Inventory Management and Budgetary Control System

1

EXECUTIVE SUMMARY

As we know that Mahindra & Mahindra Co. Ltd. is a production unit. When

ever production term comes then first thing comes in our mind that is inventory.

Because inventory is base for any production unit so, when we control and manage

the inventory properly then the company is benefited. (By reducing holding and

carrying cost of inventory.) Thus after studying inventory Management the important

activity which is done on quarterly basis in the account department is Budgetary

Control in which operating Budget expenses is to be control in Mahaindra &

Mahindra Co. Ltd. Nagpur Branch.

A Budget is a plan which relates to a definite period of time and which is

expressed in quantitative terms. It is thus a predetermined statement which

incorporates the policy of the management during a given period and serves as a

standard for comparing the actual results. Thus a budget is a tool in the actual results.

Thus a budget is tool in the hands of the management which serves as a guide to all

the employees in achieving their goals objectives and targets.

A budget can help us a planning and coordination with all the employees, and

departments, but the most important factor is that it is used for control purposes at all

levels of management.

M & M s Farm Equipment Sector is the largest manufacturer of tractors in

India with sustained market leadership of over 19 years. It designs, develops,

manufactures and markets tractors as well as implements which are used in

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conjunction with tractors. The tractor industry in Indian is segmented by horsepower

into the lower segment of 25 HP, segment of 35 HP and higher segment of 45 HP and

above. The Company s Farm Equipment Sector has a presence in all these segments

across all states.

M & M Co. Ltd. Farm equipment sector has four plant locations in Rudrapur,

Jaipur, Nagpur & Kandivalli. The project work is done for Nagpur branch. This

branch is certified for ISO 9001, QS-9000, ISO-14001, M & M tractor have earned

goodwill and trust of more than 8,00,000 customers and the Mahindra tractor has

come to be recognized as a powerful symbol of productivity and performance.

The project requires two months time for the completion. The steps involve in

collection of data from various sources like SAP, Monthly performance review

meetings (MPRM) Reports, Annual Reports, Computerized Inventory Management

system (CIMS).

Thus from this study of inventory management it is observed that by using

various techniques such as ABC, EOQ, Reorder level etc. management minimize

investment in inventory and meet a demand for the product by efficiently organizing

the production and sales operations. The firm should minimize investment in

inventory which involves costs i.e. ordering cost and carrying cost, so that smaller the

inventory, the lower is the cost to the firm.

The study of budgetary control system help business to function with

planning which is related to production, sales, stocks, requirement of labors, etc. The

advantage of planning is that we can anticipate the problems before hand. Planning

3

through budgetary control is necessary at all levels of management in which there is

the process of thinking which enables to provide new idea to the management

4

OBJECTIVES BEHIND THIS STUDY

The basic responsibility of the financial manager is to make sure the firm s

cash flows are managed efficiently.

The objective of inventory management consists of two counterbalancing

parts: (i) to minimize investments in inventory, and (ii) to meet a demand for

the product by efficiently organizing the production and sales operations.

These two conflicting objectives of inventory management can also be

expressed in terms of cost and benefit associated with inventory.

The firm should minimize investment in inventory implies that maintaining

inventory involves costs, such that the smaller the inventory, the lower is the

cost to the firm.

It should aim at a level of inventory which will reconcile these conflicting

elements. That is to say, an optimum level of inventory should be determined

on the basis of the trade off between costs and benefits associated with the

levels of inventory.

5

SCOPE

Inventory management is the base for any production unit so; it is related to

overall objective on the firm. This study is basically concerned with inventory

management techniques. This aspect covered the determination of the type of

control required & Economic Order Quantity which help the financial

manager in planning & budgeting inventory.

This study helps to minimize cost of holding the inventory i.e. ordering cost &

Carrying cost. The maintenance of inventory also helps a firm to enhance its

sales efforts. It serves to bridge the gap between current production & actual

sales.

This study also helps to minimize the setup time & manufacturing time for

each unit. This is the time form when a product is ready to start on the

production line to when it become a finished good producing to demand often

means manufacturing small quantity of product. Producing small batches is

economical only if setup time are small. It encourages research and

development as budgetary control schedules are usually based on past

experience.

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Mission Statement :

TO STRIVE FURTHER THAN THE FARTHEST. TO SET NEW STANDARDS

IN PERFORMANCE, AND THEN BREAK THEM. TO REACH FOR THE

HELIGHTS AND THEN SEEK A NEW SUMMIT,

IT S ABOUT WINNING, AND BEYOND.

7

CORE VALUES

Our core values are influenced by our past, tempered by our present and are designed

to shape our future. They are an amalgam of what we have been, what we are and

what we want to be.

These values are the compass that will guide our actions, both personal and corporate.

They are:

Good corporate citizenship: As in the past, we will continue to seek long

term success that is in alignment with our country's needs. We will do this

without compromising on ethical business standards.

Professionalism : We have always sought the best people and given them the

freedom and the opportunity to grow. We will continue to do so. We will

support innovation and well-reasoned risk-taking, but will demand

performance.

Customer First: We exist and prosper only because of our customers. We

will respond to their changing needs and expectations speedily, courteously

and effectively.

Quality focus :Quality is the key to delivering value for money to our

customers. We will make quality a driving value in our work, in our products

and in our interactions with others. We will do it "first time right .

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Dignity of the individual: We value individual dignity, uphold the right to

express disagreement and respect the time and efforts of others. Through our

actions, we nurture fairness, trust and transparency.

History

1963:

Incorporation of International Tractor Company of India (ITCI), as a Joint Venture between Mahindra & Mahindra Limited (M&M), International Harvester Inc, and Voltas Limited sharing the responsibility of design, manufacturing & marketing.

1965:

Rolled out first batch of 225 Tractors in 35 H.P. Range Model B275 Regular

1970:

Set up the Implements Division at Nagpur

1977:

Merger with M&M forming its Tractor Division. Full fledged responsibility for design, manufacturing & marketing.

1981:

100,000th Tractor rolled out.

1983:

Market leader in domestic Tractor market - has maintained this position till date !

1985:

Launched Quality Circle Movement as part of Total Quality Management.

1988:

Introduced fuel-efficient DI Tractor.

1990:

Started the Juran Quality Improvement Movement .

1991:

Launched 265 DI tractor in 25 HP range.

Launched Statistical Process Control Cell.

1992:


Vendor upgradation through self-certification.

1994:


Implements Division achieves ISO 9002 certification.

Incorporation of Mahindra USA Inc. in U.S, as wholly owned subsidiary of M&M

1995:

A decade of QC movement - 152 Quality Circles.

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1996:


Tractor assembly started at Implements Division, Nagpur

Kandivli Plant achieves ISO 9001 certification.

Rolled out 5,00,000th tractor.

1997:

Launched 585 DI tractor in 50 HP range

Launched constant mesh version of 585 DI tractors and 275 DI TU series tractor in 35 HP range.

1998:

Implemented SAP on 1st April 1998

5005 DI model (51 HP) with constant mesh transmission, power steering, alternator has been developed for US market.

Reached a level of 6,00,000 tractors sales

Implemented.Business Process Re-engineering.

1999:

4005 DI & 4505 DI (40 HP) introduced in USA.

Nagpur Plant awarded QS-9000 certificate.

M&M acquired majority stake in Gujarat Tractors Corporation Ltd

2000:

Launched 605 DI - 'Arjun', a new generation tractor - in 60 HP range.

Kandivli plant received the QS 9000 certification.

Set up its first satellite tractor plant at Rudrapur

2001:

Nagpur Plant awarded the ISO 14001 certificate.

Launched 'Arjun' 5500 DI & 6000 DI tractors in the overseas market.

2002:

Kandivli Plant awarded the IS0 14001 certificate.

Launched 'Arjun' 555DI tractor in 45 HP range & 445 DI tractor in the 40 HP range.

Launched 'Arjun' 6500 DI in overseas market.

Launched Compact series, Model C-27 & C-35, in the US market.

2003:

Ventured into manufacturing of Industrial Engines

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MAHINDRA & MAHINDRA CO. LTD. : A CURTAIN RAISER

COMPANY PROFILE :

Mahindra & Mahindra Limited (M & M) is the flagship company of around

Rs. 7000 crore Mahindra Group, which has a significant presence in key sector of the

Indian economy. A consistently high performer, M & M is one of the most respected

companies in the country.

Set up in 1945 to make general-propose utility vehicles for the Indian market,

M & M soon branched out into manufacturing agricultural tractors and light

commercial vehicles (LCVs). The company later expended its operators form

automobiles and tractors to secure a significant presence in many more important

sectors. The company has, over the years, transformed itself into a Group that caters

to the Indian and overseas markets with a presence in vehicles, farm equipment,

information technology, trade and finance related services, and infrastructure

development.

An organizational restructuring exercise in 1994 arising from a Business

Process Re-engineering programme resulted in the core activities of manufacturing

utility and light commercial vehicles and agricultural tractors remaining with the

flagship company.

All other activities were spun off into separate entities and organized under

business groups. Thus groups are in the areas of Hospitality, Trade and Financial

11

Services, Automotive Components, Information Technology, Telecom and

Infrastructure Development.

Today M & M has two main operating divisions:

The Automotive Division manufactures utility vehicles, light commercial

vehicles and three wheelers.

The Tractor (Farm Equipment) Division makes agricultural tractors and

implements that are used in conjunction with tractors. This division has also ventured

into manufacturing of industrial engines. It has won the coveted Deming Application

Prize 2003. Incidentally, this is the First Tractor Company in the world to win this

Prestigious Prize.

M & M employs around 12,000 people and has six state-of-the art

manufacturing facilities spread over 5,00,000 square meters, M & M has also set up

two satellite plants for tractors manufacturing. It has 49 sales offices that are

supported by a network of over 650 dealers across the country. This network is

connected to the company s plants by an extensive IT infrastructure.

M&M s outstanding manufacturing and engineering skills allow it to

constantly innovate and launch new products for the Indian market. Proof of this

expertise is the launch of the Bolero, Scorpio, a new-generation utility vehicle, and

the Arjun, a sophisticated agricultural tractor.

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The Company s commitment to technology driven innovation is reelected in

the setting up of the Mahindra Research Valley, a facility that will house the

Company s engineering research and product development wings, under one roof.

The M & M philosophy of growth is centered on its belief in people. As a

result, the company has put in place initiatives that seek to reward and retain the best

talent in the industry. M&M is also known for its progressive labour management

practices.

It the community development sphere, the company has implemented several

programs that have benefited the people and institutions in its areas of operations.

Farm Equipment Sector

For the third consecutive year, the Tractor Industry grew substantially

registering a growth of 18% for the year under review. This was mainly on account of

good monsoon, better availability of credit and focus on retail tractor financing by the

Banking Sector.

During the year, Company sold 85, 029 tractors as against 65,390 tractors sold in the

previous year recording a significant growth of 30% and produced 87,075 tractors as

against 67,115 tractors produced in the previous year recording notable growth of

29.7%. Company maintained its market leadership for the 23rd consecutive year in the

domestic tractor market.

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Last year Company launched two new products

235 DI and 245 DI

in the

domestic market in the low HP segment and new Arjun Ultra-1 range in the high HP

segment. These products have significantly strengthened your Company s position in

these segments.

Company sold 14,692 engines during the year under review as against, 6,672 engines

sold during the previous year, registering a massive growth of 120%. The engine

business which started from a customer base of a single client in 2002 has currently

22 corporate clients. Company has also made a foray into the retail and non-genset

segments. Beginning from this year Company has also sold 1,084 Mahindra branded

Diesel Generators (DG Sets).

Company s focus on exports continued with export volumes growing by 29.6%. The

major export markets are USA, SAARC countries, Africa, Australia and China.

Company established a Joint Venture Company (JVC) in China under the name of

Mahindra (China) Tractor Company Limited (MCTCL) in which a wholly owned

subsidiary of the Company, Mahindra Overseas Investment Company (Mauritius)

Limited, has a 80% shareholding, the balance 20% being held by Jiangling Motors

Co., Group, China. This JVC has a capacity of 12,000 tractors in 18-33 HP range.

This JVC became fully operational in July, 2005. Company has also started its East

European operations by launching tractors in Serbia. Company sold spare parts worth

Rs. 127.88 crores (including exports Rs. 11.7 crores) during the year under review as

compared to sales of Rs. 108.83 crores (including exports Rs. 7.6 crores) in the

previous year, registering a healthy growth of 17.5%.

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Company plans to offer various product solutions by offering value for money and

reliable products in domestic market. This will help your Company expand its product

range in low HP segment. Apart from new products, it is important to upgrade

existing products with contemporary features. F-06 was an encouraging year for

agriculture. Going forward, due to a good monsoon and water availability during the

year, crop production is expected to be higher by 2.5% over last year. As a result of

this, it is estimated that the agricultural GDP of India will grow by 3.2%.

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Financial Highlights

Year PAT Net Income (Rs. In Lakhs)

2002 97 3320 2003 146 3811 2004 349 5057 2005 513 6769 2006 857 8327

146

349

513

97

857

33203811

5057

6769

8327

0

100200

300

400500

600

700

800

900

1000

2002 2003 2004 2005 20060

1000

2000

3000

4000

5000

6000

7000

8000

9000

PAT

Net Income

Year Basic Earnings per share 2002 8.62 2003 12.55 2004 30.04 2005 44.19 2006 51.07

Earnings per share

0

10

20

30

40

50

60

2002 2003 2004 2005 2006

YEA R Basic Earnings per share

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PERFORMANCE OF M & M WITH ITS COMPETITIORS

Performance of a M & M with Its Competitors

Comparative Performance in 25 HP Category

Graph 5.1

Table 5.1

Above graph shows market share of different companies dealing in tractor production

and it is clear that M & M takes 33% of the total market share, followed by Eicher

which is 26% that means M & M is market leader in 25 HP.

Particulars Percentage

Tafe 6.7

Escorts 9.2

M & M 33

HMT 2

Sonalika 8.9

PTL 9.7

Others 4.2

Eicher 26.3

Eicher , 26.3

Tafe, 6.7Escorts , 9.2

Others , 4.2

PTL, 9.7

Sonalika , 8.9 HMT, 2

M & M , 33

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Comparative Performance in 35 HP Category :

Graph 5.2


Escorts 9.9

HMT 3.1

M & M 28.1

Eicher 5.8

Tafe 19.6

Others 6.2

PTL 18.1

Sonalika 9.2

Table 5.2

Above Graph shows market share of different companies dealing in tractor production

and it is clear that M & M takes 25% of total market share followed by Tafe which is

20% that means M & M is market leader in 35 HP.

M & M , 28.1

Eicher , 5.8Tafe, 19.6

Others , 6.2

PTL, 18.1HMT, 3.1

Escorts , 9.9Sonalika, 9.2

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Comparative Performance in 45 HP Category :


Escorts 20.2

HMT 1.5

M & M 18.8

Tafe 6.5

Others 3.1

PTL 9.2

Sonalika 13.4

JD 12.8

NHT 14.5

Table 5. 3

Above graph shows market share of different companies dealing in tractor production

and it is clear that M & M takes 19% total market share and Escort is also showing

19% market share in 45 HP.

NHT, 14.5

M & M , 18.8

Tafe, 6.5Others , 3.1PTL, 9.2

Sonalika, 13.4

HMT, 1.5

Escorts , 20.2

JD, 12.8

19

Tractors Below 30 HP

265 DI Sarpanch

265 DI Bhoomiputra

Arjun 445 DI

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INTRODUCTION

As we know that Mahindra & Mahindra Co. Ltd. is a production unit. When

ever production term comes then first thing comes in our mind that is inventory.

Because inventory is base for any production unit so, when we control and manage

the inventory properly then the company is benefited. (By reducing holding and

carrying cost of inventory).

Inventory, as a current asset, differs from other current assets because only

financial managers are not involved. Rather, all the functional areas finance,

marketing, production, and purchasing, are involved. The views concerning the

appropriate level of inventory would differ among the different functional areas. The

Conflicting view points of the various functional areas regarding the appropriate

inventory levels in order to fulfill the overall objective of maximizing the owner s

wealth. Thus, inventory management, like the management of other current assets,

should be related to the overall objective of the firm. It is basically concerned with

inventory management techniques. Attention is given here to basic concepts relevant

to the management and control of inventory. The aspects covered are: (i)

determination of the type of control required, (ii) the basic economic order quantity,

(iii) the recorder point, and (iv) safety stocks. As a matter of fact, the inventory

management techniques are a part of production management. Thus it will help the

financial managers in planning and budgeting inventory

.

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Meaning of Inventory

Inventories are stock of the product a company is manufacturing for sale and

components that make up the product. The various forms in which inventories exist in

a manufacturing company are: raw materials, work-in-process and finished goods.

Raw materials are those basic inputs that are converted into finished product

through the manufacturing process. Raw materials inventories are those units

which have been purchased and stored for future productions.

Work-in-process inventories are semi-manufactured products. They represent

products that need more work before they become finished products for sale.

Finished goods inventories are those completely manufactured products

which are ready for sale. Stocks of raw materials and work-in-process

facilitate production, while stock of finished goods is required for smooth

marketing operations. Thus, inventories serve as a link between the production

and consumption of goods.

Costs of Holding Inventory

One operating objective of inventory management is to minimize cost. There

are two basic categories: (i) Ordering or Acquisition or Set-up costs, and (ii) Carrying

costs.

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Ordering Costs

This category of costs is associated with the acquisition or ordering of

inventory. Firms have to place orders with suppliers to replenish inventory of raw

materials. The expenses involved are referred to as ordering costs. Included in the

ordering costs are costs involved in (i) preparing purchase order or requisition form

and (ii) receiving, inspecting, and recording the goods received to ensure both

quantity and quality. The cost of acquiring materials consists of clerical costs and

costs of stationery. It is, therefore, called a set-up cost. They are generally fixed per

order placed, irrespective of the amount of the order. The larger the orders placed the

costs. The acquisition costs are inversely related to the size of inventory: they decline

with the level of inventory. Thus, such costs can be minimized by placing fewer

orders for a larger amount. But acquisition of a large quantity would increase the cost

associated with the maintenance of inventory that is, carrying costs.

CARRYING COSTS

1. Those that arise due to the storing of inventory. The main components of

this category of carrying costs are (i) storage cost, that is, tax, depreciation,

insurance of the building, utilities and janitorial services; (ii) insurance of

inventory against fire and theft; (iii) deterioration in inventory because of

pilferage, fire, technical obsolescence, style obsolescence and price decline ;

(iv) serving costs, such as, labour for handling, clerical and accounting costs.

2. The opportunity cost of funds. This consists of expenses in raising funds

(interest on capital) to finance the acquisition of inventory. If funds were not

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locked up in inventory, they would have earned a return. This is the

opportunity cost of funds or the financial cost component of the cost.

The sum of the order and carrying costs represents the total cost of

inventory. This is compared with the benefits arising out of inventory to

determine the optimum level of inventory.

Benefits of Holding Inventory

The basic function of inventories is to act as buffer to decouple or uncouple

the various activities of a firm so that all do not have to be pursued at exactly the same

rate 3. The key activities are (1) purchasing, (2) production, and (3) selling.

Benefits in Purchasing

A firm can purchase larger quantities than is warranted by usage in production or

the sales level. This will enable it to avail of discounts that are available on bulk

purchases. Moreover, it will lower the ordering cost as fewer acquisitions would be made.

There will, thus, be a significant saving in the costs. Second, firms can purchase goods

before anticipated or announced price increases. This will lead to a decline in the cost of

production. Inventory, thus, serves s a hedge against price increase as well as shortages of

raw materials. This is a highly desirable inventory strategy.

Benefits in Production

Finished goods inventory serves to uncouple production and sale. This enables

production at a rate different from that of sales. That is, production can be carried on

at a rate higher or lower than the sales rate. This would be of special advantage to

firms with seasonal sales pattern. In their case, the sales rate will be higher than the

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production rate during a part of the year (peak season) and lower during the off-

season. The choice before the firm is either to produce at a level to meet the actual

demand, that is, higher production during peak season and lower (or nil) production

during off-season, or, produce continuously throughout the year and build up

inventory which will be sold during the period of seasonal demand.

Benefits in Work-in-Process

The inventory of work-in-process performs two functions. In the first place, it

is necessary because production processes are not instantaneous. The amount of such

inventory depends upon technology and the efficiency of production. The larger the

steps involved in the production process, the larger the work-in-process inventory and

vice versa. In a multi-stage production process, the work-in-process inventory serves

purpose also.

Benefits in Sales

The maintenance of inventory also helps a firm to enhance its sales efforts. A firm

will not be able to meet demand instantaneously. There will be a lag depending upon the

production process. If the firm has inventory, actual sales will not have to depend on

lengthy manufacturing processes. Thus, inventory serves to bridge the gap between

current production and actual sales. A basic requirement in a firm s competitive position

is its ability vis-à-vis its competitors to supply goods rapidly.

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Techniques for inventory management

A method of inventory control to indicate a broad framework for managing

inventories efficiently in conformity with the goal of wealth-maximization. The major

problem-areas that comprise the heart of inventory controls are (i) the classification

problem to determine the type of control required, (ii) the order quantity problem, (iii)

the order point problem, and (iv) safety stocks.

1. A B C System

The first step in the inventory control process is classification of different

types of inventories to determine the type and degree of control required for each. The

A B C system is a widely-used classification technique to identify various items of

inventory for purpose of inventory control.

On the basis of the cost involved, the various inventory items are, according to

this system, categorized into three classes: (i) A (ii) B and (iii) C.

2. Economic Order Quantity (EOQ) Model

After various inventory items are classified on the basis of the A B C analysis.

A key inventory problem particularly in respect of the Group. An items relates to the

determination of the size or quantity in which inventory will be acquired. In other

words, while purchasing raw materials or finished goods, the questions to be

addressed are 8. How much inventory should be bought in one lot under one order on

each replenishment? Should the quantity to be purchased be large or small? Or,

should the requirement of materials during a given period of time (say, six months or

26

one year) be acquired in one lot or should it be acquired in installments or in several

small lots? Such inventory problems are called order quantity problems.

Buying in large quantities implies a higher average inventory level which will

assure (i) smooth production/sale operations, and (ii) lower ordering or set-up costs.

But it will involve higher carrying costs. On the other hand, small orders would

reduce the carrying cost of inventory by reducing the average inventory level but the

ordering costs would increase as there is interruption in the operations due to stock-

outs. The optimum level of inventory is popularly referred to as the economic order

quantity (EOQ). It is also known as the economic lot size. The economic order

quantity may be defined as that level of inventory order that minimizes the total cost

associated with inventory management. EOQ refers to the level of inventory at which

the total cost of inventory comprising acquisition/ordering/set-up costs and carrying

cost is minimal.

C

AOEOQ

2

A = Annual usage of inventory (unit)

O = Ordering cost per order

C = Carrying cost per unit

Assumptions

The firm knows with certainty the annual usage (consumption) of a particular

item of inventory.

The rate at which the firm uses inventory is steady over time.

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The orders placed to replenish inventory stocks are received at exactly that

point in time when inventories reach zero.

3. Order Point Problem

The EOQ technique determines the size of an order to acquire inventory so as

to minimize the carrying as well as the ordering costs. In other words, the EOQ

provides an answer to the question: how much inventory should be ordered in one lot?

The reorder point is stated in terms of the level of inventory at which order

should be placed for replenishing the current stock of inventory. In other words,

reorder point may be defined as the level of inventory when fresh order should be

placed with the suppliers for procuring additional inventory equal to the economic

order quantity. It is based on the following assumptions: (i) constant daily usage of

inventory, and (ii) fixed lead time. In other words, the formula assumes conditions of

certainly.

The recorder point = Lead time in days x average daily usage of inventory

4. Safety Stock

The safety stock

as the minimum additional inventory to serve as a safety

margin or buffer or cushion to meet an unanticipated increase in usage resulting from

an unusually high demand and or an uncontrollable late receipt of incoming

inventory. The effect of increased and/or slower delivery would be a shortage of

inventory. The delay may arise from strikes, floods, transportation and other bottle

necks. That is, the firm would face a stock-out situation. This, in turn, as explained in

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detail below, would disrupt the production schedule and alienate the customers. The

firm would, therefore, be well advised to keep a sufficient safety margin by having

additional inventory to guard against stock-out situations. Such stocks are called

safety stocks. The safety stock involves two types of costs: (i) stock-out, and (ii)

carrying costs.

FINDING:

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Suggestion

As we study the inventory management system of Mahindra & Mahindra co.Ltd. We

can give few suggestions regarding the management control which increase the

production and reduce the lead time to some extend of that company-

1. Emphasis is placed on minimizing the setup time & manufacturing lead time

for each limit. This is the time from when a product is ready to start on the

production line to when it become a finished good producing to demand often

means manufacturing small quantities on product producing small batches is

economical only if setup time are small.

2. The production line is stopped if parts are absent or defective work is

discovered. Stoppage creates an emergency about correcting problem that

causes defective units.

3. This production limit consists of large amount of scrap which is the root cause

of the manufacturing unit. So the firm should emphasis on eliminating these

causes. So that wastage should not occur & that will reduce the lead time of

product.

4. The reorder point is the quantity level of inventory that triggers a new order.

It equals the sales per unit of time multiplied by the purchase-order lead time.

Safety stock is the buffer inventory held as a cushion against unexpected

unavailability of stock from suppliers.

Limitations:

1. All the programs are going under SAP System so there are the limitations

regarding the analysis of the data without user of that company only.

2. As inventory management is the vast topic it required lot of time to

understand the process in the company at each department.

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3. Some time respondent was busy because of that information regarding

project work will not available as soon as possible.

4. Non availability of data and transit or lead time is not fixed..

INTRODUCTION

Planning is the basic managerial function. It helps in determining the course of

action to be followed for achieving organizational goals. It is the decision in advance

what to do, and when to do, and who will do the particular task? Plan is made to

achieve best results. Control in the process of checking whether the plans are being

adhered to or not, keeping the record of process, comparing it with the plans and then

taking corrective measure for future if there is any devotion. Every business enterprise

needs the use of control techniques for surviving in the highly competitive and

managing economic world. There are various control devices in use .budget are the

most important tool of profit planning and control. They also act as an instrument of

coordination.

A budget is a detailed plan of operations for some specific future period. It is

an estimated prepared in advance of the future period to which it applies. It acts as a

business parameter. It is a complete programme of activities of the business for the

period covered.

According to Gordon and shilling law budget may be defined as A

redetermined detailed plan of action developed plan of action developed and

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distributed as a guide to current operations and as a partial basis for subsequent

evolution of performance

The chartered institute of management accountants, London, defines a budget

as A financial and/or quantitative statement, prepared prior to a defined period of

time, of the police to be pursued during that period for the purpose of attaining a

given objective .

Different types of budget are prepared by an industrial concern for different

purpose. A sales budget is prepared for the purpose of forecasting sale for the future

period. A manufacturing cost of budget is prepared for forecasting the manufacturing

costs. The master budget embodies forecasting the figure of profit or loss.

Control means, some sort of systematic effort to compare current performance

to the predetermined plan or objective. Presumably in order to take any remedial

action required this is a very general definition of term. However as the management

function, it has been defined as The process by which managers assure that resources

are obtained and used effectively and efficiently in the accomplishment of

organizations goals.

Management control process involves two separate but closely related

activities planing and control. Planning means deciding what it is to be done and how

it is to be done control is assuring that desired results (which may be different from

the planned onces on account of change in circumstances) are attained. Budget is

32

simply a plan of action hence the technique of budgetary control is an important tool

of managing control.

The chartered institute of management accountants, London, defines

budgetary control as The establishment of budget relating to the responsibilities of

executives to the requirement of the policy, and continuous comparison of actual with

budgeted results, either to secure by an individual action the objective of the policy or

to provide a basis for its revision. According to the J.A.Scott, it is the system of

management control and according in which all operation are forecasted and so for as

possible planned ahead and the actual results compared with the forecasted with the

forecasted and planned one.

In today s completive world, without proper planning and control over the

expenses no company can survive. Profit can be maximized by increasing sales,

which depends upon the external factor like market condition, demand, competitors

etc another way to increase profit is to decrese cost (profit=sales-total cost). But for

decreasing cost proper control system should be an action .with the help of proper

budgetary control system maximization of wheat of shareholder is possible. And for

company like m & m which comes under farm equipment sector comparison of actual

with budgets and taking remedial major for division is must do job. Termined

33

OBJECTIVE BEHIND THE STUDY

Budget and Budgetary control system is a very vast subject. But at the same

time it is basic need of every company to make the budget. So it requires the overall

knowledge and skill for making budget and without planning nobody can achieve

organizational goals. This topic is very essential to every company and it's have

special importance in the current competitive world.

Taking into consideration the vast importance of Budget and Budgetary

control. The objective behind this study work is as follows:

To study in detail the budget procedure of Mahindra & Mahindra Co. Ltd.

Nagpur.

To list of various types of budgets generally Mahindra & Mahindra Co. Ltd.

Nagpur prepares.

To evaluate variance analysis of Mahindra & Mahindra Co. Ltd. for taking

suitable action by comparing actual results with budgets so that the causes are

not repeated and remedial action should be taken in future.

34

Scope

M & M Co. Ltd. Is the large organization where budgetary control is the

important aspects. From this study we see that how Company plan there budged

according to the requirement is important the i.e. planning, co-ordination and control

a. Any modern business can t not function without planning which is related to

production, sales, stocks, requirement of labour, etc. The advantage of

planning is that we can anticipate the problems before hand. Planning through

budgetary control is necessary at all levels of management in which there is

the process of thinking which enables to provide new idea to the management.

b. A detailed budgetary control system is one where the plans are written down

and these plans are circulated to all the levels management this can be achieve

only through proper communication.

c. It encourages research and development as budgetary control schedules are

usually based on past experience. From the study variances analysis is possible

so that corrective action taken wherever necessary.

36

MEANING AND NATURE OF BUDGETORY CONTROL

MEANING OF A BUDGET

A budget is the monetary or/and quantitative expression of business plans and

policies to be pursued in the future period of time. The term budgeting is used for

repairing budgets and other procedures for planning, co-ordination and control of

business enterprise. According to ICMA, official terminology, A budget is a

financial and/or quantitative statement prepared prior to a defined period of time, of

the policy to be pursued during that period for the purpose of attaining a given

objective. In other words of Brown and Howard, A budget is a pre-determined

statement of management policy during a given period which provides a standard for

comparison with the results actually achieved.

Budgetary control is the process of determining various budgeted figures for

enterprises for me future period and then comparing the budgeted figures with the

actual performance for calculating variances, if any, first of all budgets are prepared

and then actual results are recorded. The comparison of budgeted and factual figures

will enable the management to find out discrepancies and lake remedial measures at a

proper time. The budgetary control is a continuous process, which helps in planning

and coordination. It provides a method of control too. A budget is a means and

budgetary control is the end result.

J. Batty defines it as A system, which uses budgets as a means of planning

and controlling all aspects of producing and /or selling commodities and services.

37

This relates budgetary control with day to day control process. According to him,

Budgetary control involves the use of budget and budgetaryreports,

Thought the period to co ordinate, evaluate and control day-to-day operations

in according with the goals specified by the budget . From the above given definitions

it is clear that budgetary control involves the following:

The objects are set by preparing budgets.

The business is dividend in to various responsibilities,

centers for preparing various budgets.

The actual figures are recorded.

The budgeted and actual figures are compared for

studying the performance of different cost centers.

If actual performance is less than the budgeted

norms, remedial action is taken immediately.

Thus, the three cardinal features of budgetary

control are: Planning, co-ordination, control.

BUDGET, BUDGETING AND BUDGETARY CONTROL

A budget is the blue print of a plan expressed in quantitative terms. Budgeting

is the technique for. Budgetary control, on the other hand, refers to the principles,

procedures and practices of achieving given objectives through budgets.

Rowland and William have differentiated the three terms as Budgets are the

individual objectives of a department, etc where as budgeting may be said to be act of

building budgets. Budgetary control embraces all and in addition includes the science

38

of planning the budgets to affect an overall management tool for the business

planning and control .

The budgetary involves use of budgeting techniques to help the management

for carrying various functions and carrying the activities of the business. The

budgetary technique includes:

Establishment of budgets for each department.

Variance analysis is taking suitable action.

To see that the mistake of past are not repeated in future.

Comparing the budget with the actual this is know as

variance.

39

OBJECTIVES OF BUDGETARY CONTROL

Budgetary control is essential for policy planning and control. It also

acts as an instrument of co-ordination. The main objectives of budgetary

control are as follows.

To ensure the planning for future by setting up various

budgets. The requirement and expected performance of

the enterprise are anticipated.

To co-ordinate the activities of different departments.

To operated the cost centers and department with the

efficiency and expected.

Elimination of waste and increasing profitability.

To anticipate capital expenditures for future.

To centralize the cost system

Correction of deviation from establish standard.

Fixation of responsibility of various individuals in the

organization.

40

Requisites for a successful budgetary control

system

For making a budgetary control system successful, following request are

required.

1. Clarifying objectives:

The budgets are used to realize objectives of the business. The objectives

must be clearly spelt out so that budgets are properly prepared. In absence of clear

goals, the budget must be unrealistic.

2. Proper delegation of authority and responsibility:

Budget preparation and control is done at every level of management.

Even though budgets are finalized at top level but involvement of person from lower

levels of management is essential for success. This necessitates proper delegation of

authority and responsibility.

3. Proper communication system:

An efficient system of communication is required for successful budgetary

control. The flow of information regarding is quick so that these are to be

implemented. The upward communication to be help in knowing the difficulties in

implementation of budgets. The performance level will help the top management in

budgetary control.

4. Budget education:

41

The employees should be properly educated about me benefits of budgeting

system. They should be educated about there role in the success of this system.

Budgetary control may be mil he taken, only as control device by employees but it

should be used as a tool for improving efficiency.

5. Participation of all employees:

Budgeting is done for every segment of business. It will require the active

participation and involvement of an employee. In practice the budgets are to be

executed at lower level management. Those for whom the budget is framed should be

actively associated with their participation and execution. The employees on the basis

of their past experience may give more practical and useful suggestions. The success

of the organization will depend on the participation of employee.

6. Flexibility:

Flexibility in the budget required to make them suitable under the change

in circumstances. Budget is made for future which is always uncertain. Even through

budget are prepared by consideration of future possibility but still some occurrences

later on may necessitate certain adjustments. It will make the budget more appropriate

and realistic.

7. Motivation:

Budgets are to be implemented by human beings. It will depend on the

interest shown by the employees. All persons should be motivated to improve their

42

working so that the budget is successful. a proper system of motivation should be

introduced for making this system a success.

TYPES OF BUDGETS

Time Functions Flexibility

1. Long-term budgets 1. Operating Budgets 1. Fixed budged

2. Short term budgets 2. Financial budgets 2- Flexible budged

3. Current budgets 3. Master budget

43

CLASSIFICATION AND TYPES OF BUDGETS:

The budgets are classified according to their nature. The following are the

budgets, which are commonly used.

A. CLASSIFICATION ACCORDING TO TIME.

1. Long term budgets:

The budgets are to be prepared to depict the long term planning of the

business. The period of long term planning varies from five to ten years. The

top level management does the long term planning; it is not generally to the

lower level of management. long time budgets are prepared for some sectors

of the concern such as capital expenditure, research and development, long

term finance etc. those budget are useful or those industries where gestation

period is long i.e. machinery, electricity, engineering, etc.

2. Short term budgets:

These budgets are generally for one to two years and are in the form of

monetary terms. The consumer s goods industries like sugar, cotton, textile,

and etc. use for short term budgets.

3. Current budgets:

The period of current budget is generally of months and weeks. These budgets

relate to the current activities of the business. According to I.C.W.A London,

current budget is the budget which is established for the use over the short

period of time and is related to the current condition .

44

B. CLASSIFICATION ON THE BASIS OF FUNCTIONS

1. Operating budgets:

These budgets relate to different activities or operations of the firm. The

number of such budget depends upon the size and the nature of the business. The

commonly operating budgets are:

Sales budget

Production budget

Purchase budget

Production cost budget

Row material budget

Labours budget

Plant utilization budget

Manufacturing expenses or work overhead budget

Administrative and selling expenses budget, etc.

The operating budget for the firm may be constructed in terms of programs or

responsibility areas, and these may consist of:

A. Program budget

B. Responsibility budget.

Chart ..

45

A. Program budget:

It consists of expected revenues and costs of various product or projects that

are termed as die major programme of the firm. Such a budget is prepared for each

product line or project showing revenues, costs and the relative profitability of the

various programs. Program budget are useful in locating areas where efforts may be

required to reduce cost and increase revenues. They are us useful in determining

imbalances and inadequacies in programs so much corrective action may be taken in

future.

46

B. Responsibility budget:

When the operating budget of the firm is constructed in terms of responsibly

areas is called the responsibility budget. Such a budget had shown the plan in terms of

person responsible for achieving them. The management uses it as a control device to

evaluate the performance of executives who are in charge of various cost centers.

Their performance is compared to targets (budgets), set for them and proper action is

taken for adverse results, if any. The kind of responsibility area depends upon the size

and nature of business activities and the organizational structure. However

responsibility area may be classified under three broad categories:

Cost/expenses center.

Profit center.

Investment center.

2. Financial budgets:

Financial budgets are concerned with cash receipts and disbursements, working

capital expenditure, financial position and result of business operations. The

commonly used financial budgets are:

Cash budget.

Working capital budget.

Capital expenditure budget.

Income statement budget.

Statement of retained earning budget.

budgeted balance sheet or position statement budget

47

3. Master budget:

Various functional budget are integrated into master budget .this budget is

prepared by ultimate integration of separate functional budgets. According to

I.C.W.A. London, master budget is the summary budget incorporating its functional

budgets . The budget officer prepared master budget and it remains in the top level

management. This level is to coordinate the activity of various functional departments

and also to help as a control device.

C. CLASSIFICATION ON THE BASIS OF FLEXIBILITY

1. Fixed budget:

The fixed budgets are prepared for a given level of activity; the budget is

prepared before the beginning of the financial year. If the financial period starts in

January then the budget will be prepared a month or two earlier, i.e. November or

December. The hang in expenditure arising out of anticipated change will not be

adjusted in budget. There is a difference of about twelve months in the budgeted and

actual figures. According to I.C.W.A London, fixed budget is the budget which is to

be designing to remain unchanged irrespective of the level of activity actually

attained . Fixed budgets are suitable under static conditions. If sales, expenses and

costs can be forecasted with greater accuracy then this budget can be advantageously

used.

2. Flexible budget:

A flexible budget consists of series of budgets for different level of activity.

Therefore, varies with the activity attained. A flexible budget is prepared after taking

48

in to consideration unforeseen change in conditions of the business. A flexible budget

is defined as budget which is recognized the difference between fixed, semi-fixed and

variable cost is designed to change in relation to the level of activity. The flexible

budget will be useful where levels of activity are changes from time to time. Then the

forecasting of demand is uncertain and the undertaking operates under condition of

shortage of material, labour etc, then this budget will be more suited.

PROCEDURE IN BUDGET PREPARATION:

When control through budgets is desired the budgetary organization are to busy with

the following preliminaries:

A. ESTABLISHMENT OF BUDGET CENTRES:

A Budget centre is the section of organization of an organization undertaking

defined for the purpose of budgetary control. Budget centers should be clearly defined

and established for each of which a budget will set with the help of the departments

concerned e.g. labour budget, production cost budget etc. by the accountant in

conjunction with production manager and other executives

B. PREPARATION OF THE ORGANIZATIONAL CHART:

An organization chart when properly drafted will shown the functional

responsibilities of each member management and that he knows his position in the

organization and this relation to other members .the organization chart may have to be

adjusted to ensure that each center is to be controlled by an appropriate member to the

staff.

49

SPECIMEN OF ORGANISATION CHARTS:

.

50

C. PREPARATION OF ADEQUATE ACCOUNTING RECORD:

It is essential that the accounting system should be able to record and analysis and

transactions involved. An account code should be maintained which should be

linked with the budget centers for the establishment of budget and control through the

budgets.

D. FORMATION OF BUDGET COMMITTEE:

In small sized organizations a budget officer may establish budget &

coordinate all work involved, but in larger organization the budget committee consist

of chief executive , budget officer and heads of departments or budget centers, is

established. The main functions of budget committee are as follows:

To accept the scrutinize all budgets.

To decide overall policies to be followed.

To approved finally revised budgets

To recommended action should be taken under different situations.

C. PREPARATION OF BUDGET MANUAL :

It is the document setting out the responsibilities of the person engaged in,

the routine of, and the forms and the records required for, budgetary control. a budget

manual helps in standardizing methods and procedures and the risk of overlapping of

function is eliminated.

51

C. FIXATION OF BUDGET PERIOD:

A budget period is the period of time for which the budget is to be prepared

and employed. Except in case of capital expenditure budget, the budget prepared is

generally the accounting year subdivided into 4 quarter or 12 months.

D. DETERMINATION OF GOVERNING FACTORS:

It is the factor to the extend whose influence must first be assessed in order to

ensure that functional budgets are reasonably capable of fulfillment. The key factor

serves as the starting point for preparing the budget. Generally, sales become the key

factor, but other factors of production, such as men, material, capital etc. may also be

factors.

USES/ADVANTAGES OF BUDGETORY CONTROL:

a. It locates the inefficient areas and person in the business.

b. It help to increase the efficiency, reduce the wastage and control the costs.

c. It helps to coordinate the activities of various employees, department and thus

helps to achieve the goal of the management.

d. With the help of budgeting, the responsibility of the manager can be fixed for

planning, so that they can think for future, anticipated and be prepared to meet

the challenges ahead.

e. Actual result is compared with the budget so that corrective action can be

taken in time.

f. It is like a barometer which enables to study the changes in business condition.

LIMITATIONS OF BUDGETARY CONTROL:

52

The budgetary control system is not perfect tool. It has its own limitations

which are as follows:

1. Opposition against the every sprit of budgeting.

These will always be active and passive resistance to budgetary control as it

efficiency of individuals. The opposition is also due to human nature the

tendency to resist the change. Moreover, any system of budgetary control

cannot be successful unless it has the full support of the top management

Chir Argyris has, in his study of Human Problems with budget has pointed

out the following reasons for a high degree of negative reaction against

budgeting on the part of the front line managers

a) Budgets are evaluation instruments. They tend to set the goals against which

the people are measured hence they nautically are complained about

b) Some of the supervisors tend to use budgets as whipping possible in order to

realize their feelings about many (often totally unrelated) problems.

c) Budgets are thought of as pressure devices as such they produce the same kind

of unfavorable reaction as do other kinds of pressure, regardless of origin

2. Budgeting and changing economy.

The preparation of budget which gives a realistic position of the firm s affair

under inflationary pressure and changing government policies is really

difficult. Thus the accurate position of business cannot be estimated.

53

3. Time factor.

The accuracy in budgeting came through experience. Management must not

expect too much during the development period

4. Not a substitute/ or management

Budget is only a management tool. It cannot substitute management. Besides

that budgetary programme can be successful unless adequate arrangements are

made for supervision and administration.

5. Cooperation required.

The success of the budgetary control depends upon willing co-operation and

teamwork. Budget officer must get cooperation from all department managers.

These managers must feel the responsibility for achieving or bettering

department goals laid down in the budget.

In spite of these limitations, it can be safely said the technique of budgetary

control is a must for each enterprise. It leaves sufficient time for the top

management for formulation of overall policy and planning. Much success can

be achieved if the top management devotes attention chiefly to unusual or

exceptional items that appears in daily, weekly, monthly statements and

reports. In the word of George R. Terry The success of budgetary must

depend upon adequacy and reliability records, the past and present

performances, on the interest of all the executives and ordinate in the purpose

of such control, proper, departmentalization and sub-division factory

activities, a close classification and proper division and analysis of the

54

expenditure, and the most suitable system of cost and financial accounts .

55

VARIANCE ANALYSIS FOR OPERATING EXPENSE BUDGETS

1. Nagpur PU Total

Financial Year

Budgeted Expenses

Actual Expenses

Variance

Variance in %

F - 2004 879.26 773.58 105.68 12.02

F - 2005 807.96 822.86 -14.9 -1.84

F - 2006 974.41 1150.09 -175.68 -18.03

Budget figure with variance

-400

-200

0

200

400

600

800

1000

1200

1400

F - 2004 F - 2005 F - 2006

Year

Rs.

in la

khs

Budget

Actual

Variance

Causes:-

F-2004

Variable expenses such as stores consumption decrease by Rs.12.18 lakhs, Power & Fuel consumption decreased by Rs.36.97 lakhs.

Fix expenses like repair and maintenance are decreased by Rs.30.59 lakhs, and traveling, postage, printing, telephone etc. are in increased.

F-2005

Variable expenses such as store consumption increased by Rs.10.43 lakes, Tools and power consumption are decreased.

Fix expenses like repair and maintenance is increased by Rs.2.25 lakes, rate & taxes, insurance are increased.

F-2006

Variable expenses such as store consumption increased by Rs.63.43 lakes, Tools and power consumption are increased by 26.32 lakes.

Fix expenses like repair and maintenance is increased by Rs.57.12 lakes, foreign travel, repair, professional exp, special sanctions of Rs.97.75 lakes are increased.

56

Remedies:-

F-2004

Company has to prepare a budget as per production requirement.

Company has to reduce traveling, postage, printing, telephone etc.

exp.

F-2005

Company has to keep max. production target acc. to the market

condition of product.

Company has to provide training to employee so that they can use

machinery properly.

F-2006

Company has to done some R & D activity for controlling stores

consumption, Tools and power consumption exp.

Repair and maintenance technique of the company may not be good

due to that reason exp. Increases.

2. Tractor PGL

Financial Year Budget Expenses

Actual Expenses Variance Variance in %

F - 2004 227.76 191.69 36.07 15.84

F - 2005 190.15 199.86 -9.71 -5.11

F - 2006 186.77 237.08 -50.31 -26.94


-100

-50

0

50

100

150

200

250

300

F - 2004 F - 2005 F - 2006

Year

Rs.

in la

khs

Budget

Actual

Variance

57

Causes:-

F-2004

Variable expenses such as power & fuel consumption increased by

Rs.24.29 lakhs.

Fix expenses like repair and maintenance are decreased by Rs.5.66

lakhs, other expenses is in control.

F-2005

Variable expenses such as stores consumption increased by Rs.8.36

lakes.

Fix expenses like repair and maintenance, traveling, postage,

printing, telephone etc. are increased.

F-2006

Variable expenses such as stores consumption increased by

Rs.49.33 lakhs, repair and maintenance are decreased by Rs.6.98

lakhs.

Fix expenses like repair and maintenance on spares are increased

by Rs.8.33 lakhs, other expenses such as traveling, postage,

printing, telephone etc. are decreased.

Remedies:-

F-

2004

Company has to keep contingency reserve due to change in

government policy.

Company has to keep on doing regular maintenance of machinery so

that break down will not occur.

F-

2005

Company always keep maximum target according to the market

condition.

Traveling, postage, printing and telephone exp. can be reduce by

using internet services.

F-

2006

Company has to focus on handling of inventory so that wastage not

occurs.

Repair and maintenance technique of the company for the machinery

may not be good due to that reason exp. Increases.

58

3. Engine PGL


-150

-100

-50

0

50

100

150

200

250

F - 2004 F - 2005 F - 2006

Year

Rs.

in la

khs

Budget

Actual

Variance

Causes:-

F-2004

Variable expenses such as stores consumption decrease by Rs.3.67

lakhs.

Fix expenses like repair and maintenance are increased by Rs.5.94

lakhs.

F-2005

Variable expenses such as stores consumption increase by Rs.1.33

lakhs, tools consumption increased by Rs.1.82 lakhs & repair and

maintenance of spare are increased by Rs.2.93lakhs.


lakhs.

Financial Year

Budget Expenses

Actual Expenses

Variance

Variance in %

F - 2004 84.51 81.07 3.44 4.07

F - 2005 119.5 131.82 -12.32 -10.31

F - 2006 130.42 223.07 -92.65 -71.04

59

F-2006

Variable expenses such as stores consumption increase by Rs.12.21

lakhs, Tools consumption increased by Rs.31.26 lakes, repair and

maintenance are decreased by Rs.6.70 lakhs.


lakhs.

Remedies:-

F-2004



machinery properly.

F-2005

Company has to keep contingency reserve due to change in

government policy.

Company has to provide proper and regular attention to each

machinery.

F-2006

Company has to make strategy according to the product type.

Repair and maintenance technique of the company for the

machinery may not be good due to that reason expenses increased.

4. Transmission PGL


Actual Expenses Variance

Variance in %

F - 2004 47.28 41.36 5.92 12.52

F - 2005 95.85 95.03 0.82 0.86

F - 2006 80.62 91.34 -10.72 -13.30

60


-20

0

20

40

60

80

100

120

F - 2004 F - 2005 F - 2006

Year

Rs.

in la

khs

Budget

Actual

Variance

61

Causes:-

F-2004

Variable expenses like store consumption & repair and

maintenance of spare are increased.

Fix expenses like printing and stationary, postage and general &

mis. Exp. are decreased.

F-2005

Variable expenses such as stores consumption decreased by

Rs.9.10 lakhs.

Fix expenses like repair and maintenance are increase by

Rs.5.98 lakhs.

F-2006

Variable expenses like store consumption is increased by Rs.1.6

lakhs.

Fix expenses like repair and maintenance are increased by

Rs.11.46 lakhs

Remedies:-

F-2004

There is considerable increase in variable expenses occurs.

F-2005

Company has to work on new marketing strategy for their survival

in market.


machinery properly.

F-2006

Over utilization of machinery should not be done.

5. Hydraulics PGL



Variance in %

F - 2004 100.83 75.31 25.52 25.31

F - 2005 81.53 82.52 -0.99 -1.21

F - 2006 88.13 93.63 -5.5 -6.24

62


-20

0

20

40

60

80

100

120

F - 2004 F - 2005 F - 2006

Year

Rs.

in la

khs

Budget

Actual

Variance

Causes:-

F-2004

Variable expenses like store consumption is decrease by Rs.10.89 lakhs.

Power and fuel are decrease by Rs.8.62 lakhs..

F-2005

Variable expenses like store consumption is increase by Rs.3.11 lakhs.

Fix expenses like printing and stationary, postage and general & mis. Exp. are increased.

F-2006

Variable expenses like store consumption and tool consumption are increased.

Fix expenses like Gen & Misc expense are increase by Rs.1.32 lakhs.

Remedies:-

F-2004


Company can think on another project by saving amount.

F-2005

Company always keep maximum target according to the market

condition.

There is considerable increase in fix expenses occurs.

F-2006

Company has to keep max. production target acc. to the market

condition of product.

Company has to keep some extra amount for Gen & Misc expense.

6. Engineering services PGL



Variance in %

63


-20

0

20

40

60

80

100

120

F - 2004 F - 2005 F - 2006

Year

Rs.

in la

khs

Budget

Actual

Variance

Causes:-

F-2004

Variable expenses such as stores consumption increase by Rs.

4.36 lakhs.


Rs.19.37lakhs

F-2005

Variable expenses are decreased by Rs.1.36 lakhs.


Rs.5.47 lakhs

F-2006

Variable expenses such as Tools consumption increased by

Rs.6.49 lakhs.

Fix expenses like repair and maintenance on building are

increased by Rs.2.33 lakhs, and on machinery Rs.3.28 lakhs.

Remedies:-

F-2004


inventory properly.

F - 2004 108.29 100.13 8.16 7.54

F - 2005 89.52 92.02 -2.5 -2.79

F - 2006 85.39 97.43 -12.04 -14.10

64

Machinery is not working properly so we have to change that

particular machine.

F-2005

There is considerable increase in variable expenses.

Make new strategies for continuous breakdowns.

F-2006

Company has to use tool in proper way so that over utilization or

improper consumption is not done.

7. ER & D PGL


-50

0

50

100

150

200

F - 2004 F - 2005 F - 2006

Year

Rs.

in la

khs

Budget

Actual

Variance



Variance in %

F - 2004 136.58 119.52 17.06 12.49

F - 2005 126.83 126.75 0.08 0.06

F - 2006 123.87 162.7 -38.83 -31.35

65

Causes:-

F-2004

Fix expenses like Hire & Service charges are decreased by

Rs.3.96 lakhs, Gen & Misc expense are decrease by Rs.5.83

lakhs.

F-2005

Fix expenses like General repair and maintenance are

increased by Rs2.38 lakhs

Legal exp. is decrease by Rs.3.84 lakhs.

F-2006

Variable expenses such as store consumption increase by Rs.

5.81 lakhs.

Fix expenses like General repair and maintenance are

increased by Rs.7.28 lakhs & legal expenses due to wage

settlement, increased by Rs.15.53 lakhs.

Remedies:-

F-2004

Company has to do their necessary material transportation

activity, which is pending.

Company has to maintain labours as per their requirement and

need, for cleaning and lab testing activity.

F-2005

Upkeepment of assets is good for machinery but it should not

be repeated in nature.

Company has to spend money on legal exp. because legal cases

should be solve as fast as possible.

F-2006

Company has to try to maintain the relationship with their

labours by listening problem of them and by solving it.

Improve preventive maintenance and conditioning monitoring.

66

8. Account PGL


0

1

2

3

4

5

6

7

8

F - 2004 F - 2005 F - 2006

Year

Rs.

in la

khs

Budget

Actual

Variance

Causes:-

F-2004

Fix expenses like traveling exp. are increased by Rs.0.86 lakhs.

Professional exp. is decrease by Rs. 1.98 lakhs.

F-2005

Fix expenses are decreased.

F-2006

Fix expenses are decreased.

Remedies:-

F-2004

Company can use video conferencing system so that traveling

exp. is reduce.

Company has to take expertise suggestions from outsider also.

F-2005

There is a considerable change in fix expenses.

F-2006




Variance in %

F - 2004 7.16 5.95 1.21 16.90

F - 2005 5.69 5.47 0.22 3.87

F - 2006 5.01 4.79 0.22 4.39

67

Sourcing PGL


0

1

2

3

4

5

6

7

8

F - 2004 F - 2005 F - 2006

Year

Rs.

in la

khs

Budget

Actual

Variance

Causes:-

F-2004

Fix expenses like traveling exp. are increased by Rs.0.96 lakhs.

F-2005

Fix expenses like traveling exp. are increased by Rs.2.35 lakhs

F-2006

Variable expenses like tool consumption are increased by

Rs.0.05 Lakhs.

Fix expenses are decreased by Rs.1.30 lakhs.

Remedies:-

F-2004

Company has to change their mode of traveling.



F - 2004 7.58 7.38 0.2 2.64

F - 2005 7.54 4.14 3.4 45.09

F - 2006 3.77 2.52 1.25 33.16

68

F-2005

Traveling means required for employee should be economical.

F-2006

There is considerable increase in tools consumption.

Company has to make proper communication with their vendor or

other person / company.

10. Quality PG



Variance in %

F - 2004 9.78 7.65 2.13 21.78

F - 2005 8.35 7.79 0.56 6.71

F - 2006 7.14 6.12 1.02 14.29


0

2

4

6

8

10

12

F - 2004 F - 2005 F - 2006

Year

Rs.

in l

akh

s

Budget

Actual

Variance

Causes:-

F-2004

Fix expenses like traveling exp. decreased by Rs.2.21 lakhs.

F-2005

Store consumption is decrease by Rs.1.04 lakhs

Fix expenses like repair & maintenances, traveling, postage,

telephone and gen. & misc. exp. are increased.

F-2006

Variable expenses like stores & tools consumption are increased

.

69

Fix expenses are increased by 1.68 lakhs.

70

Remedies:-

F-2004

Changes in government policy of tax is the reason of decrease in

fix exp.

F-2005


Traveling, postage, printing and telephone exp. can be reduce by

using internet services.

F-2006

There is a considerable change in variable expenses.


11. SC PC


0

5

10

15

20

25

F - 2004 F - 2005 F - 2006

Year

Rs.

in

lakh

s

Budget

Actual

Variance



F - 2004 3.1 1.86 1.24 40.00

F - 2005 2.17 1.76 0.41 18.89

F - 2006 22.98 21.19 1.79 7.79

71

Causes:-

F-2004

Fix expenses are decrease by Rs.1.86 lakhs.

F-2005

Fix expenses are increased.

F-2006

Variable expenses like store consumption are decreased by

Rs.1.91 lakhs.

Fix expenses decreased by Rs.2.62 lakhs.

Remedies:-

F-2004

Company has to make proper communication with their vendor or

other person / company.

F-2005

Company has to change their mode of traveling and also traveling

means required for employee should be economical.

F-2006

Company has to provide training to employee about logistic &

quality management so that they can use inventory properly.

12. Nagpur Others



Variance in %

F - 2004 43.07 21.86 21.21 49.25

F - 2005 70.82 48.94 21.88 30.90

F - 2006 225.5 184.84 40.66 18.03

72


0

50

100

150

200

250

F - 2004 F - 2005 F - 2006

Year

Rs.

in

lakh

s

Budget

Actual

Variance

Causes:-

F-2004


Rs.23.97lakhs.

F-2005

Variable expenses are decreased by Rs.5.73 lakhs

Fix expenses like repair and maintenance are decreased by

Rs.6.24lakhs.

Insurance exp. is increase by Rs.3.38 lakhs.

F-2006

Variable expenses are decreased on stores & tools consumption

Rs.18.24 lakhs


Rs.21.47lakhs & traveling by Rs.21.47 lakhs

Remedies:-

F-2004

Company has to install new machinery for continuous production.

F-2005


Company has to done proper and timely maintenance for all

machinery.

Company has to purchase insurance policy which is necessary as

per safety point of view.

F-2006

Company has to work on new marketing strategy and adopt new

technology for their survival in market.

73

Company has to focus on proper handling of inventory so that

wastage not occurs.

74

CONCLUSION

Inventory management:

The study of Inventory management control the activities focus on the flow of

inventory from the organization. Many decisions fall under the inventory management

umbrella which is to be seen in M & M Co. Ltd..

1. There are four main department in M & M which control, plan,

&organize the flow of inventory. They are Hydraulics, Engine,

Transmission, & Tractor departments. In this department large number

of inventory are manage according the requirement the number of

component differs according to the production requirement i.e. for

Engine-1200, Tansmission-400 to 600, Hydraulics-500, Tractor-1400

to 1600 .

2. The EOQ decision model calculates the optimal quantity of inventory

to order. The larger the order quantity, the higher the annual carrying

costs and lowers the annual ordering costs. The smaller the order

quantity, the lower annual carrying costs and higher the annual

ordering costs. The EOQ model includes those transactions routinely

recorded in the accounting system and opportunity cost not routinely

recorded.

75

3. The reorder point is the quantity level of that inventory that trigger a

new order. Safety stock is the buffer inventory held as a cushion

against unexpected unavailability of stock from suppliers.

4. EOQ analysis helps to minimize the cost of holding the inventory. This

is to be done only for hydraulics department in M & M Co. Ltd. In this

department the profit which is obtained is Rs. 4695599.7 lakhs.

5. The result is based on map which is used in calculating the ordering

cost and carryings cost which is one of the critical factor in the project.

BUDGET AND BUDGETARY CONTROL SYSTEM:

Budget and budgetary control system is basis need of entire finance gamut.

Without budget and budgetary control system no company can achieve his goals.

Budget and budgetary control system is a master key which is determining the profit

level for the company.

It is a method of forecasting future demand because of that the work of achieving the

goal can be done easy. It helps to introduce standard costing technique.

It also help to ensure cash flow and hence bank credit can be obtained. It creates cost

consciousness in the mind of the employees in the organization. Maximization of

profit is possible through budgeting. It ensures the capital of the firm utilized in

proper way and that there is no mis-utilization of funds.

76

The control system of Mahindra and Mahindra Co. Ltd. Nagpur is based on

responsibility basis means every department get the target and that department must

be complete given the target.

After carefully analyzing and studding the entire procedure of budget and

budgetary control system of M & M Co .Ltd. at Nagpur, Some observation are made

as well as the following recommendations are being suggested.

1. Changes in market condition:

M & M Co. Ltd. Should be carefully observe the market. Because if there is

any single words that can best describe today s market, it is change if they

will observe properly to the changing market condition they will not face the

problem of changes in market scenario.

2. Volume changes:

M & M Co. Ltd should determine the proper volume of production because of

changing in volume budget always remain uncertain.

3. Store consumption:

M & M Co. Ltd. Should provides sufficient material to every department

because of that every department can be completed their target within time.

Then there is no need special fund to that department.

4. Machinery fault:

77

Company is expensing the more money than budget on machinery and spare

parts for repairs and maintenance. So. M & M Co. Ltd should concentrate on

machinery.

The success lies in the budget and budgetary control system as accurate as

possible. And as M & M co. Ltd at Nagpur adopts a scientific budget and

budgetary control system it is required to maintain accuracy in the process.

78

SUGGESTIONS

As we were calculate the variation of all the functional unit on department of

Mahindra & Mahindra Co. Ltd. we suggest them

1. Constant review of performance should be made to evaluate the actual

results as compared to budgets so that corrective action can be taken at the

right time.

2. Company can take help of expertise personality for the review of

making accurate budget analysis so that variances is to be minimized..

LIMITATIONS

1. Company have limited amount to spend.

2. Govt. policy is not fixed.

3. Future is uncertain so, it is not easy to predict future.

4. Budgetary control deals with quantitative data only.

79

BIBLIOGRAPHY

1. Management Accounting - Dr. Mahesh Kulkarni

2. Principles of Financial Management - Satish M. Inamdar

3. Financial Management - M. Y. Khan & P. K. Jain

4. Financial Management - I. M. Pande

Annual Report 2002 - 2006

WEBSITE :

1. www.mahindra.com

2. www.mahindraworld.com

http://www.mahindra.com

http://www.mahindraworld.com

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