engineering Department (MED)
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EOU
Logistics
Quality Control Department
AW PRESS Shop
AW Machine Shop
Dispensary
Canteen
Chemical and Technological Laboratories
Legal Compliance and going beyond setting new standards
Stores
Material and Purchase
Accounts and Audit
Finance Management:
1) Cadres
2) Functions of Finance department
Milestones:
1961: Technical Collaboration with Wasting House Electrical International
Company USA.
1962: The name IRI was changed to USHA Refrigeration Industries Limited.
1964: Started production of Wasting House Compressors; this is known as SRX.
1966: The name of USHA Refrigeration Industries limited was again changed to “Shri Ram Refrigeration Industries Limited.
1967: Manufacturing of water coolers was added.
1969: Added Manufacturing of diesel engines pumps sets.
1986: Started Marketing of Electronics Voltage Connectors.
1987: Added Manufacturing of room air-conditioners, entered into technical
Collaboration agreement with Tecumseh Products Company, USAworld’s
largest Manufacturer of air-conditioning compressors.
1990: Discontinued Manufacturing of diesel engines. The company expanded
the range Of room air-conditioners and launched split air-conditioners.
1992: Shri Ram Refrigeration Industries Ltd was merged with Siel.
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1993: First Company in India to get world-bank aid to phase out CFC
refrigerants under the Montreal protocol.
1994: TPIPL, Hyderabad has been awarded the ISO 9001 for its quality
Management System by BVQI.
1995: Set up world class compressor manufacturing plant to increase volume
and range of Tecumseh Compressors.
1996: 100% acquisition (20 million equity shares) by TPIPL.
1999: TPIPL certified for ISO 14001 by UL India.
2000: Won National award for excellence in energy management.
2007: Won Greentech Environment excellence silver award for outstanding
achievement in environment management.
2008: Won Greentech Environment excellence silver award for outstanding
achievement in environment management.
2009: TPIPL has achieved the prestigious National award for excellence“energy
efficient unit” conducted by CII at Chennai.
2010: Won Greentech safety award.
CERTIFICATIONS:-
ISO 9001-2000 VERSION:
As Tecumseh is ISO 9001-2000 certified company , it makes all the employees aware
of the OSO norms. The topics covered under this training program are:
1. Back ground to revision of ISO 9001 standards.
2. Concepts used in the new standard.
3. Process based quality management system model.
4. Alignment with other standard for example, ISO-EMS 14000, health and safety.
5. Overview of 9001:2000.
Scope
Application normative reference
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Terms and definitions
6. Key definitions in new standards.
7. Concept of continual improvement.
ii. Control of non-conforming product
iii. Data analysis
iv. Corrective actions and improvements
v. Preventive action
Due to exposure to ISO 9001-2000 norms and requirement the employees know
how to carry out their work. They know about record maintenance and its importance.
Thus, making all the employees aware of these standards it will be easy for the
organization to produce quality products.
ISO 14001:1996
Underwriters Laboratories Inc. (UL) issues the certificate to the Firm named
above, after assessing the Firm’s environmental management system and finding it in
compliance with ISO 14001:
1996 Environmental Management System for the following scope of registration;
The Environmental Management System of Tecumseh Products India Private
Limited, Associated with the manufacture and servicing of hermitically sealed
compressors for air conditioning and refrigeration applications at their unit and service
centers located at Hyderabad, India.
This environmental management system refrigeration is included in UL’s
Directory of Registered Firms and applies to the operations of the address (es) shown
above. By issuance of this certificate the firm represents that it will maintain its
registration in accordance with the applicable requirements. This certificate is not
transferable and remains the property of Underwriters Laboratories Inc.
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PRESENCE OF TECUMSEH INDIA
They have 4 regional Sales offices, which are located in metropolitan cities like Delhi,
Mumbai, Chennai, and Calcutta in India. Besides this they have branch offices and depots
located in prime cities all over the country i.e.
Nine Depots: Secundrabad, Ahamdabad, Silwasa, Pune, Indore, Chandhghad, Raipur,
Buhneshwar, Punandichary.
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SUBSIDIARIES AND LICENSEES
SUBSIDIARY COMPANIES
A Nine Subsidiaries company in different countries
Little Giant Pump Company in Oklahoma.
Motoco, a,s, in Czech Republic.
M P Pumps, Inc in Michigan.
Tecumseh do Brazil, Ltd in Brazil.
Tecumseh Europe S.P.A in Italy.
Tecumseh Europe S.A in France.
Tecumseh Products India Ltd. in India.
Tecumseh Products of Canada Ltd. in Canada.
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Virtues, Inc in the Rhode Island
STUDY ON COST ACCOUNTING
COST CONTROL AND COST REDUCTION:
The institute of cost and Management Accountants, London defines Cost Control
as, the guidance and regulation by executive action of the cost of operating an
undertaking. The word guidance indicates a goal or target to be guided, “regulation”
indicates taking action where there is a deviation from what is laid down, executive
action denotes action to “regulate” must be initiated by executives i.e., persons
responsible for carrying our the job or the operation, and all this is to be exercised
through modern methods of costing in respect of expenses incurred in operating an
undertaking. To exercise cost control, broadly speaking the following steps should be
observed.
Determine clearly the objective i.e., pre-determine the desired results, Measure
the actual performance, Investigate into the cause of failure to perform according to plan
and Institute corrective action. The target cost and /or targets of performance should be
laid down in respect of each department or operation and these targets should be related
to individuals who, by their action, control the actual and bring them into line with the
targets. Actual cost of performance should be measured in the same manner in which the
targets are set up, i.e., if the targets are set up operation – wise, then the actual costs
should also be collected operation wise and not cost center or department – wise as this
would make comparison difficult.
Cost reduction should not be confused with cost control. Cost Reduction may be
defined as the achievement of real and permanent reduction in the unit cost of goods
manufactured or services rendered
With out impairing their suitability for the use intended or diminution in the
quality of the product. Cost saving could be a temporary affair and may be at the cost of
quality. Cost reduction implies the retention of the essential characteristics and quality of
the product and thus it must be confined to permanent and genuine savings in the cost of
manufacture, administration distribution and selling, brought about by elimination of
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wasteful and inessential elements from the design of the product and from the techniques
carried out in connection therewith.
The three – fold assumptions involved in the definition of cost reduction may be
summarized as follows: (a) There is a saving in unit cost (b) such saving is of permanent
nature (c) the utility and quality of the goods and services remain unaffected, if not
improved.
Ascertaining the profit of each activity:
The profit of any activity can be ascertained by matching cost with the revenue of
that activity. The purpose under this step is to determine costing profit or loss of any
activity on an objective basis.
Assisting Management in decision making:
Decision making is defined as a process of selecting a course of action out of two
or mare alternative courses. For making a choice between different courses of action, it is
necessary to make a comparison of the out comes which may be arrived under different
alternatives, such a comparison has only been made possible with the help of cost
Accounting information.
Cost Concepts
Cost
The amount of expenditure (actual or notional) incurred on or attributable to a given thing
To ascertain the cost of a given thing.
Note: The word “cost” can rarely on its own and should be qualified as to its limitation
(e.g.,” historical, variable etc) and related to a particular thing or object of thought’ e.g.;”
a given quantity or unit of goods made or services performed.
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Types of cost
Pre determined cost
A cost which is computed in advance of production on the basis of specification
of all the factors affecting cost.
Standard cost
A cost pre-determined cost which is calculated from management’s standard of
efficient operation and the relevant necessary expenditure. It may be used as a basis for
price fixing and for cost control through various analyses.
Marginal cost
The amount at any given volume of output by which aggregate costs are changed
if the volume of output is increased or decreased by one unit.
Note: In this context a unit may be a single article, an order, a stage of production
capacity, a process of a department. It relates to change in output in the particular
circumstances under consideration.
Cost of sales
The sum of all costs attributable to the sales made.
Note: It is not uncommon to use this in a restricted sense as the production cost of goods
sold.
Total Cost
The sum of all costs attributable to the unit under consideration.
Note: The term should always be qualified as it can mean the total cost of an undertaking
or it can mean the total cost attributed to a process or to a service.
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Cost centre
It is defined as a location, person or an item of equipment (or group of these) for
which cost may be ascertained and used for the purpose of cost control. Cost centres are
of two types viz, personal and Impersonal.
In a manufacturing concern main types of cost centers as indicated below:
Production Cost Centre
It is a cost centre where raw material is handled for conversion into finished
product. Here both direct and indirect expenses are incurred. Machine shops, welding
shops and assemble shops are examples of production cost centers.
Classification of costs
It means the grouping of costs according to their common characteristics. The
important ways of classification of costs are:
By Nature or element
The costs are divided into three categories
Material cost
Labour cost
Expenses. of classification is useful to determine the total cost.
By function
Under this classification, costs are divided according to the function for which they have
been incurred some of the examples are:
Production cost
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The cost of sequence of operations which begins with supplying materials, labour
and services and ends with primary packing of the product.
Selling Cost
The cost seeking to create and stimulate demand (sometimes termed marketing)
and of securing orders.
Distribution cost
The cost of the sequence of operations which begins with making the packed
product available for dispatch and ends with making the reconditioned returned empty
package if any available for re-uses.
Note: It also include expenditure incurred in transporting articles to central or local
storage. Distribution costs include expenditure incurred in moving articles to and from
prospective customers as in case of goods on sale or return basis. In the gas, electricity
and water industry distribution means pipes, mains and services which may be regarded
as the equivalent of packing and transportation.
Administrative Cost
The cost of formulating the policy, directing the organization and controlling the
operations of an undertaking which is not related directly to a production. Selling and
distribution, research or development activity or function.
Research cost
The cost of the process which begins with the implementation of the decision to
produce a new or improved product or to employ a new or improved method and ends
with commenmaterial of formal production of that product or by that method.
Pre-production cost
The part of development cost incurred in making a trial production run
preliminary to formal product.
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Note: This term is sometime used to cover all activities prior to production including
research and development, but in such cases the usage should be made clear in the
context.
Conversion cost
The sum of direct wages, direct expenses and overhead cost of converting raw
materials to the finished stage or converting a material from one stage of production to
the next.
Note: In some circumstances this phrase is used to include any excess material cost or
loss of material incurred at the particular stage of production. Which ever meaning is
used should be made clear
As Direct and Indirect
Under this classification costs are divided as
Direct costs
Direct costs are those costs which can be identified either with a cost centre or
with a cost unit costs which are not direct are termed as indirect costs.
Indirect costs
Indirect costs are those which cannot be identified either with a cost centre or with
a cost unit are known as indirect costs.
By Variability
According to this classification costs are classified into three groups
Fixed costs
These are costs which remain constant at all levels of production, they do not tend
to increase or decrease with the changes in volume of production. For example, rent,
insurance of factory building etc.., remain the same for different levels of production.
Variable costs
These costs tend to vary with the volume of output. Any increase in the volume of
production results in an increase in the variable costs and vice-versa.
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Semi Variable costs
They costs are partly fixed and partly variable in relation to out put.
By controllability
Costs here may be classified into controllable and un-controllable costs
Controllable costs
These are costs which can be influenced by the action of a specified member of an
undertaking. A business organization is usually divided into a number of responsibility
centers and each such centre is headed by an executive. Controllable costs incurred in a
particular responsibility centre can be influenced by the action of the executive heading
that responsibility centre. Direct costs comprising direct labour, direct material, direct
expenses and some of the overhead are generally controllable by the shop level
management.
Uncontrollable costs
Costs which cannot be influenced by the action of a specified member of an
undertaking are known as uncontrollable costs. For example, expenditure incurred by,
say, the total – room is controllable by the foreman in charge of that section but the share
of the tool – room expenditure which is apportioned to a machine shop is not to be
controlled by the machine shop foreman.
The distinction between controllable and uncontrollable costs is not very sharp
and is sometimes left to individual judgment. In fact no cost is uncontrollable; it is only
in relation to a particular individual that we may specify a particular cost to be either
controllable or uncontrollable.
By Normality
According to this basis cost may be categorized as follows:
Normal cost
It is the cost which is normally incurred at a given level of output under the
conditions in which that level of output is normally attained.
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Abnormal cost
It is the cost which is not normally incurred at a given level of output in the
conditions in which that level of output is normally attained It is charged to costing profit
and Loss Account.
MATERIAL COST CONTROL:
The first element of cost is “Direct material cost.” Material constitutes a very
significant proportion of total cost of finished product in most of the manufacturing
industries. A proper recording and control over the material costs is essential because of
the following:
The exact quality of specification of material required should be determined
according to the required quality of the product. If too superior quality of material is
purchase, it would mean higher cost due to high prices, if the quality of materials
purchased is too low, the product will be of inferior quality.The price paid should be the
minimum possible;
There should be no interruption in the production process for want of material and
stores including small inexpensive items like lubricating oil for a machine, it is those that
may be found out of stock suddenly leading to stoppage of machines.
There should be no over stocking because that would result in loss of interest
charges, higher go down changes, deterioration in quality and losses due to obsolescence
(either due to manufacture of certain articles being give up or the material previously
required for the production not being required any longer due to a change in methods of
production).
Wastage and losses while the materials are in store should be avoided as for as
possible.Wastage during the process of manufacture should be the minimum possible.
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If may also be added that information about availability of materials and stores
should be continuously available so that production may be planned properly and the
required materials purchased in time.
Control on Purchasing
Centralized Purchasing
If a concern can afford it, there should be a separate purchase department for all
purchases to the made on behalf of all other departments. Purchasing should be
centralized i.e., all purchases should be done by the purchasing department except for
small purchases which may be done by the user’s department. What is needed is that
there should be staff wholly devoted to purchasing. Such a staff is bound to become
expert in the various matters to be attended to per units and licenses to be obtained,
transport, sources of supply, probable price etc. The concerned officers in this department
keep themselves in constant touch with the markets either by reading various trade
magazines or by direct association, to have the latest information.
If a concern has a number of factories requiring the same material and stores,
there will be advantage in centralizing purchases since important economies in prices and
even transport may be obtained by placing large orders at a time. In such a case
inspection at a source may also be possible of course, there will be a little delay in supply
because of clerical processes and sometimes, there may be a misunderstanding resulting
in supply of wrong articles.
However, there is no advantage in centralized purchasing if different materials
and stores are required by different plants.
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Materials purchase Procedure:
Materials purchase department in a business house is confronted with the
following issues.
What to purchase?
When to purchase?
How to purchase?
From where to purchase?
At what price to purchase?
To overcome the above listed issues, the purchase department follows the
procedure involving following steps:
Receiving purchase requisition.
Employing the source of material supply and selecting suitable material suppliers.
Preparation and execution of purchase orders.
Receiving material supplies.
Inspecting and testing of material.
Checking and passing bills of payment.
Purchase Requisitions
Since the materials and stores purchased will be used by the production
departments, there should be constant co-ordination between the purchase and production
departments.
Control over Buying
To control overbuying of regular stores materials it is necessary to determine their
maximum, minimum, reorder level and economic.
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Order quantities.
The use of economic order quantities and various levels constitutes an adequate
safeguard against improper indenting of regular materials. In respect of special materials,
required for a special order or purpose, it is desirable that the technical department
concerned should prepare materials specification list specifying the quantity, size and
order specification of materials to be drawn from the stores and those to specially
procured.
Exploring and selecting material suppliers
A source for the supply of each material may be selected after the receipt of the
purchase requisition purchase department in each business house usually maintain a list
of suppliers for each group of materials, required by their concern at least three quotation
are invited from such suppliers.
On the receipt of these quotations a comparative statement is prepared. For
selecting material suppliers the factors which the purchase department keeps in its mind
are price, quantity, quality offered, time of delivery, mode of transportation, terms of
payment, reputation of supplier; etc. In addition to the above listed factors purchase
manager obtains the necessary information from the statement of quotations, past records,
buyer guides etc. for finally selecting material suppliers.
Purchase Order
Having decided on the best quotation that should be accepted, the purchase
manager or officer proceeds to issue the formal purchase order. It is a written request to
supply certain specified materials at specified rates and within a specified period.
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Objectives of System of Material Control:
The objectives of a system of material control are the following.
Ensuring that no activity, particularly production, suffers from interruption for
want of materials and stores – it should be noted that this requires constant availability of
every item that may be needed howsoever small its cost may be. Lubricating oil may cost
much less than the main raw material but, from the point of view of uninterrupted
production, both have equal importance. Seeing to it that all the material and stores are
acquired at the lowest possible price considering the quality that is required and
considering other relevant factors like reliability in respect of delivery etc.Minimization
of the total cost involved, both for acquiring stocks (apart from the price paid to the
suppler and for holding them).
Avoidance of unnecessary losses and wastages that may arise from deterioration
in quality due to defective or long storage or from obsolescence. It may be noted that
losses and wastages in the process of manufacture concern the production department.
Maintenance of proper records to ensure that reliable information is available for all
items of materials and stores that not only losses and pilferages are detected but also
proper production planning is possible.
The fulfillment of the objectives mentioned above will require that standard lists
of all the materials and stores required for the firm’s work be drawn up with the weekly
consumption figures. Also the lead time for each item has to be determined which will
then enable the firm to ascertain the minimum quantity for each items. It is also necessary
to fix maximum quantity so that capital is not locked up unnecessarily and the risk of
obsolescence is minimized. Costs are minimized through the A.B.C. System (which
means classification of the various items on the basis of investment involved items
requiring very large investment being classified as A, those requiring very little
investment being categorized as C and those in between as B). For any items the quantity
to be ordered (E.O.Q) is carefully worked out.
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Requirement of material control
Material control requirements are as follows
Proper co-ordination of all departments involved; viz, finance, purchasing,
receiving, inspection storage, accounting and payment
Determining purchase procedure to see that purchases are made, after making
suitable enquiries at the most favorable terms to the firm.
Use of standard form for placing the order noting receipt of goods, authorizing issue of
materials etc.
Preparation of budgets concerning materials, supplies and equipment to ensure
economy in purchasing and use of materials.
Operation of a system of internal checks so that all transactions involving
materials, supplies and equipment purchases are properly approval and automatically
checked.Storage of all materials and supplies in a well designated location with proper
safeguards.
Operation of a system of perpetual inventory together with continuous stock
checking so that it is possible to determine at any time the amount and value of each kind
of material in stock.
Operation of a system of stores control and issue so that there will be delivery of
materials upon requisition to departments in the right amount at the tie they are needed.
Development of system of controlling account and subsidiary records which exhibit
summary and detailed material costs at each stage of material receipt and consumption
from the stock room to finished goods.
Regular reports of materials purchased, issue form stock, inventory balances
stock, goods returned to vendors, and spoiled or defective units.
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Minimizing the cost of purchasing and store keeping
There are two types of costs which are involved in making a purchase and
keeping the goods in the store. For placing each order, a certain amount of labour is
required and, therefore, it will involve a not only includes the cost in cured by the
purchasing department but it also includes the cost of receiving and inspecting the goods.
These costs will naturally increase it the number of order is large; there can be saving if
the number of orders is reduced.
The other type of cost is concerned with keeping the goods in stock, it comprises
of the money invested, the loss which is likely to take place if the goods are kept, the
expenses incurred on looking after the items etc. Larger the stock, higher will be this type
of cost. In order to reduce this cost, it is necessary to bring down level of the stock. It
may be noted that the number of orders, can be cut down only if the quantity of each
order is increased; but if that is done, the average quantity on hand will increase and
therefore to have balance between those two costs and to keep total of the two at the
minimum level. With this objective in view, the economic order quantity is worked out as
stated earlier. But different items for stock have to be treated differently. The name given
to such classification is the ‘ABC’ system, or the selective inventory control.
Storage of material
The function of storage of materials is performed by the storekeeper. His duties
include accepting, identifying, classifying and proper placing of materials. Efficient
storage requires the consideration of the following points:
Checking of materials
The store-keeper should accept materials only after proper checking. He should
verify the materials received with the consignment note, inspection report and materials
received report. He should send the copy of materials received report received by him,
after verification, to the Accounts department.
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Classification and codification of materials
A proper system of classification and codification is necessary to prevent mixing
of one type of materials with the other availability of materials and supplies in required
quantities.
Materials should be classified according to their nature in appropriate categories,
e.g. materials of an engineering concern may be classified as mild steel, bronze, copper,
etc, and each of these categories may be further classified suitably. In order to save time
in handling of materials and prepare written documents and to remove ambiguity in
description of materials, it will be better if each store item is giving a code number. There
are two important methods of codification of materials.
Alphabetical methods
In this method alphabets or letter is used far codification of each category of
materials. E.g.: copper wire may be coded as CW or steam coal may be coded as SC, etc.
Numerical method
Numerical coding should invariably be used where material accounting is to be
mechanized or computerized. The first thing to be alone in numerical coding is to prepare
a list of the various departments and allotting to each of them a number. A list of the
various departments and allotting to each of them a number. A list of materials should
also be prepared and each type of materials should also be prepared and each type of
materials should also be given a number.
Codification of materials helps in two ways
In the absence of coding the title of an account may have to be written a number
of times. This results in unnecessary clerical work, particularly in case of lengthy account
titles.Secrecy, about the exact nature of the transaction from the general office
employees, can be kept.
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Putting materials into bins and racks
The store should be divided into several sections, each meant for one particular
type of material. Such containers are termed as bins or racks.
Each bin or rack should also be appropriately numbered and indented for easy
identification. For example, the store may have a separate section for bolts. This section
may keep bolts of different sizes in different bins. To facilitate material handling and
their easy location it will be better if floor plans are exhibited at the entrance of each store
exhibiting the location of various sections.
Observance of levels
In order to avoid over and under-investment in materials, the management should
decide the maximum and the minimum quantity of materials to be kept in store. The
limits set by the management should be observed by the storekeeper.
Inventory Control
The main objective of inventory control is to achieve maximum efficiency in
production and sales with the minimum investment in inventory. Inventory comprises of
stocks of materials, components, work-in-progress, and finished products. The techniques
commonly applied for inventory control are as follows.
Setting of various stock levels.
ABC analysis, two bin system
Establishment of system of budgets
Use of perpetual inventory records and continuous stock verification
Economic order quantity
Review of slow and non-moving items
Use of control rations.
Some of the above techniques have been discussed as below:
Setting a various stock levels
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Minimum level
It indicates the lowest figure of inventory balance, which must be maintained in
hand at all times, so that there is no stoppage of production due to non-availability of
inventory.
The main considerations for the fixation of minimum level of inventory are as
follows:
Information about maximum consumption and maximum delivery period in
respect of each item to determine the re-order level.
Average rate of consumption for each inventory item.
Average delivery period for each item. The period can be calculated by averaging
the maximum and minimum period.
The formula used for its calculation is as follows:
Minimum level of inventory = Re-order level – (Average rate of consumption X
average time of inventory delivery)
Maximum level
It indicates the maximum figure of inventory quantity held in stock at any time.
The important considerations which should govern the fixation of maximum level for
various inventory items are as follows:
The fixation of maximum level of an inventory item requires information about its
re-order level. The re-order level itself depends upon its maximum consumption of
inventory item and its maximum delivery period.Knowledge about minimum
consumption and minimum delivery period for each inventory item should also be
known.
The determination of maximum level also requires the figure of economic order
quantity.Availability of funds; storage space; nature of items and their price also are
important for the fixation of minimum level.
In the case of imported materials due to their irregular supply, the maximum level should
be high.
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The mathematical formula used for its determination is as follows:
Maximum level of inventory = Re-order-level - ( Minimum consumption X
Minimum re-order period) + Re-order quantity.
Re-order level
This level lies between minimum and the maximum levels in such a way that
before the material ordered is received into the stores, there is sufficient quantity on hand
to cover both normal and abnormal consumption situations. In other words, it is the level
at which fresh order should be placed for replenishment of stock.
Mathematically:
Re-order level = Maximum re-order period X maximum usage(Or)= Minimum
level + (Average rate of consumption X Average time To obtain fresh supplies)
Average Inventory Level
This level of stock may be determined by using the following formula:
Average inventory = Minimum level+ ½ Re-order quantity
(Or) = Maximum level + Minimum level
Danger level
It is the level at which normal issues of the raw material inventory are stopped
and issues are only made.
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ABC Analysis
It is a system of inventory control it exercises discriminating control over
different items of stores classified on the basis of the investment involved. Usage the
items are divided into three categories according to their importance, namely, their value
and frequency replenishment during a period.
‘A’ Category Items consists of only a small percentage i.e., about 10% of the total
items handled by the stores but require heavy investment about 70% of inventory value,
because of their high prices and heavy requirement.
‘B’ category of items is relatively less important; they may be 20% of the total
items of material handled by stores. The percentage of investment required is about 20%
of the total investment in inventories.
‘C’ category of items does not require which investment; it may be about 10% of
total inventory value but hey are nearly 70% of the total items handled by store.
‘A’ category of items can be controlled effectively by using a regular system
which ensures neither over-stocking nor storage of materials for production. Such a
system plans its total material requirements by making budgets. The stocks of materials
are controlled by fixing certain levels like maximum level, minimum level and re-order
level. A reduction in inventory management costs is achieved by determining economic
order quantities after taking into account ordering cost and carrying cost. To avoid
shortage and to minimize heavy investment in inventories, the techniques of value
analysis, variety reduction, standardization etc., may be used.
In the case of ‘B’ category of items, as the sum involved is moderate, the same
degree of control as applied in ‘A’ category of items is not warranted. The orders for the
items, belonging to this category may be placed after reviewing their situation
periodically.
For ‘C’ category of items, there is no need of exercising constant control. Orders
for items in this group may be placed either after six months or once in a year, after
ascertaining consumption requirements. IN this case the objective is to economies on
ordering and handling costs.
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The advantages of ABC analysis are the following:
It ensure that, without there being any danger of interruption of production for
want of materials or stores, minimum investment will be made on inventories of stocks of
materials or stocks to be carried.
The cost of placing orders, receiving goods and maintaining stocks is minimized
especially if the system is coupled with the determination of proper economic order
quantities.
Management time is saved since attention need be paid only to some of the items
rather than all the items as would be the case if the ABC system was not in operation
With the introduction of the ABC system, much of the work connected with purchases
can be systematized on a routine basis to be handled by sub-ordinate staff.
Two Bin Systems
Under this system each bin is divided into two parts-one, the smaller one, to stock
the quantity equal to the minimum stock or even the re-ordering level, and the other to
keep the remaining quantity. Issues are made out of the larger portion, but as soon as it
becomes
Necessary to use quantity out of the smaller portion, fresh order is placed. “Two
bin systems” is supplemental to the record of respective quantities on the bin card and the
stores ledges card.
Establishment of System of Budgets
To control investment the inventories, it is necessary to know the advance about
the inventories requirement during a specific period usually a year. The exact quantity of
various types of inventories and the time when they would be required can be known by
studying carefully production plans and production schedules. Based on this, inventories
requirement budget can be prepared. Such a budget will discourage the unnecessary
investment in inventories.
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Periodic inventory system
In case of this system quantity and value of inventory is found of only at the need
of the accounting the period after having a physical verification of the units in hand. The
system does not provide the information regarding the quantity and value of materials in
hand on a continuous basis. The cost of material used is obtained by adding the total
value of inventory purchased during the period to the value of inventory at the end of the
period. For example, if the value of the inventory in the beginning was Rs.10, 000/-
purchases during the period were of Rs.50000/- and the closing inventory Rs.15, 000/-,
the cost of material used will be taken as Rs.45, 000/-(i.e. Rs.10, 000+Rs.50, 000 - Rs15,
000) it is thus assumed that materials not in stock have been used no accounting is done
for shrinkage losses, theft and wastage.
Perpetual Inventory
It is also known as automatic inventory system. According to the chartered
institute of management accountant (CIMA), London, it is “a system of records
maintained by the controlling department, which reflects the physical movement of stock
and their current balance”.
The definition given by Weldon is more exhaustive and explanatory. According
to him it is” a method of recording stores balance after every receipt and issue, to
facilitate regular checking and to make available details about the quantity and value of
stock of each items at all times”. The system thus provides a rigid control over stocks of
materials as physical stock can regularly be verified with the stock records kept in the
stores and the cost office.It represents a system of records maintained by the stores
department it is fact comprises of:
Bin cards
Bin card maintains a quantitative record of receipts, issues and closing balances of
each item of stores. Separate bin cards are maintained for each item. Each card is filled
up with the physical movement of goods i.e., on its receipt and issue
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Stores ledger
Like bin cards, the store ledger are maintained to record all receipt and issue
transactions in respect of materials. It is filled up with the help of goods received note
and material issue requisitions.
A perpetual inventory is usually checked by a programmed of continuous stock
taking. Continuous stock taking means the physical checking of those records (which are
maintained under perpetual inventory). With actual stock. Perpetual inventory is essential
for material control. It incidentally helps continuous stock taking. The success of
perpetual inventory depends upon the following:
The stores ledger-(showing quantities and amount of each item)
Stock control cards (or Bin cards)
Reconciling the quantity balances shown above.
Checking the physical balances of a number of items every day systematically and
by rotation.
Explaining promptly the causes of discrepancies, it any, between physical
balances and book figures.
Making corrective entries were called for after step (e) and
Removing the causes of the discrepancies refereed to in step (e)
Advantages
The main advantages of perpetual inventory are as follows:
Physical stocks can be counted and book balances adjusted as and when desired
without waiting for the entire stocktaking to be alone.
Quick compilation of profit and loss mounts (for interim period) due to prompt
availability of stock figures.
Discrepancies are easily located and thus corrective action can be promptly taken
to avoid their recurrence
A systematic review of the perpetual inventory reveals the existence of surplus,
dormant, obsolete and slow-moving materials, so that remedial measures may be
taken in time.Fixation of the various levels and checking of actual balances in
hand with these levels assist the storekeeper in maintaining stocks within limits
and in initiating purchase requisitions for correct quantity at the proper time.
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Continuous stock taking
The checking of physical inventory is an essential feature of every sound system
of material control. Such a checking may be periodical or continuous. Annual stock-
taking, however, has certain inherent shortcomings which tend to detract from the
usefulness of such physical verification. For instance, since all the items have to be
covered in a given number of days, either the production department have to be shutdown
during those days to enable through checking of stock or else the verification must be of
limited character. Moreover, in the case of periodical checking there is the problem of
finding an adequately trained contingent. It is likely to be drawn from different such
temporary duties some that perfunctorily. The element of surprise, that is essential for
effective control is wholly absent in the system. Then if there are stock discrepancies,
they remain undetected until the end of the period. It means that the figures of stock
during the period continue to be supplies in correctly. Often, the discrepancies are not
corrected.
The system of continuous stock-taking consists of counting and verifying the
number of items daily throughout the year so that during the year all items of stores are
covered three or four times. The stock verifiers are independent of the stores, and the
stores staff has no fore knowledge as to the particular items that would be checked on any
particular day. But it must be seen that each item is checked a number of times in a year.
Advantages:
The advantages of continuous stock-taking are:
Closure of normal functioning is not necessary.
Whole time specialized staff can be engaged for the purpose since the work is
spread throughout the year. In smaller concerns, duties may be assigned to various
officers of middle rank by rotation to the checking, say, of 20 items. This would be easy
because the store ledger caral and the lying there and enter the quantity on the form
provided for the purpose. The rest of the work (comparison with book figures) can be
done by the stores ledger clerk.
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Stock discrepancies are likely to be brought to the surface and corrected much
earlier than under the annual stock-taking system.The system generally has a sobering
influence on the stores staff because of the element of surprise present there in.
The movement of stores items can be watched more closely by the stores auditor
so that chances of obsolescence buying are reduced.Final Accounts can be ready quickly.
Interim accounts are possible quite conveniently.
Economic Order quantity (EOQ)
Purchase department in manufacturing concerns is usually faced with the problem
of deciding the “quantity of various items” which they should purchase. If purchases of
material are made in bulk then inventory carrying cost will be high. On the other hand it
order size is small each time, and then the ordering cost will be high. In order to
minimize ordering and carrying costs it is necessary to determine the order quantity
which minimizes these two costs. The size of the order for which both ordering and
carrying cost are minimum is known as economic order quantity;
Assumptions Underlying E.O.Q
The calculation of economic order quantity of material to be purchased is subject
to the following assumptions:
Ordering cost per order and carrying cost per unit per annum are known and they
are fixed.
Anticipated usage of material in units is known.
Cost per unit of the material is constant and is known as well.
The quantity of material ordered is received immediately i.e., the lead time is
zero.
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Losses due to obsolete stores
Obsolescence is defined as “the loss in the intrinsic value of an asset due to its
suppression”. Materials may become obsolete under any of the following circumstances.
Where it is a spare part or a component of machinery used in manufacture and
that machinery becomes obsolete;
Where it is used in the manufacture of a production, which has become obsolete;
Where the material itself is replaced by another material due to either improved quality or
fall in price.
Store Ledger
A modern stores ledger is a collection of cards or loose leave specially ruled for
maintaining a record of both quantity and cost of stores received, issued and those in
stock. It being a subsidiary ledger to the main cost ledger, the cost account department
maintains it. It is posted from goods received notes and materials requisition.
The advantages of writing up stores ledger mechanically are:
It enables distribution of work among a number of clerks due to which receipt and
issue are posted quickly and regularly.
It enables stock records to be centralized in case of an organization having a
number of depots.
The accuracy of posting can be mechanically tested more convenientlyThe
records are clearer and neater also the recurring cost of maintaining them is much less
than those kept manually.
If up to date records are available, the management will be able to exercise greater
control over quantities held in stock from time to time which may result in a great deal of
saving in both the amount of investment in stock and their cost.
Now-a-days, mostly a duplicate record of issues and receipt of materials is kept
one on bin cards in the store and the second in the stores ledger in the stores.
