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

STUDIES
CANARA BANK SCHOOL OF MANAGEMENT STUDIE S
BANGALORE - 560001
 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 report
entitled “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)
 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 :

Customer Design Study Feasibility Quotation

Enquiry (Sales) (Design) Study (Sales) (Sales)

Material Release of Design Freeze Customer PO

(Purchase) BOM (Design) (Design) to Bosch

R M Inspection Manufacture F.G. Inspection Final Inspection

(Quality) (Production) (Quality) (Customer)

Commissioning Billing & Dispatch

(Service) (Logistics)

• In case of “repeat” projects, the scope of “design” activities could be

considerably reduced.
 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.

BREAK-UP OF PROJECT COSTS:
Costs can be divided into two categories:

Project
Direct Costs Cost=
Direct Indirect Costs
+
Indirect

These are accumulated from: Business Central

• Material Cost Level
Level
• Purchase Overheads
• Mechanical Design
• Electrical Design
Costs attributable to: Shared Services:
• Manufacturing
• Sales & Service Dept. • HR functions
• Mechanical Assembly
• Quality Dept. • Employee Welfare
• Electrical Assembly
• Higher Management • Controlling/Finance
• Electronic Assembly
• Utilities/Infrastructure • Technical Functions
• Corporate Services
Some Important Points: Costs etc.
• Project Management
• Material cost through POs
raised on vendors • Other administration
• Purchase Overheads are
applied as a standard
percentage of Material
Costs to cover Purchase
Dept. costs
• Other costs are booked in
hours which are then Some Important Points:
multiplied at standard • These costs are incurred periodically which are necessary to
rates of absorption. manage the organization
• Hence, they are not directly attributable to projects
• These are “Fixed” in nature
• Such costs are to be allocated to various projects
 PRESENT SCENARIO
• Actualization process involves distribution of indirect costs shown
above, to various projects, to derive the “actual cost” of the project.
• The distribution process is being carried out on various projects, on
the 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.
• Project A (Normal Scenario)

• Project B (Complete Solution)

• Project C (New Concept)

• Project D (Repeat Project)

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)
FLOWCHART FOR ACTUALISATION PROCESS

START

Extract project Extract total

wise Direct Costs Indirect Costs
(Excl Mat) - P47 from P47

Divide the Total Indirect Cost by Total Direct

Cost (Excluding Material) of all projects, to
derive “x”.

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 values

back to database.

END
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
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 COST
MATERIAL - ( 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.
 ALTERNATE METHOD
• In this method of indirect cost distribution, value addition in cost terms is
not considered for allocation of indirect costs.
• Instead, value addition in hours of activity on projects, is considered for
distribution 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
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
DESIGN 51,429 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