PREFACE

Finance as a subject of study, has received wide-spread support from both

academic and business segment people.

The topic “FINANCE MANAGEMENT, COST REDUCTION & COST

CONTROL” in HAL was selected as to understand the financial need and
importance with special reference to HAL ACCESSORIES DIVISION
LUCKNOW.

As the cost control refers to the administration of all the analysis of cost control
ratios and sources and application of funds and the company by studying,
interpreting various financial statements using various techniques such as
comparative statements analysis etc.

Even efforts have been made to collect the relevant information about the topic.
The present study about “FINANCE MANAGEMENT, COST REDUCTION &
COST CONTROL” in HAL Accessories Division, Lucknow it based on my six
weeks project study in FINANCE AND ACCOUNT DEPARTMENT in HAL.

This training gives me an opportunity to make a study and analysis the system
adopted by the organization. It enables me to build the practical knowledge
acquired during the class study with practical training received during my project.

ACKNOWLEDGEMENT

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This is to express my heartiest gratitude towards all those who helped and

inspired me to complete my project report.

I feel immense pleasure in submitting my summer training project report.

I am highly thankful to my Director Prof. J.K.Johari for his support and

encouragement that he provided me during the tenure of the project report.

I am also thankful to my H.O.D Mr. K.K.Mishra and to my faculty guide

Mrs. SHRUTI KHARE for their kind and con1stant support and guidance.

At the end I would like to mention about the constant motivation and help

that I received from my family, teachers, friends and batch mates for completing

my project report.

NIDHI YADAV

EXECUETIVE SUMMARY

Topic: - Finance Management, Cost Reduction and Cost Control.

Objective:-

1. COST REDUCTION AND CONTROL:

To have full coverage of finance control by following various budgets i.e.

capital budget, revenue budget (manpower budget, purchase budget, welfare
budget, maintenance budget, ways and means etc) and making all efforts to

2
 reduce the cost from each element of cost by curtailing the expenditure
estimated in the budget to a reasonable cost, so as to reduce the cost and
increase the profitability of the organization.

2. FINDING VARIOUS METHODS FOR IMPLEMENTATION:

To find out various methods like EOQ (Economic Order Quantity), ABC
analysis etc which are implemented by the organization to control cost under
various heads.

Research Methodology:-

Types of Research: - Descriptive research design for the final survey.

Source of Data: - Questionnaire, Personal Interviews and Departmental

Analysis.

Sample Design: - Probability sampling design.

Sample Size: - 50 people.

Recommendation:-

 There should be facility of intranet so fax and such other things must be
done through it that can reduce time and money.

 For attendance finger print system should be adopted so that actual

person’s attendance can be mentioned.

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  The time delay between rising of purchase order and preparation of RDR
should be reduced.

 Wages to direct workers should be given through piece rate system.

 Efficiency of indirect workers should be measured so that slackness can

be sorted out.

Conclusion:-

HAL is one of the largest PSU under the department of defense production, GOI
and is a “NAVRATNA” company ranked 34th in the list of world’s top 100 defense
companies. HAL with its wide spectrum of expertise in design, development and
manufacture of aircrafts, helicopters, engines, accessories and avionics has
emerged as major aeronautical complex in Asia.

As herein, the projects and items need huge investments than any other
organization and confidential factor is also there too much extent but as much
information is extracted shows that cost control is being performed quite good
that’s why it is in so much profit.

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PROFILE OF THE COMPANY

HINDUSTAN AERONAUTICS LIMITED

GENERAL PROFILE

5
Hindustan Aeronautics Limited (HAL) based in Bangalore, India, is one of
Asia’s largest aerospace companies. Under the management of the Indian
Ministry of Defence, this public sector company is mainly involved in aerospace
industry, which includes manufacturing and assembling aircraft, navigation and
related communication equipment, as well as operating airports. HAL built the
first military aircraft in South Asia and is currently involved in the design,
fabrication and assembly of aircraft, jet engines, helicopters and their
components and spares. It has several facilities throughout India including Nasik,
Korwa, Kanpur, Koraput, Lucknow, and Hyderabad. The German engineer Kurt
Tank designed the HF-24 Marut fighter-bomber, the first fighter aircraft made in
India.
HISTORY OF THE COMPANY

Hindustan Aeronautics has a long history of collaboration with several other

international and domestic aerospace agencies such as the Airbus Industries,
Boeing, Sukhoi Aviation Corporation, Israel Aircraft Industries, RSK MiG,
BAESystems, Rolls-Royce plc, Dassault Aviation, Dornier Flugzeugwerke,
Aeronautical Development Agency and Indian Space Research Organization.

HAL was established as Hindustan Aircraft in Bangalore in 1940 by Walchand

Hirachand to produce military aircraft for the Royal Indian Air Force. The initiative
was actively encouraged by the Kingdom of Mysore, especially by the Diwan, Sir
Mirza Ismail. The British Government bought a one-third stake in the company by
April 1941 as it believed this to be a strategic imperative. Later in April 1942, it
bought out the stakes of Walchand Hirachand himself and other promoters so
that it can act freely. The decision by United Kingdom was primarily motivated to
boost British military hardware supplies in Asia to counter the increasing threat
posed by Imperial Japan during Second World War. However, the Mysore
Kingdom refused to sell its stake in the company but yielded the management
control over to the British Government. Thus, within 2 years of establishment, it
was nationalized.

6
Hindustan Aeronautics Limited (HAL) came into existence on 1st October
1964.HAL was set up as an amalgamation of Hindustan Aircraft Limited along
with Aeronautics India Limited and Aircraft Manufacturing Depot located in
Kanpur, India. Hindustan Aeronautics Limited has it headquarter located at
Bangalore, India. HAL is one of the largest aerospace companies which are run
by the Ministry of Defense. The principal activities of HAL involve manufacturing
aircraft, aerospace, navigation, and instruments for communication purposes.
Apart from these, few other activities performed by HAL are Designing,
manufacturing, and collecting aircraft, jet engines, helicopters, along with their
elements and spares. Hindustan Aircraft Limited which located at Bangalore was
incorporated by the industrialist the late Seth Walchand Hirachand December
1940. The Government of India became a stakeholder of the company in 1941
and seized the management department in 1942. HAL has 19Production Units
and 9 Research and Design Centers in 7 locations in India. The Company has an
impressive product track record - 12 types of aircraft manufactured with in-house
R & D and 14 types produced under license. HAL has manufactured over 3550
aircraft, 3600 engines and overhauled over 8150 aircraft and 27300 engines.
HAL has been successful in numerous R & D programs developed for both
Defence and Civil Aviation sectors. HAL has made substantial
Progress in its current projects:

• Dhruv, which is Advanced Light Helicopter (ALH)

• Tejas - Light Combat Aircraft (LCA)
• Intermediate Jet Trainer (IJT)
• Various military and civil upgrades.

Dhruv was delivered to the Indian Army, Navy, Air

Force and the Coast Guard in March 2002, in the very
first year of its production, a unique achievement.

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HAL has played a significant role for India's space programs by participating in
the manufacture of structures for Satellite Launch Vehicles like.
• PSLV (Polar Satellite Launch Vehicle)
• GSLV (Geo-synchronous Satellite Launch Vehicle)
• IRS (Indian Remote Satellite)
• NSAT (Indian National Satellite)

HAL has formed the following Joint Ventures (JVs):

• BAeHAL Software Limited

• Indo-Russian Aviation Limited (IRAL)
• Snecma HAL Aerospace Pvt. Ltd.
• SAMTEL HAL Display System Limited
• HALBIT Avionics Pvt. Ltd.
• HAL-Edgewood Technologies Pvt. Ltd.
• INFOTECH HAL Ltd

Apart from these seven, other major diversification projects are Industrial Marine
Gas Turbine and Airport Services. Several Co-production and Joint Ventures with
international participation are under consideration.
Hal’s supplies / services are mainly to Indian Defence Services, Coast Guards
and Border Security Forces. Transport Aircraft and Helicopters have also been
supplied to Airlines as well as State Governments of India. The Company has
also achieved foothold in export in more than 30 countries, having demonstrated
its quality and price competitiveness.

• HAL has won several International & National Awards for achievements in
R&D, Technology, Managerial Performance, Exports, Energy
Conservation, Quality and Fulfillment of Social Responsibilities.

8
• HAL was awarded the “INTERNATIONAL GOLD MEDAL AWARD” for
Corporate Achievement in Quality and Efficiency at the International
Summit (Global Rating Leaders 2003), London, UK by M/s Global Rating
and UK in conjunction with the International Information and Marketing
Centre (IIMC).
• HAL was presented the International - “ARCH OF EUROPE” Award in
Gold Category in recognition for its commitment to Quality, Leadership,
Technology and Innovation.

• At the National level, HAL won the "GOLD TROPHY" for excellence in
Public Sector Management; instituted by the Standing Conference of
Public Enterprises (SCOPE).The Company scaled new heights in the
financial year 2006-07 with a turnover of Rs.7, 783.61 Cores.

PRODUCT OF HAL

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PRODUCTS IN CURRENT MANUFACTURING RANGE

10
SU 30 MKI
Twin-seater, Multi-role, Long range Fighter /
Bomber / Air Superiority Aircraft.

MIG-27 M
Single-seater Tactical Fighter / Bomber with
Variable sweep wings.

MIG-21 VARIANTS
Single-seater Front line Tactical Interceptor/
Fighter Aircraft.

AIRCRAFT WESTERN ORIGIN

JAGUAR INTERNATIONAL

HAL commenced production of Jaguar International

- deep penetration strike and battlefield tactical Support Aircraft in 1979 under
license from British Aerospace, including the engine, accessories and avionics.
Jaguar aircraft is designed with 7 hard points (4 under wing, 2 overawing and 1
under fuselage) capable of carrying a huge load of several of weapons in
different combinations to meet the Customers’ needs.

DHRUV (ADVANCED LIGHT HELICOPTER)

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With a proven track record and established technology for manufacture of
helicopters and its components, the Helicopter Division commenced series
production of Dhruv (Advanced Light Helicopter) in 2000 - 2001. The ALH is a
multi-role, multi-mission helicopter in 5.5 ton class, fully designed and developed
by HAL. Built to FAR 29specifications, Dhruv is designed to meet the requirement
of both military and civil operators.

CHETAK

The Helicopter Division manufactures the versatile and multi-purpose Chetek

Helicopters for Civil and Military applications both for Domestic and International
customers
.
OBJECTIVES OF HAL

• To ensure availability of Total Quality

People to meet the Organizational

Goals and Objectives.

• To have a continuous improvement in

Knowledge, Skill and Competence (Managerial, Behavioral and

Technical)

• To promote a Culture of Achievement and Excellence with emphasis on

Integrity, Credibility and Quality

• To maintain a motivated workforce

through empowerment of Individual and

team building.

• To enhance Organizational Learning

12
 • To play a pivotal role directly and significantly to enhance Productivity,

• Profitability and improve the Quality of Work Life

VISION OF THE COMPANY

"To make HAL a dynamic, vibrant, value-based learning organization with human

resources exceptionally skilled, highly motivated and committed to meet the

current and future challenges. This will be driven by core values of the Company

fully embedded in the culture of the Organization".

MISSION OF THE COMPANY

Enable all those working for HAL to give their best to ensure their all-round

growth as well as that of the organization. To become a globally competitive

aerospace industry while working as an instrument for achieving self-reliance in

design, manufacture and maintenance of aerospace Defence equipment and

diversifying to related areas, managing the business on commercial lines in a

13
climate of growing professional competence. "To become a globally competitive

aerospace industry while working as an instrument for achieving self-reliance in

design, manufacture and maintenance of aerospace Defense equipment and

diversifying to related areas, managing the business on commercial lines in a

climate of growing professional competence ".

VALUES OF THE COMPANY

• CUSTOMER SATISFACTION
We are dedicated to building a relationship with our customers where we become
partners in fulfilling their mission. We strive to understand our customers ' needs
and to deliver products and services that fulfill and exceed all their requirements.

• COMMITMENT TO TOTAL QUALITY

We are committed to continuous improvement of all our activities. We will supply
products and services that conform to highest standards of design, manufacture,
reliability, maintainability and fitness for use as desired by our customers.

• COST AND TIME CONSCIOUSNESS

We believe that our success depends on our ability to continually reduce the cost
and shorten the delivery period of our products and services. We will achieve this
by eliminating waste in all activities and continuously improving all processes in
every area of our work.

• INNOVATION AND CREATIVITY

We believe in striving for improvement in every activity involved in our business
by pursuing and encouraging risk-taking, experimentation and learning at all

14
levels within the company with a view to achieving excellence and
competitiveness.

• TRUST AND TEAM SPIRIT

We believe in achieving harmony in work life through mutual trust, transparency,
co-operation, and a sense of belonging. We will strive for building empowered
teams to work towards achieving organizational goals.
• RESPECT FOR THE INDIVIDUAL
We value our people. We will treat each other with dignity and respect and strive
for individual growth and realization of everyone's full potential.
INTERNATIONAL AND DOMESTIC DEALS

INTERNATIONAL DEALS

• The US$10 billion fifth-generation fighter jet program with the Sukhoi
Corporation of Russia.
• US$1 billion contract to manufacture aircraft parts for Boeing.
• Multi-role transport aircraft project with Ilyushin of Russi US$600 million.
• 120 RD-33MK turbofan engines to be manufactured for MiG-29K by HAL
for US$250 million.
• Contract to manufacture 1,000 TPE331 aircraft engines for Honeywell
worth US$200,000 each (estimates put total value of deal at US$200
million).
• US$120 million deal to manufacture Dornier 228 for RUAG of Switzerland.
• Manufacture of aircraft parts for Airbus Industries worth US$150 million.
• US$100 million contract to export composite materials to Israel Aircraft
Industries.
• US$65 million joint-research facility with Honeywell and planned
production of Garrett TPE331 engines.

15
 • US$50.7 million contract to supply Advanced Light Helicopter to
Ecuadorian Air Force [11] HAL will also open a maintained base in the
country.
• US$30 million contract to supply avionics for Malaysian Su-30MKM.
• US$20 million contract to supply ambulance version of HAL Dhruv to Peru.
• Contract of 3 HAL Dhruv helicopters to Turkey in a deal worth US$20
million.
• Supply of HAL Dhruv helicopters to Mauritius' National Police in a deal
worth US$7 million.
• Unmanned helicopter development project with Israel Aircraft Industries.

DOMESTIC DEALS

• 180 Sukhoi Su-30MKI being manufactured at HAL's facilities in Nasik and

Bangalore. The total contract, which also involves Russia's Sukhoi

Aerospace, is worth US$3.2 billion.

• 200 HAL Light Combat Helicopters for Indian Air Force and 500 HAL

Dhruv helicopters worth US$5.83 billion.

• US$900 million aerospace hub in Andhra Pradesh.

• US$57 million upgrade of SEPECAT Jaguar fleet of the Indian Air Force.

• US$55 million fighter training school in Bangalore in collaboration with

Canada's CAE.

• 64 MiG-29s to be upgraded by HAL and Russia's MiG Corporation in

program worth US$960 million. Licensed production of 82 BAe Hawk132.

16
 CUSTOMERS OF THE COMPANY

International Customers Domestic Customers

• Airbus Industries, France • Air India
• APPH Bolton, UK • Air Sahara
• BAE Systems, UK • Airports Authority of India
• Chilton, UK • Bharat Electronics
• Coast Guard, Mauritius • Border Security Force
• Corporate Air, Philippines • Coal India
• Cosmic Air, Nepal • Defense Research & Development
• Dassault Aviation, France Organization
• Dowty Aerospace • Govt. of Andhra Pradesh
Hydraulics, UK • Govt. of Jammu & Kashmir
• EADS, France • Govt. of Karnataka
• ELTA, Israel • Govt. of Maharashtra
• Gorkha Airlines, Nepal • Govt. of Rajasthan
• Hampson, UK • Govt. of Uttar Pradesh
• Honeywell International, • Govt. of West Bengal
USA • Indian Air force
• Island Aviation Services, • Indian Airlines
Maldives • Indian Army
• Israel Aircraft Industries, • Indian Coast Guard
Israel • Indian Navy
• Messier Dowty Ltd., UK • Indian Space Research Organization
• Mitsubishi Heavy • Jet Airways
Industries, Japan • Kudremukh Iron ore Company ltd.
• MOOG, USA • NALCO
• Namibian Air Force, • Oil & Natural Gas Corporation Ltd.

17
 Namibia • Ordnance Factories
• Peruvian Air Force , Peru • Reliance Industries
• Rolls Royce Plc, UK • United Breweries
• Royal Air Force, Oman
• Royal Malaysian Air Force,
Malaysia
• Royal Nepal Army, Nepal
• Royal Thai Air Force,
Thailand

EVOLUTION AND GROWTH OF THE COMPANY

The Company's steady organizational growth over the years with consolidation
and enlargement of its operational base by creating sophisticated facilities for
manufacture of aircraft / helicopters, aero engines, accessories and avionics is
illustrated below.
ORGANIZATION STRUCTURE

18
19
ACHIEVEMENTS / AWARDS

20
HAL has won several International & National Awards for achievements in R&D,

Technology, Managerial Performance, Exports, Energy Conservation, Quality

and Fulfillment of Social Responsibilities.

• HAL is the only one PSU which has been included in “NAVRATNA”

category.

• HAL was awarded the “INTERNATIONAL GOLD MEDAL AWARD” for

Corporate Achievement in Quality and Efficiency at the International

Summit (Global Rating Leaders 2003), London, UK by M/s Global Rating

and UK in conjunction with the International Information and Marketing

Centre (IIMC).

• HAL was presented the International - “ARCH OF EUROPE” Award in

Gold Category in recognition for its commitment to Quality, Leadership,

Technology and Innovation.

• At the National level, HAL won the "GOLD TROPHY" for excellence in

Public Sector Management, instituted by the Standing Conference of

Public Enterprises (SCOPE)

SERVICES

21
 FINANCIAL HIGHLIGHTS OF HINDUSTAN AERONAUTICS LTD

Hindustan Aeronautics Limited (HAL) has cruised past the Rs.10, 000 crore mark
for the first time with a sales turnover of Rs.10260 crores during the Financial
Year 2008-09. The profit of the Company (Profit before Tax) soared to Rs.2260
crores.

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The highlights are given below:

(Rupees in Crores)

Particulars 2007-08 2008-09 Growth-over

Sales 8625 10260 18.96%

VOP 8791 11162 26.97%

Profit before tax 2164 2260 4.44%

Profit after tax 1632 1559 -4.47%

Gross Block 2255 2661 18.00%

INTRODUCTION OF HAL ACCESSORIES DIVISION LUCKNOW

HAL Lucknow Division was established in 1973. The Division was setup with the
objective of supplying six types of systems equipment of Kiran and Marut
aircrafts. But now is holds a peculiar position in the company’s setup practically,
all other divisions are dependant for supply of accessories from Lucknow
Division. A mind boggling range of about 550 different products are being
produced and assembled under one roof, using totally diverse technologies.

The Division has also built up design and development capability and
indigenously developed electrical, hydraulic and other items which are
manufactures for use in aircraft as well as for fighting vehicles.

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At present division has 3207 employees out of which 2625 are workmen (1356
direct and 1269 indirect) and 582 officers. The division being a public sector
organization has extended a lot of statutory and non-statutory welfare facilities.
The human relations and discipline matters are regulated in the division through
well-defined system. Service matters of workmen are regulated through certified
Standing Orders while in the case of officers are taking care of by the Conduct
Appeal and Discipline Rules. There are 7 registered Trade Unions presently
functioning in the Lucknow Division in which H.A.E.A (Hindustan Aeronautics
Employees Association) is the majority union and has been recognized by the
management along with these is one officer’s Association H.A.O.A (Hindustan
Aeronautics Employees Association) to represent the officers of HAL.

HAL Lucknow Division is having 293 acres land area. In 48 acres factory
premises is constructed and rest 2445 acres are used of township.

HAL AT A GLANCE

1940 Hindustan Aircraft Ltd. Was set up by Late. Sri Walchand Hirachand in
association with then Govt. of Mysore, as a Private Ltd. Company.

1941-42 First product Harlow Trainer and curliest hawk Aircraft handed over
to Govt. of India Company was handed over United States Air
Force.

1942-45 HAL repaired over 1000 different varieties of aircraft and 3800
piston engines.

1945 Govt. of India took over the management of HAL again after the world war.

24
1948-49 First Percival prentice aircraft assembled.

1951 The control of HAL was shifted from ministry of industries to Ministry of
Defence.

1953-54 The first Hindustan Trainer (HT-II) had its maiden flight.

1956 HAL came under the public sector.

1960 Aircraft manufacturing depot was established at Kanpur.

1662 Aeronautics India Ltd was formed to manufacture MIG-21 Aircraft Three
factories at Nasik, Koraput and Hyderabad established.

1964 HAL was dissolved and its assets were merged with Aeronautics India Ltd
and the company by the name of Hindustan Aeronautics Limited
was formed.

1969 An agreement with USSR was reached for the license production of MIG-
21 aircraft.

1970 Helicopter Division was established to manufacture helicopters.

1973 Lucknow Division established to manufacture, instruments and

accessories.

1979 Agreement with British Aerospace for manufacturing Jaguar Aircraft.

1982 Agreement with USSR for license production of MIG-27M aircraft.

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1983 Korwa Division of HAL formed.

1990 Design and development of Light Combat Aircraft (LCA).

1991 Development of Advance Light Helicopter (ALH).

1993 Certification of ISO-9001.

1998 IMGT, a new division established at Bangalore.

2000 Certification of ISO-14001.

2003 License permitted by Russia for manufacturing of SU-30 Aircraft.

PRODUCTS OF LUCKNOW DIVISION

Electronics 1.State investment

2.DC system control and Production unit
3. AC system control and protection unit
4. Fuel management system
5. Land management system

Gyro-Instruments 1. Direction Gyros

2. Gyro Horizons
3. Rate Gyros
4. Synctors

Hydraulics 1. Accumulators
2. Servo Jacks
3. Gear Pumps
4. Activators
5. Motors

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 6. Value

Ground Support 1. Ground Power Units

Equipment 2. Hydraulic Trolleys
3. Customs Built fuel/Hydraulic test rigs

Wheels & Brakes 1. Main Wheels

2. Nose Wheels
3. Carbon composite brake pads

Sensors and Switches 1.Capacitancetypefuel content qualifying

Probes.
2. Temptation Sensor + Switches

Conventional 1. Altimeters
2. Vertical Speed Indicators
3. Jet pipe temperature indicators
4. Engine RPM indicators

Electrical 1. D. C. Generators
2. Alternators
3. Transformers Rectifier Units
4. Integrated Drive Generator

Fuel System 1. Main Pumps

2. Heat Pumps
3. Fuel Control Units
4. Booster Pump

Environment Control 1. Cold Air Units

System 2. Ventures
3. Water Extractors

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 4. Valves

Precision 1. All ranges NC Machines up to 5 Axis

Manufacturing 2. Precision Conventional machine
Capabilities

FUTURE PROSPECTS

• Company is planning to provide “AJT” (Advance Jet Trainer) named-

“HAWK” in September 2008 to the “Air Force of India”.

• The projects which are in line for future includes HJT (Hindustan Jet

Trainer) named- “KIRAN”, Sukhoi-30 named “OJAS”, PTA (Pilotless

Target Aircraft) named “Lakshay” etc.

• The company has got permission to provide LCA (Light Combat Aircraft)

named- “TEJAS” to “Indian Air Force” up to 2010 with all facilities.

• The company has also planned to start the projects like CAT (Combat

Aircraft Trainer), LCH (Light Combat Helicopter) and MLH (Medium Light

Helicopter).

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 TRADE UNIONS IN HAL LUCKNOW DIVISION

1. HAEA Hindustan Aeronautics Employees Association (Recognized)

2. HALU Hindustan Aeronautics Limited Employees Union

3. HARSS Hindustan Aeronautics Rastriya Sharam Sansthan

4. HADEA Hindustan Aeronautics Diploma Engineers Association

5. HAPKS Hindustan Aeronautics Prashikshit Karamachari Sangh

29
PROJECT PROFILE

Financial Management

30
 Financial Management can be defined as:-

The management of the finances of a business/organization in order to

achieve financial objectives

Taking a business as the most common structure, the key objectives of

financial management would be to:

• Create wealth for the business

• Generate cash, and

• Provide a return on investment keeping in mind the risks that the business is
taking and the resources invested

There are three primary elements to the process of financial management:

FINANCIAL PLANNING

Management need to ensure that sufficient funding is available to meet the

needs of the business. In the short term, funding may be needed to invest in
equipment and stocks, pay employees and fund sales made on credit.

In the medium and long term, funding may be needed for significant additions
to the productive capacity of the business or to facilitate acquisitions.

FINANCIAL CONTROL

Financial control is a critically important activity to help the business ensure

that said business is meeting its goals. Financial control addresses questions
such as:

• Are assets being used efficiently?

• Are the businesses assets secure?

•Does management act in the best interest of the shareholders and in

accordance with business rules?

FINANCIAL DECISION MAKING

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The primary aspects of financial decision making relate to investment,
financing and dividends:

• Investments must be financed in some way; however there are always

financing alternatives that can be considered. For example it is possible to
raise funds from selling new shares, borrowing from banks or taking credit
from suppliers.

• A key financing decision is whether profits earned by the business should be

retained rather than distributed to shareholders via dividends. If dividends are
too high, the business may be starved of funding to reinvest in growing
revenues and profits.

COST MANAGEMENT (CONTROL AND REDUCTION)

COST CONCEPT

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The term "cost" is synonymously used for the term "expense", which refers to

sacrifice. According to Committee of cost concepts-"Cost is foregoing, measured

in monetary terms, incurred or potentially to be incurred to achieve a specific

objective."

Controlling Cost via Responsibility Accounting-

To control cost these fundamentals should be observed-

• Fixing responsibility to control.

• Limiting the individuals control efforts to his controllable costs

• Reporting the performance of individual.

33
CLASSIFICATION OF COSTS

34
Classification by Nature:

i. Direct cost - Direct cost is that cost which can be

identified with a cost centre or a cost unit. For e.g. cost of
direct materials, cost of direct labour.

ii. Indirect cost - Cost which cannot be identified with a

particular cost centre or cost unit is called indirect costs. For
e.g. wages paid to indirect labour.

Classification By Behavior:

i. Fixed cost - Fixed cost is that cost which remains

constant at all levels of production. For e.g. rent, insurance.

ii. Variable cost - The cost which varies with the level of
production is called variable cost i.e., it increases on
increase in production volume and vice-versa. For e.g. cost
of materials, cost of labour.

iii. Semi-variable cost - This cost is partly fixed and

partly variable in relation to the output. For e.g. telephone
bill, electricity bill.

Classification by Element: The cost is classified into (a) Direct Cost,

and (b) Indirect Cost according to elements, viz, Materials, Labour and

Expenses

Classification by Function:

i. Production cost- It is the cost of the entire process

of production. In other words it is nothing but the cost of

35
 manufacture which is incurred up to the stage of primary
packing of the product.
ii. Administrative cost- It is the indirect cost pertaining
to the administrative function which involves formulation of
policies, directing the organization and controlling the
operations of an undertaking. This cost is not related to any
other functions like selling and distribution, research and
development etc.
iii. Selling cost - Selling cost represents the indirect cost
which isincurredfor
(a) seeking to create and stimulate demand
(b) securing orders.
iv. Distribution cost - It is 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-use.
v. R&D cost - "Research Cost" and "Development cost"
are two different types of costs.
Research cost is the cost of researching for new products,
methods and applications. Development cost is the cost of
the process which begins with the implementation of the
decision to produce the new product or apply the new
method and ends with the commencement of formal
production of that product or by that method.
vi. Pre-production cost - It is that part of the
development cost which is incurred for the purpose of a trial
run, before the commencement of formal production.
vii. Conversion cost - It is the cost incurred for
converting the raw material into finished product. It

36
 comprises of direct labour cost, direct expenses and factory
overheads.
viii. Prime cost - Prime cost is the aggregate of direct
material cost, direct labour cost and direct expenses. The
term ‘direct’ indicates that the elements of cost are traceable
to a particular unit of output.

Classification By Controllability:

i. Controllable cost - The cost, which can be

influenced by the action of a specified person in an
organization, is known as controllable cost. In a business
organization, heads of each responsibility centre are
responsible to control costs. Costs that they are able to
control are called controllable costs and include material,
labour and direct expenses.
ii. Uncontrollable cost - The cost which cannot be
influenced by the action of the person heading the
responsibility centre is called uncontrollable cost. For e.g. all
the allocated costs and the fixed costs.

Classification by Normality:

i. 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. Normal cost is charged to
the respective product / process.
ii. 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.

37
Classification by Time when Computed:

• Sunk cost -Historical cost which is incurred in the past is known as

sunk cost. This cost is not relevant in decision making in the current
period. For e.g. In the case of a decision relating to the replacement of a
machine, the written down value of the existing machine is a sunk cost
and hence irrelevant to decision making.

• Estimated cost -It is an approximate assessment of what the cost

will be. It is based on past data adjusted to anticipated future changes.

38
 ELEMENTS OF COST

The following diagram depicts the various elements of cost:

39
Material Cost:

Direct Materials - Materials which are present in the finished

product or can be identified in the finished product are called
direct materials. For e.g. Coconuts in case of coconut oil or
wood in a wooden cupboard.

Indirect Materials - Indirect materials are those materials which

do not normally form part of the finished products or which
cannot be directly traced to the finished product. For e.g. Stores,
oil, grease, cotton wool etc.

Labour Cost:

Direct Labour - Labour which can be attributed wholly to a

particular product, process or job is called direct labour. It is the
labour utilized in converting raw materials into finished products.
For e.g. Labour employed in the crushing department of an oil
mill.

Indirect Labour - Labour which cannot be identified with a

particular product, process or job is called indirect labour.
Indirect labour cost is apportioned to cost units or cost centres.
For e.g. Maintenance workers.

Expenses:

Direct Expenses - Expenses incurred (except direct materials

and direct labour) specifically for a product, process or job is
known as direct expenses. They are also called "chargeable
expenses". For e.g. Hiring charges for a machine specifically
hired for a particular process, excise duty, royalty.

Indirect Expenses - Expenses incurred other than direct

expenses are called indirect expenses. For e.g. Factory rent &
insurance, power, general repairs.

Overheads:

40
 Overheads is the sum total of indirect materials, indirect labour and
indirect expenses. Functionally overheads can be classified as..

i. Production / Works overheads

ii. Administrative overheads

iii. Selling overheads

COST CONTROL

Cost control can be defined as comparative analysis of actual costs with

appropriate standards or budgets to facilitate performance evaluation and
formulation of corrective measures. It aims at accomplishing conformity between
actual result and standards or budgets. Cost control is keeping expenditures
within prescribed limit. Cost control has following features:

 Creation of responsibility centre with defined authority and responsibility

for cost incurrence.
 Formulation of standards and budgets that incorporate objectives and
goals to be achieved.
 Timely cost control reports (responsibility reporting) describing variance
between budgets and standards and actual performance.
 Formulation of corrective measures to eliminate and reduce unfavorable
variances.
 A systematic and fair plan of motivation to encourage workers to
accomplish budgetary goals.
 Follow-up to ensure that corrective measures are being effectively applied.

Cost control does not necessarily mean reducing the cost but its aim is to have
the maximum utility of the cost incurred. Thus its main objective is the
performance of same job at a lower cost or better performance for the same cost.

41
Cost control process involves:

a) Setting targets and standards.

b) Ascertaining actual performance.
c) Comparing actual performance with targets.
d) Investigating the variances.
e) Taking corrective action.

In cost control, costs are optimized before they are incurred.

For cost control we should:

1. Identify major cost centre – production, sales, financing, administration

and research and development.
2. Identify major type of include – staff cost, raw material and supplies, utility
bills for energy and water, capital expenditure etc.
3. Choose the cost to focus on first :
 Costs that may offer easy savings.
 Large costs that you may be able to change in short term.

Systematic Cost Control:

1. Start from the business objective.

2. Establish standard costs for achieving your objectives.
3. Establish realistic budgeted cost based on the actual experience. It should
be higher than the standard cost, sometimes it may be lower.
4. Record actual cost and compare them with the standard and budgeted
cost.
 Costs that are higher than the budgeted cost indicate opportunities
to reduce cost in short term.
2. Periodically review.

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Easy Savings:

1. Checking supplier invoices may reveal overcharging (e.g. double billing,

missing discounts).
2. Eliminate unnecessary costs :
 Get rid of overcapacity.
 Cut out blatant waste.
 Scrap useless processes.
2. Crack down excessive costs.
3. Root out inefficiency.

Opportunities:

1. Reduce your payroll cost :

 Outsource non-core activities.
 Use part-time employees instead of full time.
 Redesign processes to cut out activities that waste time.
 Make more use of technology.

2. Improve your purchasing :

 Switch to cheaper supplier or negotiate for price reductions or
higher discount for early payments.
 Agree long-term contracts or guarantee minimum annual purchase
volumes in return for lower prices.
 Built personal relationship with supplier to encourage preferential
treatment.
 Simplify purchasing procedure to reduce your cost and those of
your suppliers.

43
  Form strategic buying alliance in businesses in your area or trade to
buy large volume.

3. Find ways to make production more efficient :

 Trim back product range and increase production runs.
 Use standard components to lower design, purchasing and
manufacturing cost.
 Change processes to minimize wastage of raw material and
energy.
 Improve quality control to cut rejection rates and reworking costs.

4. Review the Finances :

 Finance fixed requirements using loans, instead of overdrafts.
 Cut back on working capital through JIT (Just in Time) purchasing
and better credit control to suppliers.

Effective Cost Control:

1. Low rejection – trained person, tooling and healthy environment.

2. Full utilization of efficiency.
3. Effective environment.
4. Stores situated in nearby area, to reduce excess time wasted in taken
tools from the stores.
5. Maintenance workers as well as supervisors should be available nearby.
6. CRI and quality control members must come to the shop to check and
encourage employees.
7. Extra facilities must be provided (e.g. medical, ATM, canteen etc.).

Methods of Cost Control:

Cost control involves control of material as well as labor overheads.

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Material control Methods:

Material management includes-

a. Procedure for material procurement and use.

b. Material costing methods.
c. Cost of material in inventory at the end of a period.
d. Costing procedure for scrap, spoiled goods and defective work.

FLOWCHART FOR PROCUREMENT OF MATERIAL

45
Inventory planning and control method should have one goal that might be
expressed in two ways-
1. To minimize total cost.
2. To maximize profit within specified time and resource allocations.

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Material Requirement Planning:

To plan manufacturing requirements, every stock item or class of items should be

analyzed periodically to-

a. Forecast demand for next month, quarter, or year.

b. Determine acquisition lead time.
c. Plan usage during the lead time.
d. Establish quantity on hand.
e. Place units on order.
f. Determine reserve or safety stock requirements.

Material planning deals with two fundamental factors-

1. The quantity to purchase.

2. The time to purchase-or simply how much and when to buy.
Determination of how much and when to buy involves two
conflicting type of costs-
a. The cost of holding or carrying.
b. The cost of inadequate carrying.

Cost of holding or carrying Cost of inadequate carrying

Interest or investigation of working capital. Extra purchasing, handling and

transportation costs.

Taxes and insurance. High price (small order quantity).

Warehousing and storage. Frequent stock outs causing disruption

Handling. of production schedule, overtime and

Deterioration and shrinkage of stocks. Extra setup time.

Obsolescence of stocks. Lost sales and loss of customer.

ECONOMIC ORDER QUANTITY

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Economic order quantity is the amount of inventory to be ordered in one time for
the purpose of minimizing annual inventory costs. If the company buys in large
quantity, the cost of holding or carrying the inventory is high because of high
investment. If purchases are made in small quantities, frequent orders with
correspondingly high ordering cost will result. Therefore we must balance
between two factors-

1. The cost of possessing (carrying) material.

2. The cost of acquiring (ordering) material.

Buying in larger quantities may decrease the unit cost of acquisition, but this
saving may be more than offset by the cost of carrying material in stock for longer
period of time.

How to compute Economic Order Quantity:

However there are tabular and graphic methods for determining economic order
quantity but they are very lengthy, hence companies use order-point calculations
to calculate economic order quantities. With information such as quantity
required, unit price, inventory carrying cost, and cost per order, differential
calculus makes it possible to compute economic order quantity using the formula-

Economic order quantity = √ (2 × Annual required units × Cost per order) ⁄

(Cost per unit of material × carrying cost percentage)

DETERMINING TIME TO ORDER:

The economic order formula answers quite satisfactory the quantity problem of
inventory control. However, the time to order is also important.

The problem of when to order is controlled by three factors-

1. Time needed for delivery.

2. Rate of inventory usage.
3. Safety stock.

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 Determining order point would be relatively simple if lead time- the interval
between placing an order and having the material on the factory floor
ready for production – and the usage pattern for a given item were
definitely predictable. For most stock items there is a variation in either or
both of these factors. The theory behind this safety stock calculation is
that you will have just enough inventories in stock if two "catastrophic"
events happen simultaneously:

1. Your supplier's lead time slips to the longest it's ever been with
that supplier; and

2. On those days that your supplier is late, your company uses the
most inventories it has ever used.

The Safety Stock Level (SSL) can be calculated using following formula-

Maximum SSL = MHDU x (MHLT - ALT)

Whereas,

SSL=Safety Stock Level.

MHDU = Maximum historical daily usage.

MHLT = Maximum historical lead time.

ALT = Average lead time.

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 STORES ORGANISATION

Efficient storing after efficient purchasing is another important step in material

control system. Factors involved in establishing stores organization are-

a. Location of stores: Location of store should be carefully planned so

as to give maximum efficiency. Following factors are important in deciding
location of stores-
1. Nature of material.
2. Distance from user department.
3. Size of unit.
4. Spacing.
5. Unit of material used.
6. Security requirements.

b. Storage Layout: Storage layout should be carefully designed for

saving of costs. Material should be stored according to-

1. Account number specifically given to different type of material.

2. The frequency of their usage.
3. The production area where item is used.
4. Nature, size and shape of item.
Stores should maintain all documents like material requisition form, material
procurement form, stock ledger cards, bin cards etc.

LABOUR CONTROL

Effective control over labor is very important as it is very important part of total
cost. The following departments should contribute for labor control-
 Personnel Department.

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  Time keeping Department.
 Payroll Department.
 Cost Accounting Department.

The main function of personnel department is to provide efficient labor force.

Personnel manager is responsible to maintain sufficient manpower so that there
will be no surplus as well as deficit of efficient manpower. For this employees
record card is maintained which is known as punch card with every employee’s
PB (Permanent batch) number.

Time keeping department prepare record for time spent by each employee for
labor costing and control process. Various documents used by department
include clock card for attendance record, job ticket, job docket, job card etc.

Payroll department is an intermediate function between time keeping and cost

analysis department. It can control labor cost by maintaining sufficient wage
system.

Cost accounting department helps in implementing incentive wage plans,

efficiency plan, bonus plan, budgeted expenditure plans to control cost at all
overheads.

COST REDUCTION

Cost reduction embraces:

1. Unit cost reduction by expenditure reduction in respect of a given volume

of output ; and / or

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 2. Unit cost reduction by the increase in productivity (i.e. an increase in
output, yield, or rate of output for a given expenditure).

In other words, cost reduction is the process whereby permanent savings are
made without any reduction in the quality and / or usefulness of the products.

Difference between cost reduction and cost control:

Cost Control Cost Reduction

1. Concerned with adhering as 1. Concerned with genuine cost
closely as possible to the set savings. Existing costs, including
standards. standards, are challenged in an
effort to reduce them.
2. Standards are regarded as
2. Standards are taken to be the yardsticks which can be
desired state of efficiency. improved upon. They are viewed
with suspicion.
3. Attempts to be guided by what is 3. Recognizes that the operations
the lowest cost for the conditions of a company are dynamic in
which prevail. nature. For this reason changes
in costs are expected.
4. Is generally effective only when 4. Can be effective for all types of
some form of standards can be conditions. It is not limited to
set. where standard costing can
apply.

IMPORTANCE OF COST REDUCTION

1. Without cost reduction a business is unlikely to survive. Once costs are

saved they should be controlled at the new level until some method of
reducing them still further is found.

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 2. A business has to deal with two aspects – cost incurred and revenue
received. The difference between the two is profit out of which the
following must be satisfied :
• Shareholder
• Expansion of the business
2. In addition, there is the question of dealing with pay claims which increase
costs and reduce profits unless prices are increased. Finally, there is the
satisfaction of the consumer.
3. Competition from within the economy affects the price that can be
charged. If too high, products will not sell.
4. Cost reduction of a permanent nature, without any reduction in quality or
usefulness, is the only solution which is unlikely to have adverse effects. In
effect, cost reduction is profit earning: by reducing the cost side of the cost
/ revenue equation it is possible to increase the profit.

AREAS OF COST REDUCTION

1. The real success of a business depends primarily on the efficient use of

those basic cost elements: by basic costs are meant the man-hours of
labor, kilowatt hours of electric energy, weights of raw material, etc., per
unit of production of goods and services.
2. The first basic cost reduction should be the elimination of waste all along
the line from source to ultimate consumption or use.
3. Not only are materials wasted, but countless man-hours are lost for a
variety of reasons. Among these are poor personnel relations and failure
to make the most of the individual employee’s talents, training and
inclination, inefficient management and dispute between labor and
management, accidents and illness, failure to plan and execute the job
properly the first time and bureaucracy and pressure groups.

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 4. In addition to raw material and man-hour losses, excessive use of utilities
frequently occurs. In fact it is exceptional to find an industrial plant where a
reduction of utilities consumed per unit of production cannot be made.
5. There are many ways in which industrial engineering know-how and
procedures can be applied to basic cost reduction.

MATERIAL COST REDUCTION

In a manufacturing industry, material takes a major share (50 to 70%) of the cost.
Hence there is maximum scope for cost reduction in this area. For example:

1. In a rubber works, manufacturing caps for penicillin vials, the rejection for
various reasons was found to be as much as 38%. Hence the direct
material cost of this product for this factory is 60% higher than what it
ought to be.
2. A manufacturer of electronic equipment in Bombay found by investigation
that he could obtain an 18.8% saving in the component cost of unitized
Gamma Ray Spectrometer by eliminating a few of the components and
substituting cheaper ones for others without affecting the quality of the
instrument.
The above example show that the direct material cost is to a great extent
enhanced by:

i. Defective design of the product and its components.

ii. Wrong selection of raw material in terms of type or of quality.
iii. Poor manufacturing methods leading to excessive scrap and rejection.

LABOR COST REDUCTION

1. Even though material cost reduction was presented as the most potential
area for cost reduction due to being a major part of the cost in

54
 manufacturing industries, labor cost control has received more attention
due to its easiness to handle. Another reason for its receiving favorable
consideration from management and consultants is the extent to which
reduction is possible. While material cost could be reduced from 60% to
50% or even 40%, labor cost with mechanization can be almost brought
down to 5% to 10%.

2. Direct labor cost normally shown on the cost sheet includes true labor cost
(payment for the time booked) which cannot be reduced and a major
portion of costs added due to various factors, such as
i. Poor planning
ii. Poor manning
iii. Poor working methods
iv. Lack of motivation

3. The solution to a reduction of labor cost lies in the elimination of the

factors enumerated before as leading to poor utilization of manpower. To
summarize, labor productivity can be enhanced and labor cost
consequently reduced by:
i. Reducing the work content of jobs
ii. Providing adequate work
iii. Recognizing extra effort
iv. Worker working

OVERHEADS

1. Overhead cost in almost every industry is excessive. This may be

attributed to factors like poor planning, poor inventory policy leading to

55
 excessive stocks of raw material, finished goods, tools and spare parts,
lack of standardization and poor organization.
2. Poor planning adds up unnecessary overhead expenses also in addition to
direct material and labor costs. It is regrettably true that management’s
concern for efficiency in manufacture often appears to be continued to the
more obvious factors like production methods, factory layout and operator
efficiency, while other potential sources of considerable savings go
untapped.
3. The importance of stock control arises from the demand which investment
in stocks places upon the available liquid capital. It is of far greater
significance from the point of view of cost reduction by virtue of the fact
that stocks can give rise to the following sources of cost:
i. Storage cost
ii. Handling cost
iii. Stock-taking and other clerical expenses
iv. Deterioration and its prevention
v. Pilferage
vi. Insurance and stock room security
vii. Obsolescence
2. The effects upon costs and the general manufacturing efficiency of a wide
diversity of products, components, equipment and methods are sufficiently
important to warrant special consideration of this factor.
3. The wheels of industry turn to the orders of many persons having various
degrees of authority and the contribution that a properly defined chain of
responsibility and channels of communication can make towards a
reduction of costs is difficult to measure.
4. Finally, cost reduction and control is a continuous process, and a
programmed once commenced should be coordinated and controlled, lest
the benefits achieved by improved performance may easily be dissipated.

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Waste can be made in following forms:

1. Waste of material
2. Waste of supplies
3. Waste of machinery
4. Waste of manpower
5. Waste of money
6. Waste of space
7. Waste of customers
8. Waste of ideas

Planning overhead cost control: There are six basic steps through which
overhead cost can be controlled:

1. Establish company objectives and targets

2. Develop detailed programmers
3. Organize resources to meet the objectives
4. Establish department standards of performance to match programmers
5. Develop a system of budgets
6. Report on performance

In some organization a systematic approach is followed so that methods can be

improved in the department. It is a simple five step plan to:

a) Select the operation for improvement.

b) Get the facts by breaking down the operation into detailed steps.
c) Analyze the facts by questioning every step.
d) Develop a new and improved method.
e) Install the new met

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Below mentioned are the points essential in the organization of cost reduction:

1. One person has to be responsible. That person must think constantly in

terms of cost reduction, and seize every opportunity to bring the subject to
the attention of all employees.
2. Top management must have interest, cooperation, consideration and a
firm belief that cost reduction is worthwhile and necessary. At the same
time, they must have patience because ideas create more ideas, and
every idea does not produce the desired result. But the more ideas there
are, the more opportunity there is to get worthwhile results.
3. A cost reduction programmed must encompass all employees- each
person that is a part of the organization.
4. All possible means must be used to make all employees cost conscious
and cognizant of the need for cost awareness.

5. There is no single way to fulfill the needs of obtaining cost reduction. It has
to be a combination of many ways.
6. It has to be a continuous operation. It cannot be started and stopped at
will, but must be worked on constantly. There must be constant effort to
improve, and to think of new methods.
7. Cost reduction ideas must always be “glamorized” in order to make them
appear new and different, and to increase and create greater interest on
the part of the employees.

Tools and Techniques of Cost Reduction

1. VALUE ANALYSIS: Value analysis is a technique applied to analyze all

aspects of an existing product to determine the minimum cost necessary

58
 for specific functional requirement. It helps in improving quality of product.
In HAL various methods are implemented for value analysis. They are :
VOP (Value of production) = Total sales ± Changes in WIP / SIT

Value added = VOP – Raw material consumed

Capital employed = Working capital + Net block of fixed assets + Special

tools

Working capital = Current assets – Current liabilities

SIT = Opening balance + Dispatch – Fitment

2. WORK STUDY: Work study includes calculation of standard costs and

batch costs and then prepares FPQ (Fixed price quotation) for fixing prices
of every product.

3. PRODUCTION PLANNING: In HAL Lucknow, the main function is

production of accessories of aircrafts. For planning the production process
production budget is prepared in advance. This is done by planning
department. For this planning department meet with all divisions and ask
for their production targets. All divisions mutually agree to set their targets
and to fulfill them. After that they sign MAS (Mutually agreed schedule) for
all IDTO’s (Inter divisional transaction orders).
After this planning department send this to budget department for
production budget.
4. Organization and method study: In HAL method study is implemented
during production process. Various methods for production of job are
studied minutely and the method which is least time consuming and
having cost conciseness is accepted.

59
5. Operations study: In HAL process layout is prepared to study various
operations included in completion of a job. For this every employee got a
job card, job docket and job ticket in which standard time for completion of
each and every operation is fixed and it is inspected periodically, so that
standard time should be maintained at relevant cost so that cost and time
should be controlled.

6. Quality control: Quality is the strength of HAL. The company aim at best
quality product. For this TQM is applied in whole organization. The
objectives of TQM are :

i. Zero defect
ii. Continuous improvement(Kaizen)
iii. Wastage removal(Lean management)
iv. Customer satisfaction

 Zero defect: Organization found that there are three main factors which
cause defect in the production:

a) Don’t have full knowledge of job.

b) Don’t have required resources for the work.
c) Don’t concentrate on the work.

For zero defects all these factors are removed. The organization quality policy
is producing “1st Time Correct “.

 Continuous Improvement: Every employee of the organization should

aim at maintaining the continuous improvement in their work. They should
aim to complete their production and services with low time and cost and
that too with good quality, and to make their products and services of

60
 international level. Every employee is aware of all possible improvements
in his work area, so he should give suggestions to the management for
this improvement.

 Wastage Removal: Employee should aim to remove all those wastages

that cause cost increment like water, electricity, stationary etc. so as to
make the organization more economic.

 Customer Satisfaction: The basis of every organization is their

customers, whether internal or external. The organization should find their
customer's requirements and to fulfill them without any defect, at low cost
and to deliver them within time limit.

2. Standardization: In HAL standards are fixed for time consumption as well

as for cost incurred. For time standards the standard time is fixed for every
process of job and for cost standards standard cost and FPQ are defined
in advance to control time and cost.

3. Simplification: In HAL for this purpose lean management is applied for

all production processes.

"Lean is a term to describe a system that produces-

1. What customer wants?

2. When they want it? with minimum wastages.

The historic approach of the organization was- PRICE=COST + PROFIT

But in present scenario it changed to- PROFIT= PRICE – COST.

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Lean Tools:
 Waste elimination.
 Do the 5S.
 Create flow.
 Put in visual control.
 Job standardization.
 Reduction in set up time.
 Continuous Improvement.

What Is 5S?
1. Sort.
2. Simplify.
3. Shine
4. Standardize.

5. Self Discipline.

KAIZEN:
Achieving continuous improvement in performance by identification and
elimination of all wastage relentlessly. Present capacity includes value
work as well as wastes. Value work is that customer is willing to pay for,
and waste is adding cost but not the value.

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 Continuous Improvement.

There are 8 wastes which the organization should keep in mind-

 Over Production and Over Processing.

 Waiting.

 Transportation.

 Inventory.

 Motion.

 Defects.

 Untapped Resources.

 Misused Resources.

63
 DEPARTMENTAL ANALYSIS

VARIOUS SECTIONS OF FINANCE AND

ACCOUNTS DEPARTMENT IN HAL

BILLS PAYABLE SECTION

Objectives:

Meeting organizations liability is the task of this section. It is responsible for

payment of suppliers and service providers as per terms and conditions of
the P.O. It also ensures timely payment to different parties so that the suppliers
and services to the division are ensured uninterruptedly in furthering the
organization's objectives. It also ensures proper accounting
as per the requirements from the corporate office. This section also ensures
that the statutory deductions like TDS etc. are made from the bills of service
providers and deposited timely with the appropriate authority. This section
has three segregations, which perform their function independently. These sub-
sections are as under:
 Bills Payable (Indigenous)
 Bills Payable (Foreign)

64
  Bills Payable (Service and Civil works)

BILLS PAYABLE (INDIGENOUS)

Here in this section , bills related to the Indian suppliers are paid off.
It is not concerned with any kind of foreign remittance. The job of this
section starts after receipts of information of any type from commercial
or Purchase or Purchase Department .
It maintains the proper accounts in relation to the work performed by this section.
It also deals with the payment of miscellaneous advances.

Procedure:

P.O is sent by the Purchase Department after the approval.”

Material Procurement Committee '' (MPC) approves it. Then P.O is sent to bills
section which shows the details of the material required. Vendor is consulted for
the purchase the details of the material required. Vendor is consulted for the
purchase of the material. The vendor sends their quotation for supply of the
material. Then the concerned authorities select the best quotation. There after
order is placed. Invoice is sent in case of payment through bank and these
invoices are matched with the P.O and then payment is made to the concerned
party.
Invoices consist of the name of consignee , manufacturing code
number , Challan number , Customer number , date and time of invoice,
date and time of removal of goods , product code , description and
specification of goods , type , total quantity of goods , rate , unit,
assessable value , packing and forwarding charges ( P&F) ,rate of duty,
duty paid , mode of transport , freight, insurance, tax rate , sales rate etc.
Inland vendors for suppliers / services are paid by one of the following
procedures:

a) Document through bank

65
 b) Cheque against delivery
c) Advance payment
d) Open account

BILLS PAYABLE (FOREIGN)

Bills payable foreign deals with the payment of foreign suppliers as stipulated in
the purchase order. This sub-section performs its function separately from the
other sub-sections of this department.

Functions:

1) Payment and accounting of:

 Advance to suppliers as per the terms and conditions of purchase order.
 License fees, royalty etc as per the license agreement with the foreign
collaborator.
 Custom duty, freight bills.
 Final bills.

2) Opening of Letters of Credit on the advice of I.M.M Department and

liaison with Banks for Foreign Exchange release and payment on maturity date.
3) Maintenance of commitment registers for budgetary purpose.
4) Pricing of R.D.R (Receiving cum discrepancy report) with P.O.
(Purchase order) rates and loading of custom duty , freight and insurance
charges.
5) Priced R.D.R are sent to materials accounts section/ E.D.P for
punching in batch mode for the processing of materials ledger.

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Flow of work:

 All P.O / Contracts received are entered in the registers before

opening of separate file for each P.O.

 All the L.C opened in favor of Foreign suppliers as per the terms

of P.O are entered in Registers to record the particulars about their

extension, revalidation and utilization . On maturity of the L.C the

Bank Adjustment voucher is prepared on the basis of bank advice

and sent to the cash section for adjustment. Particular of payments are

noted in relevant P.O.

 Where the Purchase terms provide for " Documents through Bank"

the Bills Payable section after checking the documents with the P.O

passes the invoices and issues Letter of Authority to the Bank for

arranging payment.

 All the Contractual payments in respect of Royalty , License fee

and Technical Assistance fees are made as per the License /

Collaboration agreement.

 Bills of Entry received from the IMM Department are entered in the

register to record value of the goods assessed , amount of duty

paid to ensure that the duty levied is correct and the amount of

duty paid is loaded to the inventory accounts correctly.

 After receipt of goods the stores department send the R.D.R to the

foreign bills for pricing and making necessary accounting.

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  Pending the pricing of the R.D.R , the payments made to foreign

vendors, through letter of credit / sight draft are put temporarily in

goods in transit account.

 In respect of material dispatched by the vendor against P.O raised

by H.A.L the liability is provided in the company's books of

accounts if payments have not been made for such supplies.

 Follow-up with IMM department is done for timely release of RDR so as

to clear the G.I.T .

Foreign suppliers are paid by any of the following methods as

stipulated in the P.O./License agreement/contracts -
a) Letter of Credit
b) Sight Draft.
c) Advance Payment
d) Direct Payment.

Bills of entry

It is a document filled by custom officers for giving custom clearance to the

goods received from foreign countries. Bills of entry are received by the
agents before receiving of goods. It includes:

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 1. Total number of packages
2. Total amount of duty paid
3. Invoice value
4. Freight
5. Insurance
6. Exchange rate
7. Accessible value

RECEIVING CUM DISCREPANCY REPORT:

RDR (Receiving cum discrepancy report) is prepared at the time of receiving of

goods within organization. Pricing of RDR is done by two methods:

1. If the payment is done in advance and goods received later, then the RDR
is priced at the value of exchange rate of the last day of the previous
month.
2. If payment is done on the same day then the RDR is priced at value at
which payment is done.

BILLS PAYABLE (SERVICES & CIVIL WORKS)

Bills payable section deal with the preparation of bills of services and civil works
in the company. This sub-section is mainly responsible for-
a. Service contracts.
b. Job contracts.

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 c. Medical payment.
d. Advance payment.
e. Payment regarding construction of building etc.

Accounting related to all these are also done by the section.

Functions:

 Payment and accounting of advances, running bills to contractors and final

bills.
 Adjustment and recovery of advances.
 Accounting and adjustment of earnest money and security deposits.
 Capitalization of buildings.
 Payment of all services bills e.g. Telephone, electricity, water, canteen,
transportation, sanitation etc.
 Payment to all consultants e.g. Architects, Advocates,
Part time doctors etc.
 Payment of miscellaneous advances, impress approved by competent
authority.
 Payment to all casual employees recruited on "job-contract" basis.

Flow of work:

 In case of running bills the works accounts section links the bill,
submitted by Contractors duly certified by Engineers-In-Charge, with
the contract / acceptance letter ,work order etc and arranges
payment after deducting Income tax, balance security deposit and
other advances if any and retaining the prescribed percentage of
the bill towards retention money no deduction is to be made on
this account.

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 Final bills submitted by the contractor is checked with the
measurement book and the gross amount payable is determined.
The amount settled against running bills , advances if any , penalty
for delay in completion of work , recovery towards consumption of
material , T.D.S etc is deducted from the gross amount payable.

 Advances to contractors are given as per the acceptance letter

given to the contractor which are recovered with interest by way of
deduction from on account payment bills in suitable percentage in
relation to the progress of work so as to recover all sums
advanced by the time 80% of the contracts are completed.

 Material advances to the extent of 75% of the value of materials

brought by contractors and lying at the site are given on
certification of the Engineer-in-charge and are recovered from
running / final bills.

 Payments of bills for services e.g electricity, water etc received

from plant maintenance department / concerned user duly verified by
them and approved by the competent authority are made. Payments
in respect of other services received by the company is made after
it is duly approved by the competent authority.

 In case of job contracts payments are made to casual employees

of the company. Three categories are made and rate of these
categories differ from each other.

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 BILLS RECEIVABLE

This section is responsible mainly for the preparation and

submission of invoices etc. HAL regular customer is IAF , which
accounts for round 85% share in total sales of the organization and
rest are mainly Navy, Army, ADA and others. This section ensures
that dues from customers in respect of goods supplied and
services rendered are recovered timely as per the fixed price
quotation / price catalogue proved by the Ministry of Defense. It has
also to act as liaison with custom department , Sales tax authority
and others . Proper accounting is done as per the instructions
provided by the Corporate Office.

Objectives:

1) To ensure that the dues from the customers in respect of the

goods supplied and service rendered are recovered timely as per
the fixed price quotation / price catalogue approved by the ministry
in acceptance with the government issued by the Ministry of
Defense dated 24th August 1995.

2) To ensure that the invoices relating to the advances , stage

payment, final delivery are raised timely in order to have smooth
cash flow position.

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 3) To ensure that proper accounting is done as per the statute
and accounting instructions laid down by the Corporate Office.

4) To ensure that all statutory payments e.g sales tax, excise duty
, custom duty is recovered from the customers and is deposited
timely with appropriate authority.

Functions:

1) Preparation and rendering of invoices to Indian Air Force (IAF)

in respect of the following activities with the guidelines laid down
in the government letter dated 30th Sept, 1997.
a) Manufacturing activity
b) Repairs and overhaul
c) Supply of spares against RMSO
d) Deferred revenue expenditure

The following documents shall be produced in support of the

invoices

a) Initial advances are recovered on the basis of customers order.

• Firms / forecast task given by the Air Force.
• Chief Resident Inspector ( CRI) coordinated Inter Divisional Task
Orders ( IDTO) for divisional tasks.
• Repairs Maintenance Supply Order.

b) Subsequent stages / final payments are claimed on the basis of dispatch

advice, Acknowledgement received Air Force in Form Q423, Inspection
Note certified by the Chief Resident Inspector about the progress of the
work done.
In respect of the repairs and overhaul work the payment is strictly
regulated based upon the nature of the work carried out e.g.
Functional test, Defect investigation and Zero hours servicing, Repair and
overhaul.

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1) To prepare and render invoices to Non- Indian Air Force
customers in respect of the following activities.
• Development sales for customer financed projects.
• Suppliers and services rendered to civil customers.
• Suppliers against Repair Maintenance Supply Orders
(RMSO).

2) To raise debit on other divisions on Stock in Trade (SIT) in

respect of parts / accessories supplied for fitments in Engines /
Aircraft / Helicopters manufactured by them for supply to customers.

3) To claim payment from Account Officer Defense Accounts

Department (AODAD) on the basis of fitment details received from
those divisions.

4) To submit invoices for reimbursement of royalty from Air Force

and set up sales for these claims and created claims receivable.

5) To follow up with AODAD and other customers for collecting the

payments against the invoices raised.

6) To provide details to budget section for compilation of sales

budget on the basis of sales order, firm / forecast task , IDTO for
budget estimates, revised estimates.

7) To collect Sales Tax from the customers and deposit the same.

8) To compile Sales Tax from returns and submit the same to

Integrated Material Management ( IMM) department for onwards
submission to sales tax authorities for assessment.

74
 ACCOUNTING PROCEDURE

Accounting for the sale of aircraft / engine / equipment etc. manufactured /

repaired and overhauled and for services rendered, is done through the following
accounting journals:

1. Sales Journal: Separate journals are maintained for the following

activities:
a) Manufacture of aircraft / engine / equipment
b) Overhaul of aircraft / engine / equipment and overhaul of ratable.
c) Manufacture and supply of spares for overhaul against RMS
orders.
d) Miscellaneous

These journals are posted from the final invoices / Performa invoice raised
on dispatch or delivery. At the end of each month, these sales journals are
totaled and sales are set up by debiting to respective sundry debtors / advances
account.

75
 2. Claims / Accounts receivable journal: All invoices raised in respect of
various services rendered / facilities provided are entered into this journal
and journal entries passed at the end of each month by debiting to claims
/ accounts receivable account and crediting to the respective income
account.

FINANCE SECTION

Objectives:

1. To ensure that the financial discipline is maintained in the division.

2. To ensure that all expenditure is incurred with due regard to principles of
financial propriety.
3. To ensure that financial proposals are routed to the competent authority as
per delegation / sub-delegation of powers so as to ensure compliance of
the provisions of the Companies Act, the Memorandum and Articles of
Association of the company and the relevant rules and regulations of the
company and the guidelines issued by the company.
4. To ensure that the funds are available in the approved capital and
performance budget so as to cover the relevant proposals.
5. To submit MIS reports to corporate office monthly.

Functions:

1. To scrutinize and give financial concurrence as per delegation of power for

each proposal involving:
a. Capital expenditure

76
 b. Revenue expenditure
c. Purchase of materials / stores / tools and other services
d. Manpower requirements
e. Waiver of dues / write off of losses
f. Cases involving relaxation of rules etc. as per delegation of powers
g. Sale, lease, alienation or disposal of company’s assets
h. Contracts entered into with suppliers / collaborators / sub
contractors.
i. Award of contract in respect of civil / electrical works / other works /
plant orders
j. Project reports

2. Certification for availability of funds with reference to capital and

performance budgets and appropriation of funds.
3. Fixation of rent and rates of recovery in respect of services / supplies /
disposals by the company.

PROCEDURE (FINANCIAL VETTING)

Finance section plays a major role in accounts department. It can be termed as

centre point of activities, because this section clears all the files for proceedings
by the concerned authorities as per delegation of power.
First of all material purchase requisition is sent by the purchase department, it is
request for procurement of material which is sent to store and the store sends
this file to finance section for further proceedings. These requisitions are broadly
classified as under:

a. Non- Recurring items

b. Recurring items.

Concerned authorities in the section approve the file. Committee members as

per the amount mentioned in the files, do approval of the files. Different
Committees have been formed for different approvals like different
committee approves the proposals which amounts up to Rs 5 lakhs, different
committee is authorized for the amount above then Rs 5 lakhs & so on.
Approval is done by CM (IMM) , Manager(Maintenance) , Senior Manager

77
(Maintenance) as the case may be . After the CM’S approval, it is sent
back to IMM & the IMM sends it back to the Finance section, including
specifications which shows that it is suitable or not. Finance Department
approves P.O FILES. Then further proceedings go on which includes rising of
inquiry for tenders. Sealed tenders are opened in front of concerned authority.
There are fixed days for opening sealed tenders-Friday and Tuesday. Amongst
the sealed tenders L1 is selected , which represents the lower amount
amongst all tenders. In spite of considering lowest amount other factors
are also taken into due consideration subject to the companies policies.
Thereafter further proceedings take place:

MATERIAL ACCOUNTS SECTION

Objectives:

1. To ensure that all the receipts and issues of materials from stores are
recorded and accounted properly.
2. To ensure that all non-moving / slow moving materials are identified as
“surplus” by IMM and a suitable redundancy provision is made against
them and are disposed off.
3. To ensure that bin card balances are reconciled with the material ledger
balances in coordination with IMM and the balances of material ledgers
tallies with the general ledger.

Functions:

1. To send the priced RDR received from bills payable section to EDP for
punching in the batch mode and thus all the receipts are recorded and
control is exercised over all the purchases value-wise.
2. To generate exception list for missing RDR and getting it resolved with
bills payable section.

78
 3. All the materials drawn excess when returned are credited to stores
through stores return voucher.
4. The EDP after processing of all MR / issue vouchers prints the material
issue analysis statement monthly indicating:
a) The cost of material drawn against various job orders, expense
accounts etc.
b) The cost of material issued to contractors and others.
c) The cost of tools issued to various tool cribs from main tool stores.

Based on the above statements accounting for issue of material is done by

debit to
WIP / expense / contractors account and credit to relevant inventory accounts.

2. On the basis of list of material / transfers reclassification indicating the

material code number / quantity and value, necessary journal entries are
passed by debit / credit to relevant inventory accounts.
3. On the basis of stock verification sheets indicating stock verification note
number, material code number, shortages / overages, necessary journal
entries are passed after obtaining clarifications from stores department by
debit / credit to stock adjustment account credit / debit to relevant
inventory accounts after taking approval of CFA wherever required for
adjustments / write off of stores.
4. A list of material not moved for over 5 years is given by EDP which is
reviewed by stores / concerned programming department. Materials not
required for production or for other purposes are identified and suitable
action is taken by IMM for finding their usage in other divisions or is
auctioned.
5. Redundancy provision is made in the books of accounts at the rate of
100% for non moving inventory and for closed projects as special

79
 provision on the basis of list given by EDP. Further a normal provision at
1.5% is made on the balance inventory.

Accounting Procedure

Accounting of the receipts of material by various classes and issues thereof to

various work order and expense accounts is done based on the following
‘output’ statements received from computer / data processing section:

1. Material issue analysis statement

2. Stock transfer / stock re-classification statement
3. Stock verification statement
4. Surplus / condemned stores statement

Material issues analysis statement: The computer / data processing section

after processing all the material requisition/issue vouchers pertaining to the
month prints out the material issue analysis statements monthly indicating:

a) The cost of materials (including material overhead expenditure) drawn

against various work orders and expense accounts.
b) The cost of material issued to contractors and others.

80
c) The cost of material transferred to other divisions.
d) The cost of tools issued to various tool cribs from main tool stores.
Based on the above statements, accounting for issue of material is done by
debit to WIP/Expenses/Division/Contractors accounts concerned and credit
to the relevant inventory accounts.

Stock verification statement: The computer / data processing section

makes available the print out lists of stock verification notes, indicating stock
verification note number, material code number, overages or shortages of
less than Rs 500/- and more than Rs 500/- based on which necessary journal
entries are issued after obtaining clarifications from stores department, by
debit / credit to stock adjustment / inventory adjustment account and credit /
debit to relevant inventory accounts.

Surplus / condemned stores statement: Non moving / slow moving

material are reviewed by stores / production engineering department from the
lists of non moving / slow moving items furnished by the computer / data
processing section. Material not required for production or as “surplus” and
referred to the ‘surplus committee’ for review and declaring the same as
surplus. The surplus materials when so declared are transferred to the
salvage stores for disposal. Likewise materials held in stores and condemned
due to expiry shelf-life deterioration etc., are also transferred to salvage stores
for disposal. Based on the disposal orders received in the material accounts
section, duly approved by the competent authority, the value of the material
transferred to salvage is debited to the redundancy provision account where
available, otherwise charged off to profit and loss account by credit to
respective inventory accounts.

81
 COST ACCOUNTS SECTION

Objectives:

1. To establish a costing system in line with the activities and the product
range of the division.
2. To determine the price realizable from the customer for the products
manufactured / repaired / overhauled / serviced / supplied by the division.

Functions:

1. To determine the rate of absorption / recovery of labor and other

overheads for recovering labor cost on the different jobs undertaken i.e.
MHR computation.
2. To accumulate the labor and overheads content of each activity project-
wise based on evaluated LTB generated by EDP from work orders / time
dockets.
3. To keep track of different jobs completed and jobs lying incomplete in
different stages over a reasonable period of time and to coordinate with
concerned production controllers for justification for jobs lying unfinished

82
 beyond a reasonable period of time and to ensure their early disposition.
4. To review work orders on which no material / labor cost has been
recorded and finding out the reasons for the same.
5. To get the WIP statement as on 31st March from EDP for all manufacturing
components, sub-assembly WIP, assembly WIP for physical verification by
the concerned production shops.
6. To ensure that the valuation of WIP has been done correctly keeping in
view the percentage of completion of the job.
7. To keep track of SIT transactions with different divisions.
8. To keep record of all IDTO received and issued.
9. To send debit advices to other divisions for items dispatched against IDTO
received from them.
10. To accept the debit raised by other divisions for items received by the
division in respect of requirements raised by us through IDTO.

COSTING SYSTEM

In Hal Division the work carried out in following categories-

 Manufacturing and Assembling Operations

• Of aircrafts, aero-engines, avionics, ground radars, accessories
and instruments.
• Of spares required for overhaul of aircrafts, engines, engines
etc. and DRDL for supply to IAF against RMS order, navy, army
etc.
• Of other equipment like foreign and costing.
 Repairs and Overhaul Activities
• Aircraft, engines, avionics, ground radars, accessories and
instruments.
• Other equipments.

83
  Design and Development Activities of aircrafts, aero-engines, avionics,
ground radars, accessories and instruments.
• Customer Finance.
• Company Finance.

Though HAL manufacturing don't come in the range of products under cost audit
and cost. Accounting records rules formed by the GOI, a fully fledged cost
accounting system is essential for effective cost monitoring and cost control.

THE SYSTEM

The system of cost accounting followed in HAL is "Batch Costing" which is a

variation of job costing and is mainly designed to suit the work carried out in HAL.
Some divisions of HAL have also work order schemes suitable for component
costing.

a. Batch Costing
1. In the batch costing system, all the components, minor
assemblies, etc. required for a batch of aircraft /engines/equipments
are manufactured on batch order/mass fabrication orders. Though job
cards/job tickets are issued for manufacturing of individual
components, cost is not recorded separately. Labor and material costs
are booked on the batch work order/mass fabrication order only.
2. The components after manufactured are carried out to
production store and drawn for assembling on the next assembly line
immediately .The items are held in quantitative inventory, the cost
being held in WIP. Individual work order are issued for assembly,
erection and testing. The cost of bought out items drawn at the stages
of assembly and erection is booked to these orders.
3. In this system the cost of all components, minor assemblies, sub
assemblies, etc. relating to an aircraft/engines/equipments in the
complete batch is determined by dividing the total cost recorded on the

84
 batch work order/mass fabrication work order by the number of units
produced in the batch. To this is added, the cost recorded on assembly
line, erection and testing work order(s) and sundry direct charges to
arrive at the total cost of the aircraft/engines/equipments.

b. Job Costing
This system of costing is followed in the case of repairs and overhaul of
aircraft, engines, equipments etc. and for manufacture of spares against
RMSO spare for HAL held IAF store and miscellaneous jobs.
In this system individual work is issued for overhaul of each
aircraft/engine/equipment and for manufacture of spare items .Labor and
material cost is collected on the individual work orders and the total cost of
each item is ascertained.

c. Component Costing
In the component costing system, an individual work order/job ticket is
issued for each component against which labor and overheads expended
and cost of material drawn are recorded and the total cost is ascertained.
In this system the requirement of component for manufacturing of
component, overhaul and spares programs as a whole is determined and
work orders/ job cards/ job tickets are issued for manufacture of each of
component in the economical batch quantities. The batch quantities of
aircrafts/ engines etc. are not relevant but the batch quantity of each
component is important. The components after manufacture are credited
at cost to production stores and drawn for assembly when required. Thus
the items are held in priced inventory. The cost of minor assemblies, sub
assemblies, major assemblies can be built from the cost of components
issued to such assembly jobs.

d. Standard Costing

85
Standard costing is a technique to control cost. Here costs should be first
extended to manufacturing projects including fabrication of detailed
components, sub assemblies, major assemblies and final assemblies.
It can be extended for periodical overhaul of major products like
airframe, engines, avionics, wheel assembly and high value rotable, where
work schedule are available. Standards for labor and material should be
fixed for deriving variance under each category for control.

e. Labor Standards
The present standard time for each component, equipment, assembly
allotted in time docket in the division is taken as parameter for fixing
standard labor hours. These labor hours will be valued by applying yearly
Man Hour Rate (MHR) applicable to the division

f. Material Standards
The material requirements as per the bill of material shall be the basis of
determination of the standard for marginal cost. The costing of material
shall be done on the basis of weighted average rate of respective material
prevailing at the time of issue of work order. However in respect of USSR
material where itemized prices are not available, the price standards shall
be adopted based on technical estimates.
For the purpose of comparison and analysis of cost, monthly statements
should be prepared in regard to-
1. Standard Man Hours (allowed man hours where SMH are not
available) v/s actual hours booked against each work order.
2. Labor costs as per the standard and as per actual.
3. Material cost as per standard and as per actual.

g. Marginal Costing
With a view to increase the utilization of the available facilities and
manpower and to obtain some contribution towards the company's fixed

86
 overhead expenses, marginal costing techniques are adopted in the
pricing the supply and services.
Jobs may be undertaken at prices lower than the cost of sales at full man
hour rate, provided the price is not less than the prime cost of jobs. The
prime cost shall comprise of all expenditures directly incurred on the
execution of jobs and production process like direct material cost, cost of
tooling, labor cost (including wages to direct workers).

PRICING POLICY FOLLOWED IN HAL

Prior to implementation of revised pricing policy i.e. 1995, payment to HAL was
regulated as per FCQ (Fixed Cost Quotation) of cost plus system. Under FCQ
system HAL has no incentive to bring efficiency in material usage or labor
utilization since the entire cost incurred was getting paid by IAF.
In 1995, government implemented FPQ (Fixed Price
Quotation) system, in which the prices of products and services are fixed by
Directorate of Financial Planning, Air HQ at base year. The base year prices are
escalated at agreed escalation percentage and exchange rates given every year
by Air HQ for material and inflation indices for Man Hour Rate. The FPQ’s
approved for base year (1995-96) are escalated as per agreed parameters up to
8 years (2003-04) and thereafter fresh base year cost verification is done by Air
HQ by considering the actual usage of material for overhaul/repair items in the
last 3 years and accordingly material cost firmed up in 2004-05. Similarly labor
efficiency and yield factor of division are fixed at 79% and 76% respectively. The
FPQs for overhaul/repair and price catalogue for spares are approved by GOI.

Due to FPQ system HAL has find scope in bringing cost reduction in the
form of lesser usage of material or completing the work by putting lesser Man
Hours as standard man hours so that labor cost per unit should be decreased
which helps in improving the profitability of the division.

87
 At present the FPQ is applicable for repair & overhaul and supply of
spares only and for payment of manufacturing programmed e. g. Su-30, Dornier,
LCA, IJT, Hawk etc are fixed as per contract price agreed between HAL and air
force and prices offered by HAL are negotiated by the customer.

MAN HOUR RATE:

Man hour rate is defined as the rate of total expenses that the factory bears
on direct labor during production process of 1 hour. It is used as a basis for
calculation of labor cost.

Man hour rate is calculated as follows-

[Divisional expenses on salaries and other payments made including cost of

facilities provided to staff plus all the overheads e.g. power, fuel, and other
expenses incurred by the division] Divided by [the number of net available
hours of direct worker including over time hours].

Net available hours= (No of direct worker X 7.5 hrs per day X 25 days X 12
months) X (agreed yield percentage + OT hours).

Yield = Actual output in terms of SMH (Standard Man Hours) i.e. LTB hours

Percentage Total input hours

88
 RESEARCH METHODOLOGY

RESEARCH METHODOLOGY

Proposed methodology for the project is as follows

89
 Selection of the Data
Collection Method

Defining the objective

Selection of the Method

of Analysis

D
s
Data Collection

Data Analysis

Reporting

RESEARCH METHODOLOGY:-

90
The purpose of methodology is to describe the process involved is the research

work. This includes the overall research design, the data collection method

sampling procedure, and the field survey method & analysis procedures.

Meaning of Research:-

According to Redman & Mory:

“Research as a systematized effort to gains new knowledge”.

According to Clifford woody:-

“Research comprises defining & redefining problems, formulating hypothesis or

suggested solution, collecting, organizing & evaluating data making deductions &

reaching conclusion to determine whether they fit the formulating hypothesis or

not”.

Objective of Research:-

The purpose of research is to discover answer to question through the

application of scientific procedure. The main aim of research is to find out the

truth which is hidden & which has not been discovered as yet. Though each

research study has its own specific purpose.

Contact Methods:-

Once the sampling plan has been determined, the market researcher must

decide how the subject should be contacted.

91
I have carried out the direct survey method where I have contacted all post

offices and courier offices in several areas.

NATURE OF THE RESEARCH:-

The Research was exploratory in nature.

PLACE OF THE RESERCH:-

The research was conducted in Finance departments in HAL Accessories

Division Lucknow.

RESEARCH DESIGN:-

Research Design is a conceptual structure with research conducted.

There is no unique method, which can entirely eliminate the elements of under

taking. But Research methodology more than any other procedure can minimize

the degree of uncertainty, Thus it reduces the profit ability of making a wrong

choice amongst alternative causes of actions.

This is particularly significant in the light of increasing competitions &

growing size, which makes the task of choosing the best course of action difficult

for any business enterprise. It is imperative that any type of organization in the

present information coupled with tools of analysis for making sound decisions

which involved minimum risk.

92
 Exploratory method of research was chosen for it helps the collecting

summarizing, analyzing interpreting & presenting data with new ideas & in

effective manner.

The goal of exploratory research to gather primary data & to study the

nature of problem & to suggest possible solution for problem/come up with new

ideas.

For this a structured questionnaire is the research instrument used for

research works.

DATA COLLECTION:-

The collection of data is done both from primary & secondary sources.

 Primary Data:-

The primary data has been collected through questionnaire, personal

interview and departmental analysis.

 Secondary Data:-

• Website of HAL.
• Company monthly journals.
• Training manual on cost reduction provided by HAL.
• Accounting manual and Budget manual provided by HAL.
• Pricing policy of HAL.

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 TOOLS AND TECHNIQUES OF DATA
ANALYSIS

DATA ANALYSIS

1. The introduction of an online website for any company of today’s world is a

boon. Cause growth and expansion will be a promising factor as the
internet makes the world a smaller place to do business. This was
introduced in the year in the year 2000 by HAL.

Table showing the improvement of the division on introduction of a

website:

Feedback Percentage
Management level Yes 97%
Labor level No 3%

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Bar graph showing the improvement of the division on introduction of the website:

ANALYSIS: 97% of the workers / employees are aware that the website has
helped the division to improve in its company’s dealings and has helped the
company to progress in the new economy of today’s world.

INFERENCES: The remaining 3% are those workers who are at the lowest cadre
of work who do not have sufficient knowledge about the website of the
organization.

2. The knowledge about the website should be fair among the people who
work in the organization to conclude that the workers are aware as to
where the company is heading to in the 21st century. HAL being a premier
defense industry in the field of aviation has to always keep up with the
other nations and therefore adopt new technology.

Table showing the awareness level of the web by the workers in the
organization:

Response / Levels Management level Labor level

Aware / Yes 98% 87%

95
Not aware / No 2% 13%

ANALYSIS: Most of the workers in the organization are aware about the website
at both levels and know how it has improved the division, as the customers get to
know more about the division’s products and services worldwide which improves
the profitability and also helps the division to understand its customer’s
background to enhance the business.

INFERENCES: Only around 2% at management level and 13% at labor level are
not aware of the website as they have poor knowledge and belong to the lowest
cadre.

3. Website of the company helps the customers to keep in touch with the
company through the e-mail provided by the websites for various divisions.
This helps the customers, clients and vendors to have a continuous touch
with the company.

Table representing the customers who respond to the website:

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Customers Percentage
Defense customers 85%
Foreign customers 45%
Corporate customers 6%
Civil customers 5%

ANALYSIS: The major customers of HAL are the defense customers such as the
Indian Air force, Indian Army, Indian Navy, Coast Guard and Boarder Security
who often contact with the company over the net.

INFERENCES: A very small percentage of the remaining customers such as the

corporate customers and civil customers including international customers
contact with the company through net.

4. The main intension of putting up a website by any company is to get

prospective customers and induce them to make contract with the
company. It is the same for HAL accessories division too, so that the
customers can have a continuous touch with the company.

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Table representing the number of customers who respond voluntarily to
the website:

Options Response in percentage

Most of them 30%
All 40%
Few 90%
Very few 70%

ANALYSIS: From the above graph we can see that only few of the customers
respond to the website voluntarily. As most of the customers contact the
company through other means.

INFERENCES: We see that almost all customers somehow come into contact
with the company for some enquiry, doubt or clarification but since HAL is
defense oriented, so mostly the customers are from defense.

5. The main objective of any company is to get enough customers to place

an order or contract with the company, although few of the customers
come into contact with the company through the net not all might be willing

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 to place an order or make contract with the company. The table below
shows the number of customers who placed order with the company:

Table showing customers who placed order through net:

Customers who contact Percentage

Defense customers 70%
State government 20%
Corporate customers 7%
Civil customers 3%

ANALYSIS: From the above data we can conclude that most of the customers
who placed order with the company through net are the defense customers in
comparison to others.

INFERENCES: The customers belonging to the other group such as the civil and
corporate customers are very limited, therefore the company focus more on the
defense customers such as Indian Air Force, Indian Navy, and Indian Army etc.

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 6. In today’s economy we see that not only multinational companies are
trying to globalize but public sectors are also trying to globalize. And the
best way to achieve this is by obtaining many international customers. The
table below shows the number of international customers the division is
able to get through the net:

Table representing international customers over the web:

Customers In percentage
Many 10%
Few 20%
Very few 5%

ANALYSIS: Few international customers are interested in making contact with

the company. From this we can conclude that HAL has opportunities of
expansion in international market.

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INFERENCES: When international customers and corporate come into contact,
the company gets help in improving the technology for production.

7. Today’s business have made the “Customer the King” and have decided
to give the customers what they want through customization and
customerization. The table below shows the number of customers who
seek such benefits:

Table representing importance of customization to customers:

Feedback Response
Very important 90%
Important 80%
To some extent 50%
Not important 5%

ANALYSIS: Since engines are one of the most advanced machines that help in
the flying of air vehicles and customers always seek sophistication in their
engines. Therefore most of them seek customization.

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INFERENCES: Mostly the defense customers have an in-depth knowledge and
thus seek sophistication in the aircrafts. As the world is getting more advanced
thus customization becomes more important but it is not much in the case of civil
or corporate customers.

8. Sales are a very important aspect for any company and to achieve
maximum sales is a goal of all companies. HAL is one of the leading
manufacturers of engines and its accessories. The table below shows how
HAL is able to get a sufficient amount of sales after the internet came into
existence:

Table showing the sales of the division for the past 4 years:

Years Sales (in crores)

2001-2002 338.14
2002-2003 328.5
2003-2004 415.14
2004-2005 424.15

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ANALYSIS: From the above graph we can see that the sales of the company
have been increasing moderately in the past two years which is mainly because
of the use of web.

INFERENCES: Since the web was introduced in the division only in the year
2000 and the division have taken time to make complete use of it in the recent
years. Therefore we can expect sales to increase in the future.

9. Profit of any company determines its growth, expansion and development

in all directions. Therefore it is an important factor for public sector also
such as HAL which is a nonprofit organization. The table below shows the
profit of HAL in past years:

Table showing the profits of the division for last 4 years:

Years Profit (in crores)

2001-2002 46.5
2002-2003 65.9
2003-2004 62.55
2004-2005 51.66

B ar graph show ing the profits of the

division
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ANALYSIS:
As HAL is a 60
nonprofit 40 P…
20
0
Years
(n
e
c
)fitsP
ro

organization, so we can see that profits in each year are fluctuating. Therefore

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we cannot interpret whether internet will help the company in making more profits
or not.

INFERENCES: As mentioned earlier most of its customers are defense

customers and international customers who contact through net and a very few of
them are civil and corporate customers.

10. In order to grow it is necessary for every company that it must be able to
find new customers through new means and mode. As technology has
grown to such an extent that the world is no longer a huge place to trade.
With the use of internet it is possible for all companies to find new
prospective customers.

Table showing new prospective customers over net:

Customers Percentage
Civil customers 10%
Corporate customers 15%
State government 20%
Defense customers 100%

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ANALYSIS: From the above diagram we can conclude that the new customers
made by the company in each segment are very less. As it is basically a defense
oriented company, so almost all the defense customers have dealings with the
company.

INFERENCES: Although the company has limited range of new customers but it
has scope to get customers at international level also.

11. Customer relation is very important today. It is more effective only through
the World Wide Web and although it has so many plus points but there are
certain drawbacks in it. The table below shows the drawbacks in CRM
over the web:

Table showing reasons for drawbacks in CRM over web:

Reasons for drawbacks Percentage of effect

Delay in reply 20%
Negligence 30%

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Failure of system 40%
Other means 10%

ANALYSIS: Most of the reasons for the drawback of CRM are due to system
failure and it can be taken care of by providing for backup systems and better
management in replying to customers.

INFERENCES: CRM is gaining its importance in the current scenario and if more
importance is given it will prove more successful for the organization.

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 FINDINGS, SUGGESTIONS and conclusion

FINDINGS

In HAL cost reduction and cost control is done in following ways:

• In finance section, L1 i.e. lowest price is considered so that total cost of

production would be reduced and controlled.

• Quality is the strength of HAL. The company aims at best quality

product at lowest price. For this TQM is applied in whole organization

so that cost would be controlled.

• In HAL standards are fixed for time consumption and also for cost

incurred. For time standards, the standard time is fixed for every

process of job and for cost standards, standard cost and fixed price

quotation (FPQ) are defined in advance to control time and cost.

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• It also implements the technique of classification and codification for

cost reduction and control. Under this technique, all the jobs are

classified into different categories and are codified, due to which we

can identify that the job belongs to which batch.

• Process layout is used for the study of various operations included in

completion of job. Due to which standard time for completion of

operation is fixed and inspected periodically, so that cost and time can

be reduced and controlled.

• Method study is implemented during production process and the

method which is less time consuming and having less cost is accepted.

• In costing section, component costing is used for calculating the cost of

each component. By applying this method the total cost can be

reduced and controlled.

• As the rate of machine hour rate (MHR) is very high in HAL so the work

is done on contract basis i.e. outsourcing is done so that cost can be

reduced and controlled.

• Minimum inventory is kept in stores, so that there would be no wastage

and cost can be reduced.

• Efficiency of employees is approximately 100% due to which there is

no wastage and cost is reduced.

• It is also implementing methods of 5S to control and maintain cost

effectiveness.

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• It has also implemented lean management and various tools like

KAIZEN for wastage removal so as to reduce the extra cost incurred.

• It also aim at producing all accessories as first time correct and with

Zero error so that the cost incurred in rejection and rework processes

can be controlled.

SUGGESTIONS

• There should be facility of intranet so fax and such other things must

be done through it that can reduce time and money.

• For attendance finger print system should be adopted so that actual

person’s attendance can be mentioned.

• The time delay between rising of purchase order and preparation of

RDR should be reduced.

• Wages to direct workers should be given through piece rate system.

• Efficiency of indirect workers should be measured so that slackness

can be sorted out.

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• Employees should be included in brainstorming and also should be

given liberty and non-monetary incentives as appreciation.

• Officers should be promoted only on the basis of performance and not

on the basis of number of years worked.

• Workers who have talent and compatible with office grade but

restricted to work only at non-supervisory position, the policy should be

such so that grade promotion could be possible.

• Profit calculation by project cell for project evaluation is different from

costing section. In this way project evaluation is not proper. So it must

frame its cost-benefit evaluation and focus on only licensing fee and

other DRE and framing of analysis should be done as per actual

recoverable profit percentage.

• The company should give some stipend to Industry guide for summer

training due to which they will take more interest in providing guidance.

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 CONCLUSION

HAL is one of the largest PSU under the department of defense production, GOI

and is a “NAVRATNA” company ranked 34th in the list of world’s top 100 defense

companies. HAL with its wide spectrum of expertise in design, development and

manufacture of aircrafts, helicopters, engines, accessories and avionics has

emerged as major aeronautical complex in Asia.

As herein, the projects and items need huge investments than any other

organization and confidential factor is also there too much extent but as much

information is extracted shows that cost control is being performed quite good

that’s why it is in so much profit.

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In the organization, cost of inventory as well as labor is controlled very well by

implementing ABC analysis but there is also some scope for cost reduction by

reducing number of casuals to reduce labor cost and by implementing EOQ

(Economic Order Quantity) technique to control material cost.

Although for the organization’s betterment its executives are working hard and

trying to serve in the best possible manner with their colleagues and they all are

very qualified and experienced so organization must extract optimum from them.

ANNEXURE

Questionnaire:

Name:

Designation:

Section / Department:

1. Describe the major activities being carried out at the accessories division?

2. Batch costing and job costing is carried out for which of these activities?

3. Is there a component costing system in existence?

4. On what basis is the production work undertaken?

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 5. What is your comment on the present budgeting system?

6. Describe the procedure of processing the cost ledger?

7. Describe the current practice followed in calculating the cost for various

departments?

8. Describe the steps taken to improve the international relationship with

foreign companies like Turbomeca and Rolls-Royce?

9. Is the current computer system capable of tracing the work flow?

10. Describe the work order structure?

11. How are the work order issued?

BIBLIOGRAPHY

During the preparation of project I took the help of various sources which are as

follows:

Books:

 Jawaharlal – Cost accounting

Journals:

 Accounting manual

 Budget manual

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  Training manual on cost reduction

 Company monthly journals

Internet:

 www.hal-india.com

 www.wikipedia.org

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