CHAPTER-I

INTRODUCTION

INTRODUCTION
Management cannot avoid making decision. Decision-making is Iocused towards speciIic
goals and without data about these goals decision will lack purpose and eIIectiveness. Cost
accountancy is a subject that provides knowledge to take eIIective and eIIicient decision Ior cost
control, ascertainment oI proIitability, internal and external reporting.
'Costing system comprises oI the application oI costing, cost accounting principles,
methods and technique to the science, art and practice oI cost control and ascertainment oI
proIitability as well as presentation oI inIormation Ior the purpose oI decision making.
ProIit is the resultant oI two variants viz. sale and cost. The wider the gap between the
two Iactors, the large is the proIit. Thus, proIit can be maximized by either increasing sales or by
reducing cost.
In the case oI monopoly product, it may perhaps be possible to increase price to earn
more proIit and the need Ior reducing cost may not be Ielt.
But with the invent oI new pricing policy policy HAL will have to take steps towards
reduction in cost. In new pricing policy (FPQ), the price will be Iixed by HAL and IAF team
aIter taking into consideration all possible costs and adding a percentage margin oI proIit. Thus,
HAL has to Iollow a policy oI cost control and they have to produce or overhaul aircraIt with
cost lesser than the price Iixed in FPQ to increase its proIit.
Cost reduction should mean maximization oI proIits by reducing cost through economics
oI administration, selling and distribution. This makes it necessary to Iind the cost oI the product
and this has necessitated Iurther improvement in the costing system and method to have better-
cost control.

Need for the Study

OB1ECTIVES
Any project is done to give exposure to the student to his branch oI specialization. It
given an insight as to what really goes in the making oI the project in continuous and systematic
study oI topic under consideration.
The basic objectives oI undergoing this project are: -
To study costing practices Iollowed in the manuIacturing and
overhaul oI aircraIts.
To study the system oI cost according Iollowed in case oI labour,
material, overheads and sundry direct charges.
To study elements oI cost in HAL.
To study new pricing system and it`s advantages over old pricing
system.
To study the eIIect oI new pricing policy on cost control and cost
reduction.

Scope and Limitations of Study
Scope:
HAL Nashik Division is the only manuIacturing-overhauling department Ior all types oI
Russian made Iighter aircraIt like MIG variants oI 21 & 27 series. The company has already
bagged the prestigious Su-30 manuIacturing project Irom IAF and the Iirst batch oI production
has been commenced Irom 2006 onwards where the structure is quite vast.
The role oI costing system, pricing policy, cost control and cost reduction will have
important role to play since the cost or price involved is quite high. Also it is necessary to
analyze the problems associated with existing costing system and pricing policy.

Limitations:
All the Iinancial data oI HAL come under oIIicial secrets act, 1982, since it is related to
the deIence sector oI the country. Thus, this report is based on the inIormation provided by
commercial authorities. The Iigures incorporated are not the exact ones as available. The Iigure
have distorted with certain inIlation or deIlation percentage.
Research Methodology
This project report is prepared on the basis oI primary and secondary data. The primary data
is collected Irom the primary sources especially Ior working out this project report. The
secondary data is second hand inIormation, which is collected Irom the secondary sources i.e.
printed inIormation available. The primary and secondary data played very important role in
preparing this project report.
Primary Data: -
The primary data was collected by visiting costing department and by holding
discussion with executives oI the organization. The inIormation was asked as and when
required to prepare the project. The diIIiculties and queries were asked to the project guide at
the work place Irom time to time to collect the relevant inIormation.
Secondary data: -
The secondary data was collected Irom the various sources like reIerence books, Iinancial
statement, manuals, and magazines, web site. To know about the company`s history, company`s
products and services the web site oI company was visited.
Research methodology used for carrying out the study: -
Study oI existing costing system.
InIormation collection by way oI manuals, guidelines, discussion with concerned
authorities.
Analysis oI element oI cost.
Study oI impact oI costing on price.
Analysis oI pricing system by way oI its advantage over old system etc.
Study oI cost control and reduction strategies.
Recommendation and suggestions to proposed costing system and cost reduction

CHAPTER-II
INDUSTRY PROFILE

INDUSTRY PROFILE

HISTORY OF HAL:
The Hindustan AircraIt Limited was Iounded in association with the princely
state oI Mysore on 23rd December 1940 with the object oI 'ManuIacturing
aircraIt, airships, seaplanes, balloons and accessories Ior the India market.
The company`s manuIacturing Iacility was located on the Agram plains,
Bangalore, which was landing ground Ior a Iew aircraIt, then, in use in India.
M/s Walchand Tulsidas Khatau limited were the Managing Agents oI
Hindustan AircraIt Limited, a private limited company with an authorized
capital oI Rs 4 crores.
Production line was established in collaboration with Inter-
continental AircraIt Company oI USA Ior manuIacturing.
Harlow Trainer.
Curtiss Hawk Fighter.
'altess Bomber.
With the escalation oI World War II, Hindustan AircraIt geared
its activities Irom design and manuIacture to the overhaul and repair oI Iighters, bombers and
transport aircraIt in service with the allied Iorces.
By September 1942, Hindustan AircraIt was handed over to the
United States Air Force, enabling it to become a major overhaul base Ior the South East Asia
Command oI the aircraIt and 3800 piston-engines, during 1942-45.
With the World War II over, the Government oI India took over
the management oI this organization in 1945 which was at that time, reeling under a period oI
stagnation AircraIt like Tiger Month, Dakotas and Liberators, then in service with Royal Indian
Air Force, were reconditioned during this period. HAL is the only AircraIt manuIacture in India
and its manuIactures and overhaul aircraIts strictly Ior deIence purpose only. It is very important
that all possible and available resources whether men, money, material, machines etc. are Iully
and properly utilized in the prime objective oI the company. As almost all the materials are oI

Russian origin, the payment has to made in US $ this cause a considerable drain oI the Ioreign
exchange and increase the cost oI AircraIt.
In 1948, a license-agreement with the Percival AircraIt Limited, UK was entered
into Ior the manuIacture oI Percival Prentice Trainers in India. Around July-August 1950, the
Government entered into the license-agreement with the De Haviland Company oI UK Ior the
manuIacture oI 'ampire Iighters at Bangalore. During this period, the induction oI jet Iighters in
the IAF enabled Hindustan AircraIt to receive a new IaceliIt in the manuIacturing technologies
as well as in the up gradation oI skills oI its technician and aeronautical engineers.
HAL is an instrument oI national policy to achieve selI-reliance in Design,
Development and production oI aircraIt and Aeronautical Equipment with special emphasis on
Air Force requirement. In the last six decades, HAL has spread its wings to cover various
activities in the areas oI Design, Development, ManuIacture and Maintenance.
In August 1963, the government constituted Aeronautics India Limited, Ior the
manuIacture oI Soviet designed MIG- 21 series aircraIt at Nasik (AirIrames), Koraput (Aero
engines) and Hyderabad (Avionics). These three divisions oI Aeronautics India Limited were
merged with Hindustan AircraIt Limited and a new organization 'Hindustan Aeronautics
Limited came into existence in October, 1964.
1945: Govt. oI India took over the management oI HAL.
1956: Formation oI Engine Factory
1962: Formation oI Korwa Division
1964: Formation oI Hyderabad Division
1964:Formation oI Kanpur Division
1964:Formation oI Nasik Division
1970:Formation oI Lucknow Division
1970:Formation oI Helicopter Factory
1974:Formation oI Forge & Foundry
1988:Formation oI Aerospace Division

HAL`S MISSION
To become a globally competitive aerospace industry while working as an instrument Ior
achieving selI-reliance in design, manuIacture and maintenance oI aerospace deIence equipment
and diversiIying to related areas, managing the business on commercial lines in a climate oI
growing proIessional competence.

FUTURE PRO1ECTS
New projects on hand/envisaged are:

Repairs & overhaul oI SU-30 MKI AircraIt
Repairs & overhaul oI Bison AircraIt


INGS
HAL has its registered oIIice at Bangalore and has thirteen divisions spread all over the country.
Out oI these, seven divisions are located at Bangalore alone, one each at Nasik, Koraput, Luck
now, Korwa, Hyderabad and Kanpur. These divisions/units are Iully backed by nine Design
Centers, which are co-located with the production Divisions. These centers are engaged in the
Design & Development oI combat AircraIt, Helicopters, Aero engines, Engine Test Beds,
AircraIt Communication & Navigation Systems and Accessories oI Mechanical & Fuel systems
and Instruments.

COMPANY PROFILE

COMPANY PROFILE
HINDUSTAN AERONAUTICS LIMITED
(HAL NASHIK DIVISION)
Hindustan aeronautics limited was established on 1
st
October 1964 with the objectives oI
manuIacture oI Mig series aircraIt meet the requirement oI Indian airIorce. At present the
division is engaged in manuIacture oI Mig aircraIt, which is sophisticating single seater Fighter-
bomber aircraIt designed preliminary Ior ground attack only.
H.A.L Nasik Division is involved in licensed production oI Mig series aircraIt, with Iront line,
tactical supersonics, and Helicopter/ Iighter aircraIt. H.A.L. started its activity with
manuIacturing oI Mig-21 Ii aircraIt in 1968 and completed the project in 1972.
It then successIully carried out the production oI Mig-27 and Mig-27 series and advance version
oI Mig series.
H.A.L., is an ISO-9001company the scope oI certiIication is given Ior manuIacturer, supply and
overhaul, modiIication, design oI Mig-27 and Mig-21, aircraIt component spares ground support
equipment Ior aircraIt use.
The detail Iactory layout oI Nasik Iactory, H.A.L., Division was prepared with assistance oI
Soviet specialist during the period Irom April1965-1966. Majority oI the requirement oI plant
and machinery was made in importing them Ior the Soviet Union. The Iew machinery were
added later procuring them Irom indigenous and third country resources. The Plant & Machinery
has combination oI product and process layout to Iacilitate minimum movement and completion
to a large extent with in shop.
The corporate and register oIIice oI the organization is at Banglore. The main products oI the
complex are
Mig-21 FL
Mig-21 M
Mig-21 BIS
SU-30 MKI

The Mig-21 FL aircraIt manuIacture at Nasik Division delivered in 0ctober-1970. Similarly

H.A.L Nasik Division has produced diIIerent improved version oI Mig-21 series oI aircraIt to
meet overgrowing need oI Indian Air Force.
Nasik Division is having 5 DiIIerent activities mentioned below.
Production oI Air Frame i.e. Production oI Mig-27 M aircraIt, Sukhoi-30, airIrame and
Iinal assembly oI aircraIt.
Overhaul oI Mig-21 Series aircraIt.
Overhaul oI Mig-27 M.
Repair job oI Mig aircraIt at various bases in India.
Supply oI spare Ior overhaul oI aircraIt to IAF.
The division has well laid out plant and having machine shop complex, sheet-metal complex,
Heat treatment, plating, painting shop are equipped to Iabricated to a large variety oI
components.

NEED OF ESTABLISHMENT OF HAL:
HAL has been established to provide service mainly to IAF. Coast Guard and BSF.
Transports aircraIt and helicopter have also been supplied to airline as well as state government
oI India. The company has also achieved a Ioothold in export in more then 30 countries, having
demonstrated its quality and process competitiveness. HAL has played signiIicant role Ior
India`s Space program in manuIacturing oI satellite launch vehicles like PSL' (Polar Satellite
launch 'ehicle), GSL' (Geo Stationery Launch 'ehicle), IRS (Indian Remote Satellite) and
INSAT (Indian National Satellite).

OB1ECTIVE OF THE COMPANY
The objective oI the Company is to manuIacture the deIence aircraIt and to be selI-
suIIicient to meet with emergence war situation in national interest.

The import oI the completely manuIactured accessories Irom abroad is not economical
hence by obtaining any new raw materials Irom the collaborators, will cost less exchange
hence saving national exchange.
To cope up with the changing technology design models, etc. and to meet the
commitments, and to joint the proIessional competence.
To serve as instrument oI the National Policy, to achieve selI-reliance in the design,
development and production oI the aircraIt and the aeronautical equipment to meet the
countries changing and growing need with special emphasis on the military requirements.
To conduct its business economically and eIIiciently that it can contribute its due share to
the national eIIorts to achieve selI-reliance and selI-generating economy.

SOT
HAL has taken note oI the Iast changing economic scenario, new opportunities and
threats and reassessed its strengths and weakness and identiIied key thrust areas and action
plans to lead HAL into 21
st
century towards greater heights in its perIormance and growth.
The main objective oI company continues to meet the requirements oI Indian Military.
Taking into consideration the economic and aviation scenario the company has to Iurther
expand its activities in Civil Aviation Sectors and widen its export without compromising on
its role and responsibilities toward deIence requirement. In the near Iuture the company
would concentrate on the series production oI LCA (Light Combat AircraIt) presently under
development. In addition to MIG and jaguar update programmes and preparation oI project
reports Ior license production oI SU-30, the company proposes to take new initiative in
Design and development oI new project like new jet trainer, a two seater jaguar aircraIt and
development oI multirole short hand commercial aircraIt either through co-production or
joint venture arrangement with active design and development oI multirole short hand
commercial aircraIt either through co-operation or joint venture arrangements with active
design participation Irom other companies.
The skilled manpower is one oI the greatest strength oI HAL HAL has drawn plan to Iurther
consolidate their human resources by continuously updating the knowledge and skill oI their
employees through systematic learning / training programmes. Research and development is the
engine Ior growth. Company has made plans to strengthen the research, design and development
activities .The company also plans to work in close co-operation with other Aeronautical R&D
organization such as DRDO, CAB, ADA and other public sector and private sector industries Ior
integrated development oI Aeronautics in the country, meeting the requirement oI military and
civil aviation.

ACCOUNTS DEPARMENTS:
Finance is one oI the sections oI the company. It is called Accounts Department in the
company (HAL). The Accounts Department is a large department divided into various sections
as Iollows-
Finance
Bills Payable
Material
Costing
Bills Receivable
Payroll
Cash
Provident Fund
Book-Keeping
Budgeting

CHAPTER-III
LITERATURE REVIE

AN OVERVIE

HAL currently provides a wide range oI supplies and services to the Indian Air Force
(IAF). The principal tasks assigned to HAL include manuIacture oI aircraIt, helicopters
and aero engines, major repair / overhaul oI aircraIt, aero-engines and Rotables supplies
oI a variety oI Iabricated / bought out item required by the IAF as maintenance /
overhaul spares stocks in equipment depots / base repair depots. The annual value oI
HAL deliveries to the IAF presently aggregates to approximately 20 oI the IAF
budget. The pricing oI such delivers upto 1994-95 had been regulated in item oI Iixed
cost quotation (FCQ) system. In essence, this policy had entailed a process oI annual
Iixation oI MHR Ior the diIIerent HAL division based on an aggregation oI man-hour
cost and other productive overheads expenses in the division divided by the estimated
availability oI productive man-hour in the division.
The actual implementation oI the Iixed price cost quotation policy during this period
had revealed serious deIiciencies and inadequacies during the same tenure, which had
adversely impacted on the eIIorts towards securing maximum value Ior money to the
IAF. The Iixed cost quotation the arrangements did not contribute to any eIIicient
monitoring and control being instituted over the quantum oI Iinancing cost comprising
interest on Iund borrowing by HAL as well as HAL`s proIit thereon. It was also not
ensuring the eIIective capacity utilizations, diversiIication, labour eIIiciency and
productivity. In the absence oI an appropriate blend oI penalties and incentives in the
Iixed cost quotation system, the compulsion and need Ior HAL to attain the optimum
level oI Iinancial discipline, cost eIIiciently and productivity had not been actually Ielt.
It is against this backdrop that IAF had been contemplating a comprehensive revision oI
the ongoing pricing policy regulating HAL deliveries to the IAF and it was decided to
implement with eIIect Irom 1-4-1995 Fixed Price Policy in respect oI HAL`s supplies
to the IAF.

The new Policy would require a comprehensive one determination oI Iirm and Iixed
prices Ior item scheduled to be delivered by HAL to the IAF during 95-96 and aIter that
based on price negotiations. For this purpose, HAL would submit detailed price oIIer
supported by cost and other data as prescribed. Once the base price has been Iixed up as
a result the proposed price negotiations, scheduled deliveries in subsequent years ie.96-
97 and beyond will be paid Ior at prices adjusted on the basis oI an approved price
variation Iormula, which would Iorm part oI the speciIic contracts between HAL and
MOD /IAF. Such Iirm and Iixed prices with an approved base price and Iuture
escalations on the basis oI a price variation Iormula will be determined Ior a production
run not exceeding 3-4 years where-aIter Iresh base price can be worked out. For this
purpose eIIective post-contract monitoring, each contract entered into with HAL shall
incorporate a PERT chart identiIying the major physical and Iinancial milestones Ior
the execution oI the contract linked where applicable to batch production needs. The
periodical reports are submitted by HAL in relation to the progress oI work in HAL vis-
a-vis contractual commitment i.e. stage payment details. Such payments are linked to
an appropriate batch size and milestones set out in the PERT chart annexed to the
contact
About 65to 85 oI the amount oI contract is received in advance by HAL and
remaining is received on actual delivery.
FCQ SYSTEM: DEFICIENCIES IN FCQ SYSTEM
Fixed cost quotation oI price Iixation which was existed in HAL, previously
involved tedious job on the part oI HAL oI showing documentary prooIs proving cost and
justiIying cost to IAF and thereaIter continuous Iollow-up Ior payment oI jobs completed.
DeIiciencies in Iixed cost quotation system: -
Extensive record keeping Ior years together till closure oI the project resulting in
additional manpower and overheads.
Extensive and cumbersome documentation involved.
Payments not linked to physical progress.
Inordinate delay in receiving payment due to:

i) Brought on Charge (BOC) certiIication Ior engineering Department (ED)

required.
ii) Coordinated part List (CPL) procedure and certiIication by ED& CRI (ChieI
Resident Inspector)
iii) Revision oI project sanction Ior material and in line with Iixed cost quotation.
No eIIective control on:
i. Build up oI item in HAL held IAF stores and utilization / liquidation
thereoI as proIit on this material was available.
ii. Idle time cost (not separately identiIied) / slow diversiIication.
Improper budgeting oI dues to HAL as total price was known and provision in budget
made on the basis oI cash Ilow instead oI linking it to entitlements Ior supplies /services.
HAL was not getting paid Ior certain job like requires to visiting aircraIts, item not
covered by Iixed cost quotation etc.

FEATURES OF REVISED POLICY
Fixation oI price on nominative basis Ior base year with agreed escalation and ER'
Ior subsequent years.
All individuals elements oI cost Ior the base year examined / negotiated by the
customer
1
st
stage payment admissible with the order / task subsequent stage payments
linked to milestones oI physical progress certiIied by CRI.
Outstation jobs paid based on MHR Ior hours spent / worked at the base
Documents Ior payment simpliIied (removal oI BOC certiIication, CPL)
Increased productivity to be passed on to IAF by way oI yield, eIIiciency etc.
Milestones and cycle time made available.
LD (Liquidated Damages) applicable Ior delayed supplies.

BENEFITS OF THE REVISED PRICING POLICY

Insight into the build up oI diIIerent element oI cost oI the products by all participating
agencies (HAL, IAF)
i. Proper and scientiIic estmatiation oI price.
ii. Assessment oI realistic budget estimates.
iii. Better inventory management by regulating purchase related to Bill oI material
iv. Trust Ior cost reduction measures as ceiling oI price Ior individual cost element is know.
Arbitrary Iixation oI price by the customer is avoided as prices are now Iixed based on
norms linked to indices transparently.
Greater emphasis on completion oI milestones oI physical progress and adherences to
cycle time as LD (Liquidated damages) are involved Ior delayed deliveries besides
applying the price Ior scheduled delivery.
SimpliIication oI documents Ior obtaining payments: -
i) BOC certiIication Irom equipment depots Ior obtaining Ior obtaining payment removed.
ii) Application oI CPL procedure removed. SimpliIied certiIicate is introduced.
iii) Many old claim pending Ior documentation / covering order etc have been realized.
Outstation job paid appropriately based on MHR instead oI per diem rate resulting in
better cost oI the services and avoiding cross subsidization.
Better control on utilization / liquidation oI item in HAL held IAF stores (not accounted
in HAL books). Annual list oI utilization certiIied by IMM incharge only needs to be
instead oI Iollowing cumbersome CPLM procedure.
Escalation percentage and cut-oII date Ior material procurement is Iinalized keeping in
view the lead-time.
Easy and Iixation oI MHR linked to know indices.
Price Ior deliveries oI the year can be realistically assessed by June July every year.
The escalation percentages are agreed with the customer through long-term agreements.
HAL now gets stages payment with the order leading to increased cash Ilow, reduced
loan incidence and untimely reduced cost oI product / services.

Greater thrust on controlling absenteeism as HAL is required to complete the job as early
as possible to avoid increased MHR and ultimately reduction in proIit.
Greater thrust Ior diversiIication / work sharing as idle hours are identiIied and paid
separately.
As beneIits oI cost reduction now accrue to HAL, greater trust Ior cost reduction
measures: -
i. To reduce material cost by better negotiation eIIective utilization and reduce
rejections / rework.
ii. To reduce absentees and increase the labour yields.
iii. To improve the eIIiciency and reduce the lead-time oI production.
iv. To reduce the controllable overhead.
Generation oI better conIidence level (in working capital management) with the
customer leading to: -
i) Release oI the dues to the company even beIore approval oI price and completion oI
documentation.
ii) Release oI advance relating to the entitlements oI the next Iinancial year
Enabled the company the accelerate the practice oI eIIective working capital
management resulting: -
i. Substantial saving in the interest incidence Ior the co. interest saving was upto Rs.
220 Crs. Over Iirst 5 years.
ii. Improvement in the credit rating with bank and rating agencies.
iii. Improved borrowing power in the market.

5. AC1IOA REQUIRED
A) Improvement in material productively by: -
Realistic assessment oI material required as per the bill oI material.
IdentiIying right supplier by proper vender sourcing (by periodic updation) and
negotiate with them to contain the price with escalation percentages agreed with the
customer.

Quick action Ior replacement oI rejection item at the inward inspection stage.
EIIective inventory management.
Close watch on the rejection percentage during production to contain it well with
norms agreed with customer.
Close watch on non-moving items Ior possible utilization / disposal.
B) Improvement in the labour productivity by: -
Close watch on the absenteeism and lost hours possible reduction to increase the
yield.
Close watch on the eIIiciency achieved at diIIerent levels Ior possible increase to
bring down the sale hours well within the agreed sale hours.
Ensuring docketed hrs. Periodically linked to actual hours.
Close monitoring and control over SMH to avoid incidences oI reworks.
Close watch on controllable expenses Ior possible reductions.
C) The escalation percentage and cut-oII date Ior material is Iinalized, and Iixation oI MHR is
linked to published indices at the beginning oI the year. Finalization oI MHRs and quotations Ior
supplies and services is necessary by June / July every year through complex oIIice and Iollow
up with customer Ior approval.
D) The claims Ior interest Iorm 1997-98 onwards are revised and claimed in the Iixed price
quotations.
E) The stage payment claims are to be submitted Irom to time to avoid interest implications.
F) The Iinal payment is to be made on expenditure on the delivery.
G) Ensuring Iollow up with customer / Government Ior speedy settlement.
H) Ensuring cycle time / scheduled delivery is adhered to avoiding recovery oI Liquidated
Damages (LD)

6 OB1ECTIVES OF NE POLICY

Clear linkage between physical and Iinancial progress.
Payment arrangements, which would serve the twin objective oI
i. Curtailing substantially the requirement oI Iund borrowing even
while a signiIicant balance would be retained till physical deliveries
are made and
ii. Relate quantum oI Iund due to physical progress. Imposing a clear
time Irame Ior phased reduction in inventories oI HAL stores / WIP
as well as HAL held IAF stores keeping in view current production
cycle and supply lead time.
Setting out clearing the improvement in current norms Ior standard man-hours,
man hour`s availability labour eIIiciency / productivity and productive overhead
expenditure to be achieved to be achieved. The objective is to reduce overall cost
oI production.

ROLE OF VARIOUS DEPARTMENTS IN PRICING

Department Role
Production Planning and Management
services department.
i. Engineering Designs, Process Sheets, and
wastages, Rejection.
ii. SMH requirement.
Integrated material management computers Bill oI Material sourcing oI material,
purchase, storage, consumption.
Management Services department
personnel, Computers.
Manpower eIIiciency ascertainment, lost
time analysis and control.
Finance and Computer Receiving report pricing, stock ledger,
Iinancial data
General Manager Overall co-ordination and control.

8 BREAK-UP OF FIXED PRICE QUOTATION
All Iixed price quotation Ior supply to IAF is submitted to in application joint secretary
(IAF) with copies to Deputy Financial Advisor (IAF). Copies oI all quotation rendered will be
sent to corporate oIIice.
The progress oI actual cost in relation to each Iixed price quotation (FPQ) is worked out on
a monthly basis by the committee consisting oI GM, DGM, (FC) Finance Controller) and ChieI
Production Engineer. The actual cost is compared under each element oI cost indicated in the
quotation. The review analysis oI actual booking vis-a-vis FPQ is sent to corporate oIIice. The
cost overruns are worked out as the diIIerence between the cost included in FPQ and the actual
cost incurred.

For the purpose oI monitoring cost the total man-hours indicated in the Iixed price quotation
are broken down to shop wise man-hours so that it is possible to relate the man-hours with
reIerence to the responsibility center.
Fixed Price Quotation is normally submitted within 2 months Irom the commencement oI
the Iinancial year Ior deliveries during that Iinancial year. In a Iew cases where the same phase
oI production goes on Ior 2 years the Fixed Price Quotation may be submitted Ior 2 years.

HINDUSTAN
AERONAUTICS LIMITED
BREAK-UP OF
FIXED PRICE
QUOTATION
PRODUCT
BASE YEAR FOR QUOTE:
QUANTITY
Sr.No. Particular Previous
Year
Year
oI
Quote
Remarks
1 MATERIAL
1.1 Imported
i) Raw Material
ii) Less Rejection (oI RM)
iii) Less Rejection ( oI Bought out item)

Sub Total 1.1
1.2 Indigenous
i) Raw Material
Less Rejection ( oI RM)
ii) Brought out items
Less Rejection (oI Bought out item)
iii) ATF

Sub total 1.2
1.3 Frieght & Insurance Charges
( OI 1.1 1.2)

Material Cost-1

Material Cost: -
HAL will justiIy the material cost with reIerence to
iii. High value item in the product based on Bill oI Material oI the base
year.
iv. Escalation will be added keeping in view cut-oII proIit beIore
delivery, production cycle time and supply lead-time.
v. Exchange rate variation upto the scheduled cut-oII dates.
vi. Rejection based on past trend.


2 CON'ERSION COST
(As approved)

Total-2
3 NON RECURRING COST
(As approved)

4 SDC (As approved)
5 FINANCING CHARGES (cost)
(As approved)

6 Sub Total (2to5)
7 TOTAL COST (1 to 6)
8 PROFIT (oI7)
9 SELLING PRICE (78)

Conversion Cost: -
HAL justiIied the conversion cost comprising oI labour and overheads, which represents the
total manuIacturing hour involved, multiplied by MHR.
Non-Recurring Cost: -
The non-recurring cost (DRE) is spelt out in detail under various elements together with
proposed rate oI amortization. Amortization means writing oII the DRE Ior the year.
Sundry Direct Charges: -
SDC are worked out as explained in earlier chapter.
5 Financing Cost: -
The Iinancing cost on working capital would suitably be included depending upon the
cash Ilow arising out oI the agreed terms oI payment at prevailing bank rate.
6 Profit: -
The Iinancing proIit percentage based on past pattern and as mutually agreed will be added
on the cost the selling price is work out accordingly.

Profit Percentage Claim
Manufacture 5
Overhaul

PAYMENT PROCEDURE
(Stage payment)
(I) Manufacturing:
25 oI the order value on acceptance oI the order.
30 on certiIication by CRI (ChieI Resident Inspector) on the start oI manuIacturing
activity oI the batch.
20 on certiIication by CRI on the start oI the equipping oI the batch.
15 on certiIication by CRI on the Iinal acceptance with work done report.
(II) Repair & Overhaul
65 oI Iixed price quotation on receipt oI overhaul task.
30 based on certiIication oI acceptance by CRI (ChieI Resident Inspector) and
dispatch advises by user decision.
5 based on receiving report oI user.
(III) Spares:
Spares oI the value oI more than 10 lakh are covered by FPQ and spares oI the value oI less
than 10 Lakhs based on value oI approved price catalogue Ior the schedule year oI delivery.
a) Where delivery is within 12 months
iii. 65 oI the approved FPQ on placement oI order.
iv. 35 on certiIication oI acceptance by CRI
b) Where delivery is beyond 12 months
i .40 oI the approved FPQ on placement oI order.
ii .30 6months beIore scheduled delivery.
iii.30 on certiIication oI acceptance by CRI.

A COMPARISION BETEEN FCQ & FPQ

Sr.No FIXED COST QUOTATION FIXED PRICE QUOTATION
1 Annual Iixation oI MHR and quotes Fixation oI price Ior base year with ER' /escalation
Admissible Ior subsequent year deliveries oI the same
product.
2 No detailed examination oI material
cost
All the elements oI cost i.e. material, labour, DRE &
SDC are examined / negotiated and approved Ior the
base year.
3 Individual divisions submit the
FCQs and hence total cost oI
product is not known.
Total price oI the product is negotiated and known to
HAL and customers.
4 Payment is not linked to physical
progress.
Stage payments linked to milestones oI physical
progress by CRI.
5 Payment oI idle hour not considered
separately and less attention to
reduce idle hours and
diversiIication.
Idle hours are assessed based on 5 years work load to
be give to IAF and paid separately. HAL is taking
eIIorts to reduce idle hrs.
6 Outstation jobs paid as per time
basis
Quotation jobs at approved MHR so as to correctly
cost the service.
7 No eIIorts to reduce the cost as
there were any rewards Ior cost
reduction. As payment was linked
to cost plus Iixed proIit percentage.
BeneIit oI cost reduction. DiIIerence between
approved price and actual cost is beneIit to HAL.
8 Extensive documentation was
involved.
SimpliIication oI document Ior purpose oI obtaining
payment.

9 No progress in yield / eIIiciency HAL passes on increased eIIiciency to IAF above

certain limit.
10 No detailed commercial terms. Execution oI contract linked to commercial term and
conditions binding on parties including warranty, LD
etc.
11 No beneIit Ior holding IAF stores in
HAL
Decision regarding discontinuance oI HAL held IAF
stores.
12 No insight into all the elements oI
cost by the customer.
Good insight into each and every element oI the cost
by customer Ior the base year.
13 Customer had to depend on HAL
Ior budgetary projections & Iixed
cost quotation
Total price is know, projections are made easily based
on escalation Iactors.
14 Arbitrary Iixation oI MHR ScientiIic & normative bases Ior Iixation oI each
element oI cost & total price

MHR COMPUTATION

Sr No Item Amount
Basic Pay
DA
Total (A)
Other element of Salary & ages
Provident Fund ( of basic +
DA)

Total (B)
5 Overheads
6 Power
Fuel
Total
8 Net Conversion (A+B+C)
Input Hours
MHR (8/)


Operation statement is prepared tom identiIy overhead oI all department in the
base year.

ManuIacturing hours involved (available) Ior all department is calculated as

under: -
Strength oI direct workers X 8 hours X 25 days X 12 Months.
Less strength oI direct workers X 8 hours X 12 days (Casual Leave)
Less strength oI direct works X 8 hours X 30 days ('ocation Leave)
Less 10 compensation provision Ior idle and lost hours
Direct labour hour Ior all departments.




MHR Total Net Overheads
Available Direct lab our Hrs

It is necessary to identiIy overheads oI each department separately because rate oI escalation
in MHR may diIIer in case oI each department or according to type oI overhead (e.g. rate oI
escalation Ior salaries and wages, power and Iuel is diIIerent)

PROFIT
ProIit is essentially the diIIerence between sales and cost oI sales. ProIit in HAL is diIIerent
product viz. Ior manuIacturing it is 12.5 and Ior overhauling job it is 10 as agreed with the
customer.

On non-entitled to proIit as enumerated above. So proIit is depending upon the total actual
cost oI sales against the costs quoted in the FPQ (Based on escalation Iactor) Example: -
Cost Element FPQ Actual
Labour hours 20 15
MHR 10 7.5
Conversion cost 200 112.50
Material Cost 180 150.00
Freight & Insurance 10 7.50
Total Cost 390 269.00
ProIit (10 on cost) 39
Selling price 429

(Note: - Above selling price is subject to 'TransIer oI eIIiciency clause explained in next
Chapter)
Thus Irom above example it is clear that through proIit predetermined is 10 on quoted cost i.e.
39. Actual proIit to HAL is,
Total Receipts - Actual cost
429 - 269
160
To reduce overheads (to lower actual MHR)
To reduce material cost by way oI proper planning reducing waste etc. To reduce other
SDC.

TRANSFER OF EFFICIENCY
Apparently Irom example give in earlier chapter it will be seen than there will
always be large distance between agreed prices (escalated cost in FPQ) and actual costs mainly
conversion cost.
But the transIer oI eIIiciency clause is included in the agreement. This means MHR is escalated
at an agreed Iactor. Input hrs is calculated based on No. OI direct manpower available.
But iI the input hrs Ior completion oI job is more than the hours quoted, then the beneIit oI that is
transIerred to customer. The input hrs may be less due to retirement in a year, training, improved
technology etc.
But, iI the input hrs exceeds the hrs quoted then the increase actual costs have to be borne by
HAL (Actual MHR increase every year due to increase wages etc)
Example: -

Year FPQ Actual
MHR Hrs Cost MHR Hrs Cost
I 200 100 20000 180 70 12600
II 300 100 30000 180 60 10800

Thus with increase in eIIiciency (i.e. decrease in actual input hrs.) the proIit margin will go
on increasing.
But as per 'TransIer oI eIIiciency clause the beneIit oI increased eIIiciency will be transIer
as under: -
Year- I:
Saved Hrs. 100-7030

Amt. Returnable 200 X 306000

Actual amt. Receivable20000-600014000
ProIit Actual amt. Receivable - Actual Cost
14000-12600
1400

Example: - Year II:
Saved Hrs. 100-60 40
Amt Returnable 40X30012000
Actual amt. Receivable 30000-1200018000
ProIit Actual amt Receivable-Actual cost
18000-10800
7200
This clause implies: -
ProIit to HAL is only escalation in MHR but not reduction in inputs Hrs less than quoted
hours.
HAL should always try to complete the job in quoted hours or less than quoted Hrs. the
actual cost will increase iI HAL exceeds hours.

Suppose Ior the particular work order the labour hrs Iixed are 600 the year 01-02, but due to
some technical problem the work order which is likely to be get over by the end oI 02 has taken
another 2 years to get over so, now the variance in cost sale will be as Iollows-
The material is to be sold at Rs.25000

Solution: -
MHR worked out during the year 01-02 Rs.300
MHR worked out during the year 02-03 Rs.325
MHR worked out during the year 03-04 Rs.343
01 02 400 Hrs utilized
02 03 100 Hrs utilized
03 04 100 Hrs utilized
Calculation of cost: -
0,7 H78. Utili:0/ Conv078ion Co8t
01-02 400 400x300120000
02-03 100 100x32532500
03-04 100 100x34334300
Total Cost 186800

Whereas iI work was completed during the year 01-02 itselI the cost would have been 200x 600
180000
MHR is bound to due to annual increment in salaries and wages
Now, here the proIit margin has been reduced Irom Rs. 70000 to Rs. 63200 So, it become very
essential Ior HAL to complete the work within the period quoted as increase in period may turn
into losses.

ADVANTAGES FPQ POLICY TO CUSTOMER (IAF)

Equal price of each prototype: - During FCQ system due to cost negotiation Ior each
prototype the prices oI same aircraIts used to be diIIerent at diIIerent time which Iurther
created the problem in providing depreciation to same aircraIts.
Binding to HAL to produce aircraft in fixed price: -In any case the price change in
FPQ is not allowed. So there is binding on both the parties i.e. IAF to pay Iixed price and
HAL to produce in Iixed price.
Reduced Price of Aircraft`s:-In absence oI FPQ the actual cost ultimately price would
have risen due to non-existence oI incentives and penalties.
Government can allocate actual prices oI aircraIt`s in deIence Budget on FPQs.
No need to check the cost quotation every year. Fixed price can be calculated
realistically based on escalation Iactors and the document Ior supporting FPQ have also
been simpliIied.
'TransIer oI eIIiciency clause allows transIer oI extra beneIit (improved eIIiciency)
At the end oI the project the surplus material is physically evaluated and the cost oI such
surplus is transIerred to IAF considering its price contained in FPQ.
HAL is enIorced to complete the job within the period quoted as costs increase but price
remains the same iI period is exceeded and also applicable Ior delayed delivery.