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Transcript of Actualisation Project
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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 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:
PROJECT A B C D TOTAL
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
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TOTAL COST=DIRECT COST+INDIRECT COST
PROJECT A B C D TOTAL
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