secl Project cost budgeting

ACKNOWLEDGE

The present practical training report is submitted to

PUNJAB TECHNICAL UNIVERSUTY, JALANDHAR for

partial fulfillment of degree, Bachelor of Business

Administrative. First and foremost we would like to thank our

Teachers for their kind guidance in completing this project

successfully. We also thank them for their unitary attention

which they bestowed right from the beginning of this project.

We would like to thank our Director Mr. Bahauddin

Ahmed who allowed us for the project training though our

college to some well Organization.

We being the student of M.I.M.T convey our sincere

thanks to Mr. B.K. Mishra - General Manager, SECL

Kusmunda Area for providing all the facilities required for

making the training successful.

Next, we would like to thank Mr. Kanti Kumar, Area

Finance Manager, SECL Kusmunda Area for his gratitude

of permitting us to carry on this training which was very

helpful in making this project “COST BUDGETING” a

success.

For this Project, we were able to spend one month at

SECL .We were sure that the knowledge and experience

gained will go a long way in ensuring our success as a

professional and as an individual.

VIKAS SONI

1

DECLARATION

I Vikas Soni a student of BBA in Modern Institute of Management and Technology, Korba hereby declare that the project work titled “COST BUDGETING” with particular reference to Kusmunda Area is a genuine work done by me under the guidance of Mr. Kanti Kumar Area Finance Manager, Kusmunda Area, SECL Bilaspur (C.G.)

This project is record of the original work done by me and the matter enclosed has not been submitted for the award of any other degree or diploma in university. All information collected is authentic to the best of my knowledge, the work done by other if referred has been properly acknowledged.

Date:-Place: - Korba VIKAS SONI

2

CERTIFICATE

This is to certify that the project Report entitled “COST BUDGETING” which is been submitted for the partial fulfillment Bachelor of Business Administrative (B.B.A.) by Vikas Soni to M.I.M.T ,Korba (C.G) Affiliated by Punjab Technical University, Jalandhar is an original work carried out by the candidate themselves under our supervision and guidance. This work has not been submitted to any other university/ institute for the award of any Degree or Diploma to the best of our knowledge. Date:Place: Korba

Internal Examiner DIRECTORManagement dept. M.I.M.T Korba (C.G)(M.I.M.T) Korba (C.G)

3

CHAPTER - 1OVERVIEW OF

SECL

4

INTRODUCTION

South Eastern Coalfields Limited is the largest coal producing company in the country. It is one of the eight subsidiaries of Coal India Limited (A Govt. of India Undertaking) under the Ministry of Coal. The company was adjudged the best PSU in the country for 97-98 and was awarded Jawaharlal Nehru Memorial National Award for pollution control and energy conservation in the year 2003, Excellence award in 2004, 2006 and 2008, National safety award from Hon'ble President of India in 2004, 2005 and 2006. SECL has been awarded “Mini Ratna" Status by Govt of India in 2007. In year 2009-10, total coal production by SECL was 108.01 million tonnes from open cast and underground mines which is highest among all subsidiaries of Coal India Ltd and among all coal producing companies in India. In the year 2009-10 out of total coal production of 431.27 million tonnes produced by Coal India Ltd, total coal production by SECL was 108.01 million tonnes SECL has been making profits since its inception.

The important Workshop, SECL Korba has been recognized with ISO 9002:1994 License from Quality structure Certification in the area of repair of old machines and manufacturing of spares. The license is useful from 21/12/2000. The coal deposits of SECL happen in 5 districts i.e. Bilaspur, Korba, Raigarh, Surguja & Korea in Chhattisgarh and 3 districts Shahdol, Umaria, Anuppur district in MP.

SECL Korba coalfield is settled in Korba district of Chhattisgarh state and covers a field of around 530 Square kilometer. As per GSI a total of 10115.21 Metric tan. Coal reserves availableness in SECL Korba.

The coal deposits of SECL occur in five districts i.e. Bilaspur, Korba, Raigarh , Surguja & Korea in Chhattisgarh and three districts Shahdol,Umaria, Anuppur district in Madhya Pradesh. This occurs in the great Son Mahanadi master basin.

5

SECL has 92 Mines. Total UG Mines are 70 and Total OC mines are 21.There is 1 mixed mine. There are 42 UG Mines, 13 OC Mines, 1 Mixed Mines in Chhattisgarh and 28 UG Mines, 8 OC Mines in Madhya Pradesh.

These mines are divided into 13 Administrative areas - (1)Johilla area(2)Sohagpur area (3)Jamuna & kotma area(4)Hasdeo area(5)Chirimiri area(6)Baikunthpur area(7)Bisrampur area(8)Bhatgaon Area(9)Korba area(10) Gevra area(11) Kusmunda area(12) Raigarh area(13) Dipka area.

The corporate office is at Bilaspur (C.G.).As on 31/03/2007 SECL has geological coal reserve of 44.838 billion tonnes.As on 31/03/2007 SECL has mining right over 956.41 sq.km and all rights over 259.85 sq km.

6

SECL has four major coalfields with following geological reserves.Reserve potential of SECL as per GSI as on 31/03/2007.

Coal Mining Area (Sq.KM)

Geological Reserves

(Mil Tonnes)

Depth (meters)

KorbaCentral IndiaMand-RaigarhRamkola-Tatapani

530.05345.0520.0260.0

10115.2115613.9819106.041616.79

0-6000-12000-12000-600

SECL 6655.0 46452.02 0-1200

7

CORPORATE MANAGEMENT TEAM At Corporate level

N.C JHA

Chairman-Cum-Managing Director

R.S.SINGH

Director(Personnel)

A.R.KOMAWAR

Director (Finance)

P K ROY CHOWDHURY

Director(Technical)(Operation)

8

GOPAL SINGH

Director(Technical)(P&P)

K.S.KROPHA

Joint Secretary ,Govt. of India, Ministry of Coal , New

Delhi

SHRI ARUN KUMAR

PROF.B.B.BHATTACHARYA

9

CHAPTER – 2PERFORMANCE

OF “SECL MINES”

10

COAL MINING - Our Business The 4 Main Departments of a S.E.C.L.The 4 main departments are:(A) S ales :- Every company is in business to make money. It will either be selling a

product or a service. The Sales department deals with marketing and advertising the product/service and taking orders.

The advertising may be done by means of: newspapers or magazines radio or TV catalogues flyers CDs Internet etc. The sales may be made by Phone on-line emails printed order forms sales reps who work for the company and offer the customer a friendly face and

ready answers to any questions. (B) Purchasing :- If a product is being manufactured, then the components that go

to make up this product will have to be purchased from various suppliers. These components are crucial to the product and it is essential that there are always enough of them on site for the product to be manufactured every working day.

The purchasing department must know when to re-order components and how many at a time. Too many would lead to a cash flow problem with the company having to pay out for the supplies before it can recoup the cash by selling the product. Too few would lead to the company standing idle (and therefore losing money) while it is waiting for these precious components.

Even if there are no actual components to buy (i.e. a service is being sold), there are still materials to purchase (buy or rent)- computer paper, printer ink or toner, other office supplies, cleaning supplies, company cars etc. In addition every company needs electricity, phones, computers, water, building rents, council tax rates etc.

The purchasing department will have to: find a supplier negotiate a deal (discounts for bulk etc) place an order track the order check that the goods received are as requested pay the invoice

(C) Finance (Accounts) :- The Finance Department is responsible for all the money that comes into and goes out of the company. Records of all receipts and payments will probably be done on computer via spreadsheets. It will obviously

11

liaise very closely with the Purchasing and Sales departments. It will set annual budgets for the company and keep a check on the performance of the company throughout the year, producing graphs and charts where necessary.

It is also responsible for calculating and paying the wages of the employees. This means it must also make deductions for Income Tax, National Insurance, and Pension fund contributions.

(D) Operations :- This is the department where the actual production of the goods or services takes place. If it is a manufacturing company, then they may well be using computer aided design (CAD) and/or computer aided manufacturing (CAM) to produce the product.

If there is no actual product as such (i.e. a service) then the employees will probably be working at computers to perform their jobs. Such companies are in the majority today, as the manufacturing industry declines and are being replaced by service industries. A few obvious examples are:

i. Banks/building societiesii. Insurance companies

iii. Software companiesiv. Travel agents

While these are the 4 main departments in any large organization, even these are often subdivided into smaller departments, such as Personnel (Human Resources), Salaries, Project teams etc.

12

PRODUCTION AND PRODUCTIVITY :-A Mini Ratna Company - South Eastern Coalfields Limited has made a record in the year 2009-10 in Production and set an all time highest record in Overall Performance in respect of off-take/despatches, production, wagon loading, quality improvements and optimization of overall consumers’ satisfaction in terms of meeting their coal requirement.Total Production in the year 2009-10 was 108.01 Million Tonnes against the target of 106 Million Tonnes which is 6.78 % more than in the year 2008-09.SECL has also set a historical all time high record of despatch by despatching 105.87 Million Tonnes to its various Consumers during the year 2009-10. This is an all time high record by any subsidiary of Coal India Limited.

PRODUCTION AND PRODUCTIVITY FROM 1998 – 2010

Production (mill. Tonnes)

Productivity (Output/manshift)

year OC UG Total OC UG Overall

98-99 41.5616.00 57.56 9.24 0.92 2.64

99-00 42.7516.01 58.70 9.36 0.93 2.70

00-01 44.5715.76 60.33 9.96 0.93 2.83

01-02 48.2115.91 64.12 10.03 0.97 3.0

02-03 50.4416.16 66.60 10.70 1.01 3.21

03-04 54.6516.36 71.01 11.25 1.05 3.49

04-05 61.9716.58 78.55 12.27 1.11 3.95

05-06 66.5016.52 83.02 12.76 1.12 4.17

06-07 72.3016.20 88.50 13.27 1.14 4.51

07-08 77.0516.74 93.79 14.30 1.19 4.83

08-09 83.5817.57101.1515.76 1.26 5.26

09-10 90.1817.83108.0118.89 1.33 5.96

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PERFORMANCE [2009-10]

ITEM ACTUAL % Growth

TOTAL PRODN M.T. 108.01 6.78

O/C PRODN M.T. 90.18 7.90

U/G PRODN M.T. 17.83 1.48

OBR MM3 129.80 21.30

OVERALL OMS Te 5.96 13.31

OC OMS Te 18.89 19.86

U/G OMS Te 1.33 5.56

COAL OFFTAKE

MT 105.89 2.79

WAGON LOADING

FWW/DAY 4472 -4.79

SUPPLY TO STEEL PLANT

M T 1.50 -0.66

SECTOR WISE DESPATCH (MT) (TOTAL DESPATCHES - 105.87 MT) [2009-10]

Power House

CPP UNIT

CementSteel

(Blendable)Sponge FertilizerOther

74.26 11.25 4.73 0.15 4.39 0.64 10.45

MODE WISE DESPATCH (MT) (TOTAL DESPATCHES - 105.87 MT) [2009-10]

RAIL ROAD MGR BELTOTHER /(OWN

WAGONS)

40.54 40.43 16.39 5.37 3.14

GRADEWISE PRODUCTION [2008-09]

GRADE %

A 2.58

B 9.75

C 9.47

D 4.39

E + F 73.67

14

SC-II 0.14

STATE WISE PRODUCTION (MT) [ 2008 - 09 ]

Chhattisgarh Madhya Pradesh

88.72 (87.71 %) 12.43 (12.29 %)

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MAN POWER - Our Strength

Total Manpower As on 1/4/2010 = 79781

As on 1/4/2010

Executives Supervisory staff

Highly skilled & skilled

Semi skilled & Unskilled

Ministerial Staff

Trainees TOTAL

2663 8987 35976 28236 3501 418 79781

As on 1/4/2010

SCHEDULE CASTE SCHEDULE TRIBEOTHER BACKWARD

CLASSOTHERS

16414 (20.57%) 18015 (22.58%) 14679 (18.40 %) 30673( 38.45%)

Total Manpower As on 1/4/2009 = 81434

As on 1/4/2009

Executives Monthly rated Daily rated Piece rated CO' Trg TOTAL

2735 14752 60734 2770 443 81434

As on 1/4/2009

SCHEDULE CASTE SCHEDULE TRIBE OTHER BACKWARD OTHERS

16

CLASS

16761(20.58 %) 18406(22.60 % ) 14962(18.38 %) 31305(37.55 %)

Total Manpower As on 1/4/2008 = 82,782

As on 1/4/2008

Executives Monthly rated Daily ratedPiece rated CO' Trg TOTAL

2781 14,500 61,713 3473 315 82782

As on 1/4/2008


CLASSOTHERS

17301(20.91 %) 19048(23.01 % ) 15348(18.54 %) 31085(37.55 %)


As on 1/4/2007


2718 14,729 62,854 3645 422 84368

As on 1/4/2007


CLASSOTHERS

17717(21 %) 19405(23.0 % ) 15692(18.6 %) 31554(37.4 %)


As on 1/4/2006


2745 14,762 63,583 4360 421 85871

17

As on 1/4/2006


CLASSOTHERS

18033(21 %) 19750(23.0 % ) 15972(18.6 %) 32116(37.4 %)

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SAFETYA.Mission of the Company on Safety: The Company is fully committed to total

safety in all aspects of its operations. The Company’s motto is that Safety overrides all production targets. The Company attaches prime importance to safety of the employees which will not be compromised for any other considerations.

B.Safety Policy: - Mining is a hazardous profession with many of its activities forcing against the nature. But in course of time we have learnt to excel in our profession to such an extent that SECL has made multi-dimensional strides in the field of coal mining. We have formulated Safety Policy comprises of 27 points, a few of these points attracts special importance are as summarized below;

1. To plan and design all operations in such a way as to eliminate or materially reduced the mining hazards.

2. To co-operate with the Directorate of Mines Safety and the mine equipment manufacturers in developing safer mining systems and equipment as to provide safe working conditions by suitable changes in technology.

3. To regard safe working as regular precedence for improvisation over unsafe practices.

4. To bring about improvement in working conditions by suitable changes in technology.

5. To organize appropriate forum, with employees’ representatives, for joint consultation on safety matters and to secure their motivation and commitment in safety management.

6. To prepare Annual Safety Plans and Long-term Safety Plans at the beginning of every calendar year, both for the company and for the individual units, to effect improved safety in the various operations, as per respective geo-mining conditions.

7. To improve safety standards through counseling and training the accident-prone persons.

8. To arrange for multi-level monitoring of implementation of the Safety Plans through Internal Safety Organization at the Head Quarters and at Area levels.

9. To ensure that all levels of employees continue to reflect safety consciousness in their working as well as to inculcate accountability towards safety measures amongst them.

10.To institute continuous education, training and re-training of all employees, with emphasis placed on the development of safety-oriented skill.

11.To make continuous efforts to provide all the employees a good Health - physical, mental & social.

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12.To investigate the cause of any incidence of accident and suggest preventive measures by Safety Committee and follow up action for remedial measures.

13.To ensure adequate ventilation, illumination and sanitation at all working places.

C. Safety performance: - The accidents statistics for the year under review as compared to last years are tabulated as under;

2006-07 2005-06 2004-05 2003-04Fatal Accidents 6 14 9 9Fatalities 6 15 10 9Serious Accidents 69 76 116 87Serious Injuries 71 82 118 90Fatality rate per MT output 0.068 0.181 0.127 0.127 Fatality rate per 3 lakh Man shift 0.121 0.228 0.148 0.131

Note: Figs. for the calendar year 2006-07 are subject to reconciliation with DGMS.

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YEAR WISE FINANCIAL PERFORMANCE :-

(Rs. In crores)

2009-10

2008-09

2007-08

2006-07

2005-06

2004-05

2003-04

2002-03

Gross Profit before interest depreciation

3320.19

2178.95

2449.9

2024.91

1529.66

1820.17

1560.63

1146.74

Less : Interest 14.20 13.82 14.56 20.91 15.28 13.78 19.71 36.67

Less : Depreciation

242.42 347.20 367.81

226.17 228.26 225.46 226.70 227.94

Profit before tax

3063.57

1817.93

2067.3

1777.8 1286.1 1580.9 1314.2 882.13

Less: Provisions for

taxation

946.35 786.81 708.23

540.94 334.09 522.86 390.88 324.58

Profit after tax 2117.22

1031.12

1359.1

1236.8 952.03 1058.0 923.34 557.55

Add: Balance in Profit & Loss A/c

3200.05

2995.97

2753.8

2238.4 1839.0 1412.7 1003.7 815.88

Investment utilization

Reserve written back

0.00 0.00 00.00 0.00 0.00 0.00 16.35 31.22

Adjustment of excess

0.00 0.00 0.38 29.86 23.02 -0.70 2.77 1.36

21

provision for tax

Impairment of Assets/Adjustm

ent of Employee

benefit

0.00 - 15.82 - - 43.30 - -

Surplus available for appropriation

5317.27

4027.08

4096.7

3445.5 2768.0 2428.2 1940.6 1406.0

Appropriations:

Capital Redemption

Reserve

- - - - - - - 75.00

General Reserve

211.80 103.20 137.10

123.70 95.20 105.85 92.50 56.00

Dividend on Preference

Shares

0.00 - - - - - 26.31 30.00

CSR Reserve 43.14

Dividend on Equity Shares

1270.46

618.68 823.71

495.31 380.92 424.45 359.70 210.43

Dividend Tax 215.92 105.15 139.99

72.67 53.43 58.89 49.45 30.80

Balance carried to

Balance Sheet 3575.95

3200.06

2995.9

2753.8 2238.4 1839.0 1412.7 1003.7

PROFIT BEFORE TAX :-

YEAR RS. IN CRORES

2002-03 882.13

2003-04 1314.22

2004-05 1580.93

2005-06 1286.12

2006-07 1777.83

2007-08 2067.37

2008-09 1817.93

2009-10 3063.57

22

Financial Performances Indices :-

Sl.No.

Particulars Year ending

2009-10 2008-09 2007-08

2006-07

2005-06

2004-05

2003-04

2002-03

1. Capital Employed(crore

s)

4360.76 4380.28 3814.60

3489.76

2780.98

2301.83

1887.66

2939.71

2. Sales(crores) 11219.02

10166.61

8728.04

7646.26

7127.19

6544.52

5365.66

5062.99

3. Current Ratio 1.20 1.27 1.29 1.40 1.25 1.20 1.03 1.53

4. Debt/Equity Ratio

0.06 0.08 0.08 0.09 0.12 0.16 0.21 0.25

5. Profit before tax to (%)

I. Capital Employed

70.25 41.50 54.20 50.94 46.25 68.68 69.62 30.01

II. Networth 69.66 38.14 46.36 43.57 37.37 53.65 54.43 45.72

III. Sales 27.31 17.89 23.69 23.25 18.05 24.16 24.49 17.42

6. Profit after tax/Equity

588.61 286.66 377.85 343.87 264.67 294.15 256.70 146.66

7. Earning per share of

Rs.1000/- (in RS)

5886.06 2866.60 3778.53

3438.68

2646.74

2941.53

2493.82

1466.62

23

CHAPTER – 3CONCEPT OF

COST

24

INTRODUCTION:In business, the cost may be one of acquisition, in which case the amount of

money expended to acquire it is counted as cost. In this case, money is the input that is gone in order to acquire the thing. This acquisition cost may be the sum of the cost of production as incurred by the original producer, and further costs of transaction as incurred by the acquirer over and above the price paid to the producer. Usually, the price also includes a mark-up for profit over the cost of production.

cost reflects the true cost of purchasing a financial asset held over an extended period of time. The longer a stock or other assets is held, the higher the probability that the original purchase price will need to be revised in order to reflect adjustments such as future purchases, stock splits, and dividend payments.

Cost basis can also increase if a dividend is reinvested. In this case, the cost basis goes up to reflect the increased investment. Using an incorrect cost basis can have significant tax implications as it affects the calculation of taxable profits.

Different Types of Costs:In the effort to properly classify the types of costs, here are some of them:

1. Manufacturing Costs :- These costs involve the conversion from raw materials to finished goods employing labor and manufacturing facilities. These include direct materials, direct labor and manufacturing overhead. Direct materials are the main components of the finished product and direct labor is the manpower costs that are attributable to the manufacture of the merchandise. Manufacturing overhead are costs that is not properly identified as direct labor or direct materials.

2. Non-Manufacturing Costs :- Period and product costs are the two types of costs under this classification. Period costs are those that are measurable through time intervals like rent on a monthly basis. Product costs are those expenses related to the sale of the products.

3. Costs Related to Function and Control :-These are costs that are variable, fixed, direct, indirect, controllable, non-controllable, avoidable, unavoidable, relevant and irrelevant. Variable costs are those that will change in line with the level of business activity. Examples are direct materials, direct labor, cost of goods sold, etc. since they tend to fluctuate in relation to the output of the goods, both in the manufacture and sales.

4. Direct Costs :-These are costs that are directly related to your product. Ex: If you have a automobile that is being produced the staring wheal, the tires and the radio.

5. Indirect Costs :-Indirect cost are those that deal directly with the product but not any product in particular. Such as, if you have employees who build the cars they are directly responsible but not responsible completely with any one product or in this case car.

6. Fixed Costs :-These are the costs that are always the same or close to the same amount taken out every month. These are normal monthly expenses that come to your business whether you make a sale or not.

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7. Variable Costs :- These are costs that increase or decrease with the volume of sales that you have.

8. Relevant Costs :- These are costs that are needed when you take a different strategic move. If you decide you want to produce more cars and the tires go up in price then that cost is relevant to your production.

9. Irrelevant Costs :-These can be costs that decide on a future course of action and are disregarded until that time comes as they may make you make mistakes in the here and now. Or they may be some cost that happened in the past and now are irrelevant cause that money is now gone.

10.Other Costs :-These types of costs are used by management accountants in their planning and budgeting. They are the following; differential, opportunity, imputed, out-of pocket and sunk costs.

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CHAPTER - 4CATEGORIES OF

COST

27

ESTIMATIONCOCT

OPERATIONALCOST

ORGANIZA-TIONAL

COST

STAFFINGCOST

CAPITALCOST

ESTIMATING COSTS - CATEGORIESThe cost estimate is what helps you determine realistically what it will cost to implement your operational plan.

When you carry out your plans you will probably need to make use of a wide range of inputs. Inputs include people, information, equipment, skills. Most of these inputs will have a cost attached to them. These are the costs you need to estimate in order to develop a budget. Careful cost estimation helps in the following ways:

It helps you develop an accurate budget; and It helps you to monitor and control the actual costs of carrying out activities.

The costs you need to estimate fall into the following categories:

(1)Operational cost :-The direct costs of doing the work e.g. the cost of hiring a venue, or of printing a publication, or of travelling to the sites where fieldwork needs to take place. Here you would include materials, equipment, transport and services.

(2)Organizational costs : - The costs of your organizational base, including management, administration, governance. Once you have decided on the best organizational set-up to support your operational plans, you will incur the organizational expenses on a regular basis – even if you do not carry out your plans or have activity levels as high as you had hoped. So, for example, if you hire premises for four projects but only manage to carry out two, you will still have to pay rent for the extra space. If you have hired a full-time receptionist on the same belief, you will still have to pay her salary, even if she is under-utilized.

(3)Staffing costs : - These are the costs for your core staff – the people involved in management, the people doing work that cuts across projects. (These costs can be included as a category under “organizational costs”.) These costs include their salaries and any benefits such as medical aid or pension fund payments for which the organization is responsible. You can “charge staff costs out” to the various projects on which the staff members work. So, for example, if your Publications Officer is going to spend half her time working on publications for a particular

28

StandardCosting

MarginalCosting

Absorp-tion

Costing

FullCosting

Cost center Types

project, then you can include half her salary and benefits in your costing for the project. If your Director is going to spend 15% of her time providing management support to the head of the same project, then 15% of her time and benefits can also be charged to the project.

(4)Capital costs : - These are costs for large “investments” which, while they may be necessary because of a project or projects, will remain organizational assets even after the projects are over. Vehicles and equipment such as computers and photocopiers fit here. They may be used by all projects, or they might only be required for a specific project. Depending on how you intend to use the equipment, you might budget for it under operational costs or under organizational costs.

COST CENTERThere are various types of cost centers are:

1. Full Costing : - A method of allocating indirect costs to a range of products

produced by the firm. e.g. if a firm produces three products - a, b, and c - and has

indirect costs of £1 million, assume proportion of direct costs of 20% for a, 55%

for b and 25% for c Indirect costs allocated as 20% of 1 million to a, 55% of £1

million to b and 25% of £1 million to c.

2. Absorption Costing : - All costs incurred are allocated to particular cost centres – direct costs, indirect costs, semi variable costs and selling costs Allocates indirect costs more accurately to the point where the cost occurred.

29

3. Marginal Costing : - The cost of producing one extra unit of output (the variable costs).

Selling price – MC = ContributionContribution is the amount which can contribute to the overheads (fixed costs)

4. Standard Costing : - The expected level of costs associated with the production of a good/service.

Actual costs – Standard costs = VarianceMonitoring variances can help the business to identify where inefficiencies or efficiencies might lie

30

Frameworks for Estimating Costs: Estimating operational costs:-

Activity Unit cost Quantity Total cost of item

Materials Equipment Services Transport

The unit cost is the cost of a single item,Or one unit. E.g. Cost per day, per kilometer, per person.

This is the number of units (how many) youWill need for the activity. e.g. 200 training packs, 130 days of trainers’ time.

Multiply the total number of units by the unit cost.

Total cost forActivity

The sum of all theindividual costs

Estimating organizational cost :-Once you have done your estimates here, you may decide to assign a percentage of the various items to specific departments or projects. This is acceptable practice.

2007 2008 2009Management:Salaries/benefits:Donor liaison:Governance liaison:Public relations:Fundraising:Human resourcing:Administration:Salaries/benefits:Equipment:Software:Stationery:Governance and organizationaldevelopment:Board meetings:Organizational processes:Resource centre:Overheads:Office rental:Electricity and water:Insurance:Maintenance:Legal fees and audit fees:

Annual totals:

Total:

31

CHAPTER - 5INTRODUCTION

OF BUDGETS

32

Introduction:-A Budget is a plan that outlines an organization's financial and operational goals.

So a budget may be thought of as an action plan; planning a budget helps a business allocate resources, evaluate performance, and formulate plans.

While planning a budget can occur at any time, for many businesses, planning a budget is an annual task, where the past year's budget is reviewed and budget projections are made for the next three or even five years.

The basic process of planning a budget involves listing the business's fixed and variable costs on a monthly basis and then deciding on an allocation of funds to reflect the business's goals. (For more on fixed and variable costs, see Breakeven Analysis.)

Functions of a Budget:-Budgets can fulfill one or more of the following functions: 1. Mapping : A budget can be used to detail the road to be traveled in fulfillment of an

organizational objective. It details all the steps to be taken, and therefore can act as a check on the overall viability of the organization’s objectives.

2. Controlling : The budget can ensure the achievement of objectives by placing a planning control framework over the steps to be taken.

3. Coordinating : By spelling out the linkages between parts of the organization’s plan, the budget can help to co-ordinate activities.

4. Communicating : The budget is a means for management to explicitly inform staff and the wider public what the organization will be doing.

5. Instructing : A budget is often just as much a form of executive order as an organizational plan since it lays out the requirements of the organization – it may therefore be regarded as a managerial instruction.

6. Authorizing : As well as an instruction, the budget is an authorization to take action within the specified limits. In that respect, the budget performs a delegating function.

7. Motivating : Budgets can act as a motivational tool to encourage managers to perform within targeted limits.

8. Performance Measurement : A budget may provide a benchmark against which actual performance can be measured.

9. Decision-Making : A well-designed budget can be a useful tool in evaluating the consequences of proposed changes in actions, since it should be possible to track the effect of any change throughout the organization.

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Sales BudgetForecasts how

much will be sold

Sales BudgetForecasts how

much will be sold

Production Budget

Forecasts how many units need to

be made

Production Budget

Forecasts how many units need to

be made

Labor BudgetOutlines the

labour required of production budget

Labor BudgetOutlines the

labour required of production budget

Cash Budget(Cash flow) Forecasts the

money flows in & out of the business

Cash Budget(Cash flow) Forecasts the

money flows in & out of the business

Marketing Budget

Estimating funds for promotion

Marketing Budget

Estimating funds for promotion

Project BudgetPrediction of cash to achieve objects

Project BudgetPrediction of cash to achieve objects

TYPES OF BUDGET

TYPES OF BUDGET

TYPES OF BUDGET:-A firm will create a number of different budgets:-

A.Sales budget : - The sales budget shows the projected sales of various products, their average sales price, and the total sales realisation. The sales budget is subjected to the greatest uncertainty considering that the preparation of sales budget starts with sales forecast. Sales forecast is essentially an estimate, a prediction of customers demand, and a reflection of market demand. Management reacts to sales forecast by making decision relating to where it wants to position the company in the marketplace in relation to its competitors. This decision is reflected in the sales budget.

B.Production budget : - Product oriented companies create a production budget which estimates the number of units that must be manufactured to meet the sales goals. The production budget also estimates the various costs involved with manufacturing those units, including labor and material.

C. Cash Flow/Cash budget : - Cash budget is essentially the cash plan for a defined period of time. The objective of the cash budget is to ensure that sufficient cash is available at all times to meet the level of operations that are outlined in the various budgets. Cash budget enable a firm to take precautionary measures and arrange in advance for investment and loan facilities whenever cash surpluses or deficits arises. The overall aim is to manage the cash of the firm to attain maximum cash availability and maximum interest income on any idle funds. Cash budget also show the

34

feasibility of management's plans in cash terms and illustrate the financial impact of changes in management policy.

D.Marketing budget : - The marketing budget is an estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service.

E. Project budget : - The project budget is a prediction of the costs associated with a particular company project. These costs include labor, materials, and other related expenses. The project budget is often broken down into specific tasks, with task budgets assigned to each.

F. Labor budget : - The direct labor budget is a budget of planned expenditures for direct labor. The direct labor budget indicates the rate per hour and the number of hours necessary to meet production requirements. The manpower budget contains detailed information about all employees in the organization. This budget is a tool which can be used as a human resource planning over a short time horizon. In the preparation of this budget, it involves the process of analysis and estimation of the need for the availability of employees by considering present skills level, changes in the technology, vacancies expected to arise from transfer, retirement and promotion, expansions planned and contraction of operations.

Features of budgets:-(1)Estimates of the income and expenditure of a business or a part of a business over

a time period.(2)Used extensively in planning.(3)Helps establish efficient use of resources.(4)Help monitor cash flow and identify departures from plans Maintains a focus and

discipline for those involved.(5)An important instrument of the financial management used as aid in planning,

programming and control.(6)A budget may be defined as a financial and quantitative statement, prepared and

approved prior to defined period of time, of the policy to be pursued during that period for the purpose of achieving the given objective.

Advantages of budgeting:-a) Easily understood (as it is retrospective), makes marginal changes and secures

agreement through negotiation.b) Administratively straightforward (and therefore cheap).c) Allows policy makers to concentrate of the key areas of change. Ministers, elected

representatives and senior officials are not required to study long and detailed budgetary documents.

d) Particularly useful where outputs are difficult to define/quantify; and, stable and, therefore, changes are gradual.

Disadvantages of budgeting:-a) backward looking – focus more on previous budget than future operational

requirements and objectives;b) does not allow for overall performance overview;c) does not help managers identify budgetary ‘slack’;d) often underpinned by data or service provision which is no longer relevant or is

inconsistent with new priorities;

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CHAPTER - 6PRINCIPLES OF

BUDGETING

36

Basic Principle of Budgeting:-A budget is a document that translates plans into money - money that will need to be

spent to get your planned activities done (expenditure) and money that will need to be generated to cover the costs of getting the work done (income). It is an estimate, or informed guess, about what you will need in monetary terms to do your work.A budget is not:

a) Written in stone – where necessary, a budget can be changed, so long as you take steps to deal with the implications of the changes. So, for example, if you have budgeted for ten new computers but discover that you really need a generator, you could buy fewer computers and purchase the generator.

b) Simply a record of last year’s expenditure, with an extra 15% added on to cover inflation. Every year is different. (See also the section on different budgeting techniques.) Organizations need to use the budgeting process to explore what is really needed to implement their plans.

c) Just an administrative and financial requirement of donors. The budget should not be prepared as part of a funding proposal and then taken out and dusted when it is time to do a financial report for the donor. It is a living tool that must be consulted in day to day work, checked monthly, monitored constantly and used creatively.

d) An optimistic and unrealistic picture of what things actually cost – don’t underestimate what things really cost in the hopes that this will help you raise the money you need. It is better to return unspent money to donors than to beg for a “bit more” so you can complete the work.

Important of Budget for an Organization, Project or DepartmentThe budget is an essential management tool. Without a budget, you are like a pilot navigating in the dark without instruments.

I. The budget tells you how much money you need to carry out your activities.

II. The budget forces you to be rigorous in thinking through the implications of your activity planning. There are times when the realities of the budgeting process force you to rethink your action plans.

III. Used properly, the budget tells you when you will need certain amounts of money to carry out your activities.

IV. The budget enables you to monitor your income and expenditure and identify any problems.

V. The budget is a basis for financial accountability and transparency. When everyone can see how much should have been spent and received, they can ask informed questions about discrepancies.

37

VI. You cannot raise money from donors unless you have a budget. Donors use the budget as a basis for deciding whether what you are asking for is reasonable and well-planned.

Involvement in Budgeting:-Budgeting is a difficult and responsible job. Your organization’s ability to do

what it has planned to do and to survive financially depends on the budgeting process. Whoever does the budgeting must?

i. Understand the values, strategy and plans of the organization or project;ii. Understand what it means to be cost effective and cost efficient (see

Glossary of Terms);iii. Understand what is involved in generating and raising funds.

Where staff is competent to take full responsibility for the financial side of the organization or project, the following would normally be involved in the budgeting process:

i. The Finance Manager and/or Bookkeeper;ii. The Project Manager and/or Director of the organization or department.

Where staff lacks confidence to do the budgeting, then Board members can be brought in.Some Boards have a Finance Committee or a Budget Sub-Committee. It is a good idea to have someone on your Board with financial skills. S/he can then help the staff with budgeting.

BUDGETING GUIDELINES:While budgeting depends to a certain extent on the particulars of your organization or project, there are certain guidelines which apply across projects and organizations.BUDGETING RULESThese are not rules that are fixed for all time. They offer some guidelines that will help you deal with common situations.

(i) It is usual for long-term projects and organizations to prepare a budget which makes projections for several years at a time. While it is usually only the budget for the forthcoming year that is really quite accurate, the projections for the following years gives some indication of the levels of funding that are likely to be needed. Some allowance is usually made for inflation for subsequent years, as well as for the anticipated activities which may differ from the first year. A three-year budget should be based on a three-year plan.

(ii) Contributions in kind (not money, but goods) should be included as a note to the budget (for more on notes see the consolidated budget in the examples). Although they are not part of the budget, they reduce budget costs and so should be indicated. This includes the contribution made by volunteers in the form of sweat equity (see Glossary of Terms).

(iii) Some costs that need to be estimated but that often get forgotten:o Start-up costs – for a new organization or project, such as large-scale

recruitment, moving in, building alterations, launching the project or organization.

o Research and development – consultation, needs assessment, planning processes.

38

o Democracy and governance – establishing the structures, recruiting for them,

o Getting a constitution developed and accepted, training members of voluntary structures.

o Marketing or public relations – building a professional image.o Replacement of capital goods.o Monitoring and evaluation costs for projects.

(iv) Estimates are informed guesses, not just guesses. Does your homework, get quotes, phone around to arrive at a likely cost? Check any figures you have from previous years that may provide helpful information. Note down any price increases you already know about (e.g. a salary increase of 10% may have already been agreed.) Make notes of any unusual expenses that are likely to occur (e.g. moving your offices). A few dollars may not seem a big amount, but multiplied many times over this kind of discrepancy can make a big difference in your budget.

(v) Keep your notes! As you plan your budget and make decisions about how you will estimate costs, keep your notes handy so that you can go back and check where the amounts came from. You may, for example, work out your workshop costs on the basis of a certain amount for photocopying, based on an estimated per page cost. When, a year later, the costs are higher than anticipated, you should go back to your notes and see where the discrepancy comes in. Or, in another scenario, a donor makes ask you to explain how you arrived at the cost per participant for workshops.

(vi) For your own management purposes, break the budget for the forthcoming year into a monthly budget. This will help you when you are watching your cash flow (see section on watching your cash flow). It will also help you to pick up variances (see Glossary of Terms) quickly.

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CHAPTER - 7KINDS OF BUDGETS

40

KINDS OF BUDGETS

SURVIVAL BUDGET

GUARAN-TEED

BUDGET

OPTIMAL BUDGET

DIFFERENT KINDS OF BUDGETSIn addition to your main working budget – what you realistically expect to generate or raise, and how this will be spent – you can also have some “what if” options budget. “What if” budgets allow you to prepare for the unexpected – whether it is good or bad? You’re “what if” budgets could include:

A. Survival budget: - This is the minimum required in order for the organization or project to survive and do useful work.

B.Guaranteed budget : - This is based on the income guaranteed at the time the budget is planned. Usually the “guarantees” are in the form of promises from donors. However, unexpected situations, such as a donor grant coming through very late, may make it necessary to switch to your survival budget.

C. O ptimal budget : - This covers what you would like to do if you can raise additional money. Once extra money comes in or is promised, it becomes part of your working budget.

DIFFERENT BUDGETING TECHNIQUES:

The two main techniques for budgeting are incremental budgeting and zero based budgeting.

41

BUGETING TECHNIQUESBUGETING

TECHNIQUES

INCREMENTAL BUDGETING

INCREMENTAL BUDGETING

ZERO BASED BUDGETING

ZERO BASED BUDGETING

(A)

Incremental budgets are budgets in which the figures are based on those of the actual expenditure for the previous year, with a percentage added for an inflationary increase for the new year. This is an easy method that saves time but it is the “lazy” way and is often inaccurate. This budgeting technique is only suitable for organizations where each year is very similar to the previous one in terms of activities. Very few dynamic organizations or projects are so stable that this budgeting technique really works for them.

(B) In zero based budgets, past figures are not used as the starting point. The budgeting process starts from “scratch” with the proposed activities for the year. The result is a more detailed and accurate budget, but it takes more time and energy to prepare a budget in this way. This technique is essential for new organizations and projects, but it is also probably the best route to go in a dynamic organization that is proactive in taking on new challenges.

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QUESTIONARIES

43

1. What are the guidelines prefer for additional budget/ special budget?

GUIDELINES FOR ADDITIONAL BUDGET/ SPECIAL PURPOSE BUDGETThe Revenue Budget BE 10-11 has been prepared for normal activities and on special purpose/ additional budget has been included except coal removal expenses at Chirimiri Area by CM& LCCM operation in line with ESM payment for coal removal from face to surface in opencast mines.The additional budget/ special purpose budget will be provided to areas on following guidelines:(i) The individual case file to be initiated by Area duly examined by AFM and

recommended by Area CGM to be forwarded to GM(F) C&B through concerned HOD at HQ with his due examination and recommendation.

(ii) The Head of Expenditure and amount thereof will be limited to their original demand submitted at the time of preparation the CIL BE 23010-11 i.e. prior to 8th march 2010.

(iii) AFM should specially indicated the reasons for demanding additional/special purpose budget like in earlier year same has been incurred out of additional/special purpose budget or in past same has not be incurred & this is not for additional production or this is not routine expenditure and it is one time job etc.

(iv) Thereafter file will be examined at HQ A/c and if in order then same will recommended for approved D(T)/ D(F) /CMD for provision of additional/ special purpose budget.

(v)After communication of additional budget the respective area shall incorporated the same in their revenue budget.

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2. What are the norms are preferred by “SECL” Company?

Norms for preparation Budget:-There are following norms for preparation of cost:-

i. Production: Coal production, OBR, OBRH to be obtained from CGM (prdn). The coal, OBR, OBRH to be indicated separately by departmental and outsourced.

ii. Man shift: The manshifts deployed in 09-10 to be reduced/increased by:

a) Average reduction in manpower of 09-10 & proposed reduction in manpower in 10-11. @ 265manshift per employee/year for UG mines @ 300 manshift per employee/year for OC mine.

b) Actual physical levels of Normal OT hours in 2010-11 should not be allowed to increase over the actual physical level of normal OT hours of 09-10, No Sunday working in loss making underground mines and opencast mines. Incentive payment should be shown separately.

c) If there is an increase in manpower in 10-11, then 50% manpower to be taken and manshift to be calculated as per above rate.

iii. EMS, Salary & Wages It is to be taken 10.00% above up to January 10 and EMS excluding the expenditure of production incentive and Gratuity payment in cash. Gratuity payment in cash to be nil and separate figures for production incentive to be calculated and accordingly amount of salary wages to be carried as under:

EMS up to Jan 10 excluding cash gratuity & production incentives x 1.10 x manshift to be deployed in 10-11 Add impact of production incentives.

iv. Area OH The unit forming parts of area OH with unit wise breakup in different heads of expenditure in 09-10 upto Jan 10 and

45

proposed for 10-11 to be provided. The salary & wages to be escalated by 10.00% and other heads to be recalculated by 3%, any extra ordinary expenditure to be explained in detail.

v. Explosives This is to be calculated mine-wise based on PF of 09-10 for coal, OB blasted (excluding loose OB) and multiplied by current rate of RC. Working sheet to be enclosed for all mines.

vi. Timber It is to be calculated as prefixed/variable norms with 3% escalation.

vii. POL It is to be calculated mine wise for HSD & Lubricants based on fixed/variable norms at current rate. Calculation sheet to be enclosed for all mines with2% economy.

viii. Power It is to be calculated as per fixed/variable norms at current rate with 2% economy.

ix. Coal transportation Mine-wise coal transportation programmed duly matching with production to be prepared giving loading, transporting lead-wise and wagon loading, rates to be taken current working rates.

x. O.B.R. It is to be prepared mine-wise job-wise at current rate. The rates should be including service tax.

xi. Purchase repair Same as other contract without any sub heads.

xii. Welfare It is to be prepared on the same line with other contract with item wise/head-wise details as per welfare preformed exp. Statement.

xiii. Misc. It is to be prepared on same line other contract with major head-wise details in separate encloses.

xiv. Workshop debit On the same line of 09-10 with 4% escalation.

xv. Depreciation interest It is as normal calculation.xvi. Sale value It is to be calculated grade wise, mine-wise

taking into accounts dispatch plan by FSA, Power houses at current rates.

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3. What are the variability factors for revenue budget of the company?

SECL: BILASPUR

VARIABILITY FACTORES FOR REVENUE BUGET2010-11

HEADS OPENCAST BASIS OF CALCULATION

UNDERGROUND

Explosives 100% variable Total composite prod.

100% variable

Timber 90% variable & 10% fixed

POL 80% variable & 20% fixed

Deppt. Composite prod.

20% variable & 80% fixed

Hemm spares 30% variable & 70%fixed


Stores 30% variable & 70% fixed



Power 60%variable & 40% fixed

Total composite prod


Coal transport 100% variable Coal production 1005 variableSurface miner 100% variable As per target 100% variableOther contract 50% variable &

50% fixedDeppt. Composite

prod.50% variable &

50% fixedPurchase repair 50% variable &

50% fixedDeppt. Composite

prod.50% variable &

50% fixed

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COST SHEET MARCH 2010

SOUTH EASTERN COALFIELDS LIMITEDConfirms working

resultBudget Actual

PARTICULARS (March 2010)Total

production(LT)150.00 142.04

Revenue production (LT)

150.00 142.04

Net saleable coal (LT)

150.00 142.04

Dept. OBR (LCUM)

123.00 92.21

Total rev. OBR 220.00 172.86Total manshifts

Actual 7.19 6.88Adjusted 8.83 10.74

OMS 15.99 13.22EMS 1380.76 1456.48

EXPENDITURE Amount Cpt Amount Cpt

Salaries and wages 4347.46 28.98 5682.93 40.01Normal O.T. 425.55 2.84 588.46 4.14Sunday O.T. 633.61 4.22 812.18 5.72Lead and lift 0.00 0.00 0.00 0.00

Fall back 0.00 0.00 0.00 0.00Production Incentives

115.75 0.77 31.87 0.22

LTC/LLTC/RRF 98.71 0.66 77.71 0.55GRATUITY 22.00 0.15 12.50 0.09

LEAVE ENCASHMENT

(CASH)

0.00 0.00 0.00 0.00

OTHER PERKS 2221.02 14.81 2811.57 19.79INTERIM RELIEF 0.00 0.00 0.00 0.00Prove for NCWA-

VII (C.Y)2064.00 13.76 0.00 0.00

Total salary and wages

9928.11 66.19 10017.22 70.52

Administrative exp area OH

2116.68 14.11 2270.08 15.98

Company OH 1777.44 11.85 1777.73 12.52Total 3894.12 25.96 4047.81 28.50

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administrative exp.Stores :-

Explosive3423.89 22.83 2840.05 19.99

Timber 0.00 0.00 0.00 0.00POL 5953.73 39.89 5102.29 35.92

HEMM stores 2200.71 14.67 1902.05 13.39Other stores 1299.81 8.67 1427.62 10.05Total stores 12878.14 85.85 11272.01 79.36

Power 2491.99 16.61 2113.67 14.88Coal transportation 6977.91 46.52 7386.19 53.41

Less:- STC 6001.66 40.01 4527.70 31.88Net transport coal 976.25 6.51 3058.49 2153OBR. Contractual 6684.00 44.56 5721.00 40.28Other contractors 821.64 5.48 558.49 3.93Purchase repair 489.60 3.26 267.60 1.88Workshop debit 1409.88 9.40 1237.80 8.71

Welfare exp 1256.88 8.38 1217.95 8.57Other misc exp. 1423.02 9.49 802.72 5.65

OVR/UDR loading/demmu

0.00 0.00 154.67 1.09

TOTAL CASH COST

42343.63 282.29 40469.43 284.92

VRS 0.00 0.00 0.00 0.00Rehab of

ECL/BCCL900.00 6.00 852.75 6.00

Service charges CIL

827.28 5.52 659.15 4.64

Prov. Stock deterioration

0.00 0.00 0.00 0.00

Land reclamation 150.00 1.00 15.00 0.11OBR adjustment -6467.01 -43.11 2378.92 16.75

Interest 279.96 1.87 173.49 1.22Depreciation 3812.88 25.42 2355.00 16.58Provision for

gratuity (deferred)649.92 4.33 649.92 4.58

Provision for leave etch (deferred)

90.00 0.00 90.00 0.00

Total no-cash cost 243.03 1.62 7174.89 50.51

Total cost 42586.65 283.91 47644.32 335.43

Gross sale value of raw coal

86763.51 578.42 88058.28 619.95

Less: quality deduction

-397.72 -2.65 -483.95 -3.41

49

Bonus bill 1471.83 9.81 677.09 4.77Net sale value of

coal87837.62 585.58 88251.42 621.31

Profit or loss on coal

45250.97 301.67 40607.10 285.88

50

LIMITATION OF STUDY

1) The present study is based on last two years data.2) There is slow process of work as there are many formalities.3) When there is tender all the parties are given money but if they are not contracted

then they should return money within 15days but they are unable to get it in time.4) The under loading and over loading could not be fully minimized.5) The study is based on Kusmunda Area as a whole, thus data have been collected

from the quality control report and cost quality improvement fortnight year 2005-06 of Kusmunda Area.

6) Project wise production is not considered.

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CONCLUSION

1) In coalmines industry maximum cost is of fixed in nature.2) Every controllable heads is measured by cost per ton, to minimize it, the only

solution is to increase production.3) In petroleum, oil, lubricant specific consumption must be observed, so that

individual control is made separately.4) Store cost is very much high because of maintenance of equipment given by

World Bank as well as management fail here to control these heads.5) Almost all the controllable head have 80% direct relation with production so

20% is that part where management practices control.6) To some extent there is unnecessary wastage of diesel.7) All the heads is more or less under controllable because all are under budget.

52

BIBLIOGRAPH

1. www.google.Com2. www.coalindia.nic.in 3. www.secl.nic.in4. Yearly report of Kusmunda area.

53

Economy & Finance

secl Project cost budgeting