BACKGROUND OF INDUSTRY:

Globally, welding technology has progressed in tandem with finding relevant solutions to complex welding requirements like welding of highly sophisticated defense and aerospace equipment. In developed countries, there is an increasing shift from manual and semi-automatic welding to advanced techniques like electron beam welding, laser welding and friction stir welding. Although these techniques are extremely expensive for commercial applications, they could threaten the very existence of arc welding. Global majors like the Charter group of UK, Lincoln of USA and the SAF group of France are the pioneers in technological innovation in this field. The biggest challenge facing the welding industry is to devise techniques for welding metal substitutes like plastics, which are finding increasing usage in fabricated metal parts.

The Indian welding products business has an annual turnover of Rs10bn in which the welding equipment market is approximately Rs2.5bn and the consumable electrodes market is Rs7.5bn. Unlike advanced countries in Europe, Japan and the USA where welding by automatic and semi-automatic processes account for over 95% of the total

welding, around 85% of the welding in India is done by manual processes due to cheap labour. As a result, the metal arc welding technology is widely prevalent in India. The equipment, viz. electric arc welding equipment and consumables, viz. mild steel stick electrodes or alloy steel, needed for this type of welding are not very technology intensive. Besides, this technology is flexible due to ease of use in outdoor locations. Eg: welding of pipes, infrastructure projects.

The equipment used for semi-automatic and automatic welding are MIG, TIG and CNC machine tools. Continuous wire electrodes are used as consumables. Semi-automatic and automatic welding process significantly improve the quality and productivity of the weld. Also, automatic welding techniques are safer and less polluting than manual methods. However, automatic welding techniques are more capital intensive and lack practicability for on-site welding. They find application mainly in mass production centers involving large scale repetitive welding, where economies of scale could justify their usage. Automobile manufacturers setting up base in India typically use continuous automatic welding.

Predominance of the unorganised sector The organised sector has a presence in both automatic and semi-automatic equipment and in higher end electrodes while the unorganised sector is confined to the low-end stick and mild steel electrodes segments.

In value terms, the unorganised sector accounts for 50% of the Indian market. The unorganised sector has also been able to price its products competitively. Besides having low manufacturing and marketing overheads, these units are exempted from excise duties if their turnover does not exceed Rs7.5m.

The adopting of low technology welding processes has resulted in the presence of over 350 units in the unorganized sector, scattered across the country and catering to regional markets.

The unorganized sector may eventually be wiped out. As the economy matures, a gradual shift from manual welding to semi-automatic and automatic welding processes is expected. This would further increase the share of the organised sector. Increasing quality consciousness among the user segments may also lead them to source their requirements from the

organised sector manufacturers. Thirdly, the import duties on electrodes and equipment, which stand at 40% and 20% respectively, may be brought down. This may lead to cheap imports in low-end electrodes, as a result of which only players in the higher end and players with a strong cost advantages would survive. A shake out in the unorganised sector thus seems imminent.

Earning sensitivity factors An economic recovery, characterized by growth in industrial and infrastructure related activity would lead to increased volumes.

Further reduction in import duties will lead to heavy imports and price competition at the lower end of the market.

Raw materials form a substantial portion of sales. An increase in metal prices can impact margins, unless the company is able to pass on the increased costs. Entry of multinationals can lead to increased competition at the higher end of the market.

Demand growth The key indicator for growth in the welding market is the index of industrial production. Specific applications for welding electrodes and equipment lie in the areas of repairs and maintenance, construction, fabrication and shipbuilding. The most reliable lead indicator for welding electrodes and equipment would be steel production. The growth rate for this industry should be 8-10%, i.e. the expected industrial growth. However, volume growth for individual players will depend upon the product mix, shift in consumption patterns (i.e. towards high-end consumables) and market share gains from the unorganised sector.

BACKGROUND OF COMPANY: Advani Oerlikon was incorporated in October 1951 and was converted into a public limited company in 1975. It was promoted by J.B. Advani & Co. Pvt. Ltd. The objects & activities of the company include the manufacture of a wide range of welding electrodes & their accessories, industrial electronics equipment & power & process control equipment, DC machines & power control equipment In 1986, the Company entered into collaboration agreement with welding industries Oerlikon Buhrle Ltd., Switzerland for technology upgradation of welding consumables. This company is now part of Air Liquide of France.

During December 1993, the Company came out with a rights issue for Capacity expansion.

Competitive position Advani-Oerlikon is the number one player in the domestic welding sector, with a market share of 48% in the organized sector. Esab has the second largest market share of 40%. Advani-Oerlikon dominates the conventional low end welding products segment (offers 250 types of electrodes) and hence faces higher degree of competition from the unorganised sector. The

numero uno position of ADOR stems from its 5-decade-long presence in the Indian market.

ADOR derives 66% of its sales turnover from welding electrodes, 18% from continuous wire electrodes and special electrodes and 16% from welding equipment.

The current demand for welding products is skewed in favour of welding consumables (70% of total demand). As against this, the global consumables demand is only 40% and equipment demand is 60%. The Indian ratio is expected to align itself to global standards in due course. ADOR has around 16% of its sales coming from equipment. A significant portion of the demand for welding consumables arises from maintenance related applications and hence is insulated from economic downturns to that extent. Welding equipment demand, on the other hand, is largely cyclical in nature.

ORGANIZATION STRUCTURE: AOL is headed by the Managing Director at the apex level and is responsible for the overall functioning of the organization . The MDs work is supported by an Executive Director.

He is supported by Senior Vice President who is responsible for the day to day functioning as well as the for strategic decisions of the organization . These Senior Vice President is supported by the General manager. The chief managers of the organization are responsible to the general manager and GM is also supported by Deputy General Managers. These people will be responsible for all strategic decision making at the middle level management .

Senior Vice President, GM, D.G.Ms are the core management team who are responsible for establishing, setting and monitoring strategic plans and goals for their respective functions that are inline with their corporate plans and objectives . These different department DGMs are supported by various Managers and Jr. Managers The overall controlling and decision making process takes place from Chinchwad, Pune .The chart on the next page shows the organizational structure of AOL .

Managing director

Executive director

Senior Vice Presidents

Senior Vice President

General Manager

Chief manager

Chief manager

DGM

DGM

DGM

DGM

Manager

Jr. Manager

COST CENTRES: Cost or expense centers are responsibility centers whose managers are normally accountable for only those costs that are under their control. Cost center means A location , person or item of equipment (a group of these) or which costs may be ascertained and used for the purpose of cost control. A cost center in an organizational segment or area of activity, considered to accumulate costs

COST CENTER AT ADOR WELDING LTD.

COST CENTRE

Production Cost Centre

Service Cost Centre

Administrative Cost Centres

Welding 1. Machine Shop 2. Fabrication And Fittings 3. Motor Generator 4. Diesel Shop 5. Rectifier Shop 6. Mig And Subarc 7. Argon Plasma 8. Winding 9. Painting WAPS Production Torch Production

Purchases Material Planning Stores 1. Production Planning Quality Control Engineering Cell Marketing 1. Welding 2. WAPS Erection And Commission

Packing Tool Room Maintenance 1. Civil 2. Electrical and Mechanical Import Export Transport

Corporate HR and Administration Accounts Costing Despatch Security EDP Training Documentation House Keeping And Gardening

INTRODUCTION TO COSTING The term cost is a frequently used term, that reflects a monetary measure of the resources sacrificed or foregone to achieve a particular objective, such as acquiring goods and services. In this era of liberalization and globalization CUSTOMER IS THE KING. In the highly competitive market one needs to price the product effectively and efficiently. Cost accounting techniques play a major role in determining the right cost and help the company being price competitive in the market place. It also helps the company in maximizing the profits, which is the ultimate objective of any commercial business organization. Modern cost accounting is often called MANAGEMENT ACCOUNTING. This is because cost accountants regard managers within their own organization as the primary user of their accounting information and are henceforth considered as their internal customers.

FUNCTIONS OF COST ACCOUTING Cost allocation Providing information to managers Sources of planning , control and performance measurement

Cost allocation: It helps in allocating costs between cost of goods sold and inventories for internal and external profit reporting. In an organization like ADOR WELDING LTD. which produces wide range of products , it is necessary to charge the costs to individual products. The total value of the stock is calculated by summing up the value of finished goods, work in progress (WIP) and any un-used raw material forms the basis for determining the inventory valuation. This total is also the basis for determining the stock valuation for inclusion in the balance sheet. Costs are therefore traced to each individual job or product for financial accounting requirements in order to allocate the costs incurred during a period between cost of goods sold and inventories. This information is required for external financial accounting requirements but most organizations also produce internal profit reports at monthly intervals. Providing information to managers: This involves both routine and nonroutine reporting. Routine information is required relating to the profitability of various segments of the business such as products, services, distribution

channels etc. to ensure that profitable activities are taken up. Information is also required for making resource allocation and product mix. Cost information extracted from the costing system plays a crucial role in determining the selling price. Non-routine information is required for strategic decisions, e.g.: development of new products and services, investment in new plant, and so on. Source of planning ,control and performance measurement : Planning involves translating goals and objectives into the specific activities and resources that are required to achieve the goals and objectives. Companies develop both long term and short term plans. Control is the process of ensuring that the actual the actual outcomes confirm with the planned outcomes. The control process involves the setting of targets or standards against which actual results are measured. Performance is the measured with and compared with the targets on a periodic basis.

TRADITIONAL METHOD OF COSTING: In manufacturing concerns, products are frequently cost objects. Traditional cost accounting system accumulate product costs as follows:

Direct materials: Direct labor: Prime cost: Manufacturing overheads -

Total manufacturing costs:

Direct material consist of all those materials that can be identified with a specific product. Indirect materials consist of machines used for repair for manufacturing different products. These items or materials cannot be identified with regard to one particular product. It should be noted that indirect materials form part of the manufacturing overhead cost.

Direct labor consists of those labor costs that can be specifically traced to or identified with a particular product. EG: the wages of operatives who assemble the parts of a finished product or machine operatives engaged in the production process. By contrast, the salaries of factory supervisors or the wages paid to the staff in the stores department cannot be specifically identified to a product, and thus form a part of the indirect labor. Prime cost refers to the direct cost of the product and consists of direct labor costs plus direct material costs and any direct expenses. Manufacturing overhead consists of all manufacturing costs other than direct labor, direct material and direct overhead costs. It therefore includes all indirect costs involved. E.g.: rent of the factory and depreciation of the machinery. Manufacturing overheads cannot be directly traced to products. They are assigned to products using cost allocations. A cost allocation is the process of estimating the cost of resources consumed by the products that involves the use of surrogate rather than direct measures.

COSTING AND PRICING: ROLE OF COST INFORMATION IN PRICING DECISION: Most organizations need to make decisions about setting or accepting selling prices for their products and services. In some firms overall market supply and demand forces set prices and the firm has little or no influence over the selling prices of its products or services. This situation is likely to occur where there are many firms in an industry and there is little to distinguish their products from each other. No one firm can influence prices significantly by its own actions. Also, small firms operating in an industry where prices are set by the dominant leaders will have little influence over the price of their products or services. Firms that have little or no influence over the prices of their products or services are described as price takers. In contrast, firms selling products or services which are highly customized or differentiated from each other by special features, or who are market leaders, have some discretion in selling prices. Here the pricing decision will be will be influenced by the cost of the product, the actions of the competitors and the extent to which customers value the product. Such firms that have some discretion over setting the selling price of the products or services are described as price setters. ADOR WELDING LTD. falls under both the above-mentioned categories. The company is into manufacturing of both customized and non-customized products as per the market and customer requirement.

PRODUCTS OF ADOR WELDING LTD. (AWL) Welding equipments o Standard in price list o Non-standard customized & not in price list Welding accessories o Supportive accessories like helmet , hand gloves , etc. Welding spares E-range products Projects o Manufacturing flare systems o Incinerators WAPS ( Welding Automation Products & Systems) o Export markets o Manufactured o Bought out components

PRICING AT ADOR WELDING LTD.

Market analysis: Under this, all the factors influencing the pricing decisions in the current market scenario and the future expectations are taken into consideration. Also the previous records are kept in mind with relevance to the market and customer. In the past, about 20 years back company had a monopoly in the market because of less number of players. In the present scenario many competitors like Esab and Miller (international player) are giving tough competition to the companies as well as the presence of the small scale industries has immensely effected the pricing policies of the company. In the future, company has serious threats of international players entering the local markets.

Pricing techniques
o Export pricing : This is nothing but costing of the products for

the international market. Under this the company uses standard costing method, wherein it is taken into consideration that unnecessary costs are not assigned to the product. This costing uses costs from efficient operations plus agreed profits. Under usually the Ex-factory costs are the same for indigenous and export products but the corporate expenses differ, as they are on marginal basis.
o Cost based pricing: Under this total cost or full cost plus

pricing methodology is adopted ie all costs plus profit margin. It includes not only the products direct costs but also the

indirect costs incurred by the overall company which have to be allocated to different products in case different products are manufactured. This method of costing is usually used for monopoly items wherein the customer agrees to whatever price asked for a particular product.
o Market based pricing : This is nothing but marginal cost plus

pricing method under which only the variable costs are the basis for pricing. Fixed costs are not added to the product, services or contract. This approach helps the business to enter new markets easily, to increase its competitive position in the market, to survive during trade depression and to utilize spare available capacity. Factors influencing pricing decision
o

Costs. Focus on your current and future, not historical, costs to determine the cost basis for your pricing strategy . Price Sensitivity. The price sensitivities of buyers shift based on a number of factors and your pricing strategy must shift with them. Competition. Pay attention to them, but don't copy them . . . when it comes to pricing strategy they may have no idea what they're doing. Product Lifecycle. How you price, and what value you provide for that price, will change as you move through the product lifecycle.

Guiding factors for pricing policy at AWL. o Sales policy :ANNEXURE I

o Commercial policy. ANNEXURE II

TERMS USED:IN ALPHABETIC ORDER CNC: MIG TIG