Download - Actualisation Project

8/8/2019 Actualisation Project

1/14

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


2/14

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)


3/14

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


4/14

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.


5/14

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


6/14

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.


7/14

Project A (Normal Scenario)

Project B (Complete Solution)


8/14

Project C (New Concept)

Project D (Repeat Project)


9/14

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)


10/14

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


11/14

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


12/14

ALLOCATIONS:


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


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.


13/14

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:


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 previous illustration.

INDIRECT COST+DIRECT COST 1,40,000

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

TOTAL HRS OF VA - ( d ) 130

RATE OF IC/HR - (x=y/d) 769.23

ALLOCATION:


DESIGN - (f=b*x*l) 7,692 3,846 23,077 0 34,615

MANUFACTURING - (g=c*x*l) 11,538 7,692 0 46,154 65,385

GRAND TOTAL INDIRECT COST-

(h=f+g) 19,231 11,538 23,077 46,154 1,00,000


14/14

TOTAL COST=DIRECT COST+INDIRECT COST


TOTAL COST

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

VALUE ADDITION:

DESIGN - ( b*200 ) 2,000 1,000 6,000 0 9,000

DESIGN ALLOCATION - ( f ) 7,692 3,846 23,077 0 34,615

MANUFACTURING - (c*100) 1,500 1,000 0 6,000 8,500

MANUFACTURING ALLOCATION

- ( g ) 11,539 7,692 0 46,154 65,385

TOTAL PROJECT COST -(a+b*200+c*100+f+g) 29,231 21,538 33,077 56,154 1,40,000

The table appears as above after the distribution of the indirect costs.

DIFFERENCE IN ALLOCATION IN BOTH THE METHODS

DEPARTMENT METHOD 1 METHOD 2 DIFFERENCE

DESIGN51,429 34,615 16,814

Project A 11,429 7,692 3,737

Project B 5,714 3,846 1,868

Project C 34,286 23,077 11209

Project D 0 0 0

MANUFACTURE 48,571 65,385 -16,814

Project A 8,517 11,538 -3,021

Project B 5,714 7,692 -1,978

Project C 0 0 0

Project D 34,286 46,154 -11,868

TOTAL 1,00,000 1,00,000 0