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    A RESEARCH STUDY ON ACTUALISATION PROCESS AT

    BOSCH INDIA LIMITED

    SUBMITTED BY,

    MANOJ M BHAT

    Reg. No: 09TUCMA044

    Under the guidance of

    Dr. D.GOPALAKRISHNA, MBA, M.com, LLB, PhD

    READER, CBSMS

    2009-2011

    CANARA BANK SCHOOL OF MANAGEMENT STUDIECANARA BANK SCHOOL OF MANAGEMENT STUDIECANARA BANK SCHOOL OF MANAGEMENT STUDIECANARA BANK SCHOOL OF MANAGEMENT STUDIESSSS

    BANGALORE - 560001

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    CANARA BANK SCHOOL OF MANAGEMENT STUDIES

    (Department of Management Studies, Bangalore University)

    Central College Campus, Bangalore 560001, Karnataka.

    GUIDE CERTIFICATE

    This is to certify that MANOJ M BHAT has prepared this project reportentitled A RESEARCH STUDY ON PROJECT COST ACTUALISATION PROCESS

    under my guidance. The report submitted by him has been successfully completed and

    reflects his hard work and sincere effort.

    Place: BENGALURU Mr Sundara Raman K(BanP/CFA)

    Date:

    (External Guide)

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    Machine-Building Business Salient Features

    Business segment deals with Industrial/Capital Goods. Projects are delivered on specific customer needs, hence not standard. The scope of design and cost vary with each project. The lead time for project delivery ranges between 3-6 months. Important resources: Technology, Design skills and Capital. E.g.: Assembly lines, Metal-Cutting machines, Test equipment, etc. Customers: TATA motors, MUL, Hero Honda, Honda Motors etc. Projects are undertaken for RBIN captive requirements as well. A typical project delivery process is outlined below :

    In case of repeat projects, the scope of design activities could beconsiderably reduced.

    Customer

    Enquiry (Sales)

    Design Study

    (Design)Feasibility

    Study (Sales)

    Quotation

    (Sales)

    Customer PO

    to Bosch

    Design Freeze

    (Design)

    Release of

    BOM (Design)

    Material

    (Purchase)

    R M Inspection

    (Quality)

    Manufacture

    (Production)F.G. Inspection

    (Quality)Final Inspection

    (Customer)

    Billing & Dispatch(Lo istics

    Commissioning(Service

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    NEED FOR ACTUALISATION PROCESS

    1. Since projects vary in scope and complexity, costs are unique.2. Direct Costs (Project-specific expenses for e.g. material) are booked on

    the project, hence such expenses are not under the purview of the

    actualization process.

    3. Indirect expenses (Administration Costs), not attributable at project level,should be allocated to various projects.

    4. The total of point no 2 and 3 above, constitute the total project cost.5. This is essential to satisfy the audit and MIS requirements.6. The projects could be in WIP or Completed status.

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    BREAK-UP OF PROJECT COSTS:

    Costs can be divided into two categories:

    Project

    Cost=

    Direct

    +

    Indirect

    These are accumulated from:

    Material Cost Purchase Overheads Mechanical Design Electrical Design Manufacturing Mechanical Assembly Electrical Assembly Electronic AssemblySome Important Points:

    Material cost through POsraised on vendors

    Purchase Overheads areapplied as a standard

    percentage of Material

    Costs to cover Purchase

    Dept. costs

    Other costs are booked inhours which are then

    multiplied at standard

    rates of absorption.

    Direct Costs

    Business

    Level

    Central

    Level

    Costs attributable to:

    Sales & Service Dept. Quality Dept. Higher Management Utilities/Infrastructure

    Costs etc.

    Shared Services:

    HR functions Employee Welfare Controlling/Finance Technical Functions Corporate Services Project Management Other administration

    Some Important Points:

    These costs are incurred periodically which are necessary tomanage the organization

    Hence, they are not directly attributable to projects These are Fixed in nature Such costs are to be allocated to various projects

    Indirect Costs

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    PRESENT SCENARIO

    Actualization process involves distribution of indirect costs shownabove, to various projects, to derive the actual cost of the project.

    The distribution process is being carried out on various projects, onthe basis of their share of direct costs.

    ILLUSTRATION OF THE CURRENT PROCEDURE

    SAP P47 provides the direct costs incurred for every project.PROJECT A B C D TOTAL

    MATERIAL - ( a ) 6,500 8,000 4,000 4,000 22,500

    VALUE ADDITION (VA):DESIGN - ( b ) 2,000 1,000 6,000 0 9,000

    MANUFACTURING - ( c ) 1,500 1,000 0 6,000 8,500

    TOTAL - (d=b+c) 3,500 2,000 6,000 6,000 17,500

    GRAND TOTAL DIRECT COST-

    (e=a+b+c) 10,000 10,000 10,000 10,000 40,000

    Let us now study the distribution of direct costs in the project.

    Typical Project (A) Material 65%, Design 20% & Manufacturing 15%. Project B (Complete Solution) Material (80%) and VA (20%). Project C (New Concept) Design (60%) and Material (40%) Project D (Repeat Order) Manufacturing (60%) and Material (40%) Let us now see the composition of all the projects.

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    Project A (Normal Scenario)

    Project B (Complete Solution)

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    Project C (New Concept)

    Project D (Repeat Project)

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    These Value Added Costs can be represented in one pie chart as follows.

    SHARE OF VALUE ADDED COSTS IN TERMS OF:

    AMOUNT PERCENTAGE

    The Indirect costs must also be distributed an all the projects and also within the

    projects, in the same proposition. This process can be explained with the help of

    a flowchart (on the next page)

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    FLOWCHART FOR ACTUALISATION PROCESS

    START

    Extract project

    wise Direct Costs

    (Excl Mat) - P47

    Multiply x with the project direct cost

    (Excluding Material). This provides the project-

    wise indirect cost.

    Add indirect costs above to the direct cost

    values (Including Material). This provides

    the total cost of the project

    Store the valuesback to database.

    END

    Divide the Total Indirect Cost by Total Direct

    Cost (Excluding Material) of all projects, to

    derive x.

    Extract total

    Indirect Costs

    from P47

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    This procedure can be used to find the cost of each project.

    The final table after distribution will appear in the following way:

    INDIRECT COST DETAIL:

    INDIRECT COSTS

    BUSINESS LEVEL: CENTRAL LEVEL:

    SALES & SERVICE 30,000 HR FUNCTIONS 15,000

    QUALITY 5,000 EMPLOYEE WELFARE 5,000

    HIGHER MANAGEMENT 7,500 CONTROLL/FINANCE 15,000

    UTILITIES & INFRASTRUCTURE 7,500 TECHNICAL FUNCTIONS 5,000

    TOTAL - ( j ) 50,000 CORPORATE OVERHEAD 5,000

    PROJECT MGMT 3,000

    OTHER ADMINISTRATION 2,000

    TOTAL - ( k ) 50,000

    TOTAL INDIRECT COST - (y=j+k ) 1,00,000

    DIRECT COST DETAIL:

    PROJECT A B C D TOTAL

    MATERIAL - ( a ) 6,500 8,000 4,000 4,000 22,500

    VALUE ADDITION (VA):

    DESIGN - ( b ) 2,000 1,000 6,000 0 9,000

    MANUFACTURING - ( c ) 1,500 1,000 0 6,000 8,500

    TOTAL - (d=b+c) 3,500 2,000 6,000 6,000 17,500

    GRAND TOTAL DIRECT COST -

    (e=a+b+c) 10,000 10,000 10,000 10,000 40,000

    INDIRECT COST+DIRECT COST 1,40,000

    TOTAL INDIRECT COST - ( y ) 1,00,000

    TOTAL VALUE ADDITION - ( d ) 17,500

    IC:VA - (x=d/z) 5.71

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    ALLOCATIONS:

    PROJECT A B C D TOTAL

    DESIGN - (f=b*x) 11,429 5,714 34,286 0 51,429

    MANUFACTURING - (g=c*x) 8,571 5,714 0 34,286 48,571

    GRAND TOTAL INDIRECT COST-

    (h=f+g) 20,000 11,428 34,286 34,286 1,00,000

    TOTAL COST=DIRECT COST+INDIRECT COST

    PROJECT A B C D TOTAL

    TOTAL COSTMATERIAL - ( a ) 6,500 8,000 4,000 4,000 22,500

    VALUE ADDITION:

    DESIGN - ( b ) 2,000 1,000 6,000 0 9,000

    DESIGN ALLOCATION - ( f ) 11,429 5,714 34,286 0 51,429

    MANUFACTURING - ( c ) 1,500 1,000 0 6,000 8,500

    MANUFACTURING ALLOCATION

    -( g ) 8,571 5,714 0 34,286 48,571

    TOTAL PROJECT COST-

    (a+b+f+c+g) 30,000 21,428 44,286 44,286 1,40,000

    IC-Indirect Cost DC-Direct Cost

    Note*- Material Cost is considered separately as it is not considered while distributing the

    indirect cost. The value that will be used for distribution of indirect costs will be the Value

    Added Cost.

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    ALTERNATE METHOD

    In this method of indirect cost distribution, value addition in cost terms isnot considered for allocation of indirect costs.

    Instead, value addition in hours of activity on projects, is considered fordistribution of indirect costs.

    The same example above is outlined below with the alternate method :

    Value Addition in hours is shown in the table under each dept. booking the

    hours.

    DIRECT COST TABLE:

    PROJECT A B C D TOTAL

    MATERIAL - ( a ) 6,500 8,000 4,000 4,000 22,500

    VALUE ADDITION:

    DESIGN HRS - ( b ) 10 5 30 0 45

    MANUFACTURING HRS - ( c ) 15 10 0 60 85

    TOTAL - (d=a+b) 25 15 30 60 130

    GRAND TOTAL DIRECT COST -(a+b*200+c*100) 10,000 10,000 10,000 10,000 40,000

    The indirect costs will remain the same as in the previ