A

SUMMER TRAINING PROJECT REPORT

ON

PRODUCT COSTING OF PISTON

UNDER TAKEN AT
FEDERAL MOGUL GOETZ INDIA LTD

PATIALA (Punjab)
Submitted to Punjabi University Patiala in partial
fulfillment of the requirements for the degree of
Master of Business Administration
SUBMITTED TO:
PROF.DALVIR SINGH

SUBMITED BY:
JASWINDER KAUR
MBA 3RD SEM
ROLL NO.1411

AKAL GROUP OF TECHNICAL & MANAGEMENT

INSTITUTIONS,MASTUANA SAHIB
SANGRUR

ACKNOWLEDGEMENT
I hereby want to thank Federal Mougal Goetz India Ltd. and its members for their help
given to me during my training. I was thrilled to find that people here were very cooperative and helped me in all ways possible. They were very eager in solving my
queries and were ready to help all the time.
Moreover, I want to take this opportunity to thank MR. DALVIR SINGH Despite being
one of the busiest people in the bank he took out time to attend to my questions. So for
this, I want to thank him for his co-operation and knowledge that he has imparted to me.

Jaswinder kaur

DECLARATION
I, JASWINDER KAUR hereby declare that the project
entitled PRODUCT COSTING assigned to me by FEDERAL
MOGUL GOETZE (INDIA) LTD, during my 8 weeks training for
the partial fulfillment of MBA is the original work done by me and
the information provided in the study is authentic to the best of my
knowledge.
This study has not been submitted to any other institution or
university for the award of any other degree.

JASWINDER KAUR

TABLE OF CONTENTS
SR. NO.

01

PAGE NO.

ACKNOWLEDGEMENT

02

CERTIFICATE BY PROJECT GUIDE

03

DECLARATION

04

INTRODUCTION
Company Profile [Goetze (India) Ltd.

05-29

Company profile [federal mogul

02

Federal Mogul Goetze (India) Ltd.

SCOPE & OBJECTIVE OF STUDY
Research Methodology
Limitations

03

PRODUCT COSTING
Product Costing of Goetze (India) Ltd.

04

33-80

CONCLUSION
SWOT Analysis
Findings & Suggestions

05

30-32

BIBLIOGRAPHY

81-87

88

Chapter 1

INTRODUCTION

COMPANY PROFILE
It is good to have goodwill
It is good to have enthusiasm
But it is essential to have training
Pt. J.L.Nehru
The above quoted lines by the great soul Pt.J.L.Nehru rightly tell us that training is
a very necessary part in ones life of one wants to achieve success &have proper
knowledge about a particular aspect.

Federal Mogul Goetze (India) Limited was established in 1954 as a joint venture
with Goetze-Werke of Germany.
Goetze-Werke of Germany is now owned by Federal-Mogul Corporation of USA,
a 6.3 billion company and one of the largest manufacturers of automotive
components in the world.
Federal Mogul Goetze (India) Limited is the largest manufacturer of PISTONS &
PISTON RINGS in India.

Federal Mogul Goetze (India) Limited

Manufacturers of world class Pistons, Piston Rings, Sintered Parts & Cylinder
Liners covering wide range of applications: Two / Three - Wheelers, Cars, Jeeps,
Tractors, Light Commercial Vehicles, Heavy Commercial Vehicles, Stationary
Engines & High out-put Locomotive Diesel Engines. Widest range of Piston Rings
& Pistons varying from a 30mm to 300mm Dia. The most modern
production facilities at Bangalore & Patiala are TS 16949 and ISO14001
certified & at Bhiwadi TS

16949

certified.

Market

leaders

both in

OE

and Replacement Market. Exports too many countries.

Federal Mogul Goetze (India) Ltd. based in Bangalore was established in 1954 as
a joint venture between Goetze-Werke of Germany and Escorts Ltd. GoetzeWerke, is however now part of Federal Mogul Corporation of US, a 6.17 billion
company and one of the largest manufacturers of automotive components in the
world. The Group's principal activities are the manufacture of piston rings (OE) for
shell moulding process and production of edible oil and leather garments exports.
The company is amongst the largest manufacturer of automotive pistons, gudgeon
pins in India and covers complete range of bi-wheelers, passenger cars, three
wheelers, LCVs, trucks, HCVs etc, and has a market share of 36%. The company
caters to both OE (Original equipment) and RM (replacement market) segment of
automotive industry. The major customers of the company include Telco, Ashok
Leyland, Bajaj, TVS, Mahindra & Mahindra, Maruti, defence and the Indian
Railways. The companys manufacturing facilities are situated at Bangalore and
Patiala. The companys plants are situated at Alwar, Bhiwandi, Bangalore and
Patiala.

The present product range covers Piston Rings which constitute the Ring Activity
and Pistons, Piston-Pins and Circlips in Piston Activity. The company is the largest
manufacture of Piston Rings and Pistons in the country.
Over a period of time, keeping in view the nature of demand, additional capacities
were created besides upgrading technology to growing trends by virtue of stream
ling quality culture, adaptation of latest technology & equipment.
Technology leadership matched with innovated thinking has made GOETZE
products to enjoy a high degree of customer confidence and is the first choice of
every discerning customer for applications ranging from Bi-wheelers to Battle
Tanks.

Our History
1899 1940: Founded on Innovation
1941 1956: Diversifying for Success
1957 1974: Going Global
1975 2005: A Bright Future
Federal-Mogul Corporation is an innovative and diversified $6.3 billion global
supplier of quality products, trusted brands and creative solutions to the
automotive, light commercial, heavy-duty truck, off-highway, agricultural, marine,
rail and industrial markets. The 45,000 people of Federal-Mogul located in 35
countries
drive
excellence
in
all
they
do.
Companys globally networked engineering and technical centers in the U.S.,
Europe and Asia enable to bring customers breakthroughs in advanced technology
and innovation.
Federal Mogul is a premier supplier of products, services and solutions to original
equipment manufacturers that use quality components in their vehicles and
automotive systems, and to aftermarket customers who sell companys world
renowned brand-name replacement parts through repair shops and retail outlets. As
partner with a global network of suppliers whose commitment to excellence and
on-time
deliver
is
crucial
to
company
success.
For more than a century, Federal Mogul has developed the innovative products
which customers need to produce in the next generation of vehicles. FederalMogul has been creating value through innovation and leading technology for
more than 100 years. Today, the company is a key player in the global marketplace,
serving industries that range from automotive and commercial vehicles to railroad
9

and aerospace. Customers know they can rely on Federal-Moguls quality

excellence in products, trusted brands and creative solutions.
This company started with a bold idea and over time grew into a FORTUNE 500
companies with a global workforce thousands strong. The Federal-Mogul team has
celebrated countless victories and worked hard to overcome the inevitable
challenges.
Federal-Mogul is a global supplier of automotive components, modules and
systems serving the world's original equipment manufacturers and the aftermarket
industry. The company utilizes its engineering and materials expertise, proprietary
technology, manufacturing skill, distribution flexibility and marketing power to
deliver quality products and services, and leading brands. Federal-Mogul is
focused on driving global profitable growth and creating value to satisfy customer,
employee and stakeholder expectations.
Headquartered in Southfield, Michigan, the Company, which reported sales of $6.3
billion in 2005, employs 42,000 people worldwide. Federal-Mogul was founded in
Detroit in 1899. The Companys principal customers include many of the worlds
foremost original equipment manufacturers of automotive, light commercial,
heavy-duty truck, agricultural, marine, rail and industrial vehicles and equipment
as well as the worldwide aftermarket.
Federal-Moguls products are sold under a variety of power brands, including but
not limited to, AE engine products, ANCO wipers, Champion spark plugs
and wipers, Fel-Pro gaskets, Ferodo brake pads, Glyco bearings, Goetze
piston rings, Moog chassis products, National wheel-end components, Nral
pistons, Payen gaskets, Sealed Power engine products and Wagner lighting
and brake products

10

BRAND

Federal-Mogul Goetze (India) Limited

Manufacturer of world-class pistons, piston rings, sintered parts and cylinder
liners covering a wide range of applications including two/three-wheelers, cars,
SUVs, tractors, light commercial vehicles, heavy commercial vehicles, stationary
engines and high output locomotive diesel engines.
Widest range of piston rings and pistons varying from 30mm to 300mm diameter.
The most modern production facilities at Bangalore, Patiala and Bhiwadi are
certified TS 16949, ISO14001 and OHSAS 18001.
Market leaders both in OEM and aftermarket. Exports to many countries.
Goetze and Goetze Brico provides leading-edge technologies and competitive
solutions for original equipment manufacturers and the automotive aftermarket.

11

PROFILE
Federal mogul Goetze (India) Limited was established in 1954 as a joint venture
with Goetze-Werke of Germany.
Goetze-Werke of Germany is now owned by Federal-Mogul Corporation, a $6.3
billion global company and one of the leading manufacturers of automotive
components in the world.
Federal-Mogul Goetze (India) Limited is the largest manufacturer of pistons and
piston rings in India.

Production Capacity:

Turnover:
Net Profit (after tax):

Piston rings

54.96 Million

Pistons
Dec, 31st 2013

13.57 Million
INR 67253.44 Lacks

st

Dec, 31 2013

INR (689.23) Lacks

Product Range: pistons, piston rings, , light

alloy castings, sintered
products

12

MILESTONES
1954 Incorporated as a JV with Goetze Werke
1957 Ring & liner production
1958 Piston production as escorts

1960
1968
1977
1982
1985
1989
1990
1992
1994
1996
1997
2001
2003

Patiala
Patiala

(Automotive Division)
(Collaboration:Mahle)
Cast iron / Forged piston
Patiala
production started
Pins / ring carrier production
Patiala
started
Piston / ring production started Bangalore
Steel rings / Large bore
Bangalore
locomotive piston
Light alloy products
Patiala
Auto thermic pistons production Bangalore
Moly coated / IKA / chrome oil Patiala
rings
Large bore rings / pistons for
Bangalore
battle tanks
Composite pistons / new ring
Bangalore
foundry
Escorts (Automotive Division) hived off into joint venture with M/S
Mahle, Germany
Goetze TP (India) Ltd. - Manufacturer of steel rings
Merger of Federal-Mogul sintered products Ltd. with Goetze (India)
Ltd.
Merger of Escorts pistons activities with Goetze (India) Ltd.
Introduction of chrome-ceramic rings

2004
2004 Technical collaboration for pistons with Federal-Mogul Corporation

13

2006 Majority stakeholding acquisition by Federal-Mogul Corporation

2006

Name changed "Goetze (India) Limited" to "Federal-Mogul Goetze

(India) Limited"

Mission of the Company

Steadily moving towards leadership with piston with vision strategy seeing it as
the best way to leaders in business

Vision of the company

To be one of the worlds leading automotive solutions provider.

Share Holding Pattern:

Federal-Mogul Corporation.

51 %

Goetze India Ltd.

24.5 %

Teikoku Piston Rings Co. Ltd., Japan

24.5 %

14

Federal Mugal
24.5

Goetze india
ltd
Teikoku piston
51

24.5

EXPORT DESTINATION
Dubai
Bangladesh
Singapore
Egypt
Mauritius
U.S.A
Germany
15

 Nepal
Sri Lanka
Uganda

COLLABORATIONS
A. GERMANY

Faun
Class
B. JAPAN

Yamaha
Kayaka
Mikni
C. UK

16

 JCB (Goetze)
Ford
D. USA

HUGHES
E. FRANCE

Bosch
Dynapal

PRODUCT RANGE

17

Piston Rings
L manufactures a wide range of Piston Rings for Bi-wheelers, Tractors and
Passenger Cars & Jeeps, Commercial Vehicles, Locomotive Engines &
Stationery Engines.
Each Piston Ring is manufactured from raw material whose composition
hardness & microstructure are thoroughly tested to ensure the highest standard of
quality.

18

FEDERAL MOGUL GOETZE (INDIA) LTD. BAHADURGARH, PATIALA

Goetze (I) Ltd., Bahadurgarh, Patiala was set up in 1954 with the collaboration of
M/s. Goetze Werke, Germany which started its production of Piston Rings for
automobile industry in 1957. The plant is situated at Bahadurgarh, about 10 kms.
From Patiala on the Patiala-Rajpura Road.
Considering the need of complete Piston assembly, Escorts Ltd. ventured into
manufacturing of Pistons in 1958 with the collaboration of M/s. Mahle GmbH,
Germany, which delivered the Indian automobile industry its Pistons in 1960.
Escorts entered in collaboration with M/s. SUKO GmbH, Germany for Piston
Rings in 1967 and manufacturing started in 1968. To meet the increasing
demand of market, in 1977, a parallel unit for manufacturing Pistons and Piston
Pins was set up in Bangalore.
From 1 October 1996, Escorts Ltd. entered into joint venture with M/s. Mahle
GmbH, Germany with the formation of the new company Escorts Mahle Ltd. in
1998, Goetze also became a part of Federal Mougal, a well-known group of
USA. In June 2000, both Escorts Mahle Ltd. and Goetze have become QS-9000
certified companies.
The present capacity of the company is 549.60 lacs nos. Piston Rings and
135.68 lac nos. Pistons (on 302 working days). The total capital employed as on
31 Dec 2009 is 168.84 crores in Ring Activity and Piston Activity. The
workforce including managers and supervisors is 830 nos. in Ring Activity and

19

1420 in Piston Activity as on 31 Dec 2013. The turnover of the Patiala Plants
280.39 crores excluding Excise (combined in Ring Activity and Piston Activity)
as on 31 Dec 2013.

PRODUCTS MANUFACTURED AT PATIALA PLANT

Pistons
Piston Rings
Cylinder Liners
Gudgeon Pins

20

MAJOR CUSTOMERS OF THE COMPANY

a) PASSENGER CARS & JEEPS
Hindustan Motors Ltd.
Premier Automobiles Ltd.
Mahindra & Mahindra Ltd.
Maruti Udyog Ltd.
Telco
b) BI-WHEELERS
Bajaj Auto Ltd.
Escorts Automotive Ltd. (MSD)
Escorts Yamaha Ltd.
Kinetic Engineering Ltd.
TVS Suzuki Ltd.
Majestic Auto Ltd.
Scooters India Ltd.
Ideal Jawa (I) Ltd.
Lohia Machines Ltd.
c) TRACTORS
Eicher Tractors Ltd.
Mahindra & Mahindra Ltd.
Escorts Ltd. (TD)
Escorts Ltd. (Farmtrac Division)
HMT Ltd.
21

d) COMMERCIAL VEHICLES (LCVs & MCVs)

Telco
e)

DEFENCE
Vehicles Factory, Jabalpur

f)

COMPRESSORS
Telco

g) STATIONERY ENGINES
Kirloskar Oil Engines Ltd.
Greaves Ltd.
Birla

22

MARKET SHARE OF PISTON MANUFACTURES IN INDIA

31-05-2009
Company Name

Market Share (%)

Federal mogul

30

IPL

25

Shriram Piston

26

Menon

Others

11

Total

100

Federal Mogul
11
8

30

IPL
Shriram Piston
Menon

26
25

Others

23

Chapter 2
ORGANISATION
OF
FEDERAL MOGUL
GOETZE (INDIA) LTD

24

ORGANISATION GOALS
The company has laid down for itself goal of improving the value to the
customers through:
LEADERSHIP: to maintain leadership in following categories

Market share: to maintain its status as brand leaders in the country for
Piston and Piston Pins.
Product Development: to develop Piston and Piston Pins for all new
applications as identified.
Technology: modernization and upgradation of technology to the
latest improvements to meet customer requirements.
CUSTOMER SATISFACTION:

It shall strive to achieve customer satisfaction rating more than 90%.

TECHNICAL REQUIREMENT:
Products are manufactured as per specifications based on DIN /
JIS / IS / MAHLE NORMS / SUKO NORMS as also against
customers specific requirements.
QUALITY:
To improve quality consistently through quality assurance and
process control.

DELIVERY:
To strive to achieve 100% on time delivery as per customer
requirements

25

ORGANISATION STRUCTURE

CHAIRMAN

EXECUTIVE
DIRECT
OR

VICE
PRESIDENT

CHIEF (plant
Services)

CHIEF
(Manufacturing)

CHIEF
(Finance)

CHIEF
(Stores)

CHIEF
(Personnel)

MANAGERS
STAFF

SUB STAFF &

WORKERS

26

ORGANISATION SET UP
The organizational set up of the following departments is studied in detail:
1. Finance Department
2. Personnel Department
3. Purchase and Store Department
4. Production Department

FINANCE DEPARTMENT
D.G.M. (Finance), Patiala who is directly responsible to Plant Head (Finance and
Accounts), one of the most reputed Functional Department in GOETZE (INDIA)
LTD. C.G.M. manage the Department and under him there are two managers, one
is Finance Manager and other is Costing Manager. The Finance Manager is
assisted by two supervisors one of these is responsible for cash and bank balances
and other is responsible for bills payable. Each supervisor is given two or three
assistants to work under him.
The amount of investment to be put in current assets like cash in hand, bank
balance, loans and advances, inventories, accrued expenses; dividends payable etc.
all are decided by Finance Department.
The realization of cash for the purpose of raw materials components and spares to
pay wages and salaries to incur day to day expenses and overhead costs, to meet

27

selling costs to provide credit facilities to customers and to maintain inventories is

also the function of this department.
The formulation of policies with regard to profitability risk and liquidity, decisions
about comparison and level of current assets and liabilities, formulation of
production policy to keep the production steady by accumulating inventories,
formulation and execution of credit policy is also the function of Finance
Department.
This Department is responsible for handling transaction relating to purchase of raw
material as well as accounts relating to sales. It is also concerned with payment of
all expenses incurred by the company like purchase of raw material, electricity
bills, repairs etc. It is also concerned with valuation of various costs relating to
inventories.
It deals with determination of monthly wages, salaries of employees, fringe
benefits of retirement, provident funds deduction, incentives, bonus and all the
rewards, which the employees get for rendering their services to the company

28

Functions of Finance Department

Cash Flow:
C.F. statements are being prepared by the plant, to be conveyed to HO. These
include sources as well as application of funds. Similarly applications of funds
related to the salary, payment to suppliers. Major expenses (like Electricity,
Telephone Bills, Excise duty and other personal & sales & administration
expenses).

Costing:
The costing is being done for all the products manufactured at the plant. These
relate to Piston, Ring, Cylinder Liners and Light Alloy Products. The Historical
base is being followed for costing purposes.

Consumption:
Every item being received in the plant for consumption. Input is being accounted
for at the plant. The ledgers are maintained for every receipt and issue.

Management Information System (MIS):

At the end of every month, profit & loss A/C is being prepared, highlighting the
sales, the expenses and profit/loss there on. Similarly first information report (FIR)
on the projected profit is prepared to find out the profits at the start of month.

Working capital management

29

Operating budget:
The budget is being prepared at the start of every year. The sales plan is received
from marketing (H.O.) and according to this sale plan the budget is prepared
highlighting the projections followed

ORGANIZATIONAL CHART OF FINANCE DEPARTMENT

Mr. S. Kohli
(Head Finance)

Mr. Ajay Singla

(General Finance &
MIS)

Costing, Fixed
assets & CWIP

General
Accounting

MIS Reporting

Store A/cing &

Bills Payable

Mr. S P Singh
Chopra

Mr. Sarbjit Singh

Mr. Bharat
Bhushan

Mr. Ashok
Kumar

Mr. Inderjit Singh

Mr. O P Ghai

Mr. Manmohan
Singh

Mr. Rabinder
Singh
Mr. Harinath
Singh

Mr. Rajnesh
Uppal

Mr. Ajay Jindal

Mr. Suresh
Kumar

30

Chapter-3
SCOPE & OBJECTIVE
OF
STUDY

31

RESEARCH METHODOLOGY
The methodology used for the collection of data has been divided into two groups:
Primary Data
This data is based upon personal discussion with managers, officers and other
employees working in various sections of Finance Department, Piston Ring
Foundry Shop and Piston Ring Machine Shop.
Secondary Data
It is mainly based upon office records, Cost-sheets and other published documents
of Federal Mogul Goetz (India) Ltd., Bahadurgarh, and Patiala.

OBJECTIVES
The major objectives of present study are as follows:
Major Objectives:
To study the manufacturing process of pistons.
To calculate cost per piston.
Minor Objectives:
To study whether the firm is able to cover its cost of production.
To study whether the firm is utilizing its productive capacity efficiently.

32

LIMITATION OF THE STUDY

Limited Time
Although the staff of Federal Mogul Goetz (India) Ltd., Patiala was highly cooperative and devoted enough to its valuable time on me but because of their busy
schedules, I feel I was unable to gain the complete knowledge. Further more, I was
allotted a limited time period for study. Both of these became the limiting factors to
get thoroughly familiar with entire organizational activities.

Lack of Confidential Data

The company did not provide some of the information confidential to the
management. Thus constraints in the availability of information resources came in
the way to learn more and thus in better completion of the project report.

Lack of Comparative Data for Interim Comparison

Interim comparison of Federal Mogul Goetze (India) Ltd. with other companies
has not been done due to non-availability of data regarding other enterprises in the
same field.

33

Chapter-4

PRODUCT
COSTING

34

COSTING
It is essential to calculate the amount of expenditure (actual or notional) incurred
on or attributable to, a given thing so that the profit objective of producing it can be
determined.
Costing is the process of ascertaining the cost of activities, processes, products or
services. Cost accounting is the classifying, recording and appropriate allocation of
expenditure for the determination of cost of products or services and for the
presentation of suitably arranged data for purposes of control and guidance of
management. It includes the ascertainment of the cost of every order, job, contract,
processes, services or unit as may be appropriate. It deals with the cost of
production, selling and distribution. It is thus the provision of such analysis and
classification of expenditure as will enable the total cost of any particular unit of
production or services to be ascertained with reasonable degree of accuracy and at
the same time to disclose exactly how much total cost is constituted (i.e. value of
material used, amount of labour and other expenses incurred) so as to control and
reduce its cost. Thus, cost accounting relates to the collection, classification,
ascertainment of cost and control relating to the various elements of cost. It
establishes budgets and standard costs and actual cost of operations, processes and
departments.

35

COSTING - AN AID TO MANAGEMENT

Costing mainly helps the management in three ways:

PLANNING
In planning, the management is concerned with laying down of objectives and
determining the courses of actions to be followed out of the several alternatives
available to achieve those objectives. Planning is thinking in advance, thus costing
provides the management tools to set targets and determining the course of actions.

DECISION MAKING
Management has to take multiple types of decisions. All rational decisions are
based on accounting information. Costing helps the management to take different
types of decisions like
Fixation of prices
Whether or not price should be reduced for increasing level of sales
Whether the change in production is followed
Determination of most profitable levels of production
Whether the product should be exported or not
36

 Whether the production should be discontinued due to current loss etc.

CONTROLLING
Controlling is that par of management activity where by managers compare actual
performance against the planned performance, find out the deviations and take
remedial steps to remove the deviations to make an improvement in performance
because promptness is the essence of an effective control.
Other ways by which costing helps the management are
classification and subdivision of costs
control of materials, labour and overhead costs
business policies
budgeting
standards for measuring efficiency
best use of limited resources
instrument of management control
cost audit
social factors
price determination
expansion

37

TYPES OF COST
Total cost
The total cost curve, if non-linear, can represent increasing and diminishing
marginal returns.In economics, and cost accounting, total cost (TC) describes the
total economic cost of production and is made up of variable costs, which vary
according to the quantity of a good produced and include inputs such as labor and
raw materials, plus fixed costs, which are independent of the quantity of a good
produced and include inputs (capital) that cannot be varied in the short term, such
as buildings and machinery. Total cost in economics includes the total opportunity
cost of each factor of production as part of its fixed or variable costs.
The rate at which total cost changes as the amount produced changes is called
marginal cost. This is also known as the marginal unit variable cost.

Fixed cost
Decomposing Total Costs as Fixed Costs plus Variable Costs. Along with
variable costs, fixed costs make up one of the two components of total cost: total
cost is equal to fixed costs plus variable costs.

38

In economics, fixed costs, indirect costs or overheads are business expenses that
are not dependent on the level of goods or services produced by the business.They
tend to be time-related, such as salaries or rents being paid per month, and are
often referred to as overhead costs. This is in contrast to variable costs, which are
volume-related (and are paid per quantity produced).

Variable cost
Variable costs are costs that change in proportion to the good or service that a
business produces Variable costs are also the sum of marginal costs over all units
produced. They can also be considered normal costs. Fixed costs and variable costs
make up the two components of total cost. Direct costs, however, are costs that can
easily be associated with a particular cost object. However, not all variable costs
are direct costs. For example, variable manufacturing overhead costs are variable
costs that are indirect costs, not direct costs. Variable costs are sometimes called
unit-level costs as they vary with the number of units produced.
Direct labor and overhead are often called conversion cost, while direct material
and direct labor are often referred to as prime cost. In marketing, it is necessary to
know how costs divide between variable and fixed. This distinction is crucial in
forecasting the earnings generated by various changes in unit sales and thus the
financial impact of proposed marketing campaigns. In a survey of nearly 200
senior marketing managers, 60 percent responded that they found the "variable and
fixed costs" metric very useful.

39

Average cost
In economics, average cost or unit cost is equal to total cost divided by the
number of goods produced (the output quantity, Q). It is also equal to the sum of
average variable costs (total variable costs divided by Q) plus average fixed costs
(total fixed costs divided by Q). Average costs may be dependent on the time
period considered (increasing production may be expensive or impossible in the
short term, for example). Average costs affect the supply curve and are a
fundamental component of supply and demand.

Short-run average cost

Average cost is distinct from the price, and depends on the interaction with demand
through elasticity of demand and an average cost due to marginal cost pricing.
Short-run average cost will vary in relation to the quantity produced unless fixed
costs are zero and variable costs constant. A cost curve can be plotted, with cost on
the y-axis and quantity on the x-axis. Marginal costs are often shown on these
graphs, with marginal cost representing the cost of the last unit produced at each
point; marginal costs are the slope of the cost curve or the first derivative of total or
variable costs.
A typical average cost curve will have a U-shape, because fixed costs are all
incurred before any production takes place and marginal costs are typically
increasing, because of diminishing marginal productivity. In this "typical" case, for
low levels of production marginal costs are below average costs, so average costs
40

are decreasing as quantity increases. An increasing marginal cost curve will

intersect a U-shaped average cost curve at its minimum, after which point the
average cost curve begins to slope upward. For further increases in production
beyond this minimum, marginal cost is above average costs, so average costs are
increasing as quantity increases. An example of this typical case would be a factory
designed to produce a specific quantity of widgets per period: below a certain
production level, average cost is higher due to under-utilized equipment, while
above that level, production bottlenecks increase the average cost.

Long-run average cost

The long run is a time frame in which the firm can vary the quantities used of all
inputs, even physical capital. A long-run average cost curve can be upward sloping,
downward sloping, or downward sloping at relatively low levels of output and
upward sloping at relatively high levels of output, with an in-between level of
output at which the slope of long-run average cost is zero. The typical long-run
average cost curve is U-shaped, by definition reflecting increasing returns to scale
where negatively sloped and decreasing returns to scale where positively sloped.
If the firm is a perfect competitor in all input markets, and thus the per-unit prices
of all its inputs are unaffected by how much of the inputs the firm purchases, then
it can be shown that at a particular level of output, the firm has economies of scale
(i.e., is operating in a downward sloping region of the long-run average cost curve)
if and only if it has increasing returns to scale. Likewise, it has diseconomies of
scale (is operating in an upward sloping region of the long-run average cost curve)
if and only if it has decreasing returns to scale, and has neither economies nor
diseconomies of scale if it has constant returns to scale. In this case, with perfect
competition in the output market the long-run market equilibrium will involve all
firms operating at the minimum point of their long-run average cost curves (i.e., at
the borderline between economies and diseconomies of scale).
If, however, the firm is not a perfect competitor in the input markets, then the
above conclusions are modified. For example, if there are increasing returns to
scale in some range of output levels, but the firm is so big in one or more input
markets that increasing its purchases of an input drives up the input's per-unit cost,
then the firm could have diseconomies of scale in that range of output levels.

41

Conversely, if the firm is able to get bulk discounts of an input, then it could have
economies of scale in some range of output levels even if it has decreasing returns
in production in that output range.
In some industries, the LRAC is always declining (economies of scale exist
indefinitely). This means that the largest firm tends to have a cost advantage, and
the industry tends naturally to become a monopoly, and hence is called a natural
monopoly. Natural monopolies tend to exist in industries with high capital costs in
relation to variable costs, such as water supply and electricity supply.
Long run average cost is the unit cost of producing a certain output when all inputs
are variable. The behavioral assumption is that the firm will choose that
combination of inputs that will produce the desired quantity at the lowest possible
cost.

Relationship to marginal cost

When average cost is declining as output increases, marginal cost is less than
average cost. When average cost is rising, marginal cost is greater than average
cost. When average cost is neither rising nor falling (at a minimum or maximum),
marginal cost equals average cost.
Other special cases for average cost and marginal cost appear frequently:

Constant marginal cost/high fixed costs: each additional unit of production is

produced at constant additional expense per unit. The average cost curve
slopes down continuously, approaching marginal cost. An example may be
hydroelectric generation, which has no fuel expense, limited maintenance
expenses and a high up-front fixed cost (ignoring irregular maintenance
costs or useful lifespan). Industries where fixed marginal costs obtain, such
as electrical transmission networks, may meet the conditions for a natural
monopoly, because once capacity is built, the marginal cost to the incumbent
of serving an additional customer is always lower than the average cost for a
potential competitor. The high fixed capital costs are a barrier to entry.
Two popular pricing mechanisms are Average Cost Pricing (or Rate of
Return Regulation) and Marginal Cost Pricing. A monopoly will produce
where their average cost curve meets the market demand curve under
42

Average Cost Pricing, referred to as the Average Cost Pricing Equilibrium.

Conversely, the same assertion can be made for Marginal Cost Pricing.
Minimum efficient scale / maximum efficient scale: marginal or average
costs may be non-linear, or have discontinuities. Average cost curves may
therefore only be shown over a limited scale of production for a given
technology. For example, a nuclear plant would be extremely inefficient
(very high average cost) for production in small quantities; similarly, its
maximum output for any given time period may essentially be fixed, and
production above that level may be technically impossible, dangerous or
extremely costly. The long run elasticity of supply will be higher, as new
plants could be built and brought on-line.
Zero fixed costs (long-run analysis) / constant marginal cost: since there are
no economies of scale, average cost will be equal to the constant marginal
cost.

Relationship between AC, AFC, AVC and MC

1. The Average Fixed Cost curve (AFC) starts from a height and goes on declining
continuously as production increases.
2. The Average Variable Cost curve, Average Cost curve and the Marginal Cost
curve start from a height, reach the minimum points, then rise sharply and
continuously.
3. The Average Fixed Cost curve approaches zero asymptotically. The Average
Variable Cost curve is never parallel to or as high as the Average Cost curve due to
the existence of positive Average Fixed Costs at all levels of production; but the

43

Average Variable Cost curve asymptotically approaches the Average Cost curve
from below.
4. The Marginal Cost curve always passes through the minimum points of the
Average Variable Cost and Average Cost curves, though the Average Variable Cost
curve attains the minimum point prior to that of the Average Cost curve.

44

Cost curve
In economics, a cost curve is a graph of the costs of production as a function
of total quantity produced. In a free market economy, productively efficient
firms use these curves to find the optimal point of production (minimizing
cost), and profit maximizing firms can use There them to decide output
quantities to achieve those aims.

Types of cost curves:-

Short-run average variable cost curve (SRAVC)

A U shaped short run Average Cost(AC) curve. AVC is the Average Variable Cost,
AFC the Average Fixed Cost, MC the marginal cost crossing the minimum of the
Average Cost curve.
Average variable cost (which is a short-run concept) is the variable cost (typically
labor cost) per unit of output: SRAVC = wL / Q where w is the wage rate, L is the
quantity of labor used, and Q is the quantity of output produced. The SRAVC curve
plots the short-run average variable cost against the level of output and is typically
drawn as U-shaped.

45

Short-run average total cost curve (SRATC or SRAC)

The average total cost curve is constructed to capture the relation between cost per
unit of output and the level of output, ceteris paribus. A perfectly competitive and
productively efficient firm organizes its factors of production in such a way that
the factors of production is at the lowest point. In the short run, when at least one
factor of production is fixed, this occurs at the output level where it has enjoyed all
possible average cost gains from increasing production. This is at the minimum
point in the diagram on the right.
Short-run total cost is given by
STC = PKK+PLL,
where PK is the unit price of using physical capital per unit time, P L is the unit price
of labor per unit time (the wage rate), K is the quantity of physical capital used,
and L is the quantity of labor used. From this we obtain short-run average cost,
denoted either SATC or SAC, as STC / Q:
SRATC or SRAC = PKK/Q + PLL/Q = PK / APK + PL / APL,
where APK = Q/K is the average product of capital and AP L = Q/L is the average
product of labor.
Short run average cost equals average fixed costs plus average variable costs.
Average fixed cost continuously falls as production increases in the short run,
because K is fixed in the short run. The shape of the average variable cost curve is
directly determined by increasing and then diminishing marginal returns to the
variable input (conventionally labor)

Long-run average cost curve (LRAC)

The long-run average cost curve depicts the cost per unit of output in the long run
that is, when all productive inputs' usage levels can be varied. All points on the
line represent least-cost factor combinations; points above the line are attainable
but unwise, while points below are unattainable given present factors of
production. The behavioral assumption underlying the curve is that the producer
46

will select the combination of inputs that will produce a given output at the lowest
possible cost. Given that LRAC is an average quantity, one must not confuse it
with the long-run marginal cost curve, which is the cost of one more unit. The
LRAC curve is created as an envelope of an infinite number of short-run average
total cost curves, each based on a particular fixed level of capital usage. The typical
LRAC curve is U-shaped, reflecting increasing returns of scale where negativelysloped, constant returns to scale where horizontal and decreasing returns (due to
increases in factor prices) where positively sloped. Contrary to Viner, the envelope
is not created by the minimum point of each short-run average cost curve. This
mistake is recognized as Viner's Error.

Short-run marginal cost curve (SRMC)

A short-run marginal cost curve graphically represents the relation between
marginal (i.e., incremental) cost incurred by a firm in the short-run production of a
good or service and the quantity of output produced. This curve is constructed to
capture the relation between marginal cost and the level of output, holding other
variables, like technology and resource prices, constant. The marginal cost curve is
usually U-shaped. Marginal cost is relatively high at small quantities of output;
then as production increases, marginal cost declines, reaches a minimum value,
then rises. The marginal cost is shown in relation to marginal revenue (MR), the
incremental amount of sales revenue that an additional unit of the product or
service will bring to the firm. This shape of the marginal cost curve is directly
attributable to increasing, then decreasing marginal returns (and the law of
diminishing marginal returns). For most production processes the marginal product
of labor initially rises, reaches a maximum value and then continuously falls as
production increases. Thus marginal cost initially falls, reaches a minimum value
and then increases. The marginal cost curve intersects both the average variable
cost curve and (short-run) average total cost curve at their minimum points. When
the marginal cost curve is above an average cost curve the average curve is rising.
When the marginal costs curve is below an average curve the average curve is
falling. This relation holds regardless of whether the marginal curve is rising or
falling.

47

Long-run marginal cost curve (LRMC)

The long-run marginal cost curve shows for each unit of output the added total cost
incurred in the long run, that is, the conceptual period when all factors of
production are variable so as minimize long-run average total cost. Stated
otherwise, LRMC is the minimum increase in total cost associated with an increase
of one unit of output when all inputs are variable.
The long-run marginal cost curve is shaped by returns to scale, a long-run concept,
rather than the law of diminishing marginal returns, which is a short-run concept.
The long-run marginal cost curve tends to be flatter than its short-run counterpart
due to increased input flexibility as to cost minimization. The long-run marginal
cost curve intersects the long-run average cost curve at the minimum point of the
latter. When long-run marginal costs are below long-run average costs, long-run
average costs are falling (as to additional units of output). When long-run marginal
costs are above long run average costs, average costs are rising. Long-run marginal
cost equals short run marginal-cost at the least-long-run-average-cost level of
production. LRMC is the slope of the LR total-cost function.

Cost curves and production functions

Assuming that factor prices are constant, the production function determines all
cost functions.. The variable cost curve is the inverted short-run production
function or total product curve and its behavior and properties are determined by

48

the production function. Because the production function determines the variable
cost function it necessarily determines the shape and properties of marginal cost
curve and the average cost curves.
If the firm is a perfect competitor in all input markets, and thus the per-unit prices
of all its inputs are unaffected by how much of the inputs the firm purchases, then
it can be shown that at a particular level of output, the firm has economies of scale
(i.e., is operating in a downward sloping region of the long-run average cost curve)
if and only if it has increasing returns to scale. Likewise, it has diseconomies of
scale (is operating in an upward sloping region of the long-run average cost curve)
if and only if it has decreasing returns to scale, and has neither economies nor
diseconomies of scale if it has constant returns to scale. In this case, with perfect
competition in the output market the long-run market equilibrium will involve all
firms operating at the minimum point of their long-run average cost curves (i.e., at
the borderline between economies and diseconomies of scale).
If, however, the firm is not a perfect competitor in the input markets, then the
above conclusions are modified. For example, if there are increasing returns to
scale in some range of output levels, but the firm is so big in one or more input
markets that increasing its purchases of an input drives up the input's per-unit cost,
then the firm could have diseconomies of scale in that range of output levels.
Conversely, if the firm is able to get bulk discounts of an input, then it could have
economies of scale in some range of output levels even if it has decreasing returns
in production in that output range.
Relationship between different curves

Total Cost = Fixed Costs (FC) + Variable Costs (VC)

Marginal Cost (MC) = dC/dQ; MC equals the slope of the total cost function
and of the variable cost function
Average Total Cost (ATC) = Total Cost/Q
Average Fixed Cost (AFC) = FC/Q
Average Variable Cost (AVC) = VC/Q.
ATC = AFC + AVC
The MC curve is related to the shape of the ATC and AVC curves:
o At a level of Q at which the MC curve is above the average total cost
or average variable cost curve, the latter curve is rising.

49

o
o
o

If MC is below average total cost or average variable cost, then the

latter curve is falling.
If MC equals average total cost, then average total cost is at its
minimum value.
If MC equals average variable cost, then average variable cost is at its
minimum value.

LIFE CYCLE OF PRODUCT COST

Project appraisal
Whole-life costing is a key component in the economic appraisal associated with
evaluating asset acquisition proposals. An economic appraisal is generally a
broader based assessment, considering benefits and indirect or intangible costs as
well as direct costs.
In this way, the whole-life costs and benefits of each option are considered and
usually converted using discount rates into net present value costs and benefits.
This results in a benefit cost ratio for each option, usually compared to the "donothing" counterfactual. Typically the highest benefit-cost ratio option is chosen as
the preferred option.
Historically, asset investments have been based on expedient design and lowest
cost construction. If such investment has been made without proper analysis of the
standard of service required and the maintenance and intervention options
available, the initial saving may result in increased expenditure throughout the
asset's life.
By using whole-life costs, this avoids issues with decisions being made based on
the short-term costs of design and construction. Often the longer-term maintenance
and operation costs can be a significant proportion of the whole-life cost.
Asset management
During the life of the asset, decisions about how to maintain and operate the asset
need to be taken in context with the effect these activities might have on the

50

residual life of the asset. If by investing 10% more per annum in maintenance costs
the asset life can be doubled, this might be a worthwhile investment.
Other issues which influence the lifecycle costs of an asset include:

site conditions,
historic performance of assets or materials,
effective monitoring techniques,
appropriate intervention strategies.

Although the general approach to determining whole-life costs is common to most

types of asset, each asset will have specific issues to be considered and the detail of
the assessment needs to be tailored to the importance and value of the asset. High
cost assets (and asset systems) will likely have more detail, as will critical assets
and asset systems.
Maintenance expenditure can account for many times the initial cost of the asset.
Although an asset may be constructed with a design life of 30 years, in reality it
will possibly perform well beyond this design life. For assets like these a balanced
view between maintenance strategies and renewal/rehabilitation is required. The
appropriateness of the maintenance strategy must be questioned, the point of
intervention for renewal must be challenged. The process requires proactive
assessment which must be based on the performance expected of the asset, the
consequences and probabilities of failures occurring, and the level of expenditure
in maintenance to keep the service available and to avert disaster.

OBJECTIVES OF COST ACCOUNTING

The objectives of cost accounting are ascertainment of cost, fixation of selling
price, proper recording and presentation of costs data to the management for
measuring efficiency and for cost control. The aim is to know the methods by
which expenditure on materials, wages and overheads is recorded, classified and
51

allocated so that the cost of products and services may be accurately ascertained,
these costs may be related to sales and profitability may be ascertained. Yet with
the development of business and industry, its objectives are changing day by day.
The following are the main objectives are cost accounting:
To ascertain the cost per unit of the different products manufactured by a
business concern.
To provide requisite data and serve as a guide to price fixing of products
manufactured or services rendered.
To ascertain the profitability of each of the products and advice the
management as to how these profits can be maximized.
To exercise effective control of stocks of raw materials, work-in-progress,
consumables stores and finished goods in order to minimize the capital locked
up in these stocks.
To advice management on future expansion policies and proposed capital
projects.
To help in the preparation of budgets and implementation of budgetary control.
To guide management in the formulation and implementation of incentive
bonus plans based on productivity and cost saving.
To organize cost reduction programs with the help of different departmental
managers.
Broadly speaking, the above objectives can be re-grouped under the following
three heads:
52

(1) Ascertainment and analysis of cost and income by product, function and
responsibility.
(2) Accumulation and utilization of cost data for control purposes to have the
minimum possible cost consistency with maintenance of quality. The objective
is achieved through fixation of targets, analysis of reasons of deviations
between actual and targets and reporting deviations to the management for
taking corrective action.
(3) Providing useful data to the management for taking decisions.

GENERAL PRINCIPLES OF COST ACCOUNTING

The following are the main principles of cost accounting:
Cause and effect relationship: Cause and effect relationship should be
established for each item of cost. Each item of cost should be related to its
cause as minutely as possible and the effect of the same on the various
departments should be ascertained. This cost should be shared only by those
units, which pass through the departments for which such cost has been
incurred.

53

 Charge of cost only after its incurrence : Unit cost should include only
those costs, which have been actually incurred. For example, unit cost
should not be charged with selling cost while it is still in factory.
Cost accounting should ignore the convention of prudence : Cost
accounting statements should give the factual picture of profitability of the
project. If some contingencies need to be made, it should be shown
distinctly and separately.
Past cost should not form part of future costs : Past cost (which could not
be recovered in past) should not be recovered from future cost as it will not
only affect the true results of future periods but will also distort other
statements.

Exclusion of abnormal costs from cost accounts: All costs incurred

because of abnormal reasons (like theft, negligence) should not be taken
into consideration while computing the unit cost. If done so, it will distort
the cost figures and mislead the management resulting in wrong decisions.
Principle of double entry should be followed preferably : To lessen the
chances of any mistake or error, cost ledgers and cost control accounts, as
far as possible should be maintained on double entry principles. This will
ensure the correctness of cost sheets and cost statements which are prepared
for cost ascertainment and cost control.
54

ESSENTIALS OF A GOOD COST ACCOUNTING SYSTEM

The essential features, which a good Cost Accounting System should possess, are
as follows:
Cost Accounting System should be tailor-made, practical, simple and
capable of meeting the requirements of a business concern.
The data to be used by the Cost Accounting System should be accurate;
otherwise it may distort the output of the system.
Necessary co-operation and participation of executives from various
departments of the concern is essential for developing a good system of Cost
Accounting.
The cost of installing and operating the system should justify the results.
The system of costing should not sacrifice the utility by introducing
meticulous and unnecessary details.
A carefully phased programme should be prepared by using network
analysis for the introduction of the system.

55

 Management should have a faith in the Costing System and should also
provide a helping hand for its development and success.

METHODS OF COSTING
JOB COSTING
It is the form of specific order costing where work is undertaken on customers
special requirements. Each order is of comparatively shorter duration, each job is
unique in nature with specific start and finish of the manufacturing process.

CONTRACT COSTING
It is form of specific order costing where construction work is undertaken on
customer specifications. It is of longer duration, and project in nature.

BATCH COSTING
It is that form of specific order costing, which applies where similar articles are
manufactured in batches either for sale or used within the undertaking.

PROCESS COSTING
It is that form of costing where standardized products are produced on a continuous
basis.
Modern industries are conducting in highly competitive conditions. In these days,
it is absolutely necessary that a business concern should conduct its activities with

56

maximum efficiency. The manufacturer should always try to introduce his products
in the market at competitive rates. This object can be achieved by installing the
effective costing system. There is no readymade costing system applicable to all
industries; the costing system should be modified in such a way as to suit the
special requirements of an industry

COSTING SYSTEM OF FMGL, PATIALA

Federal Mogul Goetze (India) Ltd. has not installed any separate costing
department at its Patiala plant. The finance manager does costing and all the cost
records are kept under his control. Various records are maintained for every
element of cost. Cost Sheets are prepared for every type of piston as ordered by the
customers. In cost sheet, cost is measured per piece of piston.
The company has adopted the method of process costing and production is made
batch-wise. In any manufacturing process, costs are incurred on direct material,
direct labour, indirect material, production overheads, service-centre overheads,
sales and administration overheads. In FMGL, for production of pistons, costing up
to plant level consists of the following main components- Alloy Cost, Foundry
Conversion Cost, Machine Shop Conversion Cost and Packing Cost. Head office
overheads, Royalty and profit margins are included later after apportioning
between the two plants of Patiala and Bangalore. The Finance department at the
Patiala plant is engaged in the determination of the total cost of manufacturing a
piston, exclusive of Head Office charges, as these are included in the cost by the
Head Office itself.

57

Cost Sheet
Cost sheet is a statement designed to show the output of a particular accounting
period along with breakup of costs. The data incorporated in cost sheet is collected
from various statement of accounts, which have been written in cost accounts,
either day to day or regular records.
There is no fixed form for preparation of cost sheet but in order to make the
cost sheet more useful it is generally presented in columnar form. The columns are
for the total cost of current period and cost per unit. The information to be
incorporated in cost sheet would depend upon the requirement of management for
the purpose of control.
Cost sheet is a memorandum statement. Therefore, it does not form part of
double entry cost accounting records. In spite of this, the relationship between cost
sheet and financial accounts, which are maintained on double entry system, is very
important as cost sheet derives its data from financial accounting. In case,
predetermined rates are not used, the entire data required for preparation of cost
sheet is derived from financial accounting. Therefore, periodically it becomes
necessary to reconcile the information obtained from cost accounting and financial
accounting separately.

58

Costing of pistons
PRODUCT (PISTONS)
Piston is a component produced by the company and it is a very important spare
part of all the automobiles.

FUNCTIONS OF A PISTON:
1. To convert chemical energy of fuel into mechanical energy.
2. It develops power, which is converted from reciprocating motion to rotary
motion.
3. It acts as a carrier of piston rings i.e. It forms a movable gas tight plug,
which in turn is required to seal the gases escaping from piston crown down
to the crankcase.
4. It transmits the force of explosion to the connecting rods.
5. It forms a guide and bearing to the small end of the connecting rod and takes
the side trust due to obliquity of the rod.

MANUFACTURING PROCESS:
DEPARTMENTS
Goetze (I) Limited (Piston division) has the following sections:

PISTON FOUNDRY SHOP:The first step in the manufacturing of piston is the casting of
piston . This operation is carried out in piston foundry shop.
59

 PISTON MACHINE SHOP 1

The second step in the manufacturing of pistons after casting is the
machining, which is carried out in piston machine shop, which has the
highly sophisticated CNC controlled machines. In the piston machine
shop 1 pistons for four wheelers are manufactured and pistons for biwheeler vehicles are also manufactured.

PISTON MACHINE SHOP 2

In this shop, pistons for only bi-wheeler vehicles are manufactured.

PIN PLANT :In this section, piston pins for all types of pistons are made with
the state of the art machinery.

FORGE PLANT :In this section, forged pistons are manufactured as per the specific
requirements of Telco.

CENTRAL TOOL ROOM :The tool room facility has the following functions:
It supports tooling requirement of various plants.
It manufactures new machines in its machine vuilding section.
It renovates the worn out machines and its components.

60

PISTONS FOUNDRY SHOP

As a world leader in the piston manufacturing, Goetze (India) Limited has adopted
aluminium as a base metal for manufacturing pistons because of its many
advantages over cast iron chief being light weight high thermal conductivity and
corrosion resistance. Although aluminium costs much more than steel because of
its light weight, yet it is cheaper per unit volume. Other metals comprising the
alloy are silicon, nickel, copper and magnesium. Piston foundry is the shop where
aluminium alloys are prepared and casted into rough blanks which are machined
and surface treated to form final product piston in the machine shop ready to be
fitted in the engine block. Machining and other processes are carried out in
different shops. Piston foundry comprises of following main sections:

MELTING:Aluminium alloys 124, 138, 244, AC8A and AC9A are

prepared here by melting the charge consisting of virgin metal, converted
alloy, scrap and other alloying consisting of silica, nickel, copper and
magnesium in the induction furnace. To shorten the metal preparation time,
scrap and shop returns are simultaneously melted in the oil-fired furnace.

CASTING:This section comprises of five lines having workstations

consisting of holding furnaces and casting machines. The holding furnaces
as the name suggests is for holding the alloy at the particular temperature,
degassing and grain refinement (in some cases) before casting. Every
61

workstation also has die casting machines. The type of the machines
depends upon the piston diameter and number of dies used at a time. Like
the machine MG-9C is used for producing bigger diameter pistons (80 to
116mm) with a single die whereas machine MG-17 is used for smaller
pistons with diameter 60mm and uses two dies. Similarly MG-11 and MG-7
are used for medium pistons and use one or two dies.

FETTLING:In this section runners and risers and gating systems are
removed with the help of the cutters. These cutters are mounted on top of the
machines. Even semi-skilled workers can operate these machines. Sharp
edges and burns are filed at the table area.

HEAT TREATMENT:This section consists of solutionizing which is the process of

dipping some of the selected pistons in the solution to get the required
hardness. These solutions are kept in the furnaces which are now being
operated or controlled by thrusters. This has resulted in better temperature
control, thereby saving power consumption substantially.
SPECTROMETER is used to check the chemical composition of the sample
submitted at various stages of production in the laboratory. It also provides
service to incoming inspection on request.

INSPECTION:In this section important parameters are checked for each piston
like diameter, size, grooves and especially hardness.

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PISTON MACHINE SHOP:

Piston machine shop consists of the following main sections:

PRODUCT LINES:There are around ten lines arranged in the product layout i.e.
blanks are fed into the first machine and finished pistons are obtained at the
end of the line. Planning and manufacturing is done batch wise. The
machine set up and inspection gauges are carried out lot wise or batch wise
for each machine. First line is used for pistons upto 100mm diameter. For
the pistons above 100mm of diameter next line is used. Third line is
exclusively for TATA pistons. Next two lines are of bi-wheelers and next two
lines are exclusively for MARUTI. Rest lines can be used for other piston
types. In each line similar type of machines are arranged, more or less in the
same sequence as the basis process is same across all the lines.

COATING:There are mainly three types of surface treatment (coating)

carried out i.e. Tin coating, Anodizing and Graphic coating based on
customer requirements. Latter two are mostly done for TATA pistons.
Anodizing is carried out on the crown surface to provide a resistance surface
at high temperature generated in the combustion chamber. Tin and graphic
coating is carried out for initial run lubrication. In tin coating, sodium
stannate solution liberates tin, which form metallic bonds on the piston
surface. In graphite coating, graphite particles are sprayed onto a heated
piston surface and further baked to form a layer of graphite. In anodizing,
electrolysis is done with aluminium anode, graphite cathodes and sulphuric
acid acting as electrolyte.
63

 FINE MEASURING ROOM:This section consists of measuring and calibration areas.

Measuring is mostly achieved by two instruments i.e. perthometer and
macrograph. Former is used for assessing roughness, waviness and peak
profiles while latter is used for determining serration profiles, groove form,
polar profile, groove blank squareness and other related features. Calibration
of gauges and other instruments are taken up according to planned
periodicity and records are kept or ready reference.

GROOVE-CUTTER SECTION:This section carries out two main activities:

Making groove cutting tools including re-sharpening of tools.
Profile grinding of came.
For groove cutting tools, carbide bits are brazed on shanks and grinded for
various clearance and relief angles. While in came profile grinding, required
ovality and taper are grinded twice the value then that required on the piston
because error transmitted from came to the piston through tool by the tracer
is only half. This results from tracer operating in one extreme of a lever,
while tool operating at half the distance of the same level arms.

TOOL STORE:This section is responsible for issue, collection and storage of

all tools jigs and fixtures necessary for the production activity on each
machine.

64

 INSPECTION:In this section, important parameters are checked. Especially

hardness test is carried out for the 100% lot. The setting of the tools to the
required angle on the tool post and packet formation is also undertaken by
the inspection department. It also keeps stock of machine spares to be used
in the breakdown cases. It also interacts with the stores and the purchase
department to ensure the availability of the required material in sufficient
quantity for the production.

CALCULATION OF THE COST OF A PISTON OF YAMAHA

Alloy-AC8A
Blank Weight
= 0.130 Kgs
Blank weight with R/R= 0.185 Kgs
Process Loss
= 6.50 %
Foundry Scrap
= 3%
Machine Shop Scrap = 8%
Finished Weight
= 0.090 Kgs
Blank wt-Finsh Wt (Chips= Convered Alloy ) 87%
No. of Blanks per piston = 1/ {(100-foundry scrap)/100 * (100- M/C scrap)/100}
= 1/ {(100-3)/100* (100-8)/100}
= 1.121 nos.
Gross weight
= Blank Weight/ {(100-process loss)/100/(100M/c scrap)/100}
= .130/ {(100-6.5)/100 * (100-8)/100}
= .152 kgs
Gross weight with R/R = Blank weight with R/R / {(100-Fdy scrap)/100*(100- M/c
scrap)/100}
= .185/{(100-6.5/100*(100-8)/100}
= .215 Kgs

65

NET RAW MATERIAL:

Gross weight
Recovery
Alloy rate
Net alloy required
per piston (NAR)
Cost of raw material

=.152 kgs
= {final weight * m/c scrap}/{(100-m/c scrap)/100}
= {0.090* 8%)/0.92
= 0.008 kgs
= Rs. 104.85 /kg
= Gross weight recovery
= .152-.008
= .144 kgs
= NAR * alloy rate
= .144 * 104.85
= Rs. 15.10 per piston

Scrap

= Cutting loss+ Aluminium scrap+ Slag ash

Cutting loss Cost = Cutting Loss wt(kg) / {(100-m/c scrap)/100}

= .004 /.92
= .0043 kgs per blank
Recovery

= scrap * rate (104.85 *87% Recovery of

Converted Alloy)
= .0043 * 91.20
= Rs. 0.39

Aluminium scrap

= Blank weight - Finished weight

= .130 - .090
= .040 kgs

M/c scrap

= 8%
66

Scrap per piston = aluminium scrap/{(100-machine scrap)/100}

= .040/0.92
= .043 kgs
Recovery

= scrap * rate(104.85 *87% Recovery of

Converted Alloy)
= .043 * 91.20
= Rs. 3.92

Slag ash

= 13.52%

Slag ash rate

Recovery

= Rs. 15.44
= NAR * slag ash % * rate
= .144* 13.52% * 15.44
= Rs. 0.30

Total Scrap

= .39+ 3.92 + .30

= Rs. 4.61

NET RAW MATERIAL

= Cost of raw material scrap

= 15.12 4.61
= Rs. 10.51

67

TOTAL FOUNDRY COST:

1.Spares and stores

STANDARD ARGON GAS (GRADE-II) CYL.

ARGON GAS CYLINDER (GRADE-I)
STANDARD ARGON GAS (GRADE-II) CYL.
CHLORINE GAS CYLINDER
OXYGEN GAS CYLINDER
TCT CTR 450 DIAX50X4.0MMX72TEETH
SEG-CUTTER 400MMDIA
ROUND STEEL WIRE BUFFING BRUSH
COVCERAL GR6511 (E)/2512(E)/65
CASTING SPOON 4X122MMDRG-FDY2/1134
CASTING SPOON 4X96MMDRG-FDY2/1134
CASTING SPOON 4X92MMDRG-FDY2/1134
CASTING SPOON 4X84MMDRG-FDY2/1134

Rate per kg
Stores per piston

=Total cost of stores/ total gross weight of RR (KG)

= 2811442/553136.68
=Rs. 5.083
= rate* gross weight RR
=5.083 * .215
= Rs. 1.092

2.Diesel
Rate per kg
Diesel per piston

=total cost of diesel/total groos weight of RR

= 2243954/553136.68
=Rs. .406
= rate * gross weight
=.406* .215
=Rs. 0.873

68

3.Oil
Rate per kg
Oil per piston

= Total cost of oil/ total gross weight of RR

= 175800/5513136.68
=Rs. 0.318
= rate * gross weight
= 0.318* 0.215
=Rs. 0.068

4.Maintenance
Line
losses

Comp
Air

Energy

0-175 gms

Kwh

6.720

0.340

0.221

0.300

0.032

0.034

176-350gms

Kwh

5.250

0.340

0.221

0.290

0.032

0.034

351-525gms

Kwh

5.090

0.340

0.221

0.280

0.032

0.034

Above 526gms(NRC)

Kwh

3.380

0.340

0.221

0.280

0.032

0.034

Above 526gms(RC)

Kwh

4.110

0.340

0.221

0.280

0.032

0.034

Variable

Fixed

Misc
Cateen

Centralised
services

Fdy Castin g
weight

Total

Maintenance cost/unit =Total maintenance cost/total power units

=12604793.33/9566731
=Rs. 1.317
Units per kg
=6.777 units
Gross units per kg =unit per kg* gross m/c scrap* blank weight
=6.777* .130* 1 / 0.92
=0.958 kgs
Total cost of maintenance=Gross units per kg*maintenance rate
=0.958* 1.317
=Rs. 1.261

69

5.Dies cost
= {no. of blanks per piston*cost of die}/life of a
die
= {1.121* 160000}/200000
=Re. 0.90

6.Power and fuel

Power units
Power per piston

Power rate
Power cost

=6.777 units
=power units* blank weight/{(100-m/c scrap)/100}
=6.777* 0.130/0.92
=0.958 units
=Rs. 4.70 per unit
=power per piston* power rate
=0.958* 4.70
=Rs. 4.50

Compressor Cost:
Total cost
=Rs.2147552
Total transfer
=2097261 kgs
Transfer cost per piston
=Rs.1.024
Total cost per piston =1.024* 0.130/.92
=Re. 0.14
TOTAL POWER COST
=4.50+ 0.14
=Rs. 4.64

70

7.Personnel cost

Foundry Personnel
cost (2008)
Month

Melting

Casting&

Solutionizin

16813532
1474810

Cutting
46577434
4085569

(T-6)
1870144
164041

18288342

50663003

2034185

12
Total Cost Worker Rs.
Total Cost Manager/Supervisor/Staff
TOTAL COST
MGR+SUP+GET/DET+CL

Wt. R/R
Basis

2891293.57

Rate

6.325

No Of
SHIFTS
REQUIRED
PER
ANNUAM
26198.68
RATE PER
SHIFT
MELTING RS
1933.8

No Of Blanks
(T-6)
4750084.00

0.428

It includes payment made to workers of melting section, casting and cutting

section, solution zing section and heat treatment section. It includes personnel cost
relating to the service department such as finance dept., human resource dept.,
planning and administration dept. etc.
Melting rate
=total
manpower cost/total weight of R/R
=18288342/2891293.57
=Rs.
6.325
Blank wt. with R/R =0.215 kgs
Total cost
6.325*0.215

71

= Re.1.36
Casting rate
manpower cost of casting/no. of castings per shift

= total

= 50663003/26198.68
=Rs. 1933.80
Average casting
Per day
=411*80%
=329 castings
Shifts per piston
=1.121/329
=.00341
Personnel rate
=1933.80*.00341
=Rs.6.59

Heat treatment
Rate
=total personnel cost of heat/ total hrs.
=2008873/25818.95
=Rs.77.806
2000 pistons are given heat treatment at a time which takes 5.5 hrs.
72

Time per piston

={5.5*1.121}/2000
=.003082
Cost per piston
=77.806*0.003082
=Rs.0.24
TOTAL PERSONNEL COST = maintenance cost+ melting + casting + heat treatment
=.24+1.36+6.59
=Rs. 8.43

8. Depreciation
Foundry dep.
=Rs.4883914
Power units
=9566731 units
Dep Rate per unit
dep/ power units

=foundry

=4883914/9566731
=Re. 0.511
Power per piston
units* blank wt. / {(100- m/c scrap)/100}

=power

=6.777*.130/.92
73

=0.958 units
Depreciation cost = dep rate per unit* power per piston
= 0.511*.958
= Rs.0.49

TOTAL MACHINE SHOP COST

Cost of a piston in a machine shop is calculated on the bases of total hour
used in the machining of a piston which are as follows:
Machining (minutes) = 13
Hand operation time = 0.7
Total time
=13.7

Gross machine time

= machine time/ {(100-m/c scrap)/100}

=13/ {(1/92)/100}
=14.13 min.

1) Stores and spares

=total cost/ total hrs.

=728000/89842.04
=Rs. 8.1/ hr
Cost per piston = (spares per hr* gross m/c time)/ 60
=8.1*14.13/60
=Rs. 1.91
2) Oil

= total cost/ total hrs.

=435689/89842.04
=Rs.4.85 /hr

Cost per piston = (oil per hr*gross m/c time)/60

74

=4.85*14.13/60
=Rs.1.142
3) Maintenance
Total cost of maintenance on:
Manpower

=Rs. 726300

Tools

=Rs. 523000

Repairs

=Rs. 1651500

Spares

=Rs. 5424080

Total cost
Total hrs

=Rs.7598580
=1043054.5 hrs

Total Maintenance Cost

= total cost/ total hrs.
=14858000/1043054.5
=Rs. 14.245

Fixed cost

=48.88%
=14.245*48.88%
=Rs 6.962

Fixed cost/ piston

=6.962*14.13/60

=Rs 1.64

75

 Variable cost

=14.245-6.962
=Rs 7.28

Variable cost/piston= 7.28*14.13/60

= Rs 1.71

4) Tools cost

=total nos. /total cost

=3039410/1732464
=Re.0.57

5) Power
Annual machine hrs

= 18 m/c *302 days*16 hrs /day

= 86976 hrs
th
Total hrs of line 9 = 89842.04 hrs
%age of production hrs to working hrs
= (89842.04/86976)*100
= 103.30%
Load on line 9th = 67.7545 units
Total power
= 67.7545 * 103.3% *43*302*16
= 145423.25 units
Where 43 is the power factor
Power rate
= Rs.4.70
Total power cost =145423.25*4.70
=Rs. 683489.28
Cost per hr
=Rs. 584601.47/89842.04hrs
=Rs 6.507
Cost per piston
= (6.507*14.13)/60
=Rs 1.53
6) Personnel cost

76

Total no. of employees= 41

Salary PA
=Rs. 230000
Total cost
=41*230000
=Rs.9430000
Managers salary =12.72% of workers
=12.732%* 9430000
=Rs.1199496
Total salary
=Employees+ Managers salary
=9430000+1199496
=Rs.10629496
Total hours
=95262.69
Salary per hr
=10629496/95262.69
=Rs 111.58
13.7/.92=14.89
Cost per piston
= (111.58*14.89)/60
=Rs. 27.69
Total personnel cost =Cost per piston+ Maintenance fixed cost
=27.69+ 1.64
=Rs. 29.33
7) Depreciation =total cost/total hrs
=2298000/89842
=Rs. 25.58
Dep. per piston

=25.58*14.13/60
=Rs. 6.02

77

EFFICIENCY BONUS:
Bonus is calculated as a percentage on the personnel cost.
Personnel cost of foundry=Rs. 4.712
EB
=21.43% of foundry cost
=Rs. 1.01
Personnel cost of
machine shop
=Rs. 18.369
EB
=16.52% of machine cost
=RS. 3.034
Total EB
=1.01+ 3.034
=RS. 4.044

PLANT AND ADMINISTRATION COST:

Total P & A cost

=Prime cost- raw material- components- EB

=59.588- 10.085- 4.044
=Rs. 45.459
%age
=9.03%
Plant and admin Cost =45.459*9.03%
=Rs. 4.10

INSPECTION COST:
Personnel cost of workers=Rs.9382044
Personnel cost of managers=Rs.14092025
%age of managers to workers cost
=150.20%
Total target/day
=4290792 pistons
Overhead cost
=150% of cost of workers of bi-wheelers
=150% of 7823016
=Rs. 11750170

78

Total Cost

=Workers cost+ Overhead cost

=7823016+ 11750170
=Rs. 19573186
Inspection cost/piston =Total cost/Target
=19573186/4290792
=Rs. 4.56

TOTAL COST

=Raw material+ Foundry cost+ M/C shop cost+ EB cost

+Inspection cost+ P & A cost+ Packing charges

=10.085+12.44+33.019+4.044+4.56+4.10+1.76
=Rs. 70.008

CORPORATE COST

=20% of total cost

=20% of 70.008
=Rs. 14.0016
TOTAL COST PER PISTON= Total cost + Corporate cost
= 70.008+ 14.0016
=Rs. 84.01

COST SHEET

79

APPLICATION:- YAMAHA 5400U MODEL

CUSTOMERS NAME:- M/S YAMAHA MOTORS INDIA PVT. LTD.
SET NO.
137
DRAWING NO.
LINE NO.
9
DIA (MM)
ALLOY TYPE
AC8A WT. WITH R/R
ALLOY RATE
104.83 BLANK WT.
ALUMINIUM SCRAP RATE 84.77
NET ALLOY REQUIRED
PROCESS LOSS
7.20 % M/C SHOP SCRAP
FOUNDRY SCRAP
3%
M/C TIME (M/C + HO)
MACHINE SHOP SCRAP
8%
PRODUCTION NOS.
1
DESCRIPTION
GROSS ALLOY COST
LESS:- ALUMINIUM SCRAP
NET RAW MATERIAL COST
COST OF COMPONENTS:FOUNDRY COSTSTORES AND SPARES
DIESEL FOR FOUNDRY
OILS AND LUBS
MAINTENANCE
DIES
POWER AND FUEL
PERSONNEL
DEPRECIATION
SUB TOTAL(FOUNDRY COST)
MACHINE SHOP COSTSTORES AND SPARES
OILS AND LUBS
MAINTENANCE
TOOLS
POWER AND FUEL
PERSONNEL

VARIABLE
15.12
4.275
10.83

5B1-E1631-00-P
54
.185 KGS
.130 KGS
.137 KGS
.043 KGS
13.70 MIN

COST (RS.)
FIXED
TOTAL
15.12
4.275
10.83

1.092
0.872
0.068
1.26
0.90
4.63

8.822

8.43
0.49
7.94

1.092
0.872
0.068
1.26
0.90
4.63
8.43
0.49
16.762

29.33

1.91
1.14
1.71
0.57
1.53
29.33

1.91
1.14
1.71
0.57
1.53

80

DDEPRECIATION
SUB TOTAL(MACHINE SHOP COST)
EFFICIENCY BONUS
PRIME COST
INSPECTION COST
P & A COST
PACKING COST(PRIMARY & SECONDARY)
TOTAL COST
CORPORATE AND INTEREST COST
TOTAL COST PER PISTON

6.86
4.044
27.159

1.03
28.189
28.189

6.02
35.35
32.429
4.56
4.10
0.73
41.819
14.0016
55.82

6.02
42.21
4.044
59.588
4.56
4.10
1.76
70.008
14.0016
84.01

Chapter-5

CONCLUSION

81

SWOT ANALYSIS
STRENGTH

Highly diversified, producing many products.

Availability of cheap and skilled labour.

Profit making and reputed firm.

Capable and highly disciplined staff.

Producing high quality products comparable with the international

standards as awarded by ISO 9001.

Few competitors.

Technical and operating efficiency comparable with other firms.

WEAKNESSES

82

 Facing some infrastructure problems, erratic power supply.

Problem of timely availability of imported and indigenous raw Materials.
Low return on capital employed.

OPPORTUNITIES
With the coming of MNCs in automobile sector like DAEWOO Volkswagen,
BMW, Ford the demand for production has increased the scope of ready
markets. Also scope for further expansions in production of existing products
and some new products has increase as they have wide network.
High export of opportunities.

THREATS
With the coming of MNCs, the demand for higher technology product is the
matter of concern.

83

FINDINGS & SUGGESTIONS

About the process costing:

As per the companys officials, they have adopted process-costing

methodology because the manufacturing process of all pistons is more or less same
only the type of alloy and machining time are different at foundry and machine
shop stage respectively. In the foundry, blank weight is taken as the parameter for
the absorption cost while at machine shop, machining time per ring is taken as
absorption parameter. Using these two parameters, the conversion cost at foundry
and machine shop stages are obtained, this along with other overheads gives us the
total cost for a given ring.
However, it would be appropriate to mention here that the manufacturing
process is carried out in batches. Therefore, the costing methodology should trace
cost batch wise for arriving at cost per piston. Hence, batch-costing methodology
could be adopted.

84

Proportionality:
The conversion cost whether at foundry or machine shop have been

allocated based on proportionality. In case of foundry cost, the type of piston

having more blank weight would be absorbing more overhead cost in stores and
spares or in other categories whereas the lesser blank weight would be absorbing
lesser overheads cost.
This assumption may not be correct for the following reasons:
There might be some stores and spares, which are exclusively used for
manufacturing the lesser blank weight pistons, so the cost of these items should not
be borne by the rings of more blank weight. Similarly, there might be the cases
where large blank weight will be using standard tools of lesser cost while smaller
blank weight rings might be using costlier tools. However, due to proportionately
aspect the larger weight ring is unnecessarily burdened with extra cost. So, these
dilemmas arising in proportionality based costing would be avoided by using the
activity based costing which traces out the cost incurred for conducting various
activities based on the cost drivers and periodicity of occurrence. As a result of the
activity based costing, the smaller pistons would bear the cost, which arise
specifically due to it rather than loading on the larger blank weight rings. Similar
incidents can be traced out in cost components whether in the foundry or in
machine shop.

Machining time:

85

In calculating the total machined hours line wise, the company considers
total number of pistons produced in that line and the time per ring produced in that
line.
In calculating the no. of pistons produced, it considers not only good pistons
but also the scrapped ones. These scrapped rings might be generated at the initial,
middle or at the end stages of the line. Therefore, the time spent on each of this
scrapped pistons would be different. However the company loads the scrapped
pistons with the same time. This may unnecessarily leads to a larger time per line
and accordingly affects the allocation of the cost.

Cost of production:
Cost of production must be reduced so that company can face competition in

the market and can reduce its prices. For example, in case of piston ring for
Yamaha, cost of production per ring is Rs. 100.47. But, its selling price is Rs. 92
per ring. I.e., company is suffering due to price less than the cost. Thus, the
company should try to reduce its cost of production.

Budgeting:
The company has adopted incremental approach for the preparation of its

budgets. Such approach carries forward previous years inefficiencies because

previous years figures are taken as a base for the development of a budget. Thus
incremental approach does not promote operational efficiency because it does not
require managers to review their past activities.

86

The company may use Zero Base Budgeting as a managerial tool where
taking zero as a base, a budget is developed on the basis of likely activities for the
future period.

Control of scrap and defectives:

To increase the profitability, company should try to reduce scrap and

defectives. These should be standardized properly by following standard costing

system. The actual scrap and defectives should be compared with the
predetermined standard scrap and defectives and the reasons for the differences, if
any, should be enquired into and corrective action taken whenever actual scrap and
defectives are more than what is normally allowed.

Capacity utilization:

Earlier before the year 2003, the utilized capacity for production was 92%, but for
the year 2003-2004, the company has proposed to utilize 70% of installed capacity.
The company should try to utilize more and more of installed capacity so as to
reduce cost of production.

87

BIBLIOGRAPHY
Cost Accounting by S.P. Jain, K.L. Narang, Kalayani Publishers
Cost Accounting Theory and Problems by S.N. Maheshwari, S.N.
Mittal, Shree Mahavir Book Depot
Cost Accounting Study Material Board of Studies, The Institute of
Chartered Accountants of India
www.goetzeindia.com
Annual Reports Of FMGL

88