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Faculty of Business Management

Integral University
Kursi Road, Dasauli, Lucknow: 226026.


This is to certify that Abid Rizvi, student of M.B.A. 2nd Year, 3rd semester with Roll number
0900122008 has prepared this project on the topic “FINANCE MANAGEMENT, COST
REDUCTION & COST CONTROL” under my supervision and guidance.
The behavior of the student during the preparation of this project was found to be highly
appreciable and satisfactory.
I wish him all the best for his future.

(Dr. M. S. Khan)
Head OF Department of Business Management
Integral University
Lucknow: 226026

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Finance as a subject of study, has received wide-spread support from both academic and business
segment people.


HAL was selected as to understand the financial need and importance with special reference to

As the cost control refers to the administration of all the analysis of cost control ratios and
sources and application of funds and the company by studying, interpreting various financial
statements using various techniques such as comparative statements analysis etc.

Even efforts have been made to collect the relevant information about the topic. The present
HAL Accessories Division, Lucknow it based on my six weeks project study in FINANCE AND

This training gives me an opportunity to make a study and analysis the system adopted by the
organization. It enables me to build the practical knowledge acquired during the class study with
practical training received during my project.


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This is to express my heartiest gratitude towards all those who helped and inspired me to

complete my project report.

I feel immense pleasure in submitting my summer training project report.

I am highly thankful to my H.O.D Dr.M.S.Khan for his support and encouragement that he

provided me during the tenure of the project.

I am also thankful to my supervisor Mr.Z.A.Rizvi(Cost Manager, HAL)

for his kind and constant support and guidance.

At the end I would like to mention about the constant motivation and help that I received

from my family, teachers, friends and batch mates for completing my project report.

Abid Rizvi
MBA 2nd year
Integral University


Topic: - Finance Management, Cost Reduction and Cost Control.

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To have full coverage of finance control by following various budgets i.e. capital budget,
revenue budget (manpower budget, purchase budget, welfare budget, maintenance budget,
ways and means etc) and making all efforts to reduce the cost from each element of cost by
curtailing the expenditure estimated in the budget to a reasonable cost, so as to reduce the
cost and increase the profitability of the organization.


To find out various methods like EOQ (Economic Order Quantity), ABC analysis etc which
are implemented by the organization to control cost under various heads.


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Hindustan Aeronautics Limited (HAL) based in Bangalore, India, is one of Asia’s largest
aerospace companies. Under the management of the Indian Ministry of Defence, this public
sector company is mainly involved in aerospace industry, which includes manufacturing and
assembling aircraft, navigation and related communication equipment, as well as operating
airports. HAL built the first military aircraft in South Asia and is currently involved in the
design, fabrication and assembly of aircraft, jet engines, helicopters and their components and
spares. It has several facilities throughout India including Nasik, Korwa, Kanpur, Koraput,

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Lucknow, and Hyderabad. The German engineer Kurt Tank designed the HF-24 Marut fighter-
bomber, the first fighter aircraft made in India.


Hindustan Aeronautics has a long history of collaboration with several other international and
domestic aerospace agencies such as the Airbus Industries, Boeing, Sukhoi Aviation
Corporation, Israel Aircraft Industries, RSK MiG, BAESystems, Rolls-Royce plc, Dassault
Aviation, Dornier Flugzeugwerke, Aeronautical Development Agency and Indian Space
Research Organization.

HAL was established as Hindustan Aircraft in Bangalore in 1940 by Walchand Hirachand to

produce military aircraft for the Royal Indian Air Force. The initiative was actively encouraged
by the Kingdom of Mysore, especially by the Diwan, Sir Mirza Ismail. The British Government
bought a one-third stake in the company by April 1941 as it believed this to be a strategic
imperative. Later in April 1942, it bought out the stakes of Walchand Hirachand himself and
other promoters so that it can act freely. The decision by United Kingdom was primarily
motivated to boost British military hardware supplies in Asia to counter the increasing threat
posed by Imperial Japan during Second World War. However, the Mysore Kingdom refused to
sell its stake in the company but yielded the management control over to the British Government.
Thus, within 2 years of establishment, it was nationalized.
Hindustan Aeronautics Limited (HAL) came into existence on 1st October 1964.HAL was set up
as an amalgamation of Hindustan Aircraft Limited along with
Aeronautics India Limited and Aircraft Manufacturing Depot
located in Kanpur, India. Hindustan Aeronautics Limited has it
headquarter located at Bangalore, India. HAL is one of the largest
aerospace companies which are run by the Ministry of Defense. The
principal activities of HAL involve manufacturing aircraft,
aerospace, navigation, and instruments for communication purposes. Apart from these, few other

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activities performed by HAL are Designing, manufacturing, and collecting aircraft, jet engines,
helicopters, along with their elements and spares. Hindustan Aircraft Limited which located at
Bangalore was incorporated by the industrialist the late Seth Walchand Hirachand December
1940. The Government of India became a stakeholder of the company in 1941 and seized the
management department in 1942. HAL has 19Production Units and 9 Research and Design
Centers in 7 locations in India. The Company has an impressive product track record - 12 types
of aircraft manufactured with in-house R & D and 14 types produced under license. HAL has
manufactured over 3550 aircraft, 3600 engines and overhauled over 8150 aircraft and 27300
engines. HAL has been successful in numerous R & D programs developed for both Defence and
Civil Aviation sectors. HAL has made substantial
Progress in its current projects:

• Dhruv, which is Advanced Light Helicopter (ALH)

• Tejas - Light Combat Aircraft (LCA)
• Intermediate Jet Trainer (IJT)
• Various military and civil upgrades.

Dhruv was delivered to the Indian Army, Navy, Air Force and the Coast Guard in March 2002,
in the very first year of its production, a unique achievement.
HAL has played a significant role for India's space programs by participating in the manufacture
of structures for Satellite Launch Vehicles like.
• PSLV (Polar Satellite Launch Vehicle)
• GSLV (Geo-synchronous Satellite Launch Vehicle)
• IRS (Indian Remote Satellite)
• NSAT (Indian National Satellite)

HAL has formed the following Joint Ventures (JVs):

• BAeHAL Software Limited

• Indo-Russian Aviation Limited (IRAL)
• Snecma HAL Aerospace Pvt. Ltd.
• SAMTEL HAL Display System Limited

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• HALBIT Avionics Pvt. Ltd.
• HAL-Edgewood Technologies Pvt. Ltd.

Apart from these seven, other major diversification projects are Industrial Marine Gas Turbine
and Airport Services. Several Co-production and Joint Ventures with international participation
are under consideration.
Hal’s supplies / services are mainly to Indian Defence Services, Coast Guards and Border
Security Forces. Transport Aircraft and Helicopters have also been supplied to Airlines as well as
State Governments of India. The Company has also achieved foothold in export in more than 30
countries, having demonstrated its quality and price competitiveness.
• HAL has won several International & National Awards for achievements in R&D,
Technology, Managerial Performance, Exports, Energy Conservation, Quality and
Fulfillment of Social Responsibilities.
• HAL was awarded the “INTERNATIONAL GOLD MEDAL AWARD” for Corporate
Achievement in Quality and Efficiency at the International Summit (Global Rating
Leaders 2003), London, UK by M/s Global Rating and UK in conjunction with the
International Information and Marketing Centre (IIMC).
• HAL was presented the International - “ARCH OF EUROPE” Award in Gold Category
in recognition for its commitment to Quality, Leadership, Technology and Innovation.

• At the National level, HAL won the "GOLD TROPHY" for excellence in Public Sector
Management; instituted by the Standing Conference of Public Enterprises (SCOPE).The
Company scaled new heights in the financial year 2006-07 with a turnover of Rs.7,
783.61 Cores.

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Twin-seater, Multi-role, Long range Fighter /
Bomber / Air Superiority Aircraft.

MIG-27 M
Single-seater Tactical Fighter / Bomber with
Variable sweep wings.

Single-seater Front line Tactical Interceptor/
Fighter Aircraft.



HAL commenced production of Jaguar International - deep penetration strike and battlefield
tactical Support Aircraft in 1979 under license from British Aerospace, including the engine,
accessories and avionics. Jaguar aircraft is designed with 7 hard points (4 under wing, 2
overawing and 1 under fuselage) capable of carrying a huge load of several of weapons in
different combinations to meet the Customers’ needs.


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With a proven track record and established technology for manufacture of helicopters and its
components, the Helicopter Division commenced series production of Dhruv (Advanced Light
Helicopter) in 2000 - 2001. The ALH is a multi-role, multi-mission helicopter in 5.5 ton class,
fully designed and developed by HAL. Built to FAR 29specifications, Dhruv is designed to meet
the requirement of both military and civil operators.


The Helicopter Division manufactures the versatile and multi-purpose Chetek Helicopters for
Civil and Military applications both for Domestic and International customers


• To ensure availability of Total Quality

People to meet the Organizational Goals

and Objectives.

• To have a continuous improvement in

Knowledge, Skill and Competence (Managerial, Behavioral and Technical)

• To promote a Culture of Achievement and Excellence with emphasis on Integrity,

Credibility and Quality

• To maintain a motivated workforce through empowerment of Individual and team


• To enhance Organizational Learning

• To play a pivotal role directly and

significantly to enhance Productivity,

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• Profitability and improve the Quality of Work Life


"To make HAL a dynamic, vibrant, value-based learning organization with human resources

exceptionally skilled, highly motivated and committed to meet the current and future challenges.

This will be driven by core values of the Company fully embedded in the culture of the



Enable all those working for HAL to give their best to ensure their all-round growth as well as

that of the organization. To become a globally competitive aerospace industry while working as

an instrument for achieving self-reliance in design, manufacture and maintenance of aerospace

Defence equipment and diversifying to related areas, managing the business on commercial lines

in a climate of growing professional competence. "To become a globally competitive aerospace

industry while working as an instrument for achieving self-reliance in design, manufacture and

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maintenance of aerospace Defense equipment and diversifying to related areas, managing the

business on commercial lines in a climate of growing professional competence ".


We are dedicated to building a relationship with our customers where we become partners in
fulfilling their mission. We strive to understand our customers ' needs and to deliver products and
services that fulfill and exceed all their requirements.


We are committed to continuous improvement of all our activities. We will supply products and
services that conform to highest standards of design, manufacture, reliability, maintainability and
fitness for use as desired by our customers.


We believe that our success depends on our ability to continually reduce the cost and shorten the
delivery period of our products and services. We will achieve this by eliminating waste in all
activities and continuously improving all processes in every area of our work.


We believe in striving for improvement in every activity involved in our business by pursuing
and encouraging risk-taking, experimentation and learning at all levels within the company with
a view to achieving excellence and competitiveness.


We believe in achieving harmony in work life through mutual trust, transparency, co-operation,
and a sense of belonging. We will strive for building empowered teams to work towards
achieving organizational goals.

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We value our people. We will treat each other with dignity and respect and strive for individual
growth and realization of everyone's full potential.



• The US$10 billion fifth-generation fighter jet program with the Sukhoi
Corporation of Russia.
• US$1 billion contract to manufacture aircraft parts for Boeing.
• Multi-role transport aircraft project with Ilyushin of Russi US$600 million.
• 120 RD-33MK turbofan engines to be manufactured for MiG-29K by HAL for US$250
• Contract to manufacture 1,000 TPE331 aircraft engines for Honeywell worth
US$200,000 each (estimates put total value of deal at US$200 million).
• US$120 million deal to manufacture Dornier 228 for RUAG of Switzerland.
• Manufacture of aircraft parts for Airbus Industries worth US$150 million.
• US$100 million contract to export composite materials to Israel Aircraft Industries.
• US$65 million joint-research facility with Honeywell and planned production of Garrett
TPE331 engines.
• US$50.7 million contract to supply Advanced Light Helicopter to Ecuadorian Air Force
[11] HAL will also open a maintained base in the country.

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• US$30 million contract to supply avionics for Malaysian Su-30MKM.
• US$20 million contract to supply ambulance version of HAL Dhruv to Peru.
• Contract of 3 HAL Dhruv helicopters to Turkey in a deal worth US$20 million.
• Supply of HAL Dhruv helicopters to Mauritius' National Police in a deal worth US$7
• Unmanned helicopter development project with Israel Aircraft Industries.


• 180 Sukhoi Su-30MKI being manufactured at HAL's facilities in Nasik and Bangalore.

The total contract, which also involves Russia's Sukhoi Aerospace, is worth US$3.2


• 200 HAL Light Combat Helicopters for Indian Air Force and 500 HAL Dhruv helicopters

worth US$5.83 billion.

• US$900 million aerospace hub in Andhra Pradesh.

• US$57 million upgrade of SEPECAT Jaguar fleet of the Indian Air Force.

• US$55 million fighter training school in Bangalore in collaboration with Canada's CAE.

• 64 MiG-29s to be upgraded by HAL and Russia's MiG Corporation in program worth

US$960 million. Licensed production of 82 BAe Hawk132.

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International Customers Domestic Customers

• Airbus Industries, France • Air India
• APPH Bolton, UK • Air Sahara
• BAE Systems, UK • Airports Authority of India
• Chilton, UK • Bharat Electronics
• Coast Guard, Mauritius • Border Security Force
• Corporate Air, Philippines • Coal India
• Cosmic Air, Nepal • Defense Research & Development
• Dassault Aviation, France Organization
• Dowty Aerospace Hydraulics, • Govt. of Andhra Pradesh
UK • Govt. of Jammu & Kashmir
• EADS, France • Govt. of Karnataka
• ELTA, Israel • Govt. of Maharashtra
• Gorkha Airlines, Nepal • Govt. of Rajasthan
• Hampson, UK • Govt. of Uttar Pradesh
• Honeywell International, USA • Govt. of West Bengal
• Island Aviation Services, • Indian Air force
Maldives • Indian Airlines
• Israel Aircraft Industries, Israel • Indian Army
• Messier Dowty Ltd., UK • Indian Coast Guard
• Mitsubishi Heavy Industries, • Indian Navy
Japan • Indian Space Research Organization
• MOOG, USA • Jet Airways
• Namibian Air Force, Namibia • Kudremukh Iron ore Company ltd.
• Peruvian Air Force , Peru • NALCO

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• Rolls Royce Plc, UK • Oil & Natural Gas Corporation Ltd.
• Royal Air Force, Oman • Ordnance Factories
• Royal Malaysian Air Force, • Reliance Industries
Malaysia • United Breweries
• Royal Nepal Army, Nepal
• Royal Thai Air Force, Thailand


The Company's steady organizational growth over the years with consolidation and enlargement
of its operational base by creating sophisticated facilities for manufacture of aircraft / helicopters,
aero engines, accessories and avionics is illustrated below.

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HAL has won several International & National Awards for achievements in R&D, Technology,

Managerial Performance, Exports, Energy Conservation, Quality and Fulfillment of Social


• HAL is the only one PSU which has been included in “NAVRATNA” category.
Corporate Achievement in Quality and Efficiency at the International Summit (Global
Rating Leaders 2003), London, UK by M/s Global Rating and UK in conjunction
with the International Information and Marketing Centre(IIMC)
• HAL was presented the International - “ARCH OF EUROPE” Award in Gold
Category in recognition for its commitment to Quality, Leadership, Technology and

• At the National level, HAL won the "GOLD TROPHY" for excellence in Public
Sector Management, instituted by the Standing Conference of Public Enterprises


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Hindustan Aeronautics Limited (HAL) has cruised past the Rs.10, 000 crore mark for the first
time with a sales turnover of Rs.10260 crores during the Financial Year 2008-09. The profit of
the Company (Profit before Tax) soared to Rs.2260 crores.

The highlights are given below:

(Rupees in Crores)

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Particulars 2007-08 2008-09 Growth-over

Sales 8625 10260 18.96%

VOP 8791 11162 26.97%

Profit before tax 2164 2260 4.44%

Profit after tax 1632 1559 -4.47%

Gross Block 2255 2661 18.00%


HAL Lucknow Division was established in 1973. The Division was setup with the objective of
supplying six types of systems equipment of Kiran and Marut aircrafts. But now is holds a
peculiar position in the company’s setup practically, all other divisions are dependant for supply
of accessories from Lucknow Division. A mind boggling range of about 550 different products
are being produced and assembled under one roof, using totally diverse technologies.

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The Division has also built up design and development capability and indigenously developed
electrical, hydraulic and other items which are manufactures for use in aircraft as well as for
fighting vehicles.

At present division has 3207 employees out of which 2625 are workmen (1356 direct and 1269
indirect) and 582 officers. The division being a public sector organization has extended a lot of
statutory and non-statutory welfare facilities. The human relations and discipline matters are
regulated in the division through well-defined system. Service matters of workmen are regulated
through certified Standing Orders while in the case of officers are taking care of by the Conduct
Appeal and Discipline Rules. There are 7 registered Trade Unions presently functioning in the
Lucknow Division in which H.A.E.A (Hindustan Aeronautics Employees Association) is the
majority union and has been recognized by the management along with these is one officer’s
Association H.A.O.A (Hindustan Aeronautics Employees Association) to represent the officers
of HAL.

HAL Lucknow Division is having 293 acres land area. In 48 acres factory premises is
constructed and rest 2445 acres are used of township.


1940 Hindustan Aircraft Ltd. Was set up by Late. Sri Walchand Hirachand in association
with then Govt. of Mysore, as a Private Ltd. Company.

1941-42 First product Harlow Trainer and curliest hawk Aircraft handed over to Govt. of
India Company was handed over United States Air Force.

1942-45 HAL repaired over 1000 different varieties of aircraft and 3800 piston engines.

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1945 Govt. of India took over the management of HAL again after the world war.

1948-49 First Percival prentice aircraft assembled.

1951 The control of HAL was shifted from ministry of industries to Ministry of Defence.

1953-54 The first Hindustan Trainer (HT-II) had its maiden flight.

1956 HAL came under the public sector.

1960 Aircraft manufacturing depot was established at Kanpur.

1662 Aeronautics India Ltd was formed to manufacture MIG-21 Aircraft Three factories at
Nasik, Koraput and Hyderabad established.

1964 HAL was dissolved and its assets were merged with Aeronautics India Ltd and the
company by the name of Hindustan Aeronautics Limited was formed.

1969 An agreement with USSR was reached for the license production of MIG-21 aircraft.

1970 Helicopter Division was established to manufacture helicopters.

1973 Lucknow Division established to manufacture, instruments and accessories.

1979 Agreement with British Aerospace for manufacturing Jaguar Aircraft.

1982 Agreement with USSR for license production of MIG-27M aircraft.

1983 Korwa Division of HAL formed.

1990 Design and development of Light Combat Aircraft (LCA).

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1991 Development of Advance Light Helicopter (ALH).

1993 Certification of ISO-9001.

1998 IMGT, a new division established at Bangalore.

2000 Certification of ISO-14001.

2003 License permitted by Russia for manufacturing of SU-30 Aircraft.


Electronics 1.State investment

2.DC system control and Production unit
3. AC system control and protection unit
4. Fuel management system
5. Land management system

Gyro-Instruments 1. Direction Gyros

2. Gyro Horizons
3. Rate Gyros

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4. Synctors

Hydraulics 1. Accumulators
2. Servo Jacks
3. Gear Pumps
4. Activators
5. Motors
6. Value

Ground Support 1. Ground Power Units

Equipment 2. Hydraulic Trolleys
3. Customs Built fuel/Hydraulic test rigs

Wheels & Brakes 1. Main Wheels

2. Nose Wheels
3. Carbon composite brake pads

Sensors and Switches 1.Capacitancetypefuel content qualifying

2. Temptation Sensor + Switches

Conventional 1. Altimeters
2. Vertical Speed Indicators
3. Jet pipe temperature indicators
4. Engine RPM indicators

Electrical 1. D. C. Generators
2. Alternators
3. Transformers Rectifier Units
4. Integrated Drive Generator

Fuel System 1. Main Pumps

2. Heat Pumps

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3. Fuel Control Units
4. Booster Pump

Environment Control 1. Cold Air Units

System 2. Ventures
3. Water Extractors
4. Valves

Precision 1. All ranges NC Machines up to 5 Axis

Manufacturing 2. Precision Conventional machine


• Company is planning to provide “AJT” (Advance Jet Trainer) named- “HAWK” in

September 2008 to the “Air Force of India”.

• The projects which are in line for future includes HJT (Hindustan Jet Trainer) named-

“KIRAN”, Sukhoi-30 named “OJAS”, PTA (Pilotless Target Aircraft) named “Lakshay”


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• The company has got permission to provide LCA (Light Combat Aircraft) named-

“TEJAS” to “Indian Air Force” up to 2010 with all facilities.

• The company has also planned to start the projects like CAT (Combat Aircraft Trainer),

LCH (Light Combat Helicopter) and MLH (Medium Light Helicopter).


1. HAEA Hindustan Aeronautics Employees Association (Recognized)

2. HALU Hindustan Aeronautics Limited Employees Union

3. HARSS Hindustan Aeronautics Rastriya Sharam Sansthan

4. HADEA Hindustan Aeronautics Diploma Engineers Association

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5. HAPKS Hindustan Aeronautics Prashikshit Karamachari Sangh




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Meeting organizations liability is the task of this section. It is responsible for payment of
suppliers and service providers as per terms and conditions of the P.O. It also ensures
timely payment to different parties so that the suppliers and services to the division are
ensured uninterruptedly in furthering the organization's objectives. It
also ensures proper accounting as per the requirements from the corporate office. This section
also ensures that the statutory deductions like TDS etc. are made from the bills of service
providers and deposited timely with the appropriate authority. This section has three
segregations, which perform their function independently. These sub-sections are as under:
 Bills Payable (Indigenous)
 Bills Payable (Foreign)
 Bills Payable (Service and Civil works)


Here in this section , bills related to the Indian suppliers are paid off. It is not concerned
with any kind of foreign remittance. The job of this section starts after receipts of
information of any type from commercial
or Purchase or Purchase Department It maintains the proper accounts in relation to the work
performed by this section. It also deals with the payment of miscellaneous advances.

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P.O is sent by the Purchase Department after the approval.” Material Procurement Committee
'' (MPC) approves it. Then P.O is sent to bills section which shows the details of the material
required. Vendor is consulted for the purchase the details of the material required. Vendor is
consulted for the purchase of the material. The vendor sends their quotation for supply of the
material. Then the concerned authorities select the best quotation. There after order is placed.
Invoice is sent in case of payment through bank and these invoices are matched with the P.O and
then payment is made to the concerned party.
Invoices consist of the name of consignee , manufacturing code number , Challan
number , Customer number , date and time of invoice, date and time of removal of
goods , product code , description and specification of goods , type , total quantity of
goods , rate , unit, assessable value , packing and forwarding charges ( P&F) ,rate of duty,
duty paid , mode of transport , freight, insurance, tax rate , sales rate etc.
Inland vendors for suppliers / services are paid by one of the following procedures:

a) Document through bank

b) Cheque against delivery
c) Advance payment
d) Open account


Bills payable foreign deals with the payment of foreign suppliers as stipulated in the purchase
order. This sub-section performs its function separately from the other sub-sections of this


1) Payment and accounting of:

 Advance to suppliers as per the terms and conditions of purchase order.
 License fees, royalty etc as per the license agreement with the foreign collaborator.

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 Custom duty, freight bills.
 Final bills.

2) Opening of Letters of Credit on the advice of I.M.M Department and liaison with Banks
for Foreign Exchange release and payment on maturity date.
3) Maintenance of commitment registers for budgetary purpose.
4) Pricing of R.D.R(Receiving cum discrepancy report) with P.O. (Purchase order) rates and
loading of custom duty , freight and insurance charges.
5) Priced R.D.R are sent to materials accounts section/ E.D.P for punching in batch mode
for the processing of materials ledger.

Flow of work:

 All P.O / Contracts received are entered in the registers before opening of

separate file for each P.O.

 All the L.C opened in favor of Foreign suppliers as per the terms of P.O are

entered in Registers to record the particulars about their extension, revalidation

and utilization . On maturity of the L.C the Bank Adjustment voucher is prepared

on the basis of bank advice and sent to the cash section for adjustment. Particular of

payments are noted in relevant P.O.

 Where the Purchase terms provide for " Documents through Bank" the Bills

Payable section after checking the documents with the P.O passes the invoices

and issues Letter of Authority to the Bank for arranging payment.

 All the Contractual payments in respect of Royalty , License fee and Technical

Assistance fees are made as per the License / Collaboration agreement.

 Bills of Entry received from the IMM Department are entered in the register to

record value of the goods assessed , amount of duty paid to ensure that the duty

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levied is correct and the amount of duty paid is loaded to the inventory

accounts correctly.

 After receipt of goods the stores department send the R.D.R to the foreign bills

for pricing and making necessary accounting.

 Pending the pricing of the R.D.R , the payments made to foreign vendors, through

letter of credit / sight draft are put temporarily in goods in transit account.

 In respect of material dispatched by the vendor against P.O raised by H.A.L

the liability is provided in the company's books of accounts if payments have not

been made for such supplies.

 Follow-up with IMM department is done for timely release of RDR so as to clear the

G.I.T .

Foreign suppliers are paid by any of the following methods as stipulated in the

P.O./License agreement/contracts -

a) Letter of Credit
b) Sight Draft.
c) Advance Payment
d) Direct Payment.

Bills of entry

It is a document filled by custom officers for giving custom clearance to the goods
received from foreign countries. Bills of entry are received by the agents before receiving
of goods. It includes:

1. Total number of packages

2. Total amount of duty paid
3. Invoice value
4. Freight

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5. Insurance
6. Exchange rate
7. Accessible value


RDR (Receiving cum discrepancy report) is prepared at the time of receiving of goods within
organization. Pricing of RDR is done by two methods:

1. If the payment is done in advance and goods received later, then the RDR is priced at the
value of exchange rate of the last day of the previous month.
2. If payment is done on the same day then the RDR is priced at value at which payment is


Bills payable section deal with the preparation of bills of services and civil works in the
company. This sub-section is mainly responsible for-
a. Service contracts.
b. Job contracts.
c. Medical payment.
d. Advance payment.
e. Payment regarding construction of building etc.

Accounting related to all these are also done by the section.


 Payment and accounting of advances, running bills to contractors and final bills.
 Adjustment and recovery of advances.
 Accounting and adjustment of earnest money and security deposits.

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 Capitalization of buildings.
 Payment of all services bills e.g. Telephone, electricity, water, canteen, transportation,
sanitation etc.
 Payment to all consultants e.g. Architects, Advocates, Part time doctors etc.
 Payment of miscellaneous advances, impress approved by competent authority.
 Payment to all casual employees recruited on "job-contract" basis.

Flow of work:

 In case of running bills the works accounts section links the bill, submitted by
Contractors duly certified by Engineers-In-Charge, with the contract / acceptance
letter ,work order etc and arranges payment after deducting Income tax, balance
security deposit and other advances if any and retaining the prescribed percentage
of the bill towards retention money no deduction is to be made on this account.
 Final bills submitted by the contractor is checked with the measurement book and
the gross amount payable is determined. The amount settled against running bills ,
advances if any , penalty for delay in completion of work , recovery towards
consumption of material , T.D.S etc is deducted from the gross amount payable.

 Advances to contractors are given as per the acceptance letter given to the
contractor which are recovered with interest by way of deduction from on account
payment bills in suitable percentage in relation to the progress of work so as to
recover all sums advanced by the time 80% of the contracts are completed.

 Material advances to the extent of 75% of the value of materials brought by

contractors and lying at the site are given on certification of the Engineer-in-
charge and are recovered from running / final bills.

 Payments of bills for services e.g electricity, water etc received from plant
maintenance department / concerned user duly verified by them and approved by

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the competent authority are made. Payments in respect of other services received
by the company is made after it is duly approved by the competent authority.

 In case of job contracts payments are made to casual employees of the company.
Three categories are made and rate of these categories differ from each other.


This section is responsible mainly for the preparation and submission of invoices etc.
HAL regular customer is IAF , which accounts for round 85% share in total sales of
the organization and rest are mainly Navy, Army, ADA and others. This section ensures
that dues from customers in respect of goods supplied and services rendered are
recovered timely as per the fixed price quotation / price catalogue proved by the Ministry
of Defense. It has also to act as liaison with custom department , Sales tax authority and
others . Proper accounting is done as per the instructions provided by the Corporate


1) To ensure that the dues from the customers in respect of the goods supplied and
service rendered are recovered timely as per the fixed price quotation / price catalogue
approved by the ministry in acceptance with the government issued by the Ministry of
Defense dated 24th August 1995.

2) To ensure that the invoices relating to the advances , stage payment, final delivery
are raised timely in order to have smooth cash flow position.

3) To ensure that proper accounting is done as per the statute and accounting
instructions laid down by the Corporate Office.

4) To ensure that all statutory payments e.g sales tax, excise duty , custom duty is
recovered from the customers and is deposited timely with appropriate

Abid Rizvi 37

1) Preparation and rendering of invoices to Indian Air Force (IAF) in respect of the
following activities with the guidelines laid down in the government letter dated 30th
Sept, 1997.
a) Manufacturing activity
b) Repairs and overhaul
c) Supply of spares against RMSO
d) Deferred revenue expenditure

The following documents shall be produced in support of the


a) Initial advances are recovered on the basis of customers order.

• Firms / forecast task given by the Air Force.
• Chief Resident Inspector ( CRI) coordinated Inter Divisional Task Orders ( IDTO)
for divisional tasks.
• Repairs Maintenance Supply Order.

b) Subsequent stages / final payments are claimed on the basis of dispatch advice,
Acknowledgement received Air Force in Form Q423, Inspection Note certified by the
Chief Resident Inspector about the progress of the work done.
In respect of the repairs and overhaul work the payment is strictly regulated based upon
the nature of the work carried out e.g. Functional test, Defect investigation and Zero hours
servicing, Repair and overhaul.
1) To prepare and render invoices to Non- Indian Air Force customers in respect
of the following activities.
• Development sales for customer financed projects.
• Suppliers and services rendered to civil customers.
• Suppliers against Repair Maintenance Supply Orders (RMSO).

Abid Rizvi 38
2) To raise debit on other divisions on Stock in Trade (SIT) in respect of parts /
accessories supplied for fitments in Engines / Aircraft / Helicopters manufactured by
them for supply to customers.

3) To claim payment from Account Officer Defense Accounts Department

(AODAD) on the basis of fitment details received from those divisions.

4) To submit invoices for reimbursement of royalty from Air Force and set up
sales for these claims and created claims receivable.

5) To follow up with AODAD and other customers for collecting the payments
against the invoices raised.

6) To provide details to budget section for compilation of sales budget on the

basis of sales order, firm / forecast task , IDTO for budget estimates, revised

7) To collect Sales Tax from the customers and deposit the same.

8) To compile Sales Tax from returns and submit the same to Integrated Material
Management ( IMM) department for onwards submission to sales tax authorities
for assessment.


Accounting for the sale of aircraft / engine / equipment etc. manufactured / repaired and
overhauled and for services rendered, is done through the following accounting journals:

1. Sales Journal: Separate journals are maintained for the following activities:
a) Manufacture of aircraft / engine / equipment
b) Overhaul of aircraft / engine / equipment and overhaul of ratable.
c) Manufacture and supply of spares for overhaul against RMS orders.
d) Miscellaneous

Abid Rizvi 39
These journals are posted from the final invoices / Performa invoice raised on dispatch or
delivery. At the end of each month, these sales journals are totaled and sales are set up by
debiting to respective sundry debtors / advances account.

2. Claims / Accounts receivable journal: All invoices raised in respect of various

services rendered / facilities provided are entered into this journal and journal entries
passed at the end of each month by debiting to claims / accounts receivable account and
crediting to the respective income account.


1. To ensure that the financial discipline is maintained in the division.

2. To ensure that all expenditure is incurred with due regard to principles of financial
3. To ensure that financial proposals are routed to the competent authority as per
delegation / sub-delegation of powers so as to ensure compliance of the provisions of the
Companies Act, the Memorandum and Articles of Association of the company and the
relevant rules and regulations of the company and the guidelines issued by the company.
4. To ensure that the funds are available in the approved capital and performance budget so
as to cover the relevant proposals.
5. To submit MIS reports to corporate office monthly.


1. To scrutinize and give financial concurrence as per delegation of power for each proposal
a. Capital expenditure
b. Revenue expenditure
c. Purchase of materials / stores / tools and other services
d. Manpower requirements

Abid Rizvi 40
e. Waiver of dues / write off of losses
f. Cases involving relaxation of rules etc. as per delegation of powers
g. Sale, lease, alienation or disposal of company’s assets
h. Contracts entered into with suppliers / collaborators / sub contractors.
i. Award of contract in respect of civil / electrical works / other works / plant orders
j. Project reports

2. Certification for availability of funds with reference to capital and performance budgets
and appropriation of funds.
3. Fixation of rent and rates of recovery in respect of services / supplies / disposals by the


Finance section plays a major role in accounts department. It can be termed as centre point of
activities, because this section clears all the files for proceedings by the concerned authorities as
per delegation of power.
First of all material purchase requisition is sent by the purchase department, it is request for
procurement of material which is sent to store and the store sends this file to finance section for
further proceedings. These requisitions are broadly classified as under:

a. Non- Recurring items

b. Recurring items.

Concerned authorities in the section approve the file. Committee members as per the amount
mentioned in the files, do approval of the files. Different Committees have been formed
for different approvals like different committee approves the proposals which amounts up
to Rs 5 lakhs, different committee is authorized for the amount above then Rs 5 lakhs &
so on. Approval is done by CM (IMM) , Manager(Maintenance) , Senior Manager
(Maintenance) as the case may be . After the CM’S approval, it is sent back to IMM &
the IMM sends it back to the Finance section, including specifications which shows that
it is suitable or not. Finance Department approves P.O FILES. Then further proceedings go on
which includes rising of inquiry for tenders. Sealed tenders are opened in front of concerned
authority. There are fixed days for opening sealed tenders-Friday and Tuesday. Amongst the
Abid Rizvi 41
sealed tenders L1 is selected , which represents the lower amount amongst all tenders. In
spite of considering lowest amount other factors are also taken into due consideration
subject to the companies policies. Thereafter further proceedings take place:


As the name shows, this section is concerned with salary, wages, incentives & correspondence
with Time Office. It also takes into consideration subsidies granted and providing motivational


 To formulate salaries and wages of all employees as per terms of employment.

 To regulate payment of welfare facilities extended by the management e.g. L.T.C,

medical, interest subsidiary, school fees etc

 Payment and recovery of various natures of advances such as Travel advances, LTC
advances, conveyance advance and timely adjustment thereof.

 To ensure timely remittance of amounts recovered from employees to various agencies

like LIC, UPICA, and HDFC etc.

 To ensure proper accounting is done as per the requirement of the statute and corporate
office guidelines.

 To adhere to the provisions laid down in the personnel Manual relevant to the above

Abid Rizvi 42
 To ensure that all –statutory deductions e.g. TDS, PF etc are made from the salaries of the
employees and deposited timely with the appropriate authority.


 Based on the appointment /transfer notification from personnel department, individual

files are opened in the payroll section to record the particulars of the employees such as
grade/group date of appointment/transfer, department code, P.B.No., scale of pay etc.

 The payroll records is updated from time to time entering therein increment drawn,
promotion, transfers.

 The master data in respect to all officers/employees is sent to computer department in

respect of basic pay, DA, HRA, CCA etc and this data is updated every month depending
upon the cheque.

 The deduction to be made is fed to the computer department by means of deduction

statement. Computer department in turn prints out the deduction statement. In the form of
check lists by 25th of every month. Payroll section corrects the same with reference to the
various documents and recovery registers and sends it back to compute department for
final adoption by 26th827th of the month.

 The computer department prints the payroll in duplicate in which one copy is maintained
in the payroll section for record purpose and the original copy is distributed to the
employee concerned.

 DISBURSEMENT OF SALARY 7 WAGES Payment of salary to officers is made

through Bank based on the payroll received from the computer department. In cases of
non supervisory personnel the payment is made by cash by various groups except few
cases where the payment is made through P.N.B Bank HAL branch. Cash is drawn two

Abid Rizvi 43
days in advance i.e. last day of month and filled in the envelopes are kept in safe custody
in cash office for disbursement on 1st of next month.

 REMITTANCE OF RECOVERIEES various recoveries made from employees in respect

of LIC premium, HDFC Loan, Income Tax etc are remitted to the various agencies within
the stipulated date by means of cheque.

 PAYMENT OF ADVANCES AND ADJUSTMENT thereof and reimbursement in of

expenses various type of advance such as car/scooter advance, contingency advance,
TA/DA etc are paid and adjusted / recovered as per the rule of the company. Also
reimbursement of expenses limes medical, school fee, conveyance etc. Is made as per the
rules of the company.

 ACCOUNTING PROCEDURES Monthly payroll journal entry is made both for

supervisory and non- supervisory personnel and sent to book keeping section for

 To make payments made to persons from the division, proper accounting is done to
ensure that necessary advice is raise to the concerned division.

 To monitor the controllable expenditure e.g. medical expense , conveyance expenses, etc.
on monthly basis an to ensure it does not exceed the budget provided for it.

Abid Rizvi 44



PAY SLIP FOR THE MONTH OF ________________

Name Net Pay

Deptt. / EMP No. FPF No.
Designation Bank A/c No.
Grade Bank Name
DA – 30 % Basic Branch Address
Basic Pay


Code Description Current Previous

Basic Pay - -
DA - -
HRA - -
Conv. Allow - -
Incentive Amt - -
MAGA Allow -- -
WASH. Allow - -
Basic ARR - -
DA. ARR - -
HRA Arrears - -
Earning - -

Abid Rizvi 45

Code Description Current Previous

PF - -
Income Tax - -
GSLI - -
HAOA - -
VPF - -
Sports Club - -
PF Arrear - -
HAOC - -
DRF - -

Total Deduction - -

Net Pay – Rs.______-___

In Words.______________________________

Attendence Leave Details

Salary Day Current Previous


Leave Opening Earned Availed Balance


Abid Rizvi 46

After the completion of a task or in its due course there is need to maintain an accounting
record which is duly fulfilled by passing on a journal entry in almost every finance &
accounting section with some exception. After its proper jormalization, a bunch of
journal vouchers are forwarded to Book-keeping section for consolidation. So theirs
sections responsible for proper maintenance of accounts of the company as per
requirements of the status.


 To complete the accounts of the company are prepared as per the requirement of
the statute/corporate office guidelines.

 To assess the performance of the company in financial terms such as sales,

debtors, profit, value of production, value-added etc.

 To furnish data/information in respect of income Tax Assessment done at

Corporate Office.

 To get the accounts of the company audited by the Internal, statutory &
Government auditors as prescribed by law.


 Journal entries originated by the various sections of Finance and Accounts department
are sent to book keeping section. These entries are serially numbered and punched
into the computer and thereby posted to the General ledger.

Abid Rizvi 47
 Preparation of Trial Balance, profit and loss A/c and Balance sheet. Accounts are
computerized are drawn for every quarter as on 30th June, 30th sept, 31st Dec and Final
Accounts as on31st March of each Financial year.

 Maintenance of Fixed Assets Register and depreciation schedule.

1) For all capital items purchases, RDR are furnished by the bills payable section
like wise details of assets like building etc. capitalized are also furnished by
civil works section to the book keeping section. The maintenance of assets
ledger is computerizing din which the details like data of purchase, nature of
item, P.O.No, location of asset etc are recorded.
2) Depreciation on capital assets is calculated as per the policy of the company
and is reckoned accordingly as per operating expense of the division.

 Inter Divisional Transaction are accounted through control account adjustment

advices which are reconciled twice in a year at the clearing house.

 Physical verification of fixed assets is done as per the guidelines of cooperate


 To provide support to other sections of accounts in their reconciliation and control


Registers And Documents:

Since the maintenance of accounts is computerize although it maintains vouchers

which are handwritten. It ha sits own program for consolidation purpose. The
documents are-
 Trial Balance, P&L Account and Balance Sheet
 Fixed assets registers

Abid Rizvi 48
 Deposit register
 Control advice account register
 General register
 Division control accounts


For its effective operation, management must know what are its resources, what it wants to
achieve, whether operation are going in accordance with the plan set & such other things which
are to be considered. So for this purpose it is also required that plans must be said down into
verifiable terms i.e. quantitative terms and for that necessary guidelines with target period for
achievement are to be set. This formal structure is called Budget. In this manner a Budget can be
defined as-

“It is a financial statement of plans laid done prior to the period of its implementation during
which it has to be followed based on management’s policy and prepared for specified objectives

In this way, a budget serves as the guiding path for the prosperity of an organisation. The
movements must be accordingly done so that optimum result can be obtained with less effort.

The following are the guidelines of budget section-:

 The period of budget is April to March. The budget is prepared in three

1) Current Year- Revised Estimates
2) Budget Year- Budgeted Estimates
3) Forecast Year- Forecast Estimates

Abid Rizvi 49
 To ensure that capital facility must be made available in time to suit the production requirement.
The proposal under each subhead is classified under three categories- P&M, Civil works and

 Sales Budget and cash flow after approval of the board are broken into monthly budgets.

There are many types of budget prepared but it has bifurcated under two major heads as under-



1. New Projects 1.Order Status

2.Existing Project 2.Production Budget
3.Improvemetn & Rationalization 3.Sales Budget
4. Replacement 4.Purchase Budget
5.Welfare Budget 5.Foreing Exchange
6.Design & Development 6.Manpower Budget
7. Computers 7.Training Budget
8.Profit and loss Budget
9.Welfare Budget
10.Overheads Budget
11.Ways & means Budget
12.Projected Balance Sheet

“A capital expenditure is that which helps to increase the production and revenue expenditure
is that which helps of consumption in production process.”

CAPITAL BUDGET- It is the most important budget that involves huge funds & is prepared for
long term investment. This budget is related to the capital item i.e. items which are to be used for
long period for the betterment of the organization for many tasks accomplishment. Such as
investments in plant and machinery, building, roads, vehicles, etc.

In this way it is a long term budget. It is a base for all activities. It involves huge capital outlays
projects and long term commitments. It affects decisions over a period of year. It involves large

Abid Rizvi 50
risks and uncertainties. Thus, its preparation is handed over to senior and experienced executives.
It serves following purposes-:
• Helps to evaluate capital expenditure proposal.
• Helps to formulate other organizational budget.
• Helps to consider the best proposals according to which priority can be fixed.
• Helps to control capital expenditure i.e. utilization in effective manner.
• Helps a systematic procedure for appraising profitability performance of the

Generally top executives of the coorporate and operational level take initiation for proposals of
capital expenditure as per requirement. It is generally concerned department and project in
charge who feel its need. Here in capital budget is laid down under following heads-

• New projects
• Existing project
• Improvements and rationalization
• Replacement
• Welfare
• Design & Development
• Information & Technology

The requirement and allocation of capital expenditure is raised for above stated purpose. It has
been further explained In “Capital Budgeting Head”.

PERFORMANCE BUDGET –This budget is also termed as Revenue budget but due to
misconception which might be taken by other it is named as performance budget. This budget
can be recognized as the type of budget related to different fields which directly and indirectly
affect profitability. Its benefits are realized generally at short period of time but some exceptional
cases are there e.g. sales budget, DRE, manpower budget etc. This type of budget contains
different types of budgets which are explained below-

Abid Rizvi 51
o ORDER STATUS- This budget is related to the purchase order pending to be ordered. When a
particular item is due to be purchased and for that purchase requisition is raised by the concerned
department and for that after selecting bid, purchase order is raised. So these orders status is
recognized under this budget. Generally there is also relaxation where in financial approval need
not to be taken which is fro capital item upto Rs. 20000/ and revenue item upto Rs. 50,000.

o PURCHASE BUDGET- This budget is prepared to calculate expected purchases to be made

and also payments due. These types of budgets are prepared after the information/ data submitted
by bills payable, purchase department and finance department.

o SALES BUDGET- This budget is prepared after the information supplied by customer service
department and bills receivable section which is ultimately responsible for dispatching for receipt
of sales order and raising work order and communicating bill receivable for raising invoices
respectively. So in this way expected sale is prepared. Actual these both budgets i.e. purchase
and sales are interred related as one affects automatically other’s need. Generally it is calculated
on the basis of sales order.

o PRODUCTION BUDGET-As we cans understand what this budget stands for. It takes into
consideration the production to be done in the budget period. For its preparation mainly
production department on the basis of work order received, and furnish the data to budget
section. It is also concerned with keeping sufficient inventory requirement. Production budget s
generally calculated as.

Budgeted sales + desired closing inventory of finished goods – Opening inventory of finished

So in this way, it is totally based on sales budget and desired inventory levels. It also shows
unit wise cost. By keeping balance between sales budget and production budget, idle capacity
can be avoided. It is a basis for preparation of material, labour and factory overhead budget.
It also takes into consideration the cost of carrying out production plans and programs. Here
in scientific management has also to play a significant role.

Abid Rizvi 52
• MANPOWER BUDGET -This budget is prepared out of the requirement for direct and
indirect work force, to carry out budget plan. Human Resource Department with the help
of other department judges its position. It takes into consideration the new appointments,
their forecasted grade/ scales, retirement. As contingency exists too much under this
budget due to deaths, accident and sudden resihnation so every time there is exceed in
expenditure from the budgeted figure. So in this case adjustments are made time to time.
It also calculates recruitment and selection expenditure.

• FOREIGN EXCHANE BUDGET-Basically it is a part of purchase budget but it

specifically takes in to consideration the foreign purchases i.e. import. In this way, it has
to calculate according to the foreign currency payment. As its rate is not fixed so in this
way, every time there is plus-minus. Mainly two types of imports are mentioned i.e.
Russian and western (UK. France. Etc).

• TRAINNING BUDGET- As we all can understand that such as organization always

need to be get aware with new technologies, its implementation and operation so that its
position can be maintained. Thus, different types of seminars, group discussions, tests are
held. For this, personnel are also sent to abroad for better learning. This formation
according to need is collected from different department and consolidated in well- framed
manner and submitted to budget section.

• WELFARE BUDGET- There are various facilities which are provided to employees of
HAL as well as to their families such as medical, canteen, transport, education,
maintenance of clubs & grounds, etc. So in this way, there are two items under it.

a) Capital item which is dealt in capital budget.

b) Revenue item which is dealt in this budget.

There are some facilities that are availed by only employees so accordingly classification is done.

Abid Rizvi 53
Significance For Organization:

It is a tool in the hands of management t establishes goals, objectives and targets of the
organisation and to measure performance against the stated targets. It sets out a path to walk over
to achieve goals accordingly by taking care against probable hurdles. As this section is related to
almost whole organization s its responsibility increases as for performing policies.

As their is wide difference between budgeting and budgetary control. But it is often used
unchangeably as a system o managerial control. But budgetary control has this phenomenon as it
implies the use of a comprehensive system of budgeting to as management in carrying out its
function like planning, coordination and control. It is a system which uses budgets for planning
and controlling different activities of business. The same concept applies to this organisation as
its main concentration on budget and its approach, emphasizes management to derive useful
information and use accordingly. But in this phenomenon there is need to check the activities
time to time by way of” variance analysis” by accepting it as standard figure. In this way, budget
section serves its purpose by fulfilling these objectives-

 Helping in forming plans.

 Helping in communication plan to concerned personnel.
 Co-ordination all activities of the organisations as to facilitate its working and
 Motivating employee to actively participate in decision making process and
achieving goals by fulfillment of duties.
 Controlling mainly by through discussions, passing on reports, reviewing budgets,
taking into consideration different types of contingencies etc
 Helps to define the results to be expected.

It can be termed as a type o budget follow up, which is performed to watch that whether funds
has been used properly an accordingly improvement is done. In this way by this type o system it
provides base for future budgets lying.

Abid Rizvi 54
This function is serving in HAL and organization is giving emphasis by active participation of
corporate executives. Their review, discussions and repot collection fulfilling the purpose well.

Abid Rizvi 55


1. To ensure that all the receipts and issues of materials from stores are recorded and
accounted properly.
2. To ensure that all non-moving / slow moving materials are identified as “surplus” by
IMM and a suitable redundancy provision is made against them and are disposed off.
3. To ensure that bin card balances are reconciled with the material ledger balances in
coordination with IMM and the balances of material ledgers tallies with the general


1. To send the priced RDR received from bills payable section to EDP for punching in the
batch mode and thus all the receipts are recorded and control is exercised over all the
purchases value-wise.
2. To generate exception list for missing RDR and getting it resolved with bills payable
3. All the materials drawn excess when returned are credited to stores through stores return
4. The EDP after processing of all MR / issue vouchers prints the material issue analysis
statement monthly indicating:
a) The cost of material drawn against various job orders, expense accounts etc.
b) The cost of material issued to contractors and others.
c) The cost of tools issued to various tool cribs from main tool stores.

Based on the above statements accounting for issue of material is done by debit to
WIP / expense / contractors account and credit to relevant inventory accounts.
2. On the basis of list of material / transfers reclassification indicating the material code
number / quantity and value, necessary journal entries are passed by debit / credit to
relevant inventory accounts.

Abid Rizvi 56
3. On the basis of stock verification sheets indicating stock verification note number,
material code number, shortages / overages, necessary journal entries are passed after
obtaining clarifications from stores department by debit / credit to stock adjustment
account credit / debit to relevant inventory accounts after taking approval of CFA
wherever required for adjustments / write off of stores.
4. A list of material not moved for over 5 years is given by EDP which is reviewed by stores
/ concerned programming department. Materials not required for production or for other
purposes are identified and suitable action is taken by IMM for finding their usage in
other divisions or is auctioned.
5. Redundancy provision is made in the books of accounts at the rate of 100% for non
moving inventory and for closed projects as special provision on the basis of list given by
EDP. Further a normal provision at 1.5% is made on the balance inventory.

Accounting Procedure

Accounting of the receipts of material by various classes and issues thereof to various work order
and expense accounts is done based on the following ‘output’ statements received from computer
/ data processing section:

1. Material issue analysis statement

2. Stock transfer / stock re-classification statement
3. Stock verification statement
4. Surplus / condemned stores statement

Material issues analysis statement: The computer / data processing section after processing
all the material requisition/issue vouchers pertaining to the month prints out the material issue
analysis statements monthly indicating:

a) The cost of materials (including material overhead expenditure) drawn against various
work orders and expense accounts.
b) The cost of material issued to contractors and others.
c) The cost of material transferred to other divisions.

Abid Rizvi 57
d) The cost of tools issued to various tool cribs from main tool stores.
Based on the above statements, accounting for issue of material is done by debit to
WIP/Expenses/Division/Contractors accounts concerned and credit to the relevant inventory

Stock verification statement: The computer / data processing section makes available the print
out lists of stock verification notes, indicating stock verification note number, material code
number, overages or shortages of less than Rs 500/- and more than Rs 500/- based on which
necessary journal entries are issued after obtaining clarifications from stores department, by debit
/ credit to stock adjustment / inventory adjustment account and credit / debit to relevant inventory

Surplus / condemned stores statement: Non moving / slow moving material are reviewed by
stores / production engineering department from the lists of non moving / slow moving items
furnished by the computer / data processing section. Material not required for production or as
“surplus” and referred to the ‘surplus committee’ for review and declaring the same as surplus.
The surplus materials when so declared are transferred to the salvage stores for disposal.
Likewise materials held in stores and condemned due to expiry shelf-life deterioration etc., are
also transferred to salvage stores for disposal. Based on the disposal orders received in the
material accounts section, duly approved by the competent authority, the value of the material
transferred to salvage is debited to the redundancy provision account where available, otherwise
charged off to profit and loss account by credit to respective inventory accounts.

Abid Rizvi 58

1. To establish a costing system in line with the activities and the product range of the
2. To determine the price realizable from the customer for the products manufactured /
repaired / overhauled / serviced / supplied by the division.


1. To determine the rate of absorption / recovery of labor and other overheads for
recovering labor cost on the different jobs undertaken i.e. MHR computation.
2. To accumulate the labor and overheads content of each activity project-wise based on
evaluated LTB generated by EDP from work orders / time dockets.
3. To keep track of different jobs completed and jobs lying incomplete in different stages
over a reasonable period of time and to coordinate with concerned production controllers
for justification for jobs lying unfinished beyond a reasonable period of time and to
ensure their early disposition.
4. To review work orders on which no material / labor cost has been recorded and finding
out the reasons for the same.
5. To get the WIP statement as on 31st March from EDP for all manufacturing components,
sub-assembly WIP, assembly WIP for physical verification by the concerned production
6. To ensure that the valuation of WIP has been done correctly keeping in view the
percentage of completion of the job.
7. To keep track of SIT transactions with different divisions.
8. To keep record of all IDTO received and issued.
9. To send debit advices to other divisions for items dispatched against IDTO received from
10. To accept the debit raised by other divisions for items received by the division in respect
of requirements raised by us through IDTO.

Abid Rizvi 59
In Hal Division the work carried out in following categories-

 Manufacturing and Assembling Operations

• Of aircrafts, aero-engines, avionics, ground radars, accessories and
• Of spares required for overhaul of aircrafts, engines, engines etc. and DRDL
for supply to IAF against RMS order, navy, army etc.
• Of other equipment like foreign and costing.
 Repairs and Overhaul Activities
• Aircraft, engines, avionics, ground radars, accessories and instruments.
• Other equipments.
 Design and Development Activities of aircrafts, aero-engines, avionics, ground radars,
accessories and instruments.
• Customer Finance.
• Company Finance.

Though HAL manufacturing don't come in the range of products under cost audit and cost.
Accounting records rules formed by the GOI, a fully fledged cost accounting system is essential
for effective cost monitoring and cost control.


The system of cost accounting followed in HAL is "Batch Costing" which is a variation of job
costing and is mainly designed to suit the work carried out in HAL. Some divisions of HAL have
also work order schemes suitable for component costing.

a. Batch Costing
1. In the batch costing system, all the components, minor assemblies, etc. required
for a batch of aircraft /engines/equipments are manufactured on batch order/mass
fabrication orders. Though job cards/job tickets are issued for manufacturing of
individual components, cost is not recorded separately. Labor and material costs are
booked on the batch work order/mass fabrication order only.

Abid Rizvi 60
2. The components after manufactured are carried out to production store and drawn
for assembling on the next assembly line immediately .The items are held in
quantitative inventory, the cost being held in WIP. Individual work order are issued for
assembly, erection and testing. The cost of bought out items drawn at the stages of
assembly and erection is booked to these orders.
3. In this system the cost of all components, minor assemblies, sub assemblies, etc.
relating to an aircraft/engines/equipments in the complete batch is determined by
dividing the total cost recorded on the batch work order/mass fabrication work order by
the number of units produced in the batch. To this is added, the cost recorded on
assembly line, erection and testing work order(s) and sundry direct charges to arrive at
the total cost of the aircraft/engines/equipments.

b. Job Costing
This system of costing is followed in the case of repairs and overhaul of aircraft, engines,
equipments etc. and for manufacture of spares against RMSO spare for HAL held IAF
store and miscellaneous jobs.
In this system individual work is issued for overhaul of each
aircraft/engine/equipment and for manufacture of spare items .Labor and material cost is
collected on the individual work orders and the total cost of each item is ascertained.

c. Component Costing
In the component costing system, an individual work order/job ticket is issued for each
component against which labor and overheads expended and cost of material drawn are
recorded and the total cost is ascertained.
In this system the requirement of component for manufacturing of component, overhaul
and spares programs as a whole is determined and work orders/ job cards/ job tickets are
issued for manufacture of each of component in the economical batch quantities. The
batch quantities of aircrafts/ engines etc. are not relevant but the batch quantity of each
component is important. The components after manufacture are credited at cost to
production stores and drawn for assembly when required. Thus the items are held in
priced inventory. The cost of minor assemblies, sub assemblies, major assemblies can be
built from the cost of components issued to such assembly jobs.

Abid Rizvi 61
d. Standard Costing
Standard costing is a technique to control cost. Here costs should be first extended to
manufacturing projects including fabrication of detailed components, sub assemblies,
major assemblies and final assemblies.
It can be extended for periodical overhaul of major products like airframe,
engines, avionics, wheel assembly and high value rotable, where work schedule are
available. Standards for labor and material should be fixed for deriving variance under
each category for control.

e. Labor Standards
The present standard time for each component, equipment, assembly allotted in time
docket in the division is taken as parameter for fixing standard labor hours. These labor
hours will be valued by applying yearly Man Hour Rate (MHR) applicable to the division

f. Material Standards
The material requirements as per the bill of material shall be the basis of determination of
the standard for marginal cost. The costing of material shall be done on the basis of
weighted average rate of respective material prevailing at the time of issue of work order.
However in respect of USSR material where itemized prices are not available, the price
standards shall be adopted based on technical estimates.
For the purpose of comparison and analysis of cost, monthly statements should be
prepared in regard to-
1. Standard Man Hours (allowed man hours where SMH are not available)
v/s actual hours booked against each work order.
2. Labor costs as per the standard and as per actual.
3. Material cost as per standard and as per actual.

g. Marginal Costing
With a view to increase the utilization of the available facilities and manpower and to
obtain some contribution towards the company's fixed overhead expenses, marginal
costing techniques are adopted in the pricing the supply and services.

Abid Rizvi 62
Jobs may be undertaken at prices lower than the cost of sales at full man hour rate,
provided the price is not less than the prime cost of jobs. The prime cost shall comprise of
all expenditures directly incurred on the execution of jobs and production process like
direct material cost, cost of tooling, labor cost (including wages to direct workers).


Prior to implementation of revised pricing policy i.e. 1995, payment to HAL was regulated as per
FCQ (Fixed Cost Quotation) of cost plus system. Under FCQ system HAL has no incentive to
bring efficiency in material usage or labor utilization since the entire cost incurred was getting
paid by IAF.
In 1995, government implemented FPQ (Fixed Price Quotation) system, in
which the prices of products and services are fixed by Directorate of Financial Planning, Air HQ
at base year. The base year prices are escalated at agreed escalation percentage and exchange
rates given every year by Air HQ for material and inflation indices for Man Hour Rate. The
FPQ’s approved for base year (1995-96) are escalated as per agreed parameters up to 8 years
(2003-04) and thereafter fresh base year cost verification is done by Air HQ by considering the
actual usage of material for overhaul/repair items in the last 3 years and accordingly material cost
firmed up in 2004-05. Similarly labor efficiency and yield factor of division are fixed at 79% and
76% respectively. The FPQs for overhaul/repair and price catalogue for spares are approved by

Due to FPQ system HAL has find scope in bringing cost reduction in the form of lesser usage of
material or completing the work by putting lesser Man Hours as standard man hours so that labor
cost per unit should be decreased which helps in improving the profitability of the division.

At present the FPQ is applicable for repair & overhaul and supply of spares only and for
payment of manufacturing programmed e. g. Su-30, Dornier, LCA, IJT, Hawk etc are fixed as
per contract price agreed between HAL and air force and prices offered by HAL are negotiated
by the customer.


Man hour rate is defined as the rate of total expenses that the factory bears on direct labor during
production process of 1 hour. It is used as a basis for calculation of labor cost.

Abid Rizvi 63
Man hour rate is calculated as follows-

[Divisional expenses on salaries and other payments made including cost of facilities provided to
staff plus all the overheads e.g. power, fuel, and other expenses incurred by the division]
Divided by [the number of net available hours of direct worker including over time hours].

Net available hours= (No of direct worker X 7.5 hrs per day X 25 days X 12 months) X
(agreed yield percentage + OT hours).

Yield = Actual output in terms of SMH (Standard Man Hours) i.e. LTB hours

Percentage Total input hours

Abid Rizvi 64

Financial Management

Financial Management can be defined as:-

The management of the finances of a business/organization in order to achieve financial


Taking a business as the most common structure, the key objectives of financial management
would be to:

• Create wealth for the business

Abid Rizvi 65
• Generate cash, and

• Provide a return on investment keeping in mind the risks that the business is taking and the
resources invested

There are three primary elements to the process of financial management:


Management need to ensure that sufficient funding is available to meet the needs of the
business. In the short term, funding may be needed to invest in equipment and stocks, pay
employees and fund sales made on credit.

In the medium and long term, funding may be needed for significant additions to the
productive capacity of the business or to facilitate acquisitions.


Financial control is a critically important activity to help the business ensure that said
business is meeting its goals. Financial control addresses questions such as:

• Are assets being used efficiently?

• Are the businesses assets secure?

•Does management act in the best interest of the shareholders and in accordance with
business rules?


The primary aspects of financial decision making relate to investment, financing and

• Investments must be financed in some way; however there are always financing alternatives
that can be considered. For example it is possible to raise funds from selling new shares,
borrowing from banks or taking credit from suppliers.

• A key financing decision is whether profits earned by the business should be retained rather
than distributed to shareholders via dividends. If dividends are too high, the business may be
starved of funding to reinvest in growing revenues and profits.

Abid Rizvi 66

The term "cost" is synonymously used for the term "expense", which refers to sacrifice.

According to Committee of cost concepts-"Cost is foregoing, measured in monetary terms,

incurred or potentially to be incurred to achieve a specific objective."

Controlling Cost via Responsibility Accounting-

To control cost these fundamentals should be observed-

Abid Rizvi 67
• Fixing responsibility to control.

• Limiting the individuals control efforts to his controllable costs

• Reporting the performance of individual.

Abid Rizvi 68

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Classification by Nature:

i. Direct cost - Direct cost is that cost which can be identified with a cost
centre or a cost unit. For e.g. cost of direct materials, cost of direct labour.

ii. Indirect cost - Cost which cannot be identified with a particular cost
centre or cost unit is called indirect costs. For e.g. wages paid to indirect labour.

Classification By Behavior:

i. Fixed cost - Fixed cost is that cost which remains constant at all levels of
production. For e.g. rent, insurance.

ii. Variable cost - The cost which varies with the level of production is
called variable cost i.e., it increases on increase in production volume and vice-
versa. For e.g. cost of materials, cost of labour.

iii. Semi-variable cost - This cost is partly fixed and partly variable in
relation to the output. For e.g. telephone bill, electricity bill.

Classification by Element:

The cost is classified into (a) Direct Cost, and (b) Indirect Cost according to elements, viz,
Materials, Labour and Expenses

Classification by Function:

i. Production cost- It is the cost of the entire process of production. In other

words it is nothing but the cost of manufacture which is incurred up to the stage of
primary packing of the product.
ii. Administrative cost- It is the indirect cost pertaining to the administrative
function which involves formulation of policies, directing the organization and
controlling the operations of an undertaking. This cost is not related to any other
functions like selling and distribution, research and development etc.

Abid Rizvi 70
iii. Selling cost - Selling cost represents the indirect cost which is incurred for
(a) seeking to create and stimulate demand
(b) securing orders.
iv. Distribution cost - It is the cost of the sequence of operations which
begins with making the packed product available for dispatch and ends with
making the reconditioned returned empty package, if any available, for re-use.
v. R&D cost - "Research Cost" and "Development cost" are two different
types of costs. Research cost is the cost of researching for new products, methods
and applications. Development cost is the cost of the process which begins with
the implementation of the decision to produce the new product or apply the new
method and ends with the commencement of formal production of that product or
by that method.
vi. Pre-production cost - It is that part of the development cost which is
incurred for the purpose of a trial run, before the commencement of formal
vii. Conversion cost - It is the cost incurred for converting the raw material
into finished product. It comprises of direct labour cost, direct expenses and
factory overheads.
viii. Prime cost - Prime cost is the aggregate of direct material cost, direct
labour cost and direct expenses. The term ‘direct’ indicates that the elements of
cost are traceable to a particular unit of output.

Classification By Controllability:

i. Controllable cost - The cost, which can be influenced by the action of a

specified person in an organization, is known as controllable cost. In a business
organization, heads of each responsibility centre are responsible to control costs.
Costs that they are able to control are called controllable costs and include
material, labour and direct expenses.
ii. Uncontrollable cost - The cost which cannot be influenced by the action
of the person heading the responsibility centre is called uncontrollable cost. For
e.g. all the allocated costs and the fixed costs.

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Classification by Normality:

i. Normal cost - It is the cost which is normally incurred at a given level of

output, under the conditions in which that level of output is normally attained.
Normal cost is charged to the respective product / process.
ii. Abnormal cost – It is the cost which is not normally incurred at a given
level of output in the conditions in which that level of output is normally attained.

Classification by Time when Computed:

• Sunk cost -Historical cost which is incurred in the past is known as sunk cost.
This cost is not relevant in decision making in the current period. For e.g. In the
case of a decision relating to the replacement of a machine, the written down
value of the existing machine is a sunk cost and hence irrelevant to decision

• Estimated cost -It is an approximate assessment of what the cost will be. It is
based on past data adjusted to anticipated future changes.

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The following diagram depicts the various elements of cost:

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Material Cost:

Direct Materials - Materials which are present in the finished product or can be identified in the
finished product are called direct materials. For e.g. Coconuts in case of coconut oil or wood in a
wooden cupboard.

Indirect Materials - Indirect materials are those materials which do not normally form part of
the finished products or which cannot be directly traced to the finished product. For e.g. Stores,
oil, grease, cotton wool etc.

Labour Cost:

Direct Labour - Labour which can be attributed wholly to a particular product, process or job is
called direct labour. It is the labour utilized in converting raw materials into finished products.
For e.g. Labour employed in the crushing department of an oil mill.

Indirect Labour - Labour which cannot be identified with a particular product, process or job is
called indirect labour. Indirect labour cost is apportioned to cost units or cost centres. For e.g.
Maintenance workers.


Direct Expenses - Expenses incurred (except direct materials and direct labour) specifically for a
product, process or job is known as direct expenses. They are also called "chargeable expenses".
For e.g. Hiring charges for a machine specifically hired for a particular process, excise duty,

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Indirect Expenses - Expenses incurred other than direct expenses are called indirect expenses.
For e.g. Factory rent & insurance, power, general repairs.


Overheads is the sum total of indirect materials, indirect labour and indirect expenses.
Functionally overheads can be classified as..

i. Production / Works overheads

ii. Administrative overheads

iii. Selling overheads


Cost control can be defined as comparative analysis of actual costs with appropriate standards or
budgets to facilitate performance evaluation and formulation of corrective measures. It aims at
accomplishing conformity between actual result and standards or budgets. Cost control is
keeping expenditures within prescribed limit. Cost control has following features:

 Creation of responsibility centre with defined authority and responsibility for cost
 Formulation of standards and budgets that incorporate objectives and goals to be
 Timely cost control reports (responsibility reporting) describing variance between
budgets and standards and actual performance.
 Formulation of corrective measures to eliminate and reduce unfavorable variances.
 A systematic and fair plan of motivation to encourage workers to accomplish budgetary
 Follow-up to ensure that corrective measures are being effectively applied.

Abid Rizvi 75
Cost control does not necessarily mean reducing the cost but its aim is to have the maximum
utility of the cost incurred. Thus its main objective is the performance of same job at a lower cost
or better performance for the same cost.
Cost control process involves:

a) Setting targets and standards.

b) Ascertaining actual performance.
c) Comparing actual performance with targets.
d) Investigating the variances.
e) Taking corrective action.

In cost control, costs are optimized before they are incurred.

For cost control we should:

1. Identify major cost centre – production, sales, financing, administration and research and
2. Identify major type of include – staff cost, raw material and supplies, utility bills for
energy and water, capital expenditure etc.
3. Choose the cost to focus on first :
 Costs that may offer easy savings.
 Large costs that you may be able to change in short term.

Systematic Cost Control:

1. Start from the business objective.

2. Establish standard costs for achieving your objectives.
3. Establish realistic budgeted cost based on the actual experience. It should be higher than
the standard cost, sometimes it may be lower.
4. Record actual cost and compare them with the standard and budgeted cost.
 Costs that are higher than the budgeted cost indicate opportunities to reduce cost
in short term.
2. Periodically review.

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Easy Savings:

1. Checking supplier invoices may reveal overcharging (e.g. double billing, missing
2. Eliminate unnecessary costs :
 Get rid of overcapacity.
 Cut out blatant waste.
 Scrap useless processes.
2. Crack down excessive costs.
3. Root out inefficiency.


1. Reduce your payroll cost :

 Outsource non-core activities.
 Use part-time employees instead of full time.
 Redesign processes to cut out activities that waste time.
 Make more use of technology.

2. Improve your purchasing :

 Switch to cheaper supplier or negotiate for price reductions or higher discount for
early payments.
 Agree long-term contracts or guarantee minimum annual purchase volumes in
return for lower prices.
 Built personal relationship with supplier to encourage preferential treatment.
 Simplify purchasing procedure to reduce your cost and those of your suppliers.
 Form strategic buying alliance in businesses in your area or trade to buy large

3. Find ways to make production more efficient :

 Trim back product range and increase production runs.
 Use standard components to lower design, purchasing and manufacturing cost.

Abid Rizvi 77
 Change processes to minimize wastage of raw material and energy.
 Improve quality control to cut rejection rates and reworking costs.
4. Review the Finances :
 Finance fixed requirements using loans, instead of overdrafts.
 Cut back on working capital through JIT (Just in Time) purchasing and better
credit control to suppliers.

Effective Cost Control:

1. Low rejection – trained person, tooling and healthy environment.

2. Full utilization of efficiency.
3. Effective environment.
4. Stores situated in nearby area, to reduce excess time wasted in taken tools from the stores.
5. Maintenance workers as well as supervisors should be available nearby.
6. CRI and quality control members must come to the shop to check and encourage
7. Extra facilities must be provided (e.g. medical, ATM, canteen etc.).

Methods of Cost Control:

Cost control involves control of material as well as labor overheads.

Material control Methods:

Material management includes-

a. Procedure for material procurement and use.

b. Material costing methods.
c. Cost of material in inventory at the end of a period.
d. Costing procedure for scrap, spoiled goods and defective work.

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Abid Rizvi 79
Inventory planning and control method should have one goal that might be expressed in two

Abid Rizvi 80
1. To minimize total cost.
2. To maximize profit within specified time and resource allocations.

Material Requirement Planning:

To plan manufacturing requirements, every stock item or class of items should be analyzed
periodically to-

a. Forecast demand for next month, quarter, or year.

b. Determine acquisition lead time.
c. Plan usage during the lead time.
d. Establish quantity on hand.
e. Place units on order.
f. Determine reserve or safety stock requirements.

Material planning deals with two fundamental factors-

1. The quantity to purchase.

2. The time to purchase-or simply how much and when to buy.
Determination of how much and when to buy involves two conflicting type of
a. The cost of holding or carrying.
b. The cost of inadequate carrying.

Cost of holding or carrying Cost of inadequate carrying

Interest or investigation of working capital. Extra purchasing, handling and transportation


Taxes and insurance. High price (small order quantity).

Warehousing and storage. Frequent stock outs causing disruption

Handling. of production schedule, overtime and

Deterioration and shrinkage of stocks. Extra setup time.

Obsolescence of stocks. Lost sales and loss of customer.

Abid Rizvi 81
Economic order quantity is the amount of inventory to be ordered in one time for the purpose of
minimizing annual inventory costs. If the company buys in large quantity, the cost of holding or
carrying the inventory is high because of high investment. If purchases are made in small
quantities, frequent orders with correspondingly high ordering cost will result. Therefore we
must balance between two factors-

1. The cost of possessing (carrying) material.

2. The cost of acquiring (ordering) material.

Buying in larger quantities may decrease the unit cost of acquisition, but this saving may be more
than offset by the cost of carrying material in stock for longer period of time.

How to compute Economic Order Quantity:

However there are tabular and graphic methods for determining economic order quantity but they
are very lengthy, hence companies use order-point calculations to calculate economic order
quantities. With information such as quantity required, unit price, inventory carrying cost, and
cost per order, differential calculus makes it possible to compute economic order quantity using
the formula-

Economic order quantity = √ (2 × Annual required units × Cost per order) ⁄ (Cost per unit of
material × carrying cost percentage)


The economic order formula answers quite satisfactory the quantity problem of inventory
control. However, the time to order is also important.

The problem of when to order is controlled by three factors-

1. Time needed for delivery.

2. Rate of inventory usage.
3. Safety stock.

Determining order point would be relatively simple if lead time- the interval between
placing an order and having the material on the factory floor ready for production – and the

Abid Rizvi 82
usage pattern for a given item were definitely predictable. For most stock items there is a
variation in either or both of these factors. The theory behind this safety stock calculation is
that you will have just enough inventories in stock if two "catastrophic" events happen

1. Your supplier's lead time slips to the longest it's ever been with that supplier; and

2. On those days that your supplier is late, your company uses the most inventories it has
ever used.

The Safety Stock Level (SSL) can be calculated using following formula-

Maximum SSL = MHDU x (MHLT - ALT)


SSL=Safety Stock Level.

MHDU = Maximum historical daily usage.

MHLT = Maximum historical lead time.

ALT = Average lead time.

Abid Rizvi 83

Efficient storing after efficient purchasing is another important step in material control system.
Factors involved in establishing stores organization are-

a. Location of stores: Location of store should be carefully planned so as to give

maximum efficiency. Following factors are important in deciding location of stores-
1. Nature of material.
2. Distance from user department.
3. Size of unit.
4. Spacing.
5. Unit of material used.
6. Security requirements.

b. Storage Layout: Storage layout should be carefully designed for saving of costs.
Material should be stored according to-

1. Account number specifically given to different type of material.

2. The frequency of their usage.
3. The production area where item is used.
4. Nature, size and shape of item.
Stores should maintain all documents like material requisition form, material procurement form,
stock ledger cards, bin cards etc.


Effective control over labor is very important as it is very important part of total cost. The
following departments should contribute for labor control-
 Personnel Department.
 Time keeping Department.
 Payroll Department.
 Cost Accounting Department.

Abid Rizvi 84
The main function of personnel department is to provide efficient labor force. Personnel manager
is responsible to maintain sufficient manpower so that there will be no surplus as well as deficit
of efficient manpower. For this employees record card is maintained which is known as punch
card with every employee’s PB (Permanent batch) number.

Time keeping department prepare record for time spent by each employee for labor costing and
control process. Various documents used by department include clock card for attendance record,
job ticket, job docket, job card etc.

Payroll department is an intermediate function between time keeping and cost analysis
department. It can control labor cost by maintaining sufficient wage system.

Cost accounting department helps in implementing incentive wage plans, efficiency plan, bonus
plan, budgeted expenditure plans to control cost at all overheads.

Abid Rizvi 85

Cost reduction embraces:

1. Unit cost reduction by expenditure reduction in respect of a given volume of output ;

and / or
2. Unit cost reduction by the increase in productivity (i.e. an increase in output, yield, or rate
of output for a given expenditure).

In other words, cost reduction is the process whereby permanent savings are made without any
reduction in the quality and / or usefulness of the products.

Difference between cost reduction and cost control:

Cost Control Cost Reduction

1. Concerned with adhering as closely 1. Concerned with genuine cost
as possible to the set standards. savings. Existing costs, including
standards, are challenged in an
effort to reduce them.
2. Standards are taken to be the 2. Standards are regarded as yardsticks
desired state of efficiency. which can be improved upon. They
are viewed with suspicion.
3. Attempts to be guided by what is 3. Recognizes that the operations of a
the lowest cost for the conditions company are dynamic in nature. For
which prevail. this reason changes in costs are
4. Is generally effective only when 4. Can be effective for all types of
some form of standards can be set. conditions. It is not limited to where
standard costing can apply.


Abid Rizvi 86
1. Without cost reduction a business is unlikely to survive. Once costs are saved they should
be controlled at the new level until some method of reducing them still further is found.
2. A business has to deal with two aspects – cost incurred and revenue received. The
difference between the two is profit out of which the following must be satisfied :
• Shareholder
• Expansion of the business
2. In addition, there is the question of dealing with pay claims which increase costs and
reduce profits unless prices are increased. Finally, there is the satisfaction of the
3. Competition from within the economy affects the price that can be charged. If too high,
products will not sell.
4. Cost reduction of a permanent nature, without any reduction in quality or usefulness, is
the only solution which is unlikely to have adverse effects. In effect, cost reduction is
profit earning: by reducing the cost side of the cost / revenue equation it is possible to
increase the profit.


1. The real success of a business depends primarily on the efficient use of those basic cost
elements: by basic costs are meant the man-hours of labor, kilowatt hours of electric
energy, weights of raw material, etc., per unit of production of goods and services.
2. The first basic cost reduction should be the elimination of waste all along the line from
source to ultimate consumption or use.
3. Not only are materials wasted, but countless man-hours are lost for a variety of reasons.
Among these are poor personnel relations and failure to make the most of the individual
employee’s talents, training and inclination, inefficient management and dispute between
labor and management, accidents and illness, failure to plan and execute the job properly
the first time and bureaucracy and pressure groups.

4. In addition to raw material and man-hour losses, excessive use of utilities frequently
occurs. In fact it is exceptional to find an industrial plant where a reduction of utilities
consumed per unit of production cannot be made.

Abid Rizvi 87
5. There are many ways in which industrial engineering know-how and procedures can be
applied to basic cost reduction.


In a manufacturing industry, material takes a major share (50 to 70%) of the cost. Hence there is
maximum scope for cost reduction in this area. For example:

1. In a rubber works, manufacturing caps for penicillin vials, the rejection for various
reasons was found to be as much as 38%. Hence the direct material cost of this product
for this factory is 60% higher than what it ought to be.
2. A manufacturer of electronic equipment in Bombay found by investigation that he could
obtain an 18.8% saving in the component cost of unitized Gamma Ray Spectrometer by
eliminating a few of the components and substituting cheaper ones for others without
affecting the quality of the instrument.
The above example show that the direct material cost is to a great extent enhanced by:

i. Defective design of the product and its components.

ii. Wrong selection of raw material in terms of type or of quality.
iii. Poor manufacturing methods leading to excessive scrap and rejection.


1. Even though material cost reduction was presented as the most potential area for cost
reduction due to being a major part of the cost in manufacturing industries, labor cost
control has received more attention due to its easiness to handle. Another reason for its
receiving favorable consideration from management and consultants is the extent to
which reduction is possible. While material cost could be reduced from 60% to 50% or
even 40%, labor cost with mechanization can be almost brought down to 5% to 10%.

Abid Rizvi 88
2. Direct labor cost normally shown on the cost sheet includes true labor cost (payment for
the time booked) which cannot be reduced and a major portion of costs added due to
various factors, such as
i. Poor planning
ii. Poor manning
iii. Poor working methods
iv. Lack of motivation

3. The solution to a reduction of labor cost lies in the elimination of the factors enumerated
before as leading to poor utilization of manpower. To summarize, labor productivity can
be enhanced and labor cost consequently reduced by:
i. Reducing the work content of jobs
ii. Providing adequate work
iii. Recognizing extra effort
iv. Worker working


1. Overhead cost in almost every industry is excessive. This may be attributed to factors like
poor planning, poor inventory policy leading to excessive stocks of raw material, finished
goods, tools and spare parts, lack of standardization and poor organization.
2. Poor planning adds up unnecessary overhead expenses also in addition to direct material
and labor costs. It is regrettably true that management’s concern for efficiency in
manufacture often appears to be continued to the more obvious factors like production
methods, factory layout and operator efficiency, while other potential sources of
considerable savings go untapped.
3. The importance of stock control arises from the demand which investment in stocks
places upon the available liquid capital. It is of far greater significance from the point of
view of cost reduction by virtue of the fact that stocks can give rise to the following
sources of cost:
i. Storage cost

Abid Rizvi 89
ii. Handling cost
iii. Stock-taking and other clerical expenses
iv. Deterioration and its prevention
v. Pilferage
vi. Insurance and stock room security
vii. Obsolescence
2. The effects upon costs and the general manufacturing efficiency of a wide diversity of
products, components, equipment and methods are sufficiently important to warrant
special consideration of this factor.
3. The wheels of industry turn to the orders of many persons having various degrees of
authority and the contribution that a properly defined chain of responsibility and channels
of communication can make towards a reduction of costs is difficult to measure.
4. Finally, cost reduction and control is a continuous process, and a programmed once
commenced should be coordinated and controlled, lest the benefits achieved by improved
performance may easily be dissipated.

Waste can be made in following forms:

1. Waste of material
2. Waste of supplies
3. Waste of machinery
4. Waste of manpower
5. Waste of money
6. Waste of space
7. Waste of customers
8. Waste of ideas

Planning overhead cost control: There are six basic steps through which overhead cost can be

1. Establish company objectives and targets

2. Develop detailed programmers

Abid Rizvi 90
3. Organize resources to meet the objectives
4. Establish department standards of performance to match programmers
5. Develop a system of budgets
6. Report on performance
In some organization a systematic approach is followed so that methods can be improved in the
department. It is a simple five step plan to:
a) Select the operation for improvement.
b) Get the facts by breaking down the operation into detailed steps.
c) Analyze the facts by questioning every step.
d) Develop a new and improved method.
e) Install the new met
Below mentioned are the points essential in the organization of cost reduction:
1. One person has to be responsible. That person must think constantly in terms of cost
reduction, and seize every opportunity to bring the subject to the attention of all
2. Top management must have interest, cooperation, consideration and a firm belief that
cost reduction is worthwhile and necessary. At the same time, they must have patience
because ideas create more ideas, and every idea does not produce the desired result. But
the more ideas there are, the more opportunity there is to get worthwhile results.
3. A cost reduction programmed must encompass all employees- each person that is a part
of the organization.
4. All possible means must be used to make all employees cost conscious and cognizant of
the need for cost awareness.
5. There is no single way to fulfill the needs of obtaining cost reduction. It has to be a
combination of many ways.
6. It has to be a continuous operation. It cannot be started and stopped at will, but must be
worked on constantly. There must be constant effort to improve, and to think of new
7. Cost reduction ideas must always be “glamorized” in order to make them appear new and
different, and to increase and create greater interest on the part of the employees.

Tools and Techniques of Cost Reduction

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1. Value analysis: Value analysis is a technique applied to analyze all aspects of an
existing product to determine the minimum cost necessary for specific functional
requirement. It helps in improving quality of product. In HAL various methods are
implemented for value analysis. They are :
VOP (Value of production) = Total sales ± Changes in WIP / SIT

Value added = VOP – Raw material consumed

Capital employed = Working capital + Net block of fixed assets + Special tools

Working capital = Current assets – Current liabilities

SIT = Opening balance + Dispatch – Fitment

2. Work study: Work study includes calculation of standard costs and batch costs and
then prepares FPQ (Fixed price quotation) for fixing prices of every product.

3. Production planning: In HAL Lucknow, the main function is production of

accessories of aircrafts. For planning the production process production budget is
prepared in advance. This is done by planning department. For this planning department
meet with all divisions and ask for their production targets. All divisions mutually agree
to set their targets and to fulfill them. After that they sign MAS (Mutually agreed
schedule) for all IDTO’s (Inter divisional transaction orders).
After this planning department send this to budget department for production budget.
4. Organization and method study: In HAL method study is implemented during
production process. Various methods for production of job are studied minutely and the
method which is least time consuming and having cost conciseness is accepted.

5. Operations study: In HAL process layout is prepared to study various operations

included in completion of a job. For this every employee got a job card, job docket and
job ticket in which standard time for completion of each and every operation is fixed and

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it is inspected periodically, so that standard time should be maintained at relevant cost so
that cost and time should be controlled.

6. Quality control: Quality is the strength of HAL. The company aim at best quality
product. For this TQM is applied in whole organization. The objectives of TQM are :

i. Zero defect
ii. Continuous improvement(Kaizen)
iii. Wastage removal(Lean management)
iv. Customer satisfaction

 Zero defect: Organization found that there are three main factors which cause defect in
the production:

a) Don’t have full knowledge of job.

b) Don’t have required resources for the work.
c) Don’t concentrate on the work.

For zero defects all these factors are removed. The organization quality policy is producing
“1st Time Correct “.
 Continuous Improvement: Every employee of the organization should aim at
maintaining the continuous improvement in their work. They should aim to complete
their production and services with low time and cost and that too with good quality, and
to make their products and services of international level. Every employee is aware of all
possible improvements in his work area, so he should give suggestions to the
management for this improvement.

 Wastage Removal: Employee should aim to remove all those wastages that cause cost
increment like water, electricity, stationary etc. so as to make the organization more

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 Customer Satisfaction: The basis of every organization is their customers, whether
internal or external. The organization should find their customer's requirements and to
fulfill them without any defect, at low cost and to deliver them within time limit.
2. Standardization: In HAL standards are fixed for time consumption as well as for cost
incurred. For time standards the standard time is fixed for every process of job and for
cost standards standard cost and FPQ are defined in advance to control time and cost.
3. Simplification: In HAL for this purpose lean management is applied for all
production processes.

"Lean is a term to describe a system that produces-

1. What customer wants?

2. When they want it? with minimum wastages.

The historic approach of the organization was- PRICE=COST + PROFIT

But in present scenario it changed to- PROFIT= PRICE – COST.

Lean Tools:
 Waste elimination.
 Do the 5S.
 Create flow.
 Put in visual control.
 Job standardization.
 Reduction in set up time.
 Continuous Improvement.

What Is 5S?
1. Sort.
2. Simplify.
3. Shine
4. Standardize.

5. Self Discipline.

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Achieving continuous improvement in performance by identification and elimination of all

wastage relentlessly. Present capacity includes value work as well as wastes. Value work is that
customer is willing to pay for, and waste is adding cost but not the value.

Continuous Improvement.

There are 8 wastes which the organization should keep in mind-

 Over Production and Over Processing.

 Waiting.

 Transportation.

 Inventory.

 Motion.

 Defects.

 Untapped Resources.

 Misused Resources.

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Research Methodology:-

Types of Research: - Descriptive research design for the final survey.

• Source of Data: -

• Primary Data:-

The primary data has been collected through questionnaire, personal interview and

departmental analysis.

• Secondary Data:-

• Website of HAL.

• Company monthly journals.

• Training manual on cost reduction provided by HAL.

• Accounting manual and Budget manual provided by HAL.

• Pricing policy of HAL.

Sample Design: - Probability sampling design.

Sample Size: - 10 people.


 There should be facility of intranet so fax and such other things must be done through it that
can reduce time and money.

 For attendance finger print system should be adopted so that actual person’s attendance can
be mentioned.

 The time delay between rising of purchase order and preparation of RDR should be reduced.

 Wages to direct workers should be given through piece rate system.

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 Efficiency of indirect workers should be measured so that slackness can be sorted out.



1. The introduction of an online website for any company of today’s world is a boon. Cause
growth and expansion will be a promising factor as the internet makes the world a smaller
place to do business. This was introduced in the year in the year 2000 by HAL.

Table showing the improvement of the division on introduction of a website:

Feedback Percentage
Management level Yes 97%
Labor level No 3%

Bar graph showing the improvement of the division on introduction of the website:

ANALYSIS: 97% of the workers / employees are aware that the website has helped the division
to improve in its company’s dealings and has helped the company to progress in the new
economy of today’s world.

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INFERENCES: The remaining 3% are those workers who are at the lowest cadre of work who
do not have sufficient knowledge about the website of the organization.

2. The knowledge about the website should be fair among the people who work in the
organization to conclude that the workers are aware as to where the company is heading
to in the 21st century. HAL being a premier defense industry in the field of aviation has to
always keep up with the other nations and therefore adopt new technology.

Table showing the awareness level of the web by the workers in the organization:

Response / Levels Management level Labor level

Aware / Yes 98% 87%
Not aware / No 2% 13%

ANALYSIS: Most of the workers in the organization are aware about the website at both levels
and know how it has improved the division, as the customers get to know more about the
division’s products and services worldwide which improves the profitability and also helps the
division to understand its customer’s background to enhance the business.

INFERENCES: Only around 2% at management level and 13% at labor level are not aware of
the website as they have poor knowledge and belong to the lowest cadre.

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3. Website of the company helps the customers to keep in touch with the company through
the e-mail provided by the websites for various divisions. This helps the customers,
clients and vendors to have a continuous touch with the company.

Table representing the customers who respond to the website:

Customers Percentage
Defense customers 85%
Foreign customers 45%
Corporate customers 6%
Civil customers 5%

ANALYSIS: The major customers of HAL are the defense customers such as the Indian Air
force, Indian Army, Indian Navy, Coast Guard and Boarder Security who often contact with the
company over the net.

INFERENCES: A very small percentage of the remaining customers such as the corporate
customers and civil customers including international customers contact with the company
through net.

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4. The main intension of putting up a website by any company is to get prospective
customers and induce them to make contract with the company. It is the same for HAL
accessories division too, so that the customers can have a continuous touch with the

Table representing the number of customers who respond voluntarily to the website:

Options Response in percentage

Most of them 30%
All 40%
Few 90%
Very few 70%

ANALYSIS: From the above graph we can see that only few of the customers respond to the
website voluntarily. As most of the customers contact the company through other means.

INFERENCES: We see that almost all customers somehow come into contact with the company
for some enquiry, doubt or clarification but since HAL is defense oriented, so mostly the
customers are from defense.

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5. The main objective of any company is to get enough customers to place an order or
contract with the company, although few of the customers come into contact with the
company through the net not all might be willing to place an order or make contract with
the company. The table below shows the number of customers who placed order with the

Table showing customers who placed order through net:

Customers who contact Percentage

Defense customers 70%
State government 20%
Corporate customers 7%
Civil customers 3%

ANALYSIS: From the above data we can conclude that most of the customers who placed order
with the company through net are the defense customers in comparison to others.

INFERENCES: The customers belonging to the other group such as the civil and corporate
customers are very limited, therefore the company focus more on the defense customers such as
Indian Air Force, Indian Navy, and Indian Army etc.

6. In today’s economy we see that not only multinational companies are trying to globalize but
public sectors are also trying to globalize. And the best way to achieve this is by obtaining many

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international customers. The table below shows the number of international customers the
division is able to get through the net:

Table representing international customers over the web:

Customers In percentage
Many 10%
Few 20%
Very few 5%

ANALYSIS: Few international customers are interested in making contact with the company.
From this we can conclude that HAL has opportunities of expansion in international market.

INFERENCES: When international customers and corporate come into contact, the company
gets help in improving the technology for production.

6. Today’s business have made the “Customer the King” and have decided to give the
customers what they want through customization and customerization. The table below
shows the number of customers who seek such benefits:

Table representing importance of customization to customers:

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Feedback Response
Very important 90%
Important 80%
To some extent 50%
Not important 5%

ANALYSIS: Since engines are one of the most advanced machines that help in the flying of air
vehicles and customers always seek sophistication in their engines. Therefore most of them seek

INFERENCES: Mostly the defense customers have an in-depth knowledge and thus seek
sophistication in the aircrafts. As the world is getting more advanced thus customization
becomes more important but it is not much in the case of civil or corporate customers.

7. Sales are a very important aspect for any company and to achieve maximum sales is a
goal of all companies. HAL is one of the leading manufacturers of engines and its
accessories. The table below shows how HAL is able to get a sufficient amount of sales
after the internet came into existence:

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Table showing the sales of the division for the past 4 years:

Years Sales (in crores)

2001-2002 338.14
2002-2003 328.5
2003-2004 415.14
2004-2005 424.15

ANALYSIS: From the above graph we can see that the sales of the company have been
increasing moderately in the past two years which is mainly because of the use of web.

INFERENCES: Since the web was introduced in the division only in the year 2000 and the
division have taken time to make complete use of it in the recent years. Therefore we can expect
sales to increase in the future.

8. Profit of any company determines its growth, expansion and development in all
directions. Therefore it is an important factor for public sector also such as HAL which is
a nonprofit organization. The table below shows the profit of HAL in past years:

Table showing the profits of the division for last 4 years:

Years Profit (in crores)

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2001-2002 46.5
2002-2003 65.9
2003-2004 62.55
2004-2005 51.66

Bar graph showing the profits of the


ANALYSIS: Profits(in crores) 80 As HAL is a

nonprofit 60 organization, so
we can see that profits in
each year are fluctuating.
Therefore we cannot interpret
whether internet will
help the company in
making more profits or not.

INFERENCES: As mentioned earlier most of its customers are defense customers and
international customers who contact through net and a very few of them are civil and corporate

9. In order to grow it is necessary for every company that it must be able to find new
customers through new means and mode. As technology has grown to such an extent that
the world is no longer a huge place to trade. With the use of internet it is possible for all
companies to find new prospective customers.

Table showing new prospective customers over net:

Customers Percentage
Civil customers 10%
Corporate customers 15%
State government 20%
Defense customers 100%

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ANALYSIS: From the above diagram we can conclude that the new customers made by the
company in each segment are very less. As it is basically a defense oriented company, so almost
all the defense customers have dealings with the company.

INFERENCES: Although the company has limited range of new customers but it has scope to
get customers at international level also.

10. Customer relation is very important today. It is more effective only through the World
Wide Web and although it has so many plus points but there are certain drawbacks in it.
The table below shows the drawbacks in CRM over the web:

Table showing reasons for drawbacks in CRM over web:

Reasons for drawbacks Percentage of effect

Delay in reply 20%
Negligence 30%
Failure of system 40%

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Other means 10%

ANALYSIS: Most of the reasons for the drawback of CRM are due to system failure and it can
be taken care of by providing for backup systems and better management in replying to

INFERENCES: CRM is gaining its importance in the current scenario and if more importance
is given it will prove more successful for the organization.



In HAL cost reduction and cost control is done in following ways:

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• In finance section, L1 i.e. lowest price is considered so that total cost of production

would be reduced and controlled.

• Quality is the strength of HAL. The company aims at best quality product at lowest

price. For this TQM is applied in whole organization so that cost would be controlled.

• In HAL standards are fixed for time consumption and also for cost incurred. For time

standards, the standard time is fixed for every process of job and for cost standards,

standard cost and fixed price quotation (FPQ) are defined in advance to control time

and cost.

• It also implements the technique of classification and codification for cost reduction

and control. Under this technique, all the jobs are classified into different categories

and are codified, due to which we can identify that the job belongs to which batch.

• Process layout is used for the study of various operations included in completion of

job. Due to which standard time for completion of operation is fixed and inspected

periodically, so that cost and time can be reduced and controlled.

• Method study is implemented during production process and the method which is less

time consuming and having less cost is accepted.

• In costing section, component costing is used for calculating the cost of each

component. By applying this method the total cost can be reduced and controlled.

• As the rate of machine hour rate (MHR) is very high in HAL so the work is done on

contract basis i.e. outsourcing is done so that cost can be reduced and controlled.

• Minimum inventory is kept in stores, so that there would be no wastage and cost can

be reduced.

• Efficiency of employees is approximately 100% due to which there is no wastage and

cost is reduced.

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• It is also implementing methods of 5S to control and maintain cost effectiveness.

• It has also implemented lean management and various tools like KAIZEN for wastage

removal so as to reduce the extra cost incurred.

• It also aim at producing all accessories as first time correct and with Zero error so that

the cost incurred in rejection and rework processes can be controlled.


• There should be facility of intranet so fax and such other things must be done through

it that can reduce time and money.

• For attendance finger print system should be adopted so that actual person’s

attendance can be mentioned.

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• The time delay between rising of purchase order and preparation of RDR should be


• Wages to direct workers should be given through piece rate system.

• Efficiency of indirect workers should be measured so that slackness can be sorted out.

• Employees should be included in brainstorming and also should be given liberty and

non-monetary incentives as appreciation.

• Officers should be promoted only on the basis of performance and not on the basis of

number of years worked.

• Workers who have talent and compatible with office grade but restricted to work only

at non-supervisory position, the policy should be such so that grade promotion could

be possible.

• Profit calculation by project cell for project evaluation is different from costing

section. In this way project evaluation is not proper. So it must frame its cost-benefit

evaluation and focus on only licensing fee and other DRE and framing of analysis

should be done as per actual recoverable profit percentage.

• The company should give some stipend to Industry guide for summer training due to

which they will take more interest in providing guidance.


HAL is one of the largest PSU under the department of defense production, GOI and is a

“NAVRATNA” company ranked 34th in the list of world’s top 100 defense companies. HAL

with its wide spectrum of expertise in design, development and manufacture of aircrafts,

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helicopters, engines, accessories and avionics has emerged as major aeronautical complex in


As herein, the projects and items need huge investments than any other organization and

confidential factor is also there too much extent but as much information is extracted shows that

cost control is being performed quite good that’s why it is in so much profit.

In the organization, cost of inventory as well as labor is controlled very well by implementing

ABC analysis but there is also some scope for cost reduction by reducing number of casuals to

reduce labor cost and by implementing EOQ (Economic Order Quantity) technique to control

material cost.

Although for the organization’s betterment its executives are working hard and trying to serve in

the best possible manner with their colleagues and they all are very qualified and experienced so

organization must extract optimum from them.




Section / Department:

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1. Describe the major activities being carried out at the accessories division?

2. Batch costing and job costing is carried out for which of these activities?

3. Is there a component costing system in existence?

4. On what basis is the production work undertaken?

5. What is your comment on the present budgeting system?

6. Describe the procedure of processing the cost ledger?

7. Describe the current practice followed in calculating the cost for various departments?

8. Describe the steps taken to improve the international relationship with foreign companies

like Turbomeca and Rolls-Royce?

9. Is the current computer system capable of tracing the work flow?

10. Describe the work order structure?

11. How are the work order issued?


During the preparation of project I took the help of various sources which are as follows:


• M.L. Agarwal- Cost accunting

• Jawaharlal – Cost accounting

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 Accounting manual

 Budget manual

 Training manual on cost reduction

 Company monthly journals




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