Analysis of Machine Hour Rate in the Sup

ANALYSIS OF MACHINE HOUR RATE IN THE SUPREME INDUSTRIES INDUSTRIES LIMITED

Project Report

Submitted by GOMATHIVALLI.K

REG No: 12381018

MASTER OF BUSINESS In Partial Fulfillment of the Degree of MASTER ADMINISTRATION in BANKING TECHNOLOGY

Under the guidance of Dr.S.SUDALAI MUTHU

Reader Department of Banking Technology School of Management Pondicherry University Pondicherry- 605014 (May 2013 to July 2013)

1

BONAFIDE CERTIFICATE

This is to certify that this Project Report is the bonafide work of Ms.GOMATHIVALLI.K , Reg.No.12381018, who carried out the project entitled “Analysis of Machine Hour Rate in the Supreme Industries Limited ”, Pondicherry under our supervision from May 2013 to July

2013.

Internal Guide

Head of the Department

Dr.S.SUDALAI MUTHU

Dr.K.ChandraSekharaRao

Reader

Professor & Head,

Department of Banking Technology,


Pondicherry University.


Submitted for Viva voce Examination held on_____________________

Internal Examiner

External Examiner

2

BONAFIDE CERTIFICATE

This is to certify that this Project Report is the bonafide work of Ms.GOMATHIVALLI.K , Reg.No.12381018, who carried out the project entitled “Analysis of Machine Hour Rate in the Supreme Industries Limited ”, Pondicherry under our supervision from May 2013 to July

2013.

Internal Guide

Head of the Department

Dr.S.SUDALAI MUTHU

Dr.K.ChandraSekharaRao

Reader

Professor & Head,





Submitted for Viva voce Examination held on_____________________

Internal Examiner

External Examiner

2

DECLARATION

I, GOMATHIVALLI.K

hereby declare that the project work entitled “Analysis of Machine

Hour Rate in the Supreme Industries Limited ”, is a genuine work done by me and submitted

to the Department of Banking Technology, Pondicherry University in partial fulfillment of the requirements for the award of Master of Business Administration in Banking Technology and is a record of original work done by me under the supervision of Dr.S.SUDALAI MUTHU, Reader,

Department

of

Banking

Technology,

Pondicherry

University

and

Mr.R.RATHNASAMY , Manager-Finance & Accounts, Pondicherry. The above mentioned

project has not been copied or plagiarized from any other content/source and the used texts have been cited in the reference section, wherever possible. This project report has not been submitted to any institution/University before.

Date:

GOMATHIVALLI.K

Place:

Pondicherry

MBA (Banking Technology)

3

ACKNOWLEDGEMENT

This project report is not just a one man effort, rather has been supported by a generous set of people up to fruition. To begin with, I thank the Almighty for awarding me with the capability to undertake this task and take it to completion.

I would like to express my sincerest gratitude and thanks to my Research Guide Dr.S.SUDALAI MUTHU , Reader, Department of Banking Technology, for his undaunted support

and guidance. I would also like to thank Mr.R.RATHNASAMY , Manager-Finance & Accounts, Pondicherry for extending his support in the successful completion of the project.

I would like to express my thanks to the faculty members and staffs of the Department of Banking Technology whose sincere efforts is helping the Department and its students to progress and numerous projects like this to get completed every year.

GOMATHIVALLI.K

4

CHAPTER

CONTENTS

NO

1

NO

LIST OF TABLES

7

LIST OF CHARTS

7

INTRODUCTION

8

1.1 Need for the study

8

1.2 Objectives of the study

9

1.3 Advantages of machine hour rate analysis

2

PAGE

COMPUTATION OF MACHINE HOUR

9

9

RATE

3

4

2.1 Steps for computing the machine hour rate

10

2.2 Overheads

10

2.3 Distribution of overheads

12

INDUSTRY AND COMPANY PROFILE

17

3.1 About The Supreme Industries Industries Limited Limited

17

3.2 Qualitative Analysis

21

3.3 Product Profile

25

3.4 About Pondicherry plant

28

REVIEW OF LITERATURE

28

5

28

4.1 Review of Literature

5

6

RESEARCH METHODOLOGY 5.1 Research Design

30

5.2 Data Collection

30

5.3 Research Methodology

31

5.4 Period of study

32

DATA ANALYSIS AND INTERPRETATION

33

6.1 Machine hour rate calculation for machine from the period of( July 2012 to May 2013)

7

33-43

FINDINGS & SUGGESTIONS 7.1 Findings

44

7.2 Suggestions

47

8

CONCLUSION

47

8

BIBLIOGRAPHY

48

6

PAGE

SL.NO

TABLE NAME

1

Machine Rate Calculation(July 2012)

33

2

Machine Rate Calculation(Aug 2012)

34

3

Machine Rate Calculation(Sep 2012)

35

4

Machine Rate Calculation(Oct 2012)

36

5

Machine Rate Calculation(Nov 2012)

37

6

Machine Rate Calculation(Dec 2012)

38

7

Machine Rate Calculation(Jan 2013)

39

8

Machine Rate Calculation(Feb 2013)

40

9

Machine Rate Calculation(Mar 2013)

41

10

Machine Rate Calculation(April 2013)

42

11

Machine Rate Calculation(May 2013)

43

SL.NO

CHART NAME

1

Line chart representing the machine hour rate fluctuations from the period of (Jul

NO

PAGE NO

45

12 – May 2013)

Bar chart representing the machine hour rate fluctuations from the period of (Jul 2

12 – May 2013)

7

46

INTRODUCTION

The life and death of most manufacturing concerns depends to a large extent on their cost systems, how well they perform their duties and how the facts they bring out are made use of. It is, of course, self-evident, that factories are run for the purpose of earning money, and if they don't do it, they cannot remain in "business very long. To earn money, the goods which are produced by the factory must be sold for more than they cost, hence to know the selling price, the cost must be known. The accuracy with which the selling price is fixed is a direct function of the accuracy of the costs, except in the case of certain monopolies and patented articles, and even in the latter cases, to know what the earnings are, the costs must be known. Thus it will be seen that factory costs are very important, and are among the principal items which must be closely watched by the management.

The work of the engineer, especiallythe one who is connected with factory work, is constantly broadening, and embracing more of the field of management. To be sure, there are many who will confine their work to purely professional lines, but industrial management requiresthe trained mind of the engineer,applied to management and business problems almost as much as to technical problems. One ofthe principal things with whichthe engineermust be at least somewhat familiar is factoryand construction costs. 1.1 NEED FORTHE STUDY

In factories or departments, where production is largely by machinery, this method gives greater accuracy than any of the other methods. The terminology defines a machine hour rate as “a rate calculated by dividing the budgeted or estimated overhead or labor and overhead cost attributable to a machine or group of similar machines by the appropriate number of machine hours. The hours may be the number of hours for which the machine or group is expected to be operated, the number of hours which would relate to normal working for the factory, or full capacity”. In a highly mechanized cost center, majority of the overhead expenses are incurred on 8

account of using the machine, such as, depreciation, power, repairs and maintenance, insurance, etc. Machine hour rate, therefore, provides the most equitable basis for absorption of overheads in machine intensive cost centers. 1.2 OBJECTIVES OF THE STUDY

Primary Objective 

To analyze the Machine Hour Rate

Secondary Objective 

To classify overheads and observe the absorption of overheads



To identify absorption rates and find the cost of prod uction for the future



To compute the costs of overheads and reduce its expenses in upcoming financial years.

1.3 ADVANTAGES OF MACHINE HOUR RATE ANALYSIS

1) It helps to measure the relative efficiency of different machines. 2)

It facilitates comparison of cost of operating different machines.

3) It helps to ascertain idle time of machines relating to non-productive time. 4) It is the most desirable scientific method, where the time factor is taken into account. COMPUTATION OF MACHINE HOUR RATE

The overhead expenses are to be departmentalized first. Then, each machine or a group of machines within the department shall be treated as a cost centre, and all the items of expenses are allocated to the machine cost centers on some suitable basis. Machine hour rate is then computed by dividing the total overhead for the machine cost centre by the anticipated machine hours. Machine hour rate can be bifurcated into variable or running expenses and standing or fixed expenses in order to differentiate between expenses being incurred while running the machine compared to when it remains idle. For example, power, oil, grease and cotton waste, repairs and maintenance expenses are running or variable, while depreciation, rent and taxes, lighting and heating, insurance and supervision are included understanding or fixed charges. Lastly, a 9

machine hour rate may include the wages of the machine operator and attendance, if they become part of the complements. The machine hour rate is then determined by dividing the amount of overhead cost to be apportioned or absorbed by the number of machine hours.

2.1 Steps for computing the Machine Hour Rate: The following steps are required for computing the machine hour rate: 

Identify the overhead expenses relating to a specific machine or group of machine in order to require for computing machine hour rate.



Each machine or group of machine treated as a cost centre.



Manufacturing overhead or machine expenses are grouped into two types: a) Fixed or Standing Charges b) Variable Machine Expenses.

a) Fixed or Standing Charges : Fixed or Standing Charges which remain constant irrespective of the use of machine. For example, rent, insurance charges, rates, supervision etc. b) Variable Machine Expenses : These expenses are variable with use of the machine. For example, power, depreciation repairs etc. 

An hourly rate of fixed or standing charges will be calculated by totaling of fixed charges and dividing by the number of normal hours worked by machine.



Normal working hours are calculated by adding the cost relating to non-productive time i.e. normal ideal time for maintenance and setting up etc.



Separate hourly rate for each machine expenses will be calculated.



The total of the standing charges rate and machine expenses rates per hour will give the machine hour rate.

2.2OVERHEADS

Overhead is the aggregate of indirect material, indirect labor and indirect expenses. It refers to any cost which is not directly attributable to a cost unit. The term ‘indirect’ means that which cannot be allocated, but which can be apportioned to or absorbed by cost centers or cost units. 10

Overhead cost is, therefore, a group of expenses, which are not identifiable with the cost unit, but are incurred generally for the manufacturing and selling activities of the organization and can be apportioned to and absorbed by the cost units. It is a distinct element of cost, and needs different treatment in accounting and control compared to direct cost elements. Further. With automation and introduction of new technology, manufacturing activities are increasingly depending on machineries rather than human efforts. As a result, overhead expenses are increasing continuously. 2.2.1 Importance of accounting overheads

Accounting of Overheads is one of the most important & technical aspect of Cost accounting. From Cost reduction & Cost control point of view, overhead play a great role. So, proper understanding of computation and accounting of overhead is must. In a modern unit, overheads could be as high as material cost. That is why proper and effective accounting and control of overheads is so much needed today. For proper accounting and effective control, overhead expenses are classified into a number of suitable account heads for each type of expenditure. Similar expenses are then grouped under a major account head. Such account headings are given code numbers, which could either be alphabetical or numerical or a combination of both. However, for the purpose of mechanized accounting or computerization, numerical coding structure is more useful.

2.3DISTRIBUTION OF OVERHEADS

Step 1 -Classification of Overheads Step 2 -Collection of Overheads Step 3 - Allocation of Overheads Step 4 -Apportionment of Overheads Step 5 -Re-apportionment of service department Overheads Step 6 - Absorption of Overheads

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2.3.1 CLASSIFICATION OF OVERHEADS

The machine rate is usually, but not always, divided into fixed costs, operating costs, and labor costs. For certain cash flow analyses only items which represent a cash flow are included. Certain fixed costs, including depreciation and sometimes interest charges, are omitted if they do not represent a cash payment. For some analyses, labor costs are not included in the machine rate. Instead, fixed and operating costs are calculated. Labor costs are then added separately. This is sometimes done in situations where the labor associated with the equipment works a different number of hours from the equipment. Overhead, in fact, consists of two parts. One, relating to the product, and the other relating to the facilities and services maintained for the running of the organization. While the former is incurred when production is carried on (by way of indirect material labor and expenses), the latter is incurred even when production is not undertaken. The expenses incurred for maintaining a factory shed, office building, stores, machine shop, canteen, dispensary, generation room, boiler, etc. are all included in overheads as such facilities are required to keep the unit in readiness for production activities. By themselves, these services have no use. Similarly, expenses incurred for administration of manufacturing and selling and distribution of products are included in overheads. If selling and distribution are undertaken by the organization, then a sizeable amount of the expenses enter into overheads, since only a small portion of the expenses incurred can be identified as direct cost of the product.

• Production Overheads

• Fixed Overheads

Indirect materials

• Distribution Overheads

• Variable Overheads

• Indirect Labor

• Selling Overheads

• Indirect Expenses

•Administrative Overheads

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Fixed Costs

Fixed costs are those which can be predetermined as accumulating with the passage of time, rather than with the rate of work. They do not stop when the work stops and must be spread over the hours of work during the year. Commonly included in fixed costs are equipment depreciation, interest on investment, taxes, and storage, and insurance. Operating Costs

Operating costs vary directly with the rate of work. These costs include the costs of fuel, lubricants, tires, equipment maintenance and repairs. Labor Costs

Labor costs are those costs associated with employing labor including direct wages, food contributions, transport, and social costs, including payments for health and retirement. The cost of supervision may also be spread over the labor costs.

2.3.2 COLLECTION OF OVERHEADS

Collection of overheads means the collection ofvarious items of overheads under suitable accountheading and a unique Standing Order Number (S.O.N.) or Cost Account Number (C.A.N.). For proper accounting and effective control, overhead expenses are classified into a number of suitable account heads for each type of expenditure. Similar expenses are then grouped under a major account head. Such account headings are given code numbers, which could either be alphabetical or numerical or a combination of both. However, for the purpose of mechanized accounting or computerization, numerical coding structure is more useful. For collection of overhead expenses, it is necessary to relate each item of expense to the cost centre where the expense has been incurred. Therefore, code numbers should be allotted to cost centers also with division into major, minor and detail heading. Expense code numbers allotted to factory 13

overheads are known as ‘Standing Order Numbers’, whereas those allotted to administration, selling and distribution expenses are termed as ‘Cost Account Numbers’. The method of compilation is, however, same for both types of code numbers. While preparing code structure, it should be borne in mind that



Each code should be clearly defined, leaving no room for confusion or ambiguity, and



The structure should be flexible enough for inclusion of items in future.

The allocation of code numbers can be done in a number of ways, using alphabetic or numerical methods. Each organization will have its own method depending on the needs of the accounting system. Documents for Collection of Overheads

The main sources from which overhead expenses are collected are as follows — (i) Stores requisition, (ii) Invoices, (iii) Cash book, (iv) Wages analysis, (v) Other registers and reports, (vi) Journal entries. 

Stores requisition. Indirect materials like soap, oil, cotton waste, grease, brushes,

brooms, etc. are issued from stores on the basis of stores requisition notes which are priced and charged to the cost centre which used them. 

Invoices. Invoices for material and services are entered in purchase journal with proper

accounts code and cost centre codes before making payments. Purchase Journal, if manually maintained, contains separate columns for materials and overhead expenses along with advance payment and accrued charges. 

Cash book. Where cash transactions occur for the procurement of material and services,

cash book is analyzed and indirect expenses are collected under account code and cost centre code wise. 

Wages analysis book. Wages analysis indicates overheads control accounts to which

salaries and wages are to be booked. 

Other registers and reports. For collection of depreciation amount, plant or fixed assets

register has to be scrutinized. Similarly, for scrap, waste and spoiled work or idle facilities, relevant reports have to be referred. 14



Journal entries. Monthly apportionments from payments in advance like insurance and

tax, accruals for unpaid salaries and wages or rent, notional charges for rent, interest, etc. are all collected from Journal entries. By F 2.3.3ALLOCATION OF OVERHEADS

Overheads are common costs incurred for the benefits of a number of costs centers or cost units. Therefore, they cannot be identified and allocated directly to a particular unit of output. As such, they are to be allocated among the units of output of a particular department or a number ofdepartments or cost centers.

Allocation of overheads is the process of charging overhead costs to a particular department or cost center. It is the allotment or assignment of an overhead cost to a particular cost unit. If the overhead cost is associated with a single department or cost center, the whole amount is charged or distributed among the units of output of that particular department. For example, the whole amount of repair and maintenance expenses for a machine is charged or allocated to that department where the machine has been installed.

ITEMS OF OVERHEADS ALLOCATED

PRODUCTION DEPARTMENTS P1

SERVICE DEPARTMENTS P2

S1

Direct Materials Direct Wages Direct Expenses Direct Material Indirect Wages TOTAL OVERHEADS ALLOCATED ITEMS OOVINMNDFNERHEADS 15

S2

2.3.4 APPORTIONMENT OF OVERHEADS

Distribution of an overhead cost to several departments or cost centers is known as apportionment of overheads. It is the process of charging or apportioning costs to a number of cost centers or cost units. If a given cost is common to two or more departments or cost centers, such cost should be apportioned or divided among these departments on an equitable basis. For example, the amount of factory rent should be apportioned to all the departments. Similarly, the amount of remuneration of the general manager should be distributed to the production, administration and marketing departments as the general manager is associated with all these departments.

Principles for Apportionment of Overheads

(a) Actual Benefit (b) Potential Benefit (c) Ability to pay (d) Specific Criteria/Survey method

Basis of Apportionment COMMON ITEMS OF PRODUCTION OVERHEADS

BASIS OF APPORTIONMENT

(a) Factory rent, rates & taxes (b) Insurance of factory building

Floor area occupied

(a) Insurance of Plant & Machinery (b) Depreciation of Plant & Machinery

Capital Cost of Plant & Machinery

(a) Insurance of Stock (a) Supervision (b) Canteen Staff Welfare Expenses (a) Compensation to Workers (b) PF Contribution (a) Stores Overheads/keeping expenses (a) Material Handling Charges

Insured Value of stock No. of workers Wages Value of direct materials Weight of direct Materials

16

2.3.5 ABSORPTION OF OVERHEADS

Charging of overheads to specific product is known as absorption. Overhead absorption is also known as application of overheads. In other words, absorption refers to charging of overheads of a department to different cost units in a way that each cost unit bears an appropriate portion of its share of overheads. Absorption of overheads is done by using Raw material consumed, wages, prime cost, units produced, labor hours and machine hours. Methods of Absorption of Overhead

There are number of methods applicable for computing overhead absorption rate. The following are the various methods of absorbing “Manufacturing Overhead” depending upon the suitable basis selected for the purpose 

Direct Material Cost Method



Direct Labor Cost Method



Direct Labor Hours Method



Prime Cost Method



Unit of Output Method



Machine Hour Rate Method

INDUSTRY AND COMPANY PROFILE

3.1 ABOUT THE SUPREME INDUSTRIES LIMITED

Incorporated in 1942 at Wadala, Mumbai, Supreme Industries (SIL) was promoted by the family of Kantilal K Mody. In 1996, the Taparia family took control of the company through outright purchase of shares. SIL has been consistently increasing its capacities in the plastics processing industry. Today it has one of the largest plastic processors in the country, with a product range catering to both, the industrial and consumer segment. Over the years, it has gone into almost all segments of plastic products and put up plants at various locations in the country.

17

Supreme industries limited manufactures injection-molded items, extruded items, industrial moldings, crates, furniture, polyethylene foam and polypropylene foam, PVC pipes and fittings, multi-layer sheets and products thereof, and multi-layer films. The company's operations are undertaken from Calcutta in West Bengal, Hosur in Tamil Nadu, Jalgaon and Kanhe in Maharashtra. The company came out with a rights issue in Jul.'93 to expand and upgrade its products and plant equipment. Its products are used as components in automobile parts; in material handling as crates/boxes; and in furniture as tables/chairs. In the refrigeration industry, they are used as doors/panels, and in the packaging industry for packing edible and hydrogenated oils. The company bought assets of Litelon Pvt. Ltd. in 1996 and Camphor Allied Products in 1998 that were manufacturers of protective packaging products. In 2000, it sold its wholly owned subsidiary Premier Lighting Industries. Supreme Oriented Films and Supreme Vinyl Films were amalgamated with the Supreme Industries Ltd with the prior approval from the shareholders. The move is to consolidate the group’s plastic packaging business under one company and also to consolidate its marketing operations. Supreme Industries Limited is currently India’s leading processors of plastics, offering a wide and Comprehensive range of plastic products in India.The company operates in various segments viz. plastics piping systems, protective packaging products, industrial components, material handling systems, cross laminated polyethylene films & products thereof, furniture and performance packaging films.

Supreme industries has 21 technologically advanced manufacturing facilities located at various places spreadacross the country. The company has built-up excellent relationship with its distributors and is also providing orientation to them, in order to ensure properservice to ultimate customers.

Manufacturing units in Supreme Group

Supreme Group has 21 manufacturing units in India 1. Derabassi (Punjab) 2. Durgapur (West Bengal) 3. Gadegaon (Maharashtra) 18

4. Guwahati (Assam) 5. Halol 1 (Gujarat) 6. Hosur 1(Tamil Nadu) 7. Jalgaon – Unit I (Maharashtra) 8. Jalgaon – Unit II (Maharashtra) 9. Kanhe (Maharashtra) 10. Kanpur (Uttar Pradesh) 11. Khopoli (Maharashtra) 12. Khushkheda (Rajasthan) 13. Malanpur 1 (Madhya Pradesh) 14. Malanpur 2 (Madhya Pradesh) 15. Noida (Uttar Pradesh) 16. Puducherry (Union Territory) 17. Silvassa (Union Territory) 18. Sriperumbudur (Tamil Nadu) 19. Urse (Maharashtra) 20. Hosur 2(Tamil Nadu) 21. Halol 2(Gujarat)

Board of Directors

B. L. Taparia, Chairman M. P. Taparia, Managing Director S. J. Taparia, Executive Director V. K. Taparia, Executive Director B. V. Bhargava, Director H. S. Parikh, Director N. N. Khandwala, Director S. R. Taparia, Director Y. P. Trivedi, Director

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Bankers

Central Bank of India Axis Bank Ltd. BNP Paribas ICICI Bank Ltd. IDBI Bank Ltd. Standard Chartered Bank State Bank of India Vijaya Bank

Major machineries & its count in Supreme Group

Injection Molding m/c -

125

Extrusion m/c

-

20

Thermoforming m/c

-

25

Ultrasonic Welding m/c Sheet rolling m/c

-

4 10

Export countries

Middle East Countries African Countries Australia New Zealand Sri Lanka Bangladesh USA UK Singapore

20

Major Customers

TELCO LML Limited MarutiUdyog Philips General Motor India Limited Videocon Hindustan Motors Fiat India Limited Daewoo Motors Limited Bajaj Auto Kinetic Engineering Kelvinator Whirlpool Electrolux Panasonic Racold Amtrex Carrier

3.2 QUALITATIVE ANALYSIS

The business

Supreme Industries Ltd. processes over 240,000 MT annually across 21 manufacturing facilities. They have the following business verticals:



Plastic Piping



Consumer Products (plastic furniture)



Packaging Products Specialty Films Protective Packaging Products 21

Cross Laminated Films 

Industrial Products Industrial Components (Consumer appliance body manufacturing) Material handling components (soft drink crates, pallets)

Revenue breakup for FY12 for Supreme Industries is shown below.

Supreme Petrochem, in which SIL has around 30% stake, is the largest single site polystyrene (PS) producer with a capacity of 272,000 tons per annum for polystyrene, accounting for 2% of the global capacity and 60% of the domestic installed capacity.

The company’s bargaining power with suppliers

Polymers like polyethylene, polystyrene, and polypropylene, and resins are inputs for Supreme’s business. Polymer and resin prices are linked to crude oil prices. It does not have too much flexibility and has to take prices from suppliers. Around 40% of raw materials have to be imported. Forex fluctuations affect the company’s bargaining power with customers.

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Plastic pipes are the biggest segment by revenue for Supreme Industries. Plastic pipes prices are updated daily based on input price fluctuations. Other product price changes are passed on to customers with a lag of 2-3 weeks. Supreme Industries seems like a price-setter than a pricetaker. Cash outstanding from customers seem to be pretty well managed indicating that they have relative power in the market as compared to customers. Some of the big listed competitors in plastics are given below. Most do not have exact businesses like Supreme. They compete in different segments as the case may be.



Time Technoplast – material handling equipment



Finolex, Astral Poly, Jain Irrigation – Plastic pipes



Nilkamal – Plastic furniture, it is the leader in India



Cosmo Films. Max India – Films segment

Supreme industries have superior return on net worth ratios as compared to competition.

COMPANY

RONW – FY11

RONW – FY12

Time Technoplast

13%

15%

Astral Polytechnik

22%

21%

Cosmo Films

17%

13%

Nilkamal

15%

15%

Finolex Industries

12%

11%

Supreme Industries

31%

33%

The company is innovative, it works on adding new product lines or service lines

The latest investor presentation (August 2012) talks of the following areas where they want to develop/ introduce innovative products for new applications



Immediate Focus Area – Composites 23



Electro fusion & compression molded fittings for Infrastructure & Gas Distribution



Manhole & underground sewer systems



Second generation Cross Laminated Film Product licensed to the Company by the Collaborator



Additional system in Plastic pipe Segment for replacing conventional material pipes

The sustainable advantages that the company enjoys



Distribution – 2,000 channel partners and over 25,000 retail counters



Ability to absorb new technology and launch new products, on their own or through technical collaborations and stay at the leading edge.



The “Supreme” brand name is widely known across India.



Use of patented technology (for which they are paying royalty) in multiple products



In certain segments, the company is trusted enough to co-develop / co-manage products. e.g. in packaging.

Sector Analysis:

The growth of plastics in the country is usually correlated with GDP growth. Their annual reports state that plastics consumption growth increases by 1.5 times the GDP growth. But there are exceptions. In the financial year 2011-12, consumption grew by only 6%. An earlier annual report for FY04-05 also talks of a 1% growth in plastic consumption in India in what was “the worst year in the history of plastics consumption growth in the country in the last two decades”. On the input side, crude oil prices affect raw material prices putting pressure on margins of plastics manufacturers in general. Supreme Industries is doing a good job of protecting and growing margins. Growth Analysis

Supreme Industries growth plans 

The existing capacity is to be enhanced to 630,000 MT by 2015-16.



It will need Rs. 1100 crores of capital expenditure

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

Company intends to enhance the overall contribution of value added products from 29% to 35%



Company aims to grow to Rs. 6000 crores turnover by 2015-16. This implies a 20% compounded annual growth rate in revenue. Over FY07-FY12 they grew at 23%. So this is a fair projection by the company

Risk factors The risks that this sector faces



Possible regulation in use of plastics in the country and the world



Crude oil price shocks

The specific risks that Supreme Industries faces



Competition is heating up – companies like Astral are increasingly getting stronger in areas like PVC pipes for which they have tie-ups with Lubrizol. They seem to have an interesting range of products which I could not see on the Supreme website.



There will be a limit to how much they can increase the share of value added products in total revenue. This increase has helped improve the financial profile of the company till now. Beyond this it cannot give massive improvement in financials like it has in the past.

3.3 PRODUCT PROFILE

Design and Development of Molds for 

Automotive Components

4 wheelers: Radiator grills, interior trim, scuff plates, mudguards, mud flaps, corner bumpers, bezels, instrument panels, glove boxes and lids, water deflectors, body protectors, etc. 2 wheelers: Handlebar covers, seat trim, mudguards, shields, seat bases, etc. 

Electronic Appliance parts

25

Washing Machine Base, Balancer Cases, Door Windows, Doo r Bezels, Lids. Cabinets for TV's, computers and Audio Systems, Water Heater Exteriors Air conditioner & Refrigerator components Front grills, kick plates, chill trays, etc. 

Molded Furniture

Garden furniture, mass seating systems, children furniture 

Crates

Industrial crates, special purpose & custom-developed crates 

PVC Pipe Fittings

Fittings for agricultural, SWV, SWR, ASTM and plumbing pipes 

Food Service ware Thermoforming Tools

PRODUCT GROUPS

The product groups of the Company have been recast as follows:

Group

Products

Plastics Piping System

uPVC Pipes, Injection Molded fittings and handmade fittings, Polypropylene Random Copolymer pipes and fittings, HDPE Pipe Systems, CPVC Pipes Systems, LLDPE Tube and Inspection Chambers and manholes.

Consumer products

Furniture

Industrial Products

Industrial products, Material handling System and Pallets

Packaging Products

Flexible packaging film products, Protective Packaging Products, Cross Laminated Film products

Composite Products

LPG Gas Cylinders, Composite Pipes

26

Expansion Plans 

New Product Range of Bath Fittings which Company has planned to launch is in its final stage of readiness and likely to be in market by end of the current quarter.



Augmenting of additional capacities, Automation and installation of balancing equipment at existing locations in various product segments are progressing as per sched ule.

Outlook

During the current year, the Company envisages annual growth in volume and product value of about 16% and 25% respectively over the previous year. 27

3.4 ABOUT PONDICHERRY PLANT

In 1988, an injection molding unit was established in Pondicherry. Pondicherry II was commissioned in August 1997. Started as a plant to manufacture furniture, it currently has five divisions. Division A -> Furniture Division B -> Crates Division C->

Industrial products

Division D -> Whirlpool goods Division E ->Bathroom fittings & taps (not fully established)

Pondicherry has won the following awards: 

Best Delivery Performance Award 2008 from Whirlpool of India Private Ltd.



Best Supplier Quality Award from Samsung.



Best Kaizen Award for 2010 from Whirlpool of India private Ltd.



TPM Excellence Award 2011 from Japan Institute of Plant Maintenance.

Currently Pondicherry plant is the SECOND largest plant in terms of sales turnover. (180 - 200 crores).

4.1 REVIEW OF LITERATURE Overview

The chapter aims at listing some of the latest notable contributions of other researchers in a similar field or related field for the purpose of review and analyzing the important techniques and methods to be implemented. The sources for the literature have been mentioned in the bibliography. A number of studies have been researched on export performance and export performance determinants. Brief reviews of the latest research works are as follows.

The dominant method that has been adopted over the last few decades is referred to as a machine rate calculation (Matthews 1942, Miyata 1980). This calculation is essentially a method of 28

averaging all the fixed and operating costs for a piece of equipment over its entire life span so that they may be converted to a cost per operating or scheduled hour. The method includes fixed costs for depreciation, interest, insurance, and taxes and operating costs for fuel and lubricating oil, water, power consumption, and maintenance and repair. In theory, historical data are to be used for all of these components and then converted to average costs per hour. In practice, depreciation is often the only factor that is empirically based, and rules of thumb are often used to estimate the remaining cost components. As an alternative, surveys of logging equipment dealers and loggers have been made and published periodically in machine rate form (i.e , Plummer 1967-1982; Cubbage 1986; Dorris and Cubbage 1987; Burgess and Cubbage 1989; Brinker et al. 1989), which are often used by logging analysts.

While these machine rate calculations are widely accepted due to their simplicity and ease of use, they do have shortcomings. Average machine rate costs estimated for the life of a piece of equipment may not accurately reflect costs at any given point in time. Fixed costs for equipment are likely to be greater when the machine is new than when it is old and mostly depreciated. Conversely, repair and maintenance costs will tend to be less for new equipment than for old equipment. These may or may not balance each other out at any given point in the life span of equipment. This presents a particular problem to loggers who may be paid for contract at average rates. The possibility that “On the Average” they may be making a profit is of little comfort if, at the moment, their high equipment costs are forcing them out of business.

Another serious shortcoming of the machine rate approach is that the allocations for interest, insurance, and taxes are fairly arbitrary and simplistic. Interest costs are estimated as a percentage of an “average annual investment” (AAI), which was derived by Matthews(1942). Machine rates almost always exclude any explicit consideration of the income tax treatment of equipment investments, and only include a value for property taxes and license fees. Thus, the machine rate formula is only a before – tax computation.

Butler and Dykstra (1981) and Tufts and Mills(1982) discussed these shortcomings of the machine rate formula and developed explicit models that could be used to calculate accurate costs on a cash flow basis. In theory, these methods are certainly superior to the standard 29

machine rate. However, they have not been widely adopted by researchers in their published literature, nor one would expect, by practitioners. Perhaps this lack of adoption partially could be explained by the complexity of the method, the amount of detailed information required to perform the calculations, and the constantly changing federal income tax laws regarding equipment depreciation. Traditional adherence to machine rate approaches is easier. However, a more theoretically appropriate approach for estimating machine costs would still be worthwhile.

RESEARCH

Research is a process in which the researcher wishes to find out the end result for a given problem and thus the solution helps in future course of action. The research has been defined as “A careful investigation or enquiry especially through search for new facts in branch of knowledge”

5.1RESEARCH DESIGN

The research design used in this project is Analytical in nature the procedure using, which researcher has to use facts or information already available, and analyze these to make a critical evaluation of the performance.

5.2 DATA COLLECTION Primary Sources

1. Data are collected through personal interviews and discussion with Finance Manager & executives. 2. Data are collected through personal interviews and discussion with Purchase & Stores Deputy Manager & executives.

Secondary Sources

1. The data are collected from the reports maintained by the company for the past one year.

30

2. Data are collected from the company’s website. 3. Books and journals pertaining to the topic.

5.3 RESEARCH METHODOLOGY

In this project, research has been conducted in four stages

Stage I :-Defining the Problem and Research Objective

a) To sustain the business of any firm in a long run, it is necessary to analyze the cost of production in efficient manner. b) Analyze the fixed and variable expenses of the factory with respect to total working hour of the machine in order to determine the cost of production.

Stage I I : - Developing and Collecting the Information

In this stage, efforts were directed towards developing and collecting the data. This stagecalls for determining the type of information needed and the most efficient way to gather theinformation. A researcher can get the secondary data or primary or both.

31

This project work depends on the collection of both the primary and secondary information or data. The data is being collected by visiting the different departments of the Supreme Industries Limited.

Stage I I I :- Analyzing the Information

The next step in the research process is to extract pertinent information and findings from the data. We have attempted to apply techniques in the analytical research system in the hope of discovering additional information.

Stage IV: - Presenting the findings

The next step in this process is to find out the useful and fruitful information from the dataor the analytical work done. The researcher should present major findings that are relevantto the major financial decision facing management. The study is useful when it reduces the amount of uncertainty facing the financial executive.

5.4 PERIOD OF STUDY

The period of the study at the Supreme Industries Limited, Pondicherry is for 45 da ys

32

DATA ANALYSIS AND INTERPRETATION 6.1 Machine hour rate calculation for machine from the period of( July 2012 to May 2013) Machine Rate Calculation(July 12)

Plant A machine name:

IT 1200 A

machine worth :

21677206.03

additional cost inquired for installation:

15000

working life of machine(in hours):

1,000,000-2,000,000 cycles

OR (100-200 YEARS) diesel used (per hour)

150 liter

Supervisors devote for the machine:

8 8HRS.

Cost of the power per 100 units:

5.50 per unit

power consumed per hour:

1458

Normal working hour of machine:

24 HRS.

Actually worked hour:

22 HRS.

Calculation of overhead costs: Expenses:

Per hour

Per month

Rent & rates

46.8

13479.452

Supervisors salary and labor cost

3721.23

1071715

Insurance

92.8

26728.76

Taxes

42.57

12263

Interest

2631.05

757742.4

Depreciation(machine cost+additional cost -scrap) Variable Expenses:

3678.76

1059484.9

Repairs & Maintenance

425.3

306258

Power & fuel

242.4

4190001.54

Total

10880.91

7437673.052

494.5868182

11269.20152

Fixed Expenses:

Machine hour rate or predetermined overhead rate: operation(1 YEAR) overhead costs/total no of hours the machine is in operation

33

Machine Rate Calculation(Aug 2012)

Plant A machine name: machine worth : additional cost inquired for installation: working life of machine(in hours):

IT 200 A 21677206.03 15000

DIESAL used (1 HOUR)

150 LITER


8HRS.


5.50 per unit


1458


24 HRS.


22 HRS.

1,000,000-2,000,000 cycles OR (100-200 YEARS)


per hour

per month

Rent & rates

18.72

13479.452


1488

1071715

Insurance

37.1

26728.76

Taxes

17.03

12263

Interest

1052

757742.4

Depreciation(machine cost+additional cost -scrap)

1471

1059484.9


342

246279.4

Power and fuel

6697

4822034.51

Total

11122.85

8009727.422

505.5818182

12135.95

Fixed Expenses:

Variable Expenses:

Machine hour rate or predetermined overhead rate: operation(1 YEAR) overhead costs/total no of hours the m achine is in operation

34

Machine Rate Calculation(Sep 12)


IT 1200 A

machine worth :

21677206.03


15000


1,000,000-2,000,000 cycles OR (100-200 YEARS)

Diesel used (per hour)

150 LITER


8 8HRS.


5.50 per unit


1458


224 HRS.


222 HRS.


Per hour

Per month

Rent & rates

46.8

13479.452


3721.23

1071715

Insurance

92.8

26728.76

Taxes

42.57

12263

Interest

2631.05

757742.4


3678.76

1059484.9


425.3

306258

Power & fuel

7869.4

5666000

Total

18507.91

8913671.512

841.2686364

13505.56212

Fixed Expenses:

Variable Expenses:


35

Machine Rate Calculation(Oct 12)


IT 1200 A

machine worth :

21677206.03


15000


1,000,000-2,000,000 cycles OR (100-200 YEARS)

diesel used (per hour)

150 liter


8 HRS.


5.50 per unit


1458


24 HRS.


22 HRS.


Per hour

Per month

Rent & rates

46.8

13479.452


3721.23

1071715

Insurance

92.8

26728.76

Taxes

42.57

12263

Interest

2631.05

757742.4


3678.76

1059484.9


425.3

306258

Power & fuel

6866

4943999.61

Total

17504.51

8191671.122

Fixed Expenses:


795.6363636

36

12411.62273

Machine Rate Calculation(Nov 12)


IT 1200 A

machine worth :

21677206.03


15000


1,000,000-2,000,000 cycles OR (100-200 YEARS)


150 liter


8 HRS.


5.50 per unit


1458


24 HRS


22 HRS.


Per hour

Per month

Rent & rates

46.8

13479.452


3721.23

1071715

Insurance

92.8

26728.76

Taxes

42.57

12263

Interest

2631.05

757742.4


3678.76

1059484.9


425.3

306258

Power & fuel

6941

4998000

17579.51

8245671.512

799.0454545

12493.44091

Fixed Expenses:

Variable Expenses:


37

Machine Rate Calculation(dec12)


IT 1200 A

machine worth :

21677206.03


15000


1,000,000-2,000,000 cycles OR (100-200 YEARS)

DIESAL used (per hour)

150 LITER


8 HRS.


5.50 per unit


1458


24 HRS.


22 HRS.


Per hour

Per month

Rent & rates

46.8

13479.452


3721.23

1071715

Insurance

92.8

26728.76

Taxes

42.57

12263

Interest

2631.05

757742.4

Depreciation(machine cost+additional cost scrap) Variable Expenses:

3678.76

1059484.9


425.3

306258

Power & fuel

7954

5725127

Total

18592.51

8972798.512

Fixed Expenses:


845.0909091

38

13595.14848

Machine Rate Calculation(Jan 13)


IT 1200 A

machine worth :

21677206.03


15000


1,000,000-2,000,000 cycles OR (100-200 YEARS)


150 liter


8 HRS.


5.50 per unit


1458


24 HRS.


22 HRS.


Per hour

Per month

Rent & rates

46.8

13479.452


3721.23

1071715

Insurance

92.8

26728.76

Taxes

42.57

12263

Interest

2631.05

757742.4

Depreciation(machine cost+additional cost scrap) Variable Expenses:

3678.76

1059484.9


425.3

306258

Power & fuel

6612

4761092

Total

17250.51

8008763.512

Fixed Expenses:


784.0909091

39

12134.48939

Machine Rate Calculation(Feb 2013)

Plant A machine name: machine worth : additional cost inquired for installation: working life of machine(in hours):


IT 1200 A 21677206.03 15000 1,000,000-2,000,000 cycles OR (100-200 YEARS) 150 LITER

Supervisors devote for the machine: Cost of the power per 100 units: power consumed per hour: Normal working hour of machine: Actually worked hour:

8 HRS. 5.50 per unit 1458 24 HRS. 22 HRS.

Calculation of overhead costs: Expenses: Fixed Expenses: Rent & rates Supervisors salary and labor cost Insurance Taxes Interest Depreciation(machine cost+additional cost scrap) Variable Expenses: Repairs & Maintenance Power & fuel Total Machine hour rate or predetermined overhead rate: operation(1 YEAR) overhead costs/total no of hours the m achine is in operation

Per hour

Per month

46.8 3721.23 92.8 42.57 2631.05 3678.76

13479.452 1071715 26728.76 12263 757742.4 1059484.9

425.3 6926

306258 4986999

17564.51

8234670.512

798.3636364

12476.77273

40

Machine Rate Calculation(Mar 2013)

Plant A machine name: machine worth : additional cost inquired for installation: working life of machine(in hours): DIESAL used (per hour)

IT 1200 A 21677206.03 15000 1,000,000-2,000,000 cycles OR (100-200 YEARS) 150 LITER

Supervisors devote for the machine: Cost of the power per 100 units: power consumed per hour: Normal working hour of machine: Actually worked hour:

8 HRS. 5.50 per unit 1458 24 HRS. 22 HRS.

Calculation of overhead costs: Expenses: Fixed Expenses: Rent & rates Supervisors salary and labor cost Insurance Taxes Interest Depreciation(machine cost+additional cost scrap) Variable Expenses: Repairs & Maintenance Power & fuel

Per hour

Per month

46.8 3721.23 92.8 42.57 2631.05 3678.76

13479.452 1071715 26728.76 12263 757742.4 1059484.9

425.3 14511

306258 5224002

25149.51

8471673.512

1143.136364

12835.86818


41

Machine Rate Calculation(Apr 2013)


IT 1200 A

machine worth :

21677206.03


15000


1,000,000-2,000,000 cycles OR (100-200 YEARS)


150 LITER


8 HRS.


5.50 per unit


1458


24 HRS.


22 HRS.


Per hour

Per month

Rent & rates

46.8

13479.452


3721.23

1071715

Insurance

92.8

26728.76

Taxes

42.57

12263

Interest

2631.05

757742.4


3678.76

1059484.9


425.3

306258

Power & fuel

6926

4987889

17564.51

8235560.512

798.3636364

12478.12121

Fixed Expenses:

Variable Expenses:


42

Machine Rate Calculation(may 2013)


IT 1200 A

machine worth :

21677206.03


15000


1,000,000-2,000,000 cycles OR (100-200 YEARS)


150 LITER


8 HRS.


5.50 per unit


1458


24 HRS.


22 HRS.


Per hour

Per month

Rent & rates

46.8

13479.452


3721.23

1071715

Insurance

92.8

26728.76

Taxes

42.57

12263

Interest

2631.05

757742.4


3678.76

1059484.9


425.3

306258

Power & fuel

12544.44

9031999.04

23182.95

12279670.55

1053.727273

18605.56061

Fixed Expenses:


43

FINDINGS

It is observed that the the actual overhead costs incurred will in all probability differ from the Overheads absorbed into the cost units. From (Jul 12 – Aug 12 ) – Under absorbed From(Aug12 - Sep 12) - Under absorbed From(Sep 12- Oct 12) - Over absorbed From(Oct 12- Nov 12) - Under absorbed From(Nov 12- Dec 12) - Under absorbed From(Dec 12- Jan 12) - Over absorbed From(Jan 13- Feb 13) - Under absorbed From(Feb 13- Mar 13) - Under absorbed From(Mar 13- Apr 13) - Over absorbed From(Apr 13- May 13) - Under absorbed

Month

Machine Hour Rate

Jul-12

494

Aug-12

505

Sep-12

841

Oct-12

795

Nov-12

799

44

Dec-12

845

Jan-13

784

Feb-13

798

Mar-13

1143

Apr-13

798

May-13

1053

Machine hour rate fluctuations from the period of (Jul 12 – May 2013)

mhr 1400 1200 1000 800 600

mhr

400 200 0

45

Machine hour rate fluctuations from the period of (Jul 12 – May 2013)

mhr 1400 1200 1000 800 600

mhr

400 200 0

46

SUGGESTIONS



Above findings shows that the overheads absorbed is not consistent. It is over absorbed in the

months of (Sep 12- Oct 12), (Dec 12- Jan 13), (Mar 13- Apr 13). 

And it is under absorbed in the months of (Jul 12- Aug 12), (Aug 12 - Sep 12), (Oct 12- Nov

12), (Nov 12- Dec 12), (Jan13 – Feb 13), (Feb 13- Mar 13), (Apr 13- May 13). 

We can infer that the actual overheads are greater than the overheads absorbed in most of the months. (i.e.) it is under absorbed. The reason is that the firm doesn’t properly estimate/budget the future cost of production or may it be due to the following reasons. 

Inefficient usage of machine



Improper Price Fixation



Improper cost control

CONCLUSION

Overheads are one of the factors which determine the firm’s profit. If they could properly account and estimate/budget it for the upcoming financial year or upcoming accounting period of month, the firm can enhance the profit with effective cost control, cost of production and efficient price fixation of the product.

47

BIBLIOGRAPHY 1.)http://education.svtuition.org/2010/09/how-to-calculate-machine-hour-rate.html

http://www.fao.org/docrep/t0579e/t0579e05.htm 2.)Machine hour rate computation http://www.preservearticles.com/2011092313987/steps-for-computation-of-machine-hour-rate.html 3.)calculation of machine hour rate http://www.caclubindia.com/forum/machine-hour-rate-calculation-178373.asp#.Uh-NAtLDBqU 4.)Concept of machine hour rate http://accountlearning.blogspot.in/2010/07/machine-hour-rate-method-of-providing.html 5.) A text book of cost accountancy, Vikas publishing Pvt. Ltd. By M.N.Arora 6.)Cost Accounting book, Book syndicate publications, by N.K. Prasad & A.K. Prasad

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49

Analysis of Machine Hour Rate in the Sup

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