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ACTIVITY BASED COSTING AS A MEASURE OF IMPROVING THE COST STRUCTURE OF VIKASH

INDUSTRIES

Name of Student: Saurabh Kumar Roll No: 03 Faculty Mentor: Prof. FMA Khan

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Industry Background Manufacturing can be defined as physical or chemical transformation of

materials into products on large scale using machinery or capital equipments, in contrast to production of handmade goods for personal use.

30% of the economy is of Manufacturing Sector. Manufacturing sector contributes 15.24 per cent of the country’s GDP, and

provides employment to over 6 million persons.

Major Sectors includes textiles, capital goods, metals, chemicals, tyres, cement, electronics, automotive, leather & footwear, machine tools, Food, Ceramics, Textiles Machinery etc.

Deloitte's global index, 2014, for 38 nations, has ranked India the fourth most competitive manufacturing nation, behind China, the US and Germany

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Company Background Vikash Industry established in the year 1997. They cater the electrical, elevator, home appliances automobile industry and the

defense.

Some of our esteemed clients are as under:- 

Cummins Generator Technologies OTIS Elevator (I) Ltd. Trident Power craft Pvt. Ltd. Crompton Greaves Ltd Kaytee Switch Gears Ltd. IFB India Fasco Motors, USA ABB Ltd, Bangalore

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Related ConceptDirect Costing SystemA system of costing the products where direct costs (also referred to as variable costs) are assigned to products only. It reflects the contribution to indirect costs. The system is considered appropriate for decision-making purposes. It is recommended in the circumstances where indirect costs are a low proportion of a company’s total costs.

Traditional or Absorption Costing SystemIt reflects full cost pertaining to a product. It is easy to use and, therefore, is practiced widely. The allocation of overhead costs under the system is based on a rate determined by either a percentage of direct labor cost or number of labor hours worked or another. Therefore, the reported allocation of overheads for a given product may be incorrect. It is the main defect of absorption costing.

Activity-Based Costing SystemIt also reflects full cost pertaining to a product. ABC system establishes relationships between overheads costs and activities so that we can better allocate overheads costs. It reflects the more accurate use of overheads costs based on their relevant activity levels achieved. The system has eliminated the defects of traditional/absorption costing system.

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ABC (Activity Based Costing)

Advantages of Activity Based Costing More accurate costing of products/services, customers, distribution channels Easier to understand for everyone. Makes visible waste and non-value added Activity Based Costing mirrors way work is done Integrates well with Six Sigma and other continuous improvement programs

Disadvantages of Activity Based Costing More time consuming to collect data. Cost of buying, implementing and maintaining activity based system. Makes waste visible which some executives and managers don't want their boss to see.

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Objective of the study

Objective To study the functions and operations of the organization To know and understand the existing costing method followed by Vikash Industries To identify activities involved in manufacturing of UC Range series 4 end cover. To allocate the cost for the activities. To find the cost per unit of the product UC Range series 4 end cover. To compare existing costing method followed by vikash Industries with Activity Based

Costing.Need for the study: The theoretical aspects of ACTIVITY BASED COSTING provide the framework of the

study. A conceptual and the practical approach is the need of the hour. Hence the field study becomes as essential part of the curriculum. Thus this project study conducted to integrate theoretical and practical aspects of Activity based costing in the organization

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Work Assigned/Project Methodology

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COST PER UNIT OF THE PRODUCT

ACTIVITIESAmount in Rs COST/COVER

Amt in Rs

1 PURCHASE OF RAW MATERIALS 95.017

2 MANUFACTURING

Shearing 1.232

Circle cutting 0.2766

Deep drawing 0.9578

Trimming 0.639

Piercing 0.468

Total 3.5734

3 INSPECTION 0.0422

4 PAINTING 19.90

5 DESPATCHING 18.00

GRAND TOTAL 136.68

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Finding All levels of activities in the manufacturing cost hierarchy viz unit level,

batch level, product level and faclevel ility have been identified. Cost drivers for the activities have been identified Vikash Industries follows traditional method of costing. The product UC Range series 4 end cover is over costed. According to traditional costing the cost of the cover is Rs.143.50 According to Activity Based costing the cost of the cover is Rs136.68 Vikash Industries relates overheads to cost centers which are not realistic

to the behavior of costs. To get a realistic analysis of cost behavior, the overheads have been

properly related to cost drivers

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Recommendations

Vikash Industries should adopt Activity Based costing in their organization

Instead of focusing more on cost reduction they should focus more on cost control.

As ABC integrates well with Six Sigma and continuous improvement programs the company can achieve minimum rejection rate.

Labor and employment costs are a source of considerable expense and should be constantly monitored.

Vikash Industries should follow an open style with clear and concise objective for the successful implementation of ABC.

Organization-wide awareness should be extended to convince the participants to change, as well as effecting the change.

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